Limited Scrutiny: AO can’t verify cash withdrawals when permission was for cash deposit verification
Case Law Details
Vishnu Srinivasa Rao Kakarla Vs ITO (ITAT Visakhapatnam)
The case of Vishnu Srinivasa Rao Kakarla Vs ITO revolves around the issue of limited scrutiny and the jurisdiction of the Assessing Officer (AO) to verify cash withdrawals. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) by the assessee. This article provides an analysis of the ITAT’s decision and its implications for taxpayers.
Analysis: The assessee, a Fish Commission Agent, filed his income tax return for the AY 2018-19. The case was selected for limited scrutiny to verify cash deposits. The AO issued notices and questionnaires to the assessee, who responded with the required details. However, the AO went beyond the scope of limited scrutiny and disallowed cash withdrawals under section 40A(3) of the Income Tax Act.
The assessee contended that the AO exceeded his jurisdiction by converting the limited scrutiny into a full scrutiny assessment without the required permission from the Principal Commissioner of Income Tax (Pr. CIT). The Commissioner of Income Tax (Appeals)-NFAC dismissed the appeal, upholding the AO’s order. The assessee then appealed to the ITAT.
The ITAT examined the jurisdiction of the AO and concluded that the AO had indeed exceeded his powers. The limited scrutiny proceedings were initiated to verify cash deposits, and the AO had no authority to disallow cash withdrawals without converting the case into a full scrutiny assessment. The ITAT highlighted the importance of obtaining prior approval from the Pr. CIT/CIT before converting limited scrutiny into a complete scrutiny case.
Based on these findings, the ITAT quashed the order passed by the AO and allowed the grounds raised by the assessee.
Conclusion: The ITAT’s decision in the case of Vishnu Srinivasa Rao Kakarla Vs ITO clarifies the limitations of the AO in a limited scrutiny assessment. The AO cannot travel beyond the specified parameters and verify issues that are beyond the scope of limited scrutiny without converting the case into a complete scrutiny assessment. Taxpayers can rely on this ruling to ensure that their assessments stay within the prescribed jurisdiction and to challenge any unauthorized actions by the AO.
FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM
This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [Ld. CIT(A)-NFAC] vide DIN & Order No. ITBA/NFAC/S/250/2022-23/1049624886(1), dated 10/02/2023 arising out of the order passed U/s. 143(3) r.w.s 144B of the Act, dated 26/04/2021 for the AY 2018-19.
2. The facts of the case are that the assessee is a Fish Commission Agent and acts as a middleman between farmer and market person for which he receives commission. The assessee filed his return of income for the AY 2018-19 on 25/10/2018 admitting total income of Rs. 46,15,390/-. Subsequently, the case was selected for limited scrutiny for the purpose of verifying “cash deposits”. A notice U/s. 143(2) of the Act and a detailed questionnaire through a notice U/s. 142(1) of the Act was issued and served on the assessee. In response, the assessee filed the required details before the Ld. AO. Considering the submissions made by the assessee, the Ld. AO noticed that the assessee has made cash payments exceeding the limits prescribed U/s. 40A(3) of the Act and hence the Ld. AO treated the cash withdrawals of Rs. 84,60,669/- as disallowance U/s. 40A(3) of the Act and added to the total income of the assessee. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A).
3. Before the Ld. CIT(A)-NFAC, the assessee contested in his written submissions that the Ld. AO has travelled beyond the limited scrutiny proceedings and converted it into a full scrutiny proceedings without permission from the Ld. Pr. CIT. The Ld. CIT(A)-NFAC rejected the explanation furnished by the assessee and therefore confirmed the order of the Ld. AO by dismissing the appeal. Aggrieved by the order of the Ld. CIT(A)-NFAC, the assessee is in appeal before us and raised the following grounds of appeal:
“1. The order of the Ld. CIT(A) is contrary to the facts and also the law applicable to the facts of the case.
