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Practical Aspects of Scrutiny Assessment Presentation by: CA RASESH SHAH.

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1 Practical Aspects of Scrutiny Assessment Presentation by: CA RASESH SHAH

2 CA Rasesh Shah2 Introduction  In the last two decades most of the taxpayers of India had a wonderful time with the Income-tax Department.  This was because of the scheme of department to cover most of the assessment under summary.  In recent times, the procedure for selection of the scrutiny cases underwent sea change.  As a result, many cases are picked up under scrutiny as per norms laid down by CBDT.

3 CA Rasesh Shah3 Purpose of Scrutiny  The purpose of the scrutiny assessment is to verify correctness of the income declared by the assessee.  Assessing officer may make the addition in respect of actual income understated by assessee by suppressing receipt and/or inflating expenses. The assessing officer can also make addition under deeming provisions of the Act like Sec. 68, 69, 69A, 69B, 69C even though there is no evidence of earning of actual income by assessee.

4 CA Rasesh Shah4 Section 143(1) Intimation u/s 143(1) shall be issued only if:-Intimation u/s 143(1) shall be issued only if:- (i) any tax or interest is due on the basis of return filed by assessee or (i) any tax or interest is due on the basis of return filed by assessee or (ii) any refund is due on the basis of such return. (ii) any refund is due on the basis of such return. Thus, prima facie adjustments are now not permissible.Thus, prima facie adjustments are now not permissible. Acknowledgement of return will be treated as deemed intimation.Acknowledgement of return will be treated as deemed intimation.

5 CA Rasesh Shah5 Amendment of Intimation Amendment of intimation / deemed intimation can be made u/s 154 of the Act.Amendment of intimation / deemed intimation can be made u/s 154 of the Act. Opportunity has to be given to assessee, if amendment has the effect of reducing the refund or increasing the liability of assessee.Opportunity has to be given to assessee, if amendment has the effect of reducing the refund or increasing the liability of assessee.

6 CA Rasesh Shah6 Procedure of Assessment  The notice u/s. 143(2) should be SERVED on assessee within 12 months from the end of the month in which return of income has been filed.  The assessee is duty bound to comply with all the notices issued in the course of assessment proceeding.  Assessee should reply all the queries raised either by way of letter or order sheet entries.  If the assessee or his AR can not remain present, adjournment application should be filed before date of hearing.

7 CA Rasesh Shah7 Inquiry in Scrutiny Assessment  Notice u/s. 143(2)- Production of evidence in support of return of income.  Notice u/s. 142(1)-Production of accounts or documents or furnish specified information. Assessee cannot be called upon to produce accounts relating to period more than 3 years prior to previous year.  Summons u/s 131-Discovery/Inspection, Enforcing attendance, compelling production of accounts /documents and issuing commission.  Power to impound books of accounts u/s 131(3)  Notice u/s 133(6)-Collecting accounts/information  Sec. 142A-Reference for valuation.

8 CA Rasesh Shah8 Reference to Valuation Section 142A was retrospectively inserted to empower AO to refer VO to make estimate of any movable or immovable assets for the purpose of making addition under deeming provision of section 69, 69A and 69B.Section 142A was retrospectively inserted to empower AO to refer VO to make estimate of any movable or immovable assets for the purpose of making addition under deeming provision of section 69, 69A and 69B. It has been held in case of Rallies India Limited v. Dy. CIT 284 ITR 159 (Bom) that reference to valuation cannot be made after completion of assessment.It has been held in case of Rallies India Limited v. Dy. CIT 284 ITR 159 (Bom) that reference to valuation cannot be made after completion of assessment. When the expenditure of construction is supported by bills/vouchers and no defect or omission is found out, the addition on account of understatement of construction cost cannot be made.When the expenditure of construction is supported by bills/vouchers and no defect or omission is found out, the addition on account of understatement of construction cost cannot be made.

