► Date : Jun 30, 2022

Kolkata ITAT recently examined the scope of Limited Scrutiny Assessment in the case of I.T.A. No. 2307/KOL/2018 M/s. Income Tax Officer Vs. Godhuli Dealcom LLP where the assessee by cross objection has raised a legal question with regard to the jurisdiction of Assessing Officer in Limited Scrutiny Assessment on the ground that the case of the assessee was selected for limited scrutiny but the AO made additions beyond the scope of limited scrutiny without taking approval of the competent authority.

Facts of the Case

The assessee-LLP electronically filed its first return of income in A.Y. 2015-16 on being converted from Private Limited Company to Limited Liability Partnership, which is the year under appeal. The case of the assessee is selected for limited scrutiny for the following two reasons:- (i) Low income in comparison to High Loan/Advances/investment in shares; (ii) High interest expenditure against new capital added in work-in-progress or addition made to fixed assets. Assessing Officer (AO) examined the various details and while going through the source of the investment details, also went on to examine the security premium and share capital transferred from the Private Limited Company and concluded that the security premium of Rs.12,87,23,000/- which was received in the Pvt. Limited Company before being converted into the assessee LLP cannot be transferred under the head “Reserve & Surplus” of the newly incorporated LLP and since the assessee transferred to reserve and surplus, the security premium reserve of Rs.12,87,23,000/- is to be considered as income of the LLP and accordingly added the same to the income of the Assessee.

Legal question

If the AO has travelled beyond the scope of limited scrutiny while framing the assessment under section 143(3) of the Act by going for complete scrutiny in place of the limited scrutiny without prior approval of the competent authority

ITAT Decision

ITAT observed that limited scrutiny is carried out with the assistance of computers and is based on the data filled by the assessee in their ITR return certain parameters inserted by the Department in the computer software, which helps to pin points/captures certain aspects of the financial transactions of an assessee, comparing the same with the previous years’ data like increase and decrease in turnover/profits/loans/fixed assets/capital, low profit rates, vis-a-vis high turnover and various others permutations. Based on such information through the computer software, the case is selected for limited scrutiny. Once a case is selected for limited scrutiny, though the role of the AO is confined to examine the issues for which the case is selected for limited scrutiny but then the AO has to go into the depth of such issue and minutely examine the facts attached thereto. AO just cannot casually examine the issue and come to the conclusion because the reasons are just indicative in nature and to reach the depth of the issue raised in the limited scrutiny, the AO has to make the examination deeper and deeper examining all the aspects linked to such reason. In case of the complete scrutiny, AO has to examine all the financial transactions carried out by the assessee during the year, whereas in limited scrutiny’s issues are limited but the same needs more intense, accurate and deep examination of the issue and facts attached to it.

In assessee’s case was selected for limited scrutiny and the first issue is low income in comparison to high loans/advances/investment in shares. The reason is just an indication for the AO to examine various aspects. Once the low income is to be examined, it has to be seen in consonance of the higher loans standing in the balance sheet and while examine the same in detail AO asked the assessee about the source of investment and in the present case, the interest income is shown only at Rs.14.29 lakhs, whereas the loans and advances are standing to the tune of Rs.13.97 crores. The  AO went on to examine this aspect of low income . While examining the loans and advances, AO came to know that this is the first year of incorporation and the LLP has been converted from the company.  AO then enquired about the source of investment in reply to which the assessee submitted that the source is the share capital and security premium of the erstwhile company before being converted to LLP and therefore the AO went on to examine the issue of security premium reserve.

Further, for the second reason for high interest expenditure against new capital added in work in-progress or addition made to fixed assets and the catch words are high interest expenditure, new capital added which in this case is partner’s capital and Reserve & Surplus (Security Premium Reserve). Even though the reasons are not very specific but it is also a fact that any detailed questionnaire is not supplied to the AO as to what he needs to examine for a particular reason. There are few catchy words in the reasons which are only supplied to the AO and thereafter AO needs to decide at his own end to examine a particular reason.

In view of above reasons and on thorough examination of the financial statements of the LLP, ITAT held that the reasons for selecting the case for limited scrutiny which covers various aspects of the assessee including low income, high loans, advances, investment in shares, high interest expenditure, new assets added in work-in-progress and additions in fixed assets and therefore the AO carried out the assessment proceedings only within the parameters provided under “limited scrutiny” and has fairly done well by reaching to the depth of the issue and was well within the jurisdiction to examine the source of investment i.e. share capital, Security Premium and unsecured loan of erstwhile Private Limited Company made during the year which were the source of investments fetching very low income. The source of investment as evident from the balance-sheet of LLP, is the share capital and security premium which was carried over from the Private Limited Company. ITAT, thus , held that AO has not exceeded the jurisdiction and has not travelled beyond the reasons for selecting the case of the limited scrutiny and AO has not done complete scrutiny of the case and has restricted his scrutiny proceedings only with regard to the two reasons mentioned hereinabove for carrying out limited scrutiny.

Verdict

 Legal issue raised by the assessee in the Cross Objection has no merit and is dismissed.

Crux of Case Law

Once a case is selected for limited scrutiny, though the role of the AO is confined to examine the issues for which the case is selected for limited scrutiny but then the AO has to go into the depth of such issue and minutely examine the facts attached thereto.  AO just cannot casually examine the issue and come to the conclusion because the reasons are just indicative in nature and to reach the depth of the issue raised in the limited scrutiny, the AO has to make the examination deeper and deeper examining all the aspects linked to such reason. All parameters examined due to its attachment with the reason for limited scrutiny fall within the scope of limited scrutiny assessment.

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