beneficial circulars- should be strictly adhered to scrutiny can be
restricted.
Central Board of Direct Taxes issues guidelines by way of circulars /
instructions for lower authorities providing therein detailed guidelines
which needs to be followed for selection of a return for scrutiny of the
case by issuance of notice u/s 143(2). Such circulars are binding on the
authorities below the Board.
Beneficial Circular
The circular of the Board which directs the authorities that only certain
type of income tax returns, should be selected for scrutiny is for the
purpose of achieving objectivity and result orientation by way of selection
of certain returns which deserves scrutiny as per policy decision of the
Board.
The other assessees who are not covered by the criteria for selection of
return for a scrutiny can consider the instruction as beneficial to them
because they consider that their return has to be accepted as per the policy
decision of the Board and they are not required to go through any scrutiny
by the assessing officer. Therefore, the circular on such issue is
definitely a beneficial circular for such assesses.
Beneficial circulars must be followed
It is well settled legal position that circulars issued by higher
administrative authority are binding on the officers below and particularly
when the circular is beneficial to the assessee, it has to be applied to
grant full benefit to the assessee. Any action taken contrary to the
circular, can be considered as invalid, if it destroy any benefit, advantage
or assurance is covered by the circular.
Selection of return for scrutiny contrary to Board's circular
Sometimes, it can be that return is selected for scrutiny and such selection
is not in conformity with the Board's circular. In other words a return
which should not have been selected, has been wrongly selected. This can be
due to several reasons like:-
a) ignorance of the assessing officer about the circular.
b) wrong application of the circular by the assessing officer.
c) selection due to the prejudice of the assessing officer.
If a return is wrongly selected for scrutiny then the assessing can
reasonably pray that the issuance of notice u/s 143(2) is contrary to the
Board's circular and therefore, either it should be withdrawn or the
proceedings can be dropped in view of the circular or the assessing officer
can take a summary hearing and note that since the case does not deserve
scrutiny in view of the circular, the assessment is completed as per the
return.
However, we find that there is no such clear provision or instruction in
this regard and once the notice u/s 143(2) is issued, the A.O. take up the
matter for full fledged scrutiny.
Selection of return under Computer added selection system (CASS):
Under CASS certain returns are selected for scrutiny if certain as per
return or other information the return falls into some of specified
criterion. The selection is made only because of any one or more criterion
are satisfied. Many returns are selected on the basis of Annual Information
Return(AIR). In such cases, unless there is application of mind by the A.O.
and he finds that it is necessary or expedient to scrutinize the return,
then the scope of scrutiny should be restricted to the reasons for which the
return was selected for scrutiny under CASS. However, in this regard there
is no clarity and people have different views and matter may involve
litigation.
A case before court:
The Punjab and Haryana High Court decided the issue against assessee in
Pirthi Ram Labour Contractor v. Commissioner of Income-tax, Bhathinda,
[2006] 156 Taxman 457(Punj. & Har.) - in this case notice u/s 143(2) was
issued to the assessee on 10.6.1999. The assessee relied upon the circular
about the scrutiny of cases relevant for the assessment year 1988-89. The
circular was issued on 7.6.1999 but it was received in the office of
Additional Commissioner on 17.6.1999. Therefore, in this case , a notice u/s
143(2) was issued after the issue of the circular but before it was received
in the officer of the AO. The assessee took view that the issuance of notice
itself was wrong and therefore, the case should not be scrutinized. The
authorities rejected plea of the assessee holding that since the statutory
process had already been initiated by issuance of notice u/s 143(2), the
same could not be set aside. This plea was rejected by the Tribunal also and
therefore, assessee approached the High Court by way of an appeal. Besides,
technical issue the Tribunal has also remitted back the matter about the
addition of Rs.4,38,000 to the assessing officer.
High Court's view
Regarding issuance of notice u/s 143(2), the court noted the concurrent
findings of the assessing officer, the Commissioner( Appeals) and the
Tribunal that once the notice u/s 143(2) was issued the proceedings can not
be withdrawn and the notice could not cancelled. Therefore, the High Court
did not find any infirmity in the orders of the lower authorities on this
point and the High Court also held that there is no substantial question of
law.
Proper way in the above case:
In this case the assessee should have requested the A.O. to close the file
or drop proceedings by way of completing assessment as per return since it
was not a fit case for scrutiny. However, once complete scrutiny started and
tool place, it is difficult to say that the notice was not maintainable or
void ab initio or illegal.
In case the A.O. did not drop proceedings or complete assessment , in the
above case, it could have been proper way for the assessee to challenge the
notice u/s 143(2) before the High Court at the initial stage itself.
However, once the assessee took steps in response to notice u/s 143(2)
though it may be under protest and also adopted the appeal procedure for
filing of appeal before the CIT(A) and on the substantial matter about
addition, the Tribunal had merely remitted back the issue for fresh
examination by the AO. Therefore, there was not a substantial question of
law. However, if the issuance of notice was challenged at initial stage in
the court, it was likely that court could set aside the same by holding that
the circular is not in conformity with the instruction and therefore, it
should not have been issued.
Clear provisions are required
It is well known that as and when a matter is taken up for scrutiny as a
general rule, the assessing officers make substantial additions and
disallowances, most of which are deleted by the first appellate authority.
Therefore, to avoid such futile exercises, the Board can issues circulars
restricting the scope of scrutiny according to the reasons for which
scrutiny exercise is undertaken. Therefore, if a notice is issued contrary
to such instructions then there should be provision to drop the proceeding
or complete the proceedings by taking a hearing and noting the fact that
since notice was issued contrary to the circular, the return is assessed as
per return though technically u/s 143(3). This will avoid unnecessary
litigation as we can find in the case before the Punjab and Haryana High
Court discussed above. It may be that ultimately the income assessed will be
as per return. Therefore, the whole exercises of assessment u/s 143(3)
appeal before CIT(A) by the assessee then appeal by the revenue before the
Tribunal and then appeal by the assessee before the court became
purposeless.
Dropping of proceedings:
The A.O. can be provided guidelines and authority to drop proceedings or
complete assessment as per return though a notice u/s 143(2) was issued, if
he finds that the case is not suitable for proceeding in detailed scrutiny
in any given case.