9 CA Rasesh Shah9 Special Audit – Sec. 142(2A) A.O may with the previous approval of Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by accountant.A.O may with the previous approval of Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by accountant. Opportunity must be provided to assessee before directing him to get the accounts audited.Opportunity must be provided to assessee before directing him to get the accounts audited. Max. time limit for special audit – 180 days.Max. time limit for special audit – 180 days. Expenses pertaining to special audit shall be paid by Central Government where directions are issued on or after 01/06/2007.Expenses pertaining to special audit shall be paid by Central Government where directions are issued on or after 01/06/2007. A.O cannot direct the special auditor to prepare books of accounts. Ref: Bajrang Textiles V. CIT - 3 SOT 115 (Jodh.)A.O cannot direct the special auditor to prepare books of accounts. Ref: Bajrang Textiles V. CIT - 3 SOT 115 (Jodh.) Special audit report is not binding on assessing officer.Special audit report is not binding on assessing officer.

10 CA Rasesh Shah10 Best Judgment Asst. – Sect. 144 Best judgment assessment can be made in following cases, if:-Best judgment assessment can be made in following cases, if:- (i) No return of income is filed, or (ii) Assessee fails to comply with all the terms of notice issued u/s 142(1) or 142(2A) or of notice issued u/s 142(1) or 142(2A) or section 143(2) section 143(2) A.O should give opportunity before passing order u/s 144.A.O should give opportunity before passing order u/s 144. Opportunity not necessary where notice u/s 142(1) is issued.Opportunity not necessary where notice u/s 142(1) is issued.

11 CA Rasesh Shah11 Issue of directions - Sec. 144A JCIT is empowered to issue directions to A.O to complete the assessment. Directions can be issued, either on his –JCIT is empowered to issue directions to A.O to complete the assessment. Directions can be issued, either on his – (i) own motion or (i) own motion or (ii) on a reference being made by A.O or (ii) on a reference being made by A.O or (iii) on application of assessee. (iii) on application of assessee. Directions which are prejudicial to assessee shall not be issued without giving opportunity of hearing to assessee.Directions which are prejudicial to assessee shall not be issued without giving opportunity of hearing to assessee.

12 CA Rasesh Shah12 Reassessment–Sec. 147 Notice u/s 148 cannot be issued after expiry of 4 years from the end of relevant A.Y, if:-Notice u/s 148 cannot be issued after expiry of 4 years from the end of relevant A.Y, if:- (i) Assessment is completed u/s 143(3)/147 & (i) Assessment is completed u/s 143(3)/147 & (ii) Income chargeable to tax has escaped (ii) Income chargeable to tax has escaped assessment not on account of failure on part of assessment not on account of failure on part of assessee to disclose fully & truly all material assessee to disclose fully & truly all material facts. facts. Notice cannot be issued on the basis of mere change of opinion.Notice cannot be issued on the basis of mere change of opinion.

13 CA Rasesh Shah13 Notice u/s 143(2) r.w.s. 147 Issue of notice u/s 143(2) is must.Issue of notice u/s 143(2) is must. Where return of income is filed on or before 30/09/2005 in response to issue of notice u/s 148 & notice u/s 143(2) is issued belatedly, it shall be deemed to be a valid notice. – Proviso to section 148(1).Where return of income is filed on or before 30/09/2005 in response to issue of notice u/s 148 & notice u/s 143(2) is issued belatedly, it shall be deemed to be a valid notice. – Proviso to section 148(1). Above provision is not applicable in respect of return which is filed on or after 01/10/2005.Above provision is not applicable in respect of return which is filed on or after 01/10/2005.

14 CA Rasesh Shah14 Reasons u/s 148(2) Assessee should ask for reasons recorded u/s 148 after filing return of income in response to notice.Assessee should ask for reasons recorded u/s 148 after filing return of income in response to notice. After receipt of reasons, if assessee wants to object validity of assessment, he should file objections before AO on basis of reasons recorded.After receipt of reasons, if assessee wants to object validity of assessment, he should file objections before AO on basis of reasons recorded. AO is duty bound to pass speaking order on objections raised by assessee. (Ref: GKN Driveshafts (Ind) Ltd. v. ITO (259 ITR 19) (SC)AO is duty bound to pass speaking order on objections raised by assessee. (Ref: GKN Driveshafts (Ind) Ltd. v. ITO (259 ITR 19) (SC)

