Practical Issues in Scrutiny Assessment,4th Nov 12 , CA.MAnish Shah

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Oct 30, 2013 (3 years and 7 months ago)

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J. B. NAGAR CPE STUDY
CIRCLE

Presented by: Manish Shah


Chartered Accountant

Practical

Issues in Scrutiny
Assessment

Contents


Scrutiny Assessments


Pre
-

Assessment procedures


Issues in Scrutiny Assessment


Re
-
assessment


Post
-

Assessment procedures


TP Assessments; Protective Assessments, and Order
Giving Effect to orders u/s. 263, 250 & 254

Nov 24, 2012

Bansi S. Mehta & Co.

2

Assessments

“Assessment” generally includes all proceedings



-

S.
Sankappa

v. ITO (68 ITR 760)(SC)




“The

word

“assessment”

is

used

in

the

Act

in

a

number

of

provisions

in

a

comprehensive

sense

and

includes

all

proceedings

starting

with

the

filing

of

the

return

or

issue

of

notice

and

ending

with

determination

of

tax

payable

by

the

Assessee”

Nov 24, 2012

Bansi S. Mehta & Co.

3

Assessments Covered


143(3): Scrutiny Assessment


144 : Best Judgement


147 : Reassessment proceedings


144C : Draft Orders in respect of Transfer


Pricing Assessments


Nov 24, 2012

Bansi S. Mehta & Co.

4

Pre
-
assessment Procedures


Return of Income


Annual Accounts and Tax Audit report


relevance in Scrutiny Assessments


E
-
filing Scenario
vis

a
vis

aggressive and
debatable claims


Providing Disclosure and notes


How and when


AIR information


Nov 24, 2012

Bansi S. Mehta & Co.

5

Intimation u/s.143(1)


AO

only

to

process

the

return

under

section

143
(
1
)

in

following

manner
:



Make

adjustment

to

total

income

for

the

arithmetical

mistakes

or

incorrect

claim

which

is

apparent

from

any

information

in

return
;


Compute

Tax

and

interest

on

the

basis

of

TO

so

computed
;


Determine

Demand

or

Refund



After

considering

tax

paid

and

reliefs

claimed
;



Issue

intimation

for

demand

payable

or

refund

due

and

grant

refund,

if

determined


Nov 24, 2012

Bansi S. Mehta & Co.

6

Intimation u/s.143(1)



incorrect claim’


A

claim

made

on

the

basis

of

an

entry

in

the

return

which

is

inconsistent

with

another

entry

of

the

same

or

some

other

item

in

such

return
;



A

claim,

in

respect

of

which

the

information

required

to

be

furnished

under

this

Act

to

substantiate

such

entry

has

not

been

so

furnished
;

or


In

respect

of

deduction,

where

such

deduction

exceeds

specified

limit
.


Nov 24, 2012

Bansi S. Mehta & Co.

7

Intimation u/s.143(1)


Intimation

shall

be

sent

within

1

year

from

the

end

of

the

financial

year

in

which

the

return

is

made
.


Where,

after

making

the

above

adjustments

either

no

sum

is

payable

by

the

assessee

or

no

refund

is

due

to

him,

the

acknowledgment

of

the

return

shall

be

deemed

to

be

intimation

u/s

143
(
1
)
.


Section

143
(
1
D)

provides

that

processing

of

a

return

u/s

143
(
1
)

shall

not

be

necessary,

where

a

scrutiny

notice

has

been

issued

to

assessee

under

sub
-
section

(
2
)

(applicable

from

July

1
,

2012
)
.


Is

Intimation

u/s
.

143
(
1
)

is

appealable?


Nov 24, 2012

Bansi S. Mehta & Co.

8

Initiation of Scrutiny Assessment


Issue

of

Notice

under

section

143
(
2
)


Where

the

return

has

been

made

u/s

139

or

in

response

to

notice

u/s

142
(
1
),

the

assessing

officer

shall

if

he

considers

it

necessary

or

expedient

to

ensure

that
-


The assessee has not understated the income; or


Has not computed excessive loss; or


Has not underpaid the tax in any manner


serve

a

notice

on

the

assessee

u/s

143
(
2
)

requiring

him

to

attend

his

office

or

to

produce

or

cause

to

be

produced

any

evidence

on

which

the

assessee

may

rely

in

support

of

the

return

on

a

date
.

Nov 24, 2012

Bansi S. Mehta & Co.

9

Notice u/s. 143(2)


Time

limit
:

N
otice

u/s

143
(
2
)

to

be

served

within

expiry

of

6

months

from

the

end

of

financial

year

in

which

the

return

is

furnished
.



