INCOME TAX ACT, 1961

Section 143(3) Section 143(2)

Assessment - Scrutiny assessment - Limited scrutiny notice issued under section 143(2) converted into normal (complete) scrutiny without approval from competent authority -

Assessee was an individual and claimed to have earned income under the head capital gain and other sources. The assessee during the year under consideration along with 4 other co-owners sold a piece of land in which he held his share for 30%. The assessee declared capital gains after claiming deduction under section 54. Subsequently, the return of the assessee was selected for limited scrutiny and the notice was issued under section 143(2). During the proceedings the AO observed that the impugned land was purchased by the assessee along with co-owners as agricultural land. Later on the assessee and co-owners made application for plotting of the land which was approved. The assessee with co-owners further initiated residential as well as commercial building project on the impugned land. Accordingly the AO held that the activity carried out by the assessee along with other co-owner amount to business activity. Thus, the AO held the impugned sale as business receipt and disallowed the deduction claimed under section 54. Assessee before CIT(A) submitted that the AO had travelled beyond the jurisdiction provided under the limited scrutiny. The notice under section 143(2) was issued only for the purpose of investigation of mismatch of income with form 26AS. But the AO converted the limited scrutiny into complete scrutiny and held the capital receipt as business receipt without obtaining any approval from the higher authority. CIT(A) after considering the submission of the assessee and remand report confirmed the action of the AO. Held: Admittedly, the case of the assessee was selected under 'Limited Scrutiny' scheme as evident from the notice under section 143(2). As per the CBDT Instruction No. 20/2015, dated 29-12-2015 and Instruction No. 05/2016, dated 14-7-2016 the AO in case of 'Limited Scrutiny' can only examine those issues for which the case had been selected or the issue mentioned therein. However, on perusal of the notice for 'Limited Scrutiny' there was no mentioning/whisper about examination of the fact whether the assessee was engaged in the business of property development. Accordingly, the assessing officer had exceeded his jurisdiction by denying the deduction claimed under section 54 on the reasoning that the assessee was engaged in the business of property development as the same was not mandated under the ''Limited Scrutiny' notice issued under section 143(2). If Tribunal admit the contention of the DR then the head of income from capital gain will also get change to the business income despite the fact that there was no question raised in the notice issued for the limited scrutiny under section 143(2). The right course of action for the assessing officer was to take the approval from the competent authority but he failed to do so. Thus, inaction of the AO should not cause any harassment to the assessee. Since the notice under section 143(2) was issued for limited scrutiny, the AO was precluded from considering any other issue while making the assessment under section 143(3) under limited scrutiny. As the assessee was succeeded on the technical issue raised by him, Bench refrain from adjudicating the other issues raised on merit. In the result, the appeal of the assessee was partly allowed.

Followed:Rajesh Jain v. ITO 162 Taxman 212 (Chd-Trib). Distinguished:Harshadkumar Amrutlal Patel ITA No. 361/Ahd/2019.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

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