2. The Ld. CIT(A) ought to have quashed the assessment order passed in the case of appellant U/s. 143(3) r.w.s 144B of the Act on the ground that no notice U/s. 143(2) of the Act was issued by the Assessing Officer having jurisdiction over the appellant.
3. Without prejudice to the above, the Ld. Commissioner of Income Tax (Appeals) ought to have deleted the addition of Rs. 84,80,669/- made by the Assessing Officer towards disallowance U/s. 40A(3) of the Act as beyond the scope of limited scrutiny.
4. Without prejudice to Ground No.2, and Ground No.3, the Ld. CIT(A) is not justified in sustaining the addition of Rs. 84,80,669/- made by the Assessing Officer towards disallowance U/s. 40A(3) of the Act.
5. Any other grounds may be urged at the time of hearing.”
4. Grounds No. 1 and 5 are general in nature and need no adjudication.
5. Ground No.2 being a legal ground was not pressed by the Ld. AR.
6. With respect to Grounds No. 3 & 4 where a disallowance U/s. 40A(3) was made for Rs. 84,80,669/-, the Ld. AR argued that the Ld. AO has travelled beyond his powers in verifying the cash withdrawals where the case was selected under CASS for Limited Scrutiny for the purpose of verifying the cash deposits into the bank account of the assessee. The Ld. AR vehemently argued that the Ld. AO has no jurisdiction to make disallowance U/s. 40A(3) of the Act without converting the assessment into complete scrutiny proceedings. The Ld. AR therefore pleaded that the addition made by the Ld. AO and confirmed by the Ld. CIT(A)-NFAC be deleted. Per contra, the Ld. DR fully supported the orders of the Ld. Revenue Authorities.
7. We have heard both the parties and perused the material available on record and the orders of the Ld. Revenue Authorities. It is a fact that the case was selected for scrutiny for the purpose of verifying the huge cash deposits into the bank account by the assessee. The Ld.AO has travelled beyond his jurisdiction in verifying the cash withdrawals without converting the case into complete scrutiny as per the directions issued by the Central Board of Direct Taxes [CBDT]. The Ld. AO in para 7.5 of his order has stated that the assessee himself accepted the cash withdrawals for paying the fishermen. The Ld. AO therefore disallowed the same U/s. 40A(3) of the Act since it is not covered under the exceptions prescribed under Rule 6DD of the IT Rules, 1962. However, we find that the Ld. AO has not taken approval from the Ld. Pr. CIT for verification of the cash withdrawals which is beyond the scope of the limited scrutiny for which the assessee’s case is opened for the purpose of verification of the huge cash deposits into the bank account of the assessee. There is no dispute by the Ld. AO regarding the satisfaction of the cash deposits for which the limited scrutiny purpose was initiated. As far as the limited scrutiny proceedings are concerned, the scrutiny has to be limited to the parameters selected for the purpose of scrutiny only to the specific issues and not beyond that under any circumstances. In case, if the Ld. AO wants to take up the case for complete scrutiny, first the Ld. AO has to convert the limited scrutiny into complete scrutiny case and then he may take up the case for complete scrutiny with the prior approval of the Ld. Pr. CIT / CIT concerned after being satisfied about the issue of converting it into a complete scrutiny. In the instant case, we find that no such approval has been granted to the Ld. AO to travel beyond the verification of the cash deposits. The Ld. AO also not found any material against the assessee with respect to the cash deposits into the bank accounts of the assessee. In view of the above discussions, we find that the Ld. AO has travelled beyond his jurisdiction in disallowing the cash withdrawals being payments made to various fishermen by invoking the provisions of section 40A(3) of the Act is not valid in law and therefore we are inclined to quash the order passed by the Ld. AO U/s. 143(3) r.w.s 144B of the Act and allow the Grounds No.3 and 4 raised by the assessee.
8. In the result, appeal of the assessee is allowed.
Pronounced in the open Court on the 15th June, 2023.