Meaning

of

“Service”


Notice

u/s

143
(
2
)

cannot

be

served

if

no

return

has

been

furnished

by

the

assessee
.

In

such

a

case,

notice

u/s
.

142
(
1
)

has

to

be

first

issued
.




If

Notice

u/s

143
(
2
)

is

not

served,

an

assessment

cannot

be

made

u/s

143
(
3
)
.

However,

AO

may

take

recourse

of

section

144
.


Impact

of

section

292
B

and

section

292
BB



Besides

serving

notice

u/s

143
(
2
),

the

assessing

officer

normally

also

serves

a

notice

u/s

142

for

producing

books

of

accounts,

statement

of

assets

and

liabilities

etc
.


Defects

in

Notice

under

section

143
(
2
)



whether

renders

assessment

invalid?

Nov 24, 2012

Bansi S. Mehta & Co.

10

Inquiry
-

Notice u/s. 142(1)

For the purpose of making an assessment, the Assessing officer
may:


When Return of income is not filed u/s 139(1) or before the
end of the relevant assessment year
-


Serve a notice u/s 142(1)(
i
) for furnishing the Return of
income


When Return of income is already filed
-


Serve a notice u/s 142(1)(ii) to produce such documents
or accounts as he may require,


Serve a notice u/s 142(1)(iii) to call for information he
may require including statement of assets & liabilities


Nov 24, 2012

Bansi S. Mehta & Co.

11

Obtaining information


For

the

purpose

of

obtaining

full

information

in

respect

of

income

or

loss

of

any

person,

the

assessing

officer

may

make

such

enquiry

as

he

considers

necessary
.




While

section

142
(
1
)

empowers

the

assessing

officer

to

collect

the

information

from

the

assessee

himself,

section

142
(
2
)

empowers

him

to

collect

information

from

sources

other

than

the

assessee
.



The

assessing

officer

shall

not

require

the

assessee

to

produce

any

accounts

relating

to

a

period

more

than

three

years

prior

to

the

previous

year
.

Where

the

AO

issues

a

notice

calling

for

production

of

accounts

relating

to

earlier

years

and

one

of

those

falls

beyond

the

prescribed

three
-
year

time

limit,

the

whole

notice

cannot

be

treated

as

bad,

inasmuch

as

the

illegal

portion

of

notice

as

regards

to

one

of

the

years

is

clearly

several

from

the

rest

of

the

terms

of

the

notice

which

are

legal



Murlidhar

Madanlal

v
.

CIT

(
20

ITR

231

(Pat
.
)
.


Nov 24, 2012

Bansi S. Mehta & Co.

12

Audit of Accounts
-

Section 142(2A)


The assessing officer, if


o

having regard to the nature and complexity of the accounts of the
assessee and

o

in the interest of the revenue


is of the opinion that it is necessary so to do, may, at any stage of
the proceedings before him, direct the assessee to get the
accounts audited by a Chartered Accountant nominated by the
Chief Commissioner / Commissioner of Income Tax.


The assessing officer can issue such direction only with prior
approval of the Chief Commissioner/ commissioner of Income
Tax [section 142(2A)].


Direction of audit can be given even if the accounts are already
audited under the Income Tax Act or under any other law
[Section 142(2B)].


Nov 24, 2012

Bansi S. Mehta & Co.

13

Sec.142 (2A)


The direction to get accounts audited can be issued only in the course
of pending assessment proceedings and not after the completion of
assessment. The assessment also includes reassessment.



No appeal is possible against order u/s 142(2A) for audit of accounts.



Special audit cannot be ordered only on the basis of doubt regarding
correctness accounts. Before an approval is sought for, the assessing
authority must form an opinion regards the said twin conditions.



There should be an honest attempt to understand the books of account
of the assessee.



There has to be an application of mind on the part of the assessing
authority.


Nov 24, 2012

Bansi S. Mehta & Co.

14


Quasi
-
judicial

Proceedings



Indian

&

Eastern

Newspapers

Society

v
.

CIT

(
119

ITR

996
)(SC)


Assessment

to

be

based

on

material

and

information

and

on

the

basis

of

conjectures

and

surmises



Dhakeshwari

Cotton

Mills

Ltd

(
26

ITR

775
)

(SC)


Principle

of

natural

justice

applies

(CIT

v
.

Raja

Ginning

Udyog

(
268

ITR

383
)

(MP)



Res

judicata

does

not

apply

-

Dwarkadas

Morarka

(
44

ITR

529
)(SC)
.

However

principle

of

consistency

applies

(
208

ITR

872
)(Raj)


Principle

of

Estoppel

does

not

apply

to

Department

as

well

as

to

assessee
.