15 CA Rasesh Shah15 Scope of Reassessment No general information can be gathered by AO during reassessment. Only specific inquiry can be made qua items of reassessment and roving inquiry is not permitted. So assessing officer cannot make additions in respect of items not covered by reasons recorded u/s 148. (Vipan Khanna v. CIT (255 ITR 220) (P&H)No general information can be gathered by AO during reassessment. Only specific inquiry can be made qua items of reassessment and roving inquiry is not permitted. So assessing officer cannot make additions in respect of items not covered by reasons recorded u/s 148. (Vipan Khanna v. CIT (255 ITR 220) (P&H)

16 CA Rasesh Shah16 Sanctity of Inquiry The Supreme Court in the case of Dhirajlal Girdherilal v. CIT (26 ITR 736), Dhkershwari Cotton Mills Ltd. V. CIT (26 ITR 755), Omar Salay Mohammed v. CIT (37 ITR 151), Lalchand Bhagatlal Ambica Ram v. CIT (37 ITR 288) and CIT v. Daulatram Rawatmal v. CIT (26 ITR 736) held that the assessment is liable to be cancelled if it is based on conjectures, surmises and presumptions and not on hard rock of facts and relevant material.

17 CA Rasesh Shah17 Sanctity of Inquiry In C. Vasantlal & Co. v. CIT (45 ITR 206) (SC), the Supreme Court held that it was open to an income-tax officer to collect materials to facilitate assessment even by private enquiry. But if he desires to use materials so collected, the assessee must be informed of the materials (Dhakeshwari Cotton Mills Ltd. v. CIT (26 ITR 775)(SC). The Supreme Court in case of Kishinchand Chellaram v. CIT(125 ITR 713) held that materials collected cannot be kept back from assessee by revenue authorities

18 CA Rasesh Shah18 Sanctity of Inquiry The details of comparable case should be given by assessing officer and if it is not given, assessee should ask for the same.The details of comparable case should be given by assessing officer and if it is not given, assessee should ask for the same. Assessee should demand cross examination of witnesses who furnished adverse information /statement to assessing officer.Assessee should demand cross examination of witnesses who furnished adverse information /statement to assessing officer. If cross examination is not demanded, the assessee cannot plead at later stage that as cross examination is not allowed, the addition is wrong.If cross examination is not demanded, the assessee cannot plead at later stage that as cross examination is not allowed, the addition is wrong.

19 CA Rasesh Shah19 Penalties under assessment  In case of the addition, assessing officer may initiate penalty proceeding u/s. 271(1)(c) for concealment of income.  If the notices are not complied, assessing officer may initiate penalty proceedings u/s. 271(1)(b).  Where there is failure to state truth, refusal to sign any statement and non-compliance of the summons u/s 131, the assessing officer may initiate penalty proceeding u/s 272(A)(1).

20 CA Rasesh Shah20 Fall In Gross Profit Assessee should explain fall in gross profit by showing that margin of profit was low during relevant year compared to past years.Assessee should explain fall in gross profit by showing that margin of profit was low during relevant year compared to past years. In absence of omission or defects in books of accounts and records, addition cannot be made. Case laws:In absence of omission or defects in books of accounts and records, addition cannot be made. Case laws: CIT v. Vikarm Plastic (239 ITR 161) (Guj) CIT v. Dr. Rajnikant Dave (281 ITR 6) (Del)

21 CA Rasesh Shah21 Estimate of Production A.O cannot reject book results merely on the basis of disparity in consumption of electricity vis a vis production without any supporting evidence.A.O cannot reject book results merely on the basis of disparity in consumption of electricity vis a vis production without any supporting evidence. Case Law: St. Teresa ’ s Oil Mills v. State of Kerala (76 ITR 365) (Ker)

22 CA Rasesh Shah22 New Loans Assessee should prove identity, capacity of lenders as well as genuineness of transaction.Assessee should prove identity, capacity of lenders as well as genuineness of transaction. Where lender is assessed to tax, assessee can avoid addition by filing confirmation with particulars of PAN.Where lender is assessed to tax, assessee can avoid addition by filing confirmation with particulars of PAN. Case Laws:Case Laws: Addl. CIT Vs. Hanuman Agrawal (151 ITR 150) (Pat) CIT Vs. Orissa Corporation (P) Ltd. (159 ITR 78) (SC) CIT Vs. Gopal & Co. (204 ITR 285) (Gau.) Jalan Timbers Vs. CIT (223 ITR 11) (Gau.) CIT Vs. Rohini Builders (256 ITR 360) (Guj.)

