INCOME TAX
INSTRUCTION NO. 1938/1996
Dated: May 17, 1996
Section(s) Referred: 143
Statute: Income - Tax Act, 1961
It may be recalled that the conference of CCsIT/DsGIT, held in November, 1995, discussed the issue of introduction of a new procedure for categorising cases requiring prima facie adjustments, limited scrutiny and in depth investigation. The suggestion that emerged was for evolving a three tier system under which:
a) all returns will at the first instance be processed u/s 143(1)(a) and prima facie adjustments made;
b) cases requiring in depth investigation as per the scrutiny norms prescribed by the Board will be segregated and dealt with. These cases will be referred to as cases selected for 'Investigation';
c) cases which require limited scrutiny in respect of legal issues and facts having a bearing on subsequent years' assessments alone will be identified and taken up for scrutiny assessment. No other routine details would be called by the Assessing Officers. This category of cases will hereafter be referred as cases selected for 'limited scrutiny'.
The Board has decided to implement this recommendation in respect of cases assessed with the DCIT(Spl.Range) and in cases of corporated assessees in respect of returns received for the Assessment Year 1995-96 and the returns received in financial year 1996-97.
2. The adjustments proposed to be covered under the Scheme of 'limited scrutiny' will mainly relate to legal issues, but may include making variation relating to certain facts. The object of introducing the scheme is mainly to thwart the misuse of Section 143(1)(a) and to enable officers to devote more time to Class 'A' cases and cases having investigation potential.
3. Since linking up of records will be essential for the Assessing Officer to identify cases requiring 'limited scrutiny', the returns received for Assessment Year 1995-96 and the returns received during Financial Year 1996-97 should be linked up with the past record even at the stage of processing of returns u/s.143(1)(a). No reference to past record can, however, be made for making prima facie adjustment. The intention should be to utilise the opportunity of finalising intimation u/s 143(1)(a) for identifying cases that would require limited scrutiny.
4. The criteria for adjustment are given in 'Annexure A' If a case falls under the main items listed for adjustments, the Assessing Officer may proceed by issuing a notice u/s.142(1)/143(2) along with a show cause letter asking the assessee why the proposed adjustment should not be made. A copy of this letter should be endorsed to CIT/Additional CIT as the case may be. After giving reasonable opportunity assessment order u/s. 143(3)/144 as the case may be, should be passed.
5. If the adjustment proposed falls under the residuary clause of the enclosed list, the Assessing officer will take the prior approval of his immediate superior officer, Dy.CIT/Addl.CIT or CIT and proceed to make the adjustment as per law. The residuary clause in any case will not be involved for carrying out adjustments requiring detailed investigation or in depth scrutiny.
6. In the course of 'limited scrutiny' a situation may arise which may necessitate a more detailed scrutiny. For example, ascertaining correct admissible deduction may lead to disclosure of false or unsatisfactory explanations. Such cases be converted from limited scrutiny to 'investigation' category with prior approval of CIT/Addl.CIT Range.
7. The Range DCIT or the CIT(in cases of DCIT, Special Range) will also check on sample basis the returns not selected for 'limited scrutiny' so as to satisfy himself that the new concept has been properly understood by the Assessing officers.
8. In order to ensure effective implementation of this new scheme, it is necessary that proper supervisory checks are exercised by Additional CsIT and CsIT. The information in respect of cases selected for limited scrutiny should be maintained in a register in the manner prescribed in 'Annexure B'. In the D & CR also there should be separate identifiable part allotted to enter the particulars of limited scrutiny cases. The supervisory authority shall check these registers at frequent intervals, say atleast once a month.
9. The scheme, at present, will apply only to Income-tax cases.
ANNEXURE-'A'
List of adjustments permissible in 'Limited Scrutiny' cases.
I. Legal claims which are not admissible or though admissible, are not allowable to the extent claimed by the assessee.
Illustration (i) pre-operative expenses which are to be capitalised or claimed as revenue expenses.
(ii) Incorrect computation of deduction u/s.32, 35(1), 35AC, 35CCA, 35CCB etc.
(iii) Incorrect claim of relief under Chapter VI-A.
(iv) Recomputation of correct 'gross total income' u/s.80-A and 'total income' u/s. 80AB.
II. Factual additions to be made on the basis of information available on record.
Illustration(i) under valuation of closing stock not including excise, import duty component in respect of raw material.
(ii) Excise duty not included in the turnover.
(iii) Central Tax dues such as excise, central sales tax of earlier years paid during this year.
(iv) Verification of TDS receipt reveal more than what is disclosed in the return.
III. Any addition/disallowance which is required to be made to give effect to departmental instructions and circulars etc. (Illustration: Instruction No.1022 on disallowability of interest for late payment of P.F.dues.)
IV) Cases where there are decisions of High courts in favour of revenue contrary to which the assessee has made certain claims.(Illustration: Decision of Calcutta High Court in the case of Investors Corpn.Vs. CIT 201-ITR-378).
V. Cases where there are decisions have not been accepted by the Department. However, if the judgement is that of jurisdictional High Court the same has to be followed unless stay from Supreme Court against the operation of the judgement has been obtained,
VI. Cases where additions/disallowance made in the preceding years has a bearing on the subsequent assessment year.
Illustration :
1) if cash credit is added in the preceeding year, interest paid to the alleged creditor needs to be disallowed in subsequent years.
2) If the rate of depreciation on any asset is changed, the same rate has to be
applied in subsequent year after changing the WDV.
3) If in the preceeding year value of closing stock changed in the subsequent year value of opening and closing stock on same basis is required to be adjusted.
NOTE: However, no G.P. addition or adhoc disallowance out of misc.expenses, car expenses etc. should be made even if such disallowance was made in the preceeding year.
VII. Any legal adjustments that are mentioned in auditors report but cannot be made under the provisions of section 143(1)(a).
VIII. Claims of treating the income as exempt, but which according to the revenue are not exempt.
Illustration:
1. Certain types of subsidies claimed as exempt.
2. Cess or tax collected but not paid.
IX. The issues considered in the order u/s.263 by CIT in respect of preceding assessment years or issues based on major audit objections accepted by the Department and remedial action taken.
X. Verification of CIB information(however if the number of transactions reported by CIB are many, the case may be examined from the point of view of taking up for 'Investigation'.
XI. Any other issue to be taken up with prior approval of DCIT/Addl.CIT/CIT.