AIR (Annual Information Report) and Scrutiny Assessment u/s 143(3)

In the era of technology and data analytics, Income Tax Department too empowered itself with one of the most enabling data-sets which allowed itself to peep itself into the assessee’s deeper secrets by laying down the responsibility on Financial Institution like Banks, Mutual Funds, to submit AIR (Annual Information Report). The details about certain class of transactions (criteria like amount, mode etc) which certain class of persons need to furnish annually were included in the Act by inserting Section 285BA and related rules (Rule 114E to 114H)

The content and format of AIR is not privy to the scope of this Article, but what we will try to analyse in the forthcoming discussion that how this crucial guard of information available with the department against evasion slowly becoming an indiscriminate weapon in the hands of the officials for harassing the assesses and how the proceedings emanating from AIR should be dealt with.

Regular scrutiny assessment u/s 143(3) on the basis of AIR information:

Now, As per Rule 114E read with Section 285BA, Form No. 61A (the format in which AIR is being submitted to the Department) shall be submitted by 31^st May immediately following the financial year in which transaction is registered or recorded.

For example

“A” submitted his return for AY 2017-18 (FY 2016-17) on 31^st July 2017 and say he has been maintaining a saving bank account in which he deposited Rs. 12,00,000 in cash during the year. Now, this information already reached the department in the form of AIR by 31^st May 2017. So there is a possibility, that the department issue an inquiry notice before 30.09.2018 (the last date for issuing the notice for taking the case under Sec 143(3)- Regular Scrutiny).

Now in this respect, an important set of instructions were issued by CBDT (Instruction No. 20/2015 dated 29.12.2015 to be read with Instruction No. 7/2014 dated 26.09.2014) to the field formations is very relevant. As per these instructions, in the certain category of cases which are selected under CASS only on the parameter(s) of AIR/CIB/26AS data, the “AO shall confine the Questionnaire only to the specific issues pertaining to AIR/CIB/26AS data. Wider scrutiny in these cases can only be conducted as per the guidelines and procedures stated in Instruction No. 7/2014.” Now, a reading of Instruction No. 7/2014 would give us an idea of circumstances in which wider scrutiny can be conducted.

Para 4 of the said instruction read as follows:

“In case, during the course of assessment proceedings, it is found that there is potential escapement of income exceeding Rs. 10 lakhs (for non metro charges, the monetary limit shall be Rs. 5 lakhs) on any other issue(s) apart from the AIR/CIB/26AS information based on which the case was selected under CASS requiring substantial verification, the case may be taken up for the comprehensive scrutiny with the approval of Pr. CIT/DIT concerned. However, such an approval shall be accorded by the Pr. CIT/DIT in writing after being satisfied about merits of the issue(s) necessitating wider and detailed scrutiny in the case. Cases so taken up for detailed scrutiny shall be monitored by the Jt. CIT/Addl. CIT concerned.”

It is becoming a common practice on the part of the department to use AIR information as an excuse for converting a limited scrutiny into wider scrutiny, without any reasonable basis, thus committing the blatant violation of the above instructions.

Now the question arises, whether a defense of such instructions can be taken by the assessee if his case is being expanded to full scrutiny without furnishing any concrete reasons and following the proper procedures. The answer is “Yes”. Assessee should bring this into the record that he reminded the AO about the act of malfeasance by raising the objection. This would strengthen his case before the appellate authorities and there were precedents, where proceedings were held void if not done as per CBDT Scrutiny guidelines. Notably:

M/s Crystal Phosphates Ltd. vs Asst. Commissioner of Income Tax (ITAT Delhi) ITA No. 3630/Del/2009

“Once the CBDT has issued instructions for assumption of jurisdiction for selection of cases of corporate assesses for scrutiny and assessment thereof, the same have to be followed in letter and spirit by the AO. The burden lies on the authority assuming jurisdiction to show and establish that such instructions have duly been complied and satisfied in letter and spirit. However, in the instant case, for the reasons stated above, instructions issued by the CBDT are not shown to have been satisfied for assumption of jurisdiction. Thus, we are in agreement with the contention raised by the appellant that notice issued u/s 143(2) of the Act for assumption of jurisdiction was not in terms of the instructions of the CBDT.

Hence, both the notice and the assessment framed are held to be without valid jurisdiction and stand quashed as such.”

In the same judgment, references were also made to the higher court’s judgements like

UCO Bank v. CIT [1999] 237 ITR 889- SC

“the authority, which wields the power for its own advantage under the Act, has a right to forgo the advantage when required to wield it in a manner it considers just by relaxing the rigour of the law by issuing instructions in terms of section 119 of the Act.”

Further references were made to the judgements of Hon’ble Delhi High Court in the case of Dr. Nalini Mahjan Vs. CIT 257 ITR 123 and that of Hon’ble Supreme Court in the case of L. Hirday Narain 78 ITR 26 (SC), wherein it has been held that certain things which are required to be done in prescribed manner to be done in the same manner.

And recently, CBDT on 30^th November, 2017 issued instructions with the subject reads as “Unauthorized expansion of the scope of limited scrutiny- instructions- reg.”

Para 3 of such order made it quite clear about how seriously CBDT looks this as a concern

“Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited Scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26.09.2014 , 29.12.2015 and 14.07.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of allegations of several irregularities. Amongst other irregularities it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension.”

Thus, it is important for the assessee and professionals to know the applicability of such instructions and to what extent AIR information can be used by the AO to verify the assessee’s claims and the extent of such scrutiny. This is the first part of the two part series “AIR and Assessment proceedings under Income Tax Act, 1961”. In the next article, detailed analysis would be done on AIR and Reopening of Assessment under Section 147.

(Republished with Amendments)