23 CA Rasesh Shah23 New Share Capital In case of new share capital, assessee is required to prove only identity of shareholders. Case Laws:In case of new share capital, assessee is required to prove only identity of shareholders. Case Laws: CIT Vs. Steller Inv. Ltd (192 ITR 287) (Del) CIT Vs. Kwick Travels (199 ITR 85) (St.) (Del) CIT Vs. Sophia Fin. Ltd. (205 ITR 98) (Del) (FB) CIT Vs. Steller Inv. Ltd. (251 ITR 263) (SC)

24 CA Rasesh Shah24 Receipts by way of Gift In case of gift, the heavy burden is cast on assessee to prove the genuineness of gifts. The burden to produce donor is on assessee.In case of gift, the heavy burden is cast on assessee to prove the genuineness of gifts. The burden to produce donor is on assessee. If donor is assessed to tax and confirmed donation of money to assessee by personally appearing before AO, the addition can be avoided.If donor is assessed to tax and confirmed donation of money to assessee by personally appearing before AO, the addition can be avoided. Case Law:- Murlidhar Lahorimal Vs. CIT(280 ITR 512) (Guj) Murlidhar Lahorimal Vs. CIT(280 ITR 512) (Guj)

25 CA Rasesh Shah25 Source of Source Assessee is not required to prove source of the source of credit.Assessee is not required to prove source of the source of credit. Case Laws: Hastimal V. CIT (49 ITR 273)(Mad.) Tolaram Daga V. CIT (59 ITR 632)(Assam) Nemichand Kothari v. CIT (264 ITR 254) (Gau) Murlidhar Lahorimal Vs. CIT(280 ITR 512) (Guj)

26 CA Rasesh Shah26 Remission/Cessation of Liability Section 41(1) cannot be applied for current year when liability was incurred.Section 41(1) cannot be applied for current year when liability was incurred. There must be some benefit in the form of remission or cessation.There must be some benefit in the form of remission or cessation. The burden is on revenue that assessee claimed deduction in past years.(Ref: CIT v. Pranlal Doshi-201 ITR 756).The burden is on revenue that assessee claimed deduction in past years.(Ref: CIT v. Pranlal Doshi-201 ITR 756). In CIT v. Sugauli Sugar Works P.Ltd (236 ITR 518 (SC) and Ambica Mills Ltd v. CIT(54 ITR 167) (Guj), it was held that the fact that the period of limitation prescribed by the Limitation Act had expired, does not mean that the debt was extinguished merely because remedy by way of suit was barred.In CIT v. Sugauli Sugar Works P.Ltd (236 ITR 518 (SC) and Ambica Mills Ltd v. CIT(54 ITR 167) (Guj), it was held that the fact that the period of limitation prescribed by the Limitation Act had expired, does not mean that the debt was extinguished merely because remedy by way of suit was barred.

27 CA Rasesh Shah27 Payments to Associates In CIT v. Voltamp Transformers P. Ltd. v. CIT (129 ITR 105) (Guj), it was held that payments are not to be judged from the viewpoint of a revenue officer but from the viewpoint of a businessman.In CIT v. Voltamp Transformers P. Ltd. v. CIT (129 ITR 105) (Guj), it was held that payments are not to be judged from the viewpoint of a revenue officer but from the viewpoint of a businessman. In CBDT’s circular dated 6/7/68, it has been observed that “The income-tax officer is expected to exercise his judgement in a reasonable and fair manner and provision is not be applied in a manner which will cause hardship in bona fide cases.”In CBDT’s circular dated 6/7/68, it has been observed that “The income-tax officer is expected to exercise his judgement in a reasonable and fair manner and provision is not be applied in a manner which will cause hardship in bona fide cases.”

