AMIT BAJAJ ADVOCATE

The Scrutiny Assessements under Income Tax Act 1961 are made u/s 143(3). For many years now many of the returns of the assesses are accepted as they are being filed by the assesses and intimation is sent u/s 143(1) and only fewer cases are selected for scrutiny assessement based upon some predetermined criterias. Therefore every assessee desires that his return should be accepted as it is filed u/s 143(1) and not subjected to scrutiny. Some important points relating to the assessements and scrutiny assessements are discussed herebelow:

The Honourable Supreme Court in (1999) 237 ITR 889 and (2004) ITR 272 has held that the assessing officer is bound by the instructions of the CBDT. The Delhi High Court giving reference of the above decision of the S.C. has held in (2008) 169 Taxmann 4 / (2007) 295 ITR 256 that the A.O. cannot make assessement of any case in scrutiny outside the guidelines issued by the CBDT for selection of cases for scrutiny and if such assessement is made then it will be illegal.


Time limit for issuing of Notice u/s 143(2): As per section 143(2) as ammended by the finance act 2008 with effect from 01-04-2008 the notice under section 143(2) must be served upon the assessee within 6 months from the end of relevent assessement year.Earlier the notice was required to be served within 12 months from the end of the month in which the return was furnished.

The notice u/s 143(2) must be received by the assessee now upto 30^th September for the preceeding assessement year. If the notice u/s 143(2) is received within the prescribed time then no assessement can be framed u/s 143(3).

Where the assessee affirms by way of an affidavit that notice u/s 143(2) was not received by him within the prescribed time, the onus lies with the department to conclusively prove that the notice was served upon the assessee within the prescribed time. Faliure to do so shall lead to set aside of the assessement as it was held in CIT v Lunar Diamonds Ltd.[2006] 281 ITR 1(Del.).

Section 292BB: A section 292BB has been added wef 01-04-2008 which provides that if the assessee has cooperated in the assessement or reassessement proceedings then it will be treated that the notice u/s 143(2) has been duly served upon the assessee and the assessee will not be able to object to the late or irregular service of notice.

The proviso to section 292BB makes it further clear that if the assessee has before the assessement or reassessement proceedings objected to the no service or late or irregular service of notice u/s 143(2) then section 292BB shall be not applicable.

Therefore if an assessee doesnot receive the notice or receives the notice u/s 143(2) after the 30^th September and he coopertes in the assessement proceedings and doesnot object to the non receiving or late or irregular receiving of the notice then the assessement proceedings and the assssement order shall be considered as valid and will not be quashed in the appeal.

What to do when notice U/s 143(2) is received: When a case is selected for scrutiny assessement the A.O ussualy ask for the following

-Books of Accounts

-Bank Statements

-Confirmation certificates of Loans if any

-Name and Addresses of Sundry Creditors, Debtors

-The account statements of Sundry Creditors and Debtors for verification of transactions

In case the A.O. finds any discrepancy the assessee may be asked to explain the same.

Mere filling of confirmatiory letters and producing the loan creditors donot discharge the onus that lies on the assessee. The assessee has to prove the disputed transaction prima facie appearing in his books of accounts. The assessee needs to prove the following things:

-Proof of Identity of creditor

-Credibility or capacity of a loan creditor to pay or advance the money

- the genuineness of the transaction

If the assessee prima facie proves a transaction then the onus shifts on the department to rebut the same. The A.O can only ask for the evidence of the cash credit or the loans which have been taken or given in the relevant previous year and not about those appeaing in the preceeding years.

The opportunity of being heard must be provided to the assessee: The assessee must be provide a fair opportunity of being heard during the assessement proceedings as it is a basic rule of Natural Justice. If the A.O makes any addition on the basis of an evidence procured from other sources about which the assessee is not aware then the assessee must be given fair opportunity to rebut or cross examine such evidence.

In CIT vs Eastern Commercial Enterprises 210 ITR 103(CAL) it has been held that an addition made without allowing opportunity of cross examination to the assessee, cannot be sustained.

Cases where amount deposited with the firm by the partners are not proved: If the partners in a firm have deposited some money with the firm and the same is not proved as income of the firm by the A.O then such amount cannot be treated as income of the Firm but it will be treated as the income of the partners as held in (2001) 126 Taxman 533/252 ITR 344 P& H HC.

Amounts Recived as gifts: Where receiving of any gift by the assessee is in question in the assessement proceedings then affidavit of the donor or the gift deed along with the PAN No of the donor, the source of the gift and the relationship of the donee with the donor should be produced to prove such gift.

Additions cannot be made merely on suspicion: Any addition to the income of the assessee cannot be made only on the base of suspicion. If the assessee has proved the transaction in question then merely on the suspicion the addition cannot be made.

For Example if the assessee has sufficiently proved a deposit transaction from a person then the A.O cannot make addition merely on the ground that the assessee already had enough money on the day of deposit and there was no need for such deposit.

Request for summons to the non- cooperating loan creditor or depositors :Sometimes it happens that the depositors or loan creditors donot cooperate with the assessee in the assessement proceedings then in such cases the assessee should request the A.O in writing to issue summons u/s 131 to such persons along with their books of accounts or bank statement or any other relevant documents.

Where a Deposit or loan transaction is not proved: Sometimes due to non availability of proof regarding a deposit or loan transaction the assessee has to agree for surrendering such amount as his income. In my view while surrendering such transactions as income, the assessee should get it written in his statement that he is making surrender for mental peace and on the condition of non leving of penality. In my view in such case the penality will not be imposed u/s 271(1)(c).

Additions on the base of inadequate withdrawls: The assessing officer ussualy during the assessement proceedings ask the information from the assessee about his household expenses including the number of family members, the children, the school in which they are studying, the expense on their studies, electricity bills, telephone bills, house rents if any, the salary given to any employee or the car scooter etc owned by them.

After considering all the above things the A.O estimates the household expenses of the assessee and after matching the same with the withdrawls shown, the assessing officer tends to make additions to the income of the assessee if the withdrawls are found to be inadequate.

The assessee should tell the A.O in detail about his household expenses and if any other family member of the assessee has also contributed towards the household expenses, the fact should be brought to the notice of the A.O.

Sometimes it is seen that the assesses show their withdrawls for household expenses collectively at the end of the year in which case the assessee has to face many difficulties during the assessement proceedings. The withdrawls for household expenses should be shown in every month.

Inadequate withdrawls of partner shown in the books of accounts of firm: Addition to the income of a firm cannot be made merely on the ground that the withdrawls for household expenses made by the partner from the firm is inadequate or very less. Its not the firm’s responsibility to explain or prove that how the partners have managed their household expenses as it was held in (1997) 90 Taxman 330(magazine) Jaipur Tribunal.

Additions on the basis of inadequate expenses shown on the house or shop: Generally additions are made during the assessement proceedings on the basis of the less expenditure shown in building a house or shop of the assessee. If the A.O is not satisfied by the expenditure shown on building house or shop by the assessee and also from the valuation of Registered valuer then the A.O refers the valuation to the valuer of the Department and if the valuer of the department declares the value more, then the additions is made by the A.O on the basis of such valuation and proceedings u/s 271(1)(c) are also initiated.

It has been held in many cases that the A.O cannot refer the valuation to the department’s valuer without showing any mistake in the valuation of the registered valuer or the bills and records maintained by the assessee. Allthough it is not necessary for the asseessee to keep the record of all the expenses incurred on building his house or shop. But at the appallette leval the bills and records maintained by the assessee are given very much importance. Therefore it is advisable to keep such records.