Dahila Infrastructure Pvt. Ltd. Vs DCIT (ITAT Delhi)
Summary: ITAT Delhi allowed the assessee’s appeal for AY 2015-16 and deleted additions relating to short-term capital loss of Rs.5,46,97,033/- on forfeiture of share warrants and disallowance under section 14A read with Rule 8D, holding that both additions travelled beyond the scope of the limited scrutiny proceedings. The assessee, a private limited company engaged in infrastructure development, had filed its return declaring a loss of Rs.3,92,92,800/-. Its case was selected under CASS for limited scrutiny for the reason “large other expenses claimed in Profit & Loss account”.
During appeal, the assessee raised additional legal grounds challenging the jurisdiction of the AO to make the two additions. Relying on NTPC Ltd., the Tribunal admitted the additional grounds as purely legal issues requiring no further factual verification. On examining the accounts, the Tribunal found that although loss on share warrants of Rs.5,46,97,033/- appeared under “Other expenses” in the Profit & Loss account, the assessee had itself added that amount back while computing business income.
The remaining other expenses were only Rs.14,683/-, comprising rent and taxes of Rs.600/-, auditor’s remuneration of Rs.14,045/- and printing and stationery of Rs.38/-. Thus, no “large other expenses” had actually been claimed in the return under business or profession. The Tribunal held that once the assessee had itself disallowed the large expense, the AO’s scope under limited scrutiny ended.
Invoking section 14A for other expenses and examining the share warrant loss under capital gains were outside the stated limited scrutiny reason. Referring to CBDT Instruction No.20/2015 dated 29.12.2015, the Tribunal observed that enquiries in limited scrutiny cases must remain confined to specified issues unless the prescribed procedure for conversion into complete scrutiny is followed, including recording satisfaction and obtaining the necessary approval. Relying upon CIT vs. Padmavathi and ACIT Vs. Trehan Properties & Builders Pvt. Ltd., it held that no addition could be made beyond the limited scrutiny scope without such conversion. The additional grounds were therefore allowed and the additions sustained by the CIT(A) were deleted.
Cases Discussed
- NTPC Ltd. v. CIT, (1998) 229 ITR 383 (SC) — Relied upon for admitting the additional grounds concerning the scope of limited scrutiny, as they were purely legal grounds going to the root of the matter and required no further verification.
- CWT v. N.A. Narielwalla, (1980) 126 ITR 344 (Bom.) — Relied upon by the assessee in support of admission of the additional legal grounds.
- CIT v. Padmavathi, [2020] 120 taxmann.com 187 (Madras) — Relied upon for the principle that the AO cannot make additions beyond the scope of limited scrutiny without following the prescribed procedure.
- ACIT v. Trehan Properties & Builders Pvt. Ltd., CO No. 9/Del/2020, order dated 29.10.2022 (ITAT Delhi) — Coordinate Bench decision relied upon in support of the principle restricting the AO to the scope of limited scrutiny.
FULL TEXT OF THE ORDER OF ITAT DELHI
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeal) [CIT(A)], National Faceless Appeal Centre (NFAC), dated 12.09.2024 in Appeal No. CIT(A), Delhi- 3/10151/2017-18 for AY 2015-16 vide order passed u/s 250 of the Income Tax Act, 1961 (the Act).
2. Brief facts of the case are that assessee is a private limited company engaged in the business of infrastructure development. The return of income was e-filed on 23.09.2015 declaring loss of Rs. 3,92,92,800/-. The assessment was taken up for limited scrutiny by way of issue of notice u/s 143(2) of the Act. The assessment was completed vide order dt. 30.12.2017 passed u/s 143(3) at a total income of Rs. 2,03,48,692/- by making additions of Rs. 49,28,702/- u/s 14A and further disallow the short term loss of Rs. 5,46,97,033/- incurred on share warrants. In first appeal, vide impugned order dt. 12.09.2024, ld. CIT(A) has dismissed the appeal of the assessee. Aggrieved from the said order of ld. CIT(A), assessee is in appeal before us by taking following grounds of appeal.
“1. The Hon CIT(A)-NFAC has erred in law and in facts in confirming the disallowance of short term capital loss of Rs.5,46,97,033 on account of forfeiture of share warrant on illegal and untenable grounds. Hence, Short term capital loss may be allowed to the assessee.
2. The Hon CIT(A)-NFAC has erred in law and in facts in confirming the disallowance u/s 14A read with rule 8D amounting to Rs. 49,44,460/-on illegal and untenable grounds. Hence, the amount of Rs. 49,44,460.00 may be allowed to the assessee.