28 CA Rasesh Shah28 Claim of Expenditure In CIT v. Dhanrajgiri Raja Narasingiriji (91 ITR 544), it was held by Supreme Court that ‘It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.’In CIT v. Dhanrajgiri Raja Narasingiriji (91 ITR 544), it was held by Supreme Court that ‘It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.’

29 CA Rasesh Shah29 Investment in stock In the case of difference between stock as reported to revenue and bank, no addition can be made if there is difference in value and not quantity. (Ashokkumar v. ITO) (201 CTR 178) (J & K).In the case of difference between stock as reported to revenue and bank, no addition can be made if there is difference in value and not quantity. (Ashokkumar v. ITO) (201 CTR 178) (J & K). In case of difference in stock in quantities, the addition can be avoided on basis of following case laws.In case of difference in stock in quantities, the addition can be avoided on basis of following case laws. CIT v. General Metal Works (172 ITR 173) (All) CIT v Sind. Rice & Gen. Mills(281 ITR 428) (PH) CIT v. Padmavati Cotton (236 ITR 340) (Mad)

30 CA Rasesh Shah30 Business Income v. Capital Gain Various Parameters: The intention at the time of purchaseThe intention at the time of purchase The length of period of holdingThe length of period of holding The frequency of transactionsThe frequency of transactions Owned fund v. Borrowed fundOwned fund v. Borrowed fund Time devotedTime devoted The infrastructure and set up employedThe infrastructure and set up employed The volume of transactionThe volume of transaction Alternative occupationAlternative occupation The ratio of purchase and sales/holdingThe ratio of purchase and sales/holding Circumstances responsible for saleCircumstances responsible for sale Post utilisation of proceedsPost utilisation of proceeds Treatment in books of accountTreatment in books of account MOA/AOAMOA/AOA No. of scriptsNo. of scripts

31 CA Rasesh Shah31 Circulars and Case Laws Instruction No dated 31/8/89Instruction No dated 31/8/89 Draft Circular dated 16/5/2007Draft Circular dated 16/5/2007 Cir. No. 4/2007 dated 16/6/2007Cir. No. 4/2007 dated 16/6/2007 Deepaben A. Shah 99 ITD 218 (Ahd)Deepaben A. Shah 99 ITD 218 (Ahd) Fidelity Northstar Star 288 ITR 641 (AAR)Fidelity Northstar Star 288 ITR 641 (AAR) Revashankar Kothari 283 ITR 338 (Guj)Revashankar Kothari 283 ITR 338 (Guj) Smt. Neerja Birla v. Asst CIT 66 ITD 148 (Mum)Smt. Neerja Birla v. Asst CIT 66 ITD 148 (Mum) Janak S. Rangwalla v. Asst CIT (11 SOT 627)Janak S. Rangwalla v. Asst CIT (11 SOT 627) General Ele.Pension Trust (280 ITR 425) (AAR)General Ele.Pension Trust (280 ITR 425) (AAR) Ramanarain Sons Ltd v. CIT(41 ITR 534) (SC)Ramanarain Sons Ltd v. CIT(41 ITR 534) (SC)

32 CA Rasesh Shah32 Bogus/Non-genuine Purchases Assessee should place evidence in form of bills, challan, entry in stock register, payment by crossed cheques etc.Assessee should place evidence in form of bills, challan, entry in stock register, payment by crossed cheques etc. Case Laws:Case Laws: Dy. CIT v Adinath Ind-252 ITR 476 (GUJ) ITO v Sunsteel-92 TTJ 1126 (AHD) Sri Rama Multitec v ACIT-92 TTJ 568 (AHD) CIT V S. M. Omer– 201 ITR 608 (CAL) CIT V. M.K. Brothers-163 ITR 249(GUJ) Balaji Tex. Ind.P.L. V ITO–49 ITD 177(BOM) J. R. Sol. Ind. P.L V ACIT–68 ITD 165 (CHD.) Milkfood Ltd. V. DCIT – 65 TTJ 848 (DEL) CIT V. Kashiram Textile Mills P. Ltd ITR 61 (GUJ) CIT V. Kashiram Textile Mills P. Ltd ITR 61 (GUJ)