Mistake

by

one

does

not

estopp

another
.

CIT

v
.

Thanthi

Trust

(
137

ITR

735
)Mad)

&

Balmukund

Acharya

(
Bom
)(HC
)


Nov 24, 2012

Bansi S. Mehta & Co.

15

Assessment


General Principles

Assessment


Practical Aspects


Manner

and

extent

of

furnishing

details


AIR

Reconciliation


Issue


wise

Submissions


Details

to

be

self

explanatory

else

supported

by

explanatory

notes


Additional

Information


Recurring

Issues



Fresh

Claims

and

Deductions


Without

Prejudice

claims


Recourse

to

section

144
A

Nov 24, 2012

Bansi S. Mehta & Co.

16

Time limit to Complete Assessment


From

AY

2010
-
11

&

onwards
:

An

assessment

u/s

143

shall

be

completed

within

2

years

from

the

end

of

the

relevant

assessment

year
;





From

AY

2009
-
10

&

onwards
:

Where

reference

is

made

to

Transfer

Pricing

Officer

(TPO),

the

time

limit

for

completion

of

assessment

would

be

shall

be

3

years
.


Nov 24, 2012

Bansi S. Mehta & Co.

17

Assessment Order


The

assessment

order

should

determine

not

only

the

total

income

of

the

assessee

but

also

the

amount

payable

by

him
.

Where

the

order

determining

the

total

income

is

passed

within

the

prescribed

time

limit

but

the

tax

payable

is

not

determined

within

the

prescribed

time

limit,

assessment

would

be

time

barred
.



The

officer

must

assess

the

total

income

of

the

assessee

in

accordance

with

the

provisions

of

the

Act
.

It

is

not

open

to

him

to

assess

the

income

from

one

or

more

sources

and

leave

the

others

undetermined
.

He

cannot

make

piecemeal

assessment

nor

can

he

make

a

provisional

or

tentative

assessment

-

Debi

Prasad

Malviya

v
.

CIT

22

ITR

539

(All
.
)



Nov 24, 2012

Bansi S. Mehta & Co.

18

Best Judgement Assessment (S. 144)


When can a best judgement assessment be made? (Sec.
144(1))


(a)
Failure to file ROI u/s. 139(1)
and

u/s. 139(4)/(5); or


(b)
Fails

to

comply

with

all

the

terms

of

the

notice

u/s
.

142
(
1
)

or

direction

u/s
.

142
(
2
A)
;

or


(c)
Fails

to

comply

with

all

the

terms

of

notice

u/s
.

143
(
2
)







AND


(d)
Assessee

is

given

an

opportunity

of

being

heard

(issue

of

show

cause

notice)





Nov 24, 2012

Bansi S. Mehta & Co.

19

Section 144


In

addition

to

above,

the

assessing

officer

is

empowered

to

make

best

judgment

assessment

in

the

following

situation
:



Where the assessing officer is not satisfied about the
correctness or completeness of the accounts of the
assessee; [See:
Madani

Construction Corporation P. Ltd.
V . CIT (296 ITR 45) (
Gauh
.)]



Where the method of accounting u/s 145(1) has not
been regularly
followed; and



Where accounting standards notified by the central
government u/s 145(2) have not been regularly
followed by the assessee.


Nov 24, 2012

Bansi S. Mehta & Co.

20

Section 144….


Issue of Show cause notice:

o
Before

proceeding

with

best

judgement

assessment,

show

cause

notice

u/s
.

144

needs

to

be

issued

to

the

assessee
.

o
No

such

notice

be

issued

in

case

notice

u/s
.

142
(
1
)

is

already

issued
.

o
No

time

limit

specified

upto

which

such

notice

needs

to

be

issued
.



Time limit for passing 144 order
-

Sec. 153(1):

Assessment u/s. 144 to be completed within 2 years
from the end of the relevant assessment year


Nov 24, 2012

Bansi S. Mehta & Co.

21

Issues related to section 144


144 Order needs to be a speaking order as regards:


Reasons for conducting best judgement assessment


Basis of determining the tax liability

Caselaws
:


CIT V.
Ranicherra

Tea Co. Ltd. [207 ITR 979] (Cal.)


Oceanic Industries (India) Pvt. Ltd. (34 STC 546) (Cal.)


ACIT V.
Roopchand

Kharani

(66 DTR 104) (
Chattisgarh
)



AO needs to make an intelligent and well grounded estimate and
thereby does
not have an absolute arbitrary authority
u/s. 144


Caselaws
:


S. N.
Hasan

V. New Gramophone House (AIR 1977 SC 1788)
(SC)


State of Orissa V. Maharaja
Shri

B. P. Singh
Deo

(76 ITR 690)
(SC)


Kanchwala

Gems V. JCIT (288 ITR 10) (SC)



Nov 24, 2012

Bansi S. Mehta & Co.

