Section 139 (1) enjoins on all corporate and partnership firms to file return of income whether or not they have income or loss. In the case of other assessees i.e., individuals, HUFs etc., the return of income has to be filed only if the income exceeds the prescribed basic limit.This write-up discusses the scrutiny procedure prescribed by the Central Board of Direct Taxes (CBDT) for the current financial year and the related issues.
As per Section 143 (1) if any tax or interest is due, intimation is required to be issued to the assessee. Similarly, where there is any refund due on the basis of return filed by the assessee, intimation is required to be issued by the Assessing Officer (AO). The time limit for giving intimation is one year from the end of the financial year in which the return was filed. For example, for the assessment year 2006-07 if the return is filed on June 5, 2007, the time limit for giving intimation under Section 143(1) is available up to March 31, 2009.
Where the AO believes that the claim of loss, exemption, deduction, allowance or relief in the return is inadmissible or if he considers it necessary to ensure that the assessee has not understated his income, a notice under Section 143 (2) would be issued for verifying the books of account and other relevant documents and evidences. The culmination of this exercise would be scrutiny assessment envisaged in Section 143(3).
The time limit for service of scrutiny notice is 12 months from the end of the month in which the return was filed by the taxpayer. The time limit for completing the assessment is 21 months from the end of the assessment year in which the return was first assessable.
For the assessment year 2007-08 if the return is filed after June 1, 2007 the time limit for completing scrutiny assessment would expire after December 31, 2009. The time limit for issuing intimation under Section 143(1) for non scrutiny cases, however, is available up to March 31, 2010 (i.e.2 years from the end of the financial year in which the return was filed).
The CBDT instruction
The CBDT has given norms for current fiscal for selection of cases meant for scrutiny.
For corporates: All banks and public Sector undertakings are liable for scrutiny. Also, all NSE-500 companies and BSE-A group companies listed in Bombay Stock Exchange as on March 31, 2007, are covered. Companies in Delhi , Mumbai, Chennai, Kolkata, Pune, Hyderabad , Bangalore and Ahmedabad paying book profit tax under Section 115 JB on the book profit of Rs 50 lakh and above are liable for scrutiny. In the case of companies in other places the monetary limit for book profit is Rs 25 lakh.
All non-banking financial corporations and investment companies having paid up capital of Rs 10 crore are covered. Companies who have amalgamated and seeking set off of loss under Section 72 A are also to be scrutinised. Where the fresh capital introduced is Rs 50 lakh during the year such assessees are liable for scrutiny assessment.
For non-corporates: If the fresh capital introduced exceeds Rs 50 lakh in respect of cases in Delhi, Mumbai, Chennai, Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad are liable for scrutiny. In respect of other places the monetary limit for fresh capital introduction is Rs 10 lakh for scrutiny selection.
Where the unsecured loans introduced during the year exceeds Rs 25 lakh, such case is also covered. All market committees and statutory bodies are liable for compulsory scrutiny. Professionals with gross receipts of Rs 20 lakh or more but the income returned is less than 20 per cent are liable for scrutiny of their cases.
Common to all taxpayers
The following criteria apply for all the taxpayers regardless of their status.
All search and seizure cases and surveys conducted under Section 133 A.
Cases where deduction under chapter VI-A exceeds Rs 25 lakh.
Cases were the CIT or ITAT has confirmed addition or disallowance of Rs 5 lakh or above in an earlier year and the identical issue arising in the current year.
All cases in which the appeal is pending before CIT or pending before ITAT in respect of appeal preferred by the Department relating to addition or disallowance of Rs 5 lakh and the identical issue arising in the current year.
Charitable trusts claiming exemption under Section 11 with gross receipt exceeding Rs 5 crore in 8 cities viz Delhi, Mumbai, Chennai, Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad. For other places the monetary limit is Rs 1 crore.
Educational institutions, hospitals (being non profit organisations) with aggregate receipt exceeding Rs 10 crore (including corpus donations) in 8 cities and Rs 5 crore in other places. However, it will not apply to those which are substantially financed by the Government.
All cases where the total value of International Transactions for the year exceeds Rs 15 crore.
Stock brokers and commodity brokers where the brokerage exceeds Rs 1 crore.
Stock brokers and commodity brokers including sub-brokers if the bad debt claim is Rs 5 lakh. For corporates, if the bad debt claim is Rs 10 lakh or more it will be liable for scrutiny.
All cases where deduction under Sections 10A/10B/10BA/ 10AA exceeds Rs 25 lakh.
Contracts (other than transporters) whose contract receipt exceeds Rs 1 crore and the income declared is less than 5 per cent of gross contract receipts.
Loss from house property if more than Rs 2.50 lakh.
Investment in property is more than 5 times the gross income (including agriculture and other exempt incomes).
Short-term capital gains covered under Section 111A and long-term capital gains exceeding Rs 25 lakh.
Sale of property as per AIR return but no capital gain declared in the return of income.
Commission paid during the year if more than Rs 10 lakh.
Real estate business with gross turnover of Rs 5 crore.
Business of hotels/tour operators with gross turnover exceeding Rs 5 crore but the net profit is less than 0.05 per cent.
All cases where depreciation claimed at the rates of 80 per cent and 100 per cent is more than Rs 25 lakh.
All cases where the net agricultural income is more than Rs 10 lakh.
Deduction under Sections 80-IA (4), 80-IB, 80-IAB, 80-IC, 10(23C), 10A, 10AA, 10B or 10BA is claimed for the first time. All returns filed in response to notice under Section 148 shall be liable for scrutiny.
While above the parameters set for selection of cases for scrutiny is welcome, there is no general exemption or relief from scrutiny for admitting higher income by the taxpayers.
For example, if the taxpayer admits 30 per cent more than the previous year income still he can be subjected to scrutiny assessment if any transaction therein is covered by the above-said criteria. Indiscriminate issue of Section 148 notice and thereby subjecting the taxpayer to scrutiny assessment is possible. Necessary safeguards have to be introduced for preventing its misuse.
Currently, even exempted entities and taxpayers with below taxable income do not get exemption certificate from AO without going through the rigours of approval from the Joint Commissioner. While justification of such bureaucratic measures remains on one side, the difficulties of the small assessees require objective consideration.
At present, approval of scrutiny draft orders by the higher authorities delays the completion of assessment and causes hardship to the taxpayers. The AO who is empowered to make assessment in law must be permitted to complete the assessment without procedural bottlenecks. The administrative delay could be reduced by fixing the responsibility on the AOs wholly and solely for completing the scrutiny assessments.
If the AO chooses a case for scrutiny deviating from the norms fixed by the Board then the assessee can challenge the selection of case by means of a writ. There is no provision within the statute book for preventing the AO from proceeding further. However, even after the completion of assessment it could be challenged. Favourable decisions could be found in Nayana P. Dedhia vs Asst. CIT (86 ITD 398); Bombay Cloth Syndicate vs CIT (214 ITR 210) and CIT vs Savoy Enterprises Ltd (211 ITR 192). Contrary decision could be found in Setalvad Brothers vs M.K.Meerani, Addtl. CIT (253 ITR 530).