33 CA Rasesh Shah33 Assessment after revision It has been held that the issue which is not touched upon on revision cannot be basis for making addition in assessment taken in pursuance of order u/s 263-Ref: CIT v. D. N. Doshani & Co. (280 ITR 275) (Guj)It has been held that the issue which is not touched upon on revision cannot be basis for making addition in assessment taken in pursuance of order u/s 263-Ref: CIT v. D. N. Doshani & Co. (280 ITR 275) (Guj)

34 CA Rasesh Shah34 Inclusion of taxes/duties-Sec-145A Our Institute suggested exclusive method but section 145A talks about inclusive method. Both methods are revenue neutral.Our Institute suggested exclusive method but section 145A talks about inclusive method. Both methods are revenue neutral. So auditor gives reconciliation in the tax audit report & demonstrates that even when adjustments are made as per provisions of section 145A, there is no impact on the figure of net profit / loss.So auditor gives reconciliation in the tax audit report & demonstrates that even when adjustments are made as per provisions of section 145A, there is no impact on the figure of net profit / loss. However, AO makes adjustment only to the figure of closing stock so as to make addition.However, AO makes adjustment only to the figure of closing stock so as to make addition. Case Laws: CIT v. Indo Nippon Chemicals Ltd (261 ITR 275) (SC) Dy. CIT v. Gandhar Oil Ltd. (104 TTJ 630) (Mum)

35 CA Rasesh Shah35 Whether stock can be valued at Market Price? The stock cannot be valued at market price, if it is higher than cost price.The stock cannot be valued at market price, if it is higher than cost price. Case Law: Sanjeev Woolen Mills v. CIT (279 ITR 434) (SC) If the value of closing stock is disturbed in any year, the corresponding adjustment in value of opening stock of next year should be given.If the value of closing stock is disturbed in any year, the corresponding adjustment in value of opening stock of next year should be given. Case Law: CIT v. Chandrika Towers (275 ITR 173) (MP)

36 CA Rasesh Shah36 Addition on basis of Stamp Duty Addition cannot be made on basis of increased stamp duty payable by assessee on higher valuation made by revenue authorities.Addition cannot be made on basis of increased stamp duty payable by assessee on higher valuation made by revenue authorities. Case Laws: Dinesh Mittal v. ITO (193 ITR 770) (All) Dinesh Mittal v. ITO (193 ITR 770) (All) CGT v. R. Damodaran (247 ITR 698) (Mad) CGT v. R. Damodaran (247 ITR 698) (Mad)

37 CA Rasesh Shah37 Destruction of books of accounts I.T authorities can accept the audit report where books of accounts are destroyed & they can also draw inference from the same regarding supporting materials for deductions claimed.I.T authorities can accept the audit report where books of accounts are destroyed & they can also draw inference from the same regarding supporting materials for deductions claimed. Case Law:- CIT. V. Jay Engg. Works Ltd. – 113 ITR 389(Del)

38 CA Rasesh Shah38 Protective Assessment Protective assessment has been recognised by judicial decisions although there is no specific provision in the Act.Protective assessment has been recognised by judicial decisions although there is no specific provision in the Act. If substantive assessment is not made, protective assessment becomes substantive assessment.If substantive assessment is not made, protective assessment becomes substantive assessment. There cannot be recovery in case of protective assessment.There cannot be recovery in case of protective assessment. Although protective assessment is permissible, protective penalty order is not permissible.Although protective assessment is permissible, protective penalty order is not permissible.

39 CA Rasesh Shah39 New Claim During Assessment It has been held by Supreme Court in Goetze (India) Ltd. Vs. CIT (284 ITR 323) that new claim for deduction cannot be entertained by assessing authority other than by way of filing revised return of income.It has been held by Supreme Court in Goetze (India) Ltd. Vs. CIT (284 ITR 323) that new claim for deduction cannot be entertained by assessing authority other than by way of filing revised return of income. However, the above decision does not impinge on the power of ITAT to admit new claim.However, the above decision does not impinge on the power of ITAT to admit new claim.

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