3 That the appellant craves leave to add, delete, modify or substitute any ground of appeal on or before the date of hearing. All the above ground of appeal are independent of each other.
3. During the course of hearing vide application dt. 11.02.2025 assessee has taken additional ground of appeal, which is as under:
“1. That the assessment order is bad in law and on facts as the disallowance of short term capital loss of Rs. 5,46,97,033/- on account of forfeiture of share warrant is beyond the scope of limited scrutiny. Hence, the disallowance of short term capital loss may be deleted.
2. That the assessment order is bad in law and on facts as the disallowance of expenses u/s 14A read with rule 8D amounting to Rs. 49,44,460/- is beyond the scope of limited scrutiny. Hence, the disallowance of expenses u/s 14A read with rule 8D may be deleted.
4. The ld. AR submits that the additional grounds of appeal now raised are purely legal grounds and goes to the root of the matter thus the same may be admitted and adjudicated first. He placed reliance on the decision of Hon’ble Supreme court in the case of NTPC Ltd. reported in 229 ITR 383 (SC) and also on the judgement of Hon’ble Bombay high court in the case of CWT Vs. N.A. Narielwalla (1980) 126 ITR 344 (Bom.).
5. After considering the submission and looking to the nature of additional grounds of appeal raised by the assessee, we find that in these grounds of appeal, the assessee has challenged the scope of limited scrutiny vis-à-vis additions made beyond the reasons for limited scrutiny which issue is purely legal and requires no further verification. Thus, in the interest of justice and in view of the ratio laid down by the Hon’ble Supreme court in the case of NTPC Ltd. (supra), the additional grounds of appeal taken by the assessee are admitted and taken up for consideration first.
6. Before us, ld.AR submitted that the case of the assessee was selected for limited scrutiny in terms of the notice issued u/s 143(2) dt. 14/04/2016, copy of which is placed in the paper book page 18. He further drew our attention to page 20 of paper book which is the copy of questionnaire u/s 142(1) dt. 19.01.2017 wherein the AO in point No. 2 has asked the assessee to justify the CASS reason for limited scrutiny i.e. “Large other expenses claimed in the Profit & Loss A/c”. However, the assessment was completed wherein an addition is made of Rs 49,44,460/- u/s 14A read with Rule 8D of the Act and also disallowed the short term loss on sale of share warrants of Rs.5,46,97,033/-. He further stated that assessee has not claimed any large expenses in P&L account for which the provisions of section 14A could be invoked. For this he took us to page 13 of the paper book where in Note No. 14 to Profit & Loss account other expenses to the tune of 5,47,11,716/- were claimed which inter-alia include Loss on Share warrants of Rs. 5,46,97,033/-. Ld. AR further submitted that the amount of loss on share warrants has already been disallowed and added back to the total income which could be verified from the computation of income placed in paper book page 2. He thus argued that assessee has not claimed any large expenses in the return of income filed and the major amount of Rs. 5,46,97,033/- being loss on share warrants was already included in the total income therefore, their remained no issue specified under the reason for limited scrutiny. According to ld. AR the issue of 14A is not at all referred in limited scrutiny but was also considered and additions was made, therefore, the entire addition made by the A.O. and which was sustained by the CIT(A) requires to be set aside. He prayed accordingly.
7. Per contra, the Ld. DR has relied on the order of the lower authorities and submitted that Ld. CIT(A) has dealt with every issue in detailed thus the same requires no interference. He further submits that issue of short term loss on sale of shares is borne out from the other expenses claimed in the Profit & Loss account by the assessee thus this issue is fully covered by the limited scrutiny reason. Regarding the addition made u/s 14A, ld. AR submitted that when the assessee has claimed dividend received as exempt income, AO has rightly invoked the provisions of section 14A and made the addition. He therefore, requested to confirm the orders of the lower authorities.
8. We have heard the parties and perused the material on record. After giving thoughtful consideration to the facts, we found that the case of the assessee was selected under CASS for limited scrutiny where the reason for limited scrutiny was “large other expenses claimed in Profit & Loss account”. From the perusal of the return of income and the Profit & Loss account produce before us, it is seen that the assessee though had claimed loss on share warranty of Rs. 5,46,97,033/- in Profit & Loss account under the head “Other expenses” however, the same was added back to the total income and not claimed in the return filed as expenses under income from business or profession. The remaining expenses under the head “other expenses’ were to the tune of Rs. 14,683/- claimed towards Rent and Taxes Rs.600/-, Auditors remuneration Rs. 14045/- and Printing & stationery Rs. 38/-. Therefore, no large other expenses was claimed by the assessee in the Profit & Loss account as per the reason of limited scrutiny. Further the quantum and nature of remaining expenses suggest that they were neither large in amount nor were incurred to earn exempt income thus the AO has no power to examine these expenses under limited scrutiny since it is beyond the scope of reason for limited scrutiny.