22

Issues related to section 144


Once

books

of

accounts

are

rejected,

then

reliance

on

some

entries

in

those

books

to

make

separate

addition

is

not

justified


ACIT

V
.

Renu

Mukherjee

(
177

Taxmann

58
)(Del
.
)(Trib
.
)



Clause

(a)

to

(d)

-

whether

cumulative

or

alternative?


Supreme

Court

in

Buchiah

Setty’s

case

(
77

ITR

539
)

dealing

under

the

1922

Act

held

that

the

conditions

specified

are

‘alternative’


Kerala

HC

in

Mubarak

Trading

Co

(
174

Taxmann

339
)

dealing

under

the

present

Act

has

held

that

the

conditions

are

‘cumulative’



Nov 24, 2012

Bansi S. Mehta & Co.

23

Income Escaping Assessment (Sec.
147)


AO has to have a reason to believe that income has escaped assessment


Obligatory to issue notice


Reasons must be recorded in writing


ITO should have “reasons to believe” and not “reasons to suspect” [ACIT
vs. Rajesh
Jhaveri

Stock Brokers (P) Ltd.(2007) 291 ITR 500 (SC)]


Limitation of issuing notice


6 years from end of AY


Approvals to be taken [sanctions]


Types


No Regular Assessment


Regular Assessment, but within 4 years


Regular Assessment, beyond 4 years [Failure cases]


Cases where no time limit applies


Special cases of agent U/s. 163 [2 year time limit]


Assessment procedure


Nov 24, 2012

Bansi S. Mehta & Co.

24

Tabular presentation of Provisions

If no Regular Assessment
1

If less than 4 Years
*

Nil

None

If more than 4 years
*

Rs. 1.00

lac

JCIT

If Regular Assessment

If less than 4 years
*

Nil

JCIT sanction
[ITO]

If more than 4 years
*

Rs
. 1.00

lac

CCIT / CIT

Failure of
Assessee

If Assessment as agent

Overall time

limit of 2 years from end of AY

Nov 24, 2012

Bansi S. Mehta & Co.

25

1
Including Assessment under Section 147

* From end of the Relevant Assessment Year

Overall time limit of 6 years from end of the relevant AY

“Escapement of Income”


Explanation 2 to 147 [namely


but “also”]


No ROI furnished though income exceeded maximum amount not
chargeable to tax;


Return filed, no assessment made and the AO notices that Assessee
has understated income or has claimed excessive loss, deduction,
allowance or relief in the return


Assessment made, but Income under assessed, or Assessed at too
low a rate or Excessive relief ; or Excessive loss or depreciation
allowance or any other allowance


Escapement is must


Assessed for later year is not escapement [Hum
Boldt

Wedag

India ltd.
(236 ITR 845) (Cal)]


Pendency of valid return bars reassessment [
Deva

Prasad
Barua

(75
ITR 18) (SC),
Ranchhoddas

Karsondas

(36 ITR 569) (SC)]


Pending Assessment proceedings [(51 ITR 557) (SC)]

Nov 24, 2012

Bansi S. Mehta & Co.

26

Reasons to be recorded


Absolute must and it has to be recorded before
issuance of notice


Forms foundation of the proceeding


Recording it before issuance of notice is a must


Smt.
Narinder

Kaur

144 Taxation 527 (
Punj
)


IBM World Trade Corporation 216 ITR 811 (
Bom
)


UOI Vs.
Rai

Singh 88 ITR 200 (SC)


Johri

Lal

88 ITR 439 (SC)


Divekar

157 ITR 629 (
Bom
)


Mechanically recording of reasons [
Lokendra

(155 ITR 629) /
Agarwalla

(189 ITR 786)


Factually incorrect or misguiding [
Suganchand

(105 ITR 743(]


Cannot be waived by the Assessee [
Doshi

(113 ITR 22) (
Guj
)]


Nov 24, 2012

Bansi S. Mehta & Co.

27

Communication of the Reasons


Reasons need not be communicated with the notice


Law pronounced by the SC in the case of GKN
DriveShafts

(259
ITR 19)


AO issues the notice


Assessee files the returns and asks for copy of the reasons recorded
[better if you file initial objections or denial of the validity]


AO provides the copy of the reasons recorded


Assessee filed the objections


AO disposes off the objections by speaking order


AO then proceeds with the assessment


Whether the order by AO disposing off the objection is an
appealable order?


