Practical Issues in Scrutiny Assessment

Report
J. B. NAGAR CPE STUDY CIRCLE
Practical Issues in Scrutiny
Assessment
Presented by: Manish Shah
Chartered Accountant
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
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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”
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Assessments Covered

143(3): Scrutiny Assessment

144
: Best Judgement

147
: Reassessment proceedings

144C : Draft Orders in respect of Transfer
Pricing Assessments
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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
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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
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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.
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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(1D) 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?
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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.
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Notice u/s. 143(2)

Time limit: Notice 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 292B and section 292BB

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?
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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
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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.).
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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)].
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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.
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Assessment– General Principles





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)
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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 144A

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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.
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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.)
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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(2A); 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)
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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.
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Section 144….

Issue of Show cause notice:
o
o
o

Before proceeding with best judgement assessment,
show cause notice u/s. 144 needs to be issued to the
assessee.
No such notice be issued in case notice u/s. 142(1) is
already issued.
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
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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)
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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’
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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
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Tabular presentation of Provisions
If no Regular Assessment1
If less than 4 Years*
If more than 4 years*
Nil
None
Rs. 1.00 lac
JCIT
Nil
JCIT sanction
[ITO]
Rs. 1.00 lac
CCIT / CIT
If Regular Assessment
If less than 4 years*
If more than 4 years*
If Assessment as agent
Failure of
Assessee
Overall time limit of 2 years from end of AY
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
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“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)]
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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)]

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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
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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)]
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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
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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
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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 underassessment 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
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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
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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
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Post Assessment Procedures

Penalty Proceedings

Stay Proceedings

Filing of Appeals and Revision Applications

Rectification Proceedings

Additional Claims post assessment
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Thank You
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