9. The assessment of the assessee company was selected for limited scrutiny for the reasons mentioned above. When the assessee itself has disallowed the large expenses claimed in the shape of loss on share warrants and added back to the total income computed under the head “Income from Business or Profession” the scope of the AO in limited scrutiny ends. The action of the AO in invoking the provision of section 14A for other expense claimed under the said head and ultimately made addition is not part of the reasons mentioned in the limited scrutiny and thus not permissible. Further as observed above, the assessee has not claimed large expenses in the shape of loss on sale of share warrant, the AO has no jurisdiction under limited scrutiny to further examine the said loss claimed by the assessee under the head “Income from Capital Gains” as it is not covered in the reason for limited scrutiny. The said action of the Ld. A.O is contrary to the procedure prescribed by the CBDT Instruction No. 20/2015 dated 29/12/2015 which reads as follows:-
“3. As far as the returns selected for scrutiny through CASS-2015 are concerned, two type of cases have been selected for scrutiny in the current Financial Year – one is ‘Limited Scrutiny’ and other is Complete Scrutiny’. The assessee’s concerned have duly been intimated about their cases falling either in ‘Limited Scrutiny’ or ‘Complete Scrutiny’ through notices issued under section 143(2) of the Income-tax Act, 1961 (‘Act’). The procedure for handling ‘Limited Scrutiny’ cases shall be as under:
a. ‘Limited Scrutiny ‘ cases, the reasons/issues shall be forthwith communicated to the assessee concerned.
b. The Questionnaire under section 142(1) of the Act in ‘Limited Scrutiny’ cases shall remain confined only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope of enquiry shall be restricted to the ‘Limited Scrutiny ‘ issues.
c. These cases shall be completed expeditiously in a limited number of hearings.
d. During the course of assessment proceedings in ‘ Limited Scrutiny’ cases, if it comes to the notice of the Assessing Officer that there is potential escapement of income exceeding Rs. five lakhs (for metro charges, the monetary limit shall be Rs. ten lakhs) requiring substantial verification on any other issue(s), then, the case may be taken up for ‘Complete Scrutiny ‘ with the approval of the Pr. CIT/CIT concerned.
However, such an approval shall be accorded by the by the Pr. CIT/CIT in writing after being satisfied about merits of the issue(s) necessitating ‘Complete Scrutiny’ in that particular case. Such cases shall be monitored by the Range Head concerned. The procedure indicated at points (a), (b) and (c) above shall no longer remain binding in such cases. (For the present purpose, ‘Metro charges’ would mean Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Ahmedabad).”
10. It is well settled law that if a case is taken for limited scrutiny by the A.O., he cannot exceed the jurisdiction beyond the one which he has carved out himself in the notice issued for limited scrutiny. In the present case, the Ld. Assessing Officer has travelled beyond his jurisdiction and made additions on the issues which are not part of the reasons for limited scrutiny. Therefore, both the A.O. and Ld. CIT(A) has committed an error in making the addition and sustaining the same which requires to be set aside. This view of our is supported by the decision of Hon’ble Madras High Court in the case of CIT vs. Padmavathi reported in [2020] 120 taxmann.com 187 (Madras). Similar view is expressed by the coordinate bench of Tribunal, Delhi in the case of ACIT Vs. Trehan Properties & Builders Pvt. Ltd. in CO No. 9/Del/2020 vide order dt. 29.10.2022.
11. As the facts of the present case are squarely covered by the decision of the Hon’ble Madras High Court in the case of Padmavathi (supra) and also of the coordinate bench of ITAT, thus in our opinion no addition could be made in the hands of the assessee beyond the scope of limited scrutiny without following the procedure laid down for converting the limited scrutiny into complete scrutiny by recording satisfaction and further by taking necessary approval from the higher authorities as prescribed.
12. Accordingly, the Additional Grounds of appeal taken by the assessee are allowed and the additions sustained by the Ld. CIT(A) are hereby deleted.
13. As a result, appeal of the assessee is allowed.
Order pronounced in the open court on 26/3/2025.