Writ or appeal against normal assessment


Nov 24, 2012

Bansi S. Mehta & Co.

28

Issue of Notice


Concept is “issue” of notice and not “Service”


The limitation applies to issuance of notice and not of service R. K.
Upadhyaya

Vs.
Shanabhai

Patel 166 ITR 163


However, service of valid notice is a must for reassessment


Non
-
service of the valid notice is jurisdictional defect and cannot be
cured T. R.
Rajakumari

96 ITR 78 (Mad)


If the notice is invalid for any reason or service is invalid the entire
proceedings gets vitiated and becomes null and void [Y.
Narayana

Chetty

35 ITR 388 (SC)


Notice could be invalid for the following reasons


Vague [about assessment year / person / status, etc.] [
Chandiprasad

119
ITR 340;
Madablal

144 ITR 745;
Adinaryana

65 ITR 607]


Not served in accordance with law [
Jayanthi

120 ITR 576]


Incorrect Assessment Year [
Kurban

Hussain

82 ITR 821 (SC)]


Not Signed [
Gooyee

62 ITR 109 (Cal)]


Nov 24, 2012

Bansi S. Mehta & Co.

29

Objections to the Reasons


Change of Opinion


143 (1) Notice


No Opinion and therefore no question of change of
opinion Bharat V. Patel [268 ITR 116 (
Guj
)]


Mere Change of opinion does not entitle the AO to re
-
open the
assessment


even within the period of 4 years [Kelvinator 256 ITR
1 (Delhi) (FB) Jindal Photo (234 ITR 170)


No “change of opinion” if AO does not specifically apply his mind


Usha

International Ltd (Delhi HC)(Full Bench)



Pending Assessment


Notice U/s. 148 cannot be issued when valid return pending


Once the time limit for issuance of notice U/s. 143 (2) has passed,
the 148 notice can be issued

Nov 24, 2012

Bansi S. Mehta & Co.

30

Regular assessment > 4 Years


Proviso to Section 147


Where an assessment U/s. 143 (3) or S. 147 made earlier


No action under Section 147 beyond 4 years from end of the A.Y.
unless, income has escaped assessment on account of failure on
the part of the assessee to:


File the return of income; or


Fully and truly disclose all material facts necessary
for the purpose of making an assessment



Failure” on the Part of the Assessee


“Material Facts”

Therefore, mere escapement of income is not sufficient


Nov 24, 2012

Bansi S. Mehta & Co.

31

Scope of Re
-
assessment


Need

not

restrict

himself

to

the

reasons

recorded

-

Fishing

enquiry



whether

permissible


When

original

reasons

recorded

are

held

to

be

invalid,

the

re
-
assessment

cannot

be

confirmed

on

other

grounds

-

[
Chunnilal

160

ITR

141
]

o
Reasons

recorded

on

Grounds

A

and

B

o
Grounds

A

and

B

no

addition

made
;

o
Additions

made

on

Ground

C



Not

Valid


What

is

set
-
aside

in

the

re
-
assessment

is

only

the

previous

under
-
assessment

and

not

the

whole

assessment

.

Assessee

cannot

re
-
agitate

questions

which

had

been

decided

in

the

original

assessment

-

[Sun

Engineering

Works

198

ITR

297

(SC)


However,

the

assessee

can

put

forward

his

claim

for

expenditure

relatable

to

escaped

income

[
Caixa

Economica

210

ITR

719

(
Bom
)]


Reduction

in

originally

assessed

income,

refund

of

tax,

assessment

of

loss,

etc
.

not

permissible

[
Kasinath

4

ITC

472
,

Satyendra

4

ITC

447
,

Niranjan

52

ITR

882



Nov 24, 2012

Bansi S. Mehta & Co.

32

Section 292B and 292BB


Effect on assessments


Applicability of sec 292 BB


Assessment
Year 2008
-
09 and onwards.


For earlier A Y’s


objections can be
raised at any forum


Kuber

Tobacco Products P Ltd (117 ITD 273)
ITAT Delhi


Nov 24, 2012

Bansi S. Mehta & Co.

33

Other Aspects in assessments


Scrutiny Assessment with reference to AIR (Sec.
285BA)


Transfer Pricing Assessments and DRP


Protective Assessments


Order Giving Effect to 263, 250, 254


Nov 24, 2012

Bansi S. Mehta & Co.

34

Post Assessment Procedures


Penalty Proceedings


Stay Proceedings


Filing of Appeals and Revision Applications


Rectification Proceedings


Additional Claims post assessment

Nov 24, 2012

Bansi S. Mehta & Co.

35

Thank You

Nov 24, 2012

Bansi S. Mehta & Co.

36