AI Insights
The case involves an appeal by the Income Tax Officer (ITO) against the order of the Commissioner of Income Tax (Appeals) which had deleted an addition of Rs. 8,55,00,000 made on account of a security premium by the assessee, M/s Citywings Dealers Pvt. Ltd. The assessee, after converting from a private limited company to a limited liability partnership (LLP), was assessed for income including the security premium which was transferred during the conversion. The ITO argued that this premium should be taxed as it became available to the partners of the LLP post-conversion. The Tribunal, referencing several precedents, held that the ITO exceeded his jurisdiction by making additions beyond the scope of the limited scrutiny for which the case was selected, without the necessary permissions.
Appeal Details
Counselvise Citation
[2022] 140 COUNSELVISE.COM (IT) 127246 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
15-11-2022
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
C
Next Hearing Date
22-08-2022
Assessment Year
misc
Appeal Filed On
08-06-2023
Judgement Text
आयकर अपील य अ धकरण, कोलकाता पीठ ‘सी’, कोलकाता IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA ी संजय गग या यक सद यएवं ी राजेश क ु मार, लेखा सद य के सम [Before Shri Sanjay Garg, Judicial Member & Shri Rajesh Kumar, Accountant Member] I.T.A. No. 2309/Kol/2018 Assessment Year : 2015-16 ITO, Ward- 34(3), Kolkata Vs. M/s Citywings Dealers Pvt. Ltd. (PAN: AAKFC 0689 D) Appellant / (अपीलाथ ) Respondent / (!"यथ ) C.O. No. 17/Kol/2021 Assessment Year : 2015-16 M/s Citywings Dealers Pvt. Ltd. (PAN: AAKFC 0689 D) Vs. ITO, Ward- 34(3), Kolkata Cross- Objector Respondent / (!"यथ ) Date of Hearing / स ु नवाई क% त'थ 23.08.2022 Date of Pronouncement/ आदेश उ*घोषणा क% त'थ 16.11.2022 For the Appellant/ नधा 0रती क% ओर से Shri A.K. Tibrewal, FCA For the Respondent/ राज व क% ओर से Shri Amal Kamat, CIT ORDER / आदेश Per Rajesh Kumar, AM: This is the appeal preferred by the revenue and the cross objection raised by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-10, 2 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. Kolkata (hereinafter referred to as the Ld. CIT(A)”] dated 24.08.2018 for the AY 2015-16. 2. In the revenue’s appeal, the order of Ld. CIT(A) has been challenged for deleting the addition of Rs. 8,55,00,000/- as made by the AO on account of security premium by raising the following grounds: 1. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the securities premium reserve of Rs. 8,55,00,000/- which stood transferred by the erstwhile company to the assessee-LLP upon conversion as a taxable profit. Since the assessee has raised this legal/technical issue before us therefore we are inclined to adjudicate the same before deciding the revenue’s appeal. The grounds taken in the cross objections are as under: “1.That the ld CIT(Appeals) erred in not adjudicating the additional ground taken by the appellant LLP. 2.That the case of the assesse was selected for limited scrutiny but the assessing officer made addition beyond the scope of limited scrutiny without taking approval of the competent authority and therefore the ld CIT(A) should have quashed those addition made beyond the scope of limited scrutiny.” 3. Facts in brief are that the assessee came into being after Citywings Dealers Pvt. Ltd. was converted into the assessee LLP and filed its return of income on 08.09.2015 declaring a loss of Rs. 8,824/-. The case of the assessee was selected for scrutiny for examining the following issues namely i) investment in unlisted equities, ii) low income and high loans/advance/investment and iii) low income and high investments. The said company issued shares to 23 private limited companies and share allotted at face value of Rs. 10/- each at a premium of Rs. 90/-. The said company continued on 8.11.2015. The LLP was formed with two share holders of the company being Shri Bhoopender Kumar Jain and Smt. Manjusha Jain. Shri Bhupender Kumar Jain owned 6,40,000 of equity shares whereas Smt. Manjusha Jain owned 3,20,000 of equity shares agreed to convertd their holding as the partner’s contribution in the company and the contribution of Shri Bhupender Kumar Jain was Rs. 64 lakhs and Smt. 3 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. Manjusha Jain it was Rs. 32 Lakhs. It is also noted that LLP continued with the investment already made by the erstwhile company in the name of M/s Satnam Global Infra ltd. and the said company had allotted 94,300 equity shares at Rs. 100/- per share at a premium of Rs. 900/- per share on 15.10.2008 for total consideration of Rs. 9.43 crores to City Wings Dealers Pvt. Ltd. and Shri Bhupender Kumar Jain and Smt. Manjusha Jain were also director in M/s Satnam Global Infra Ltd. After conversion of company the share premium received by the erstwhile company of Rs. 8,55,00,000/- was shown under the reserve and surplus and all other assets were taken over and accounted for by the present LLP. It is noteworthy that in terms of Section 47(xiiib) of the Act, the transfer of capital asset or intangible asset of a private limited company to a limited liability partnership as a result of conversion of the company into LLP in accordance with provisions of LLP Act, 2008 will not result in any capital gain, provided all the assets and liability were transferred into the LLP. According to AO, after conversion, the said share premium of Rs. 8,55,00,000/- becomes available to the partners of LLP, whereas before conversion it was not available to the shareholders except for issue of bonus shares and could not have been withdrawn as per the provisions specified/ provided under the provisions of Companies Act. So according to the AO, the premium reserve becomes the general reserve and therefore has to be taken as profit of LLP on the date of conversion and must be brought to tax and he accordingly added the same to the income of the assessee LLP. 4. Now the assessee before us has raised the ground as to whether the said addition could have been made in a limited scrutiny, which has been selected by a notice u/s 143(2) of the Act on 28.07.2016 for examination of investment in unlisted equities, low income and high loans/advances/investments and low income and high investments without converting the same into unlimited scrutiny. 5. The Ld. Counsel for the assessee submitted before us that the scope of limited scrutiny is confined to the issues raised in the notice issued u/s 143(2) and the AO 4 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. could not have travelled beyond the issues as mentioned in the impugned notice. The Ld. Counsel for the assessee by referring to the notice issued u/s 143(2) of the Act tried to prove his case that the AO has travelled beyond his jurisdiction to examine an issue which was not appearing /figuring in the notice issued u/s 143(2) of the Act. The case was selected for three specific issues for their examination and verification and the AO has exceeded his jurisdiction by examining and making the addition of Rs. 8,55,00,000/- which is not the mandate under the Act and is impermissible. In defense of its arguments the Ld. A.R relied on the decision of Co-ordinate Bench of ITAT, Kolkata in the case of ITO vs. M/s Dhanterash Financial Advisory LLP in ITA No. 2308/Kol/2018 for AY 2015-16 dated 27.11.2020. The ld AR also referred to the decision of the coordinate bench in the case of ITO Vs. M/S Godhuli Dealcom LLP ITA No. 2307/Kol/2018 & CO No. 16/Kol/2021 dated 28.06.2022, wherein under similar facts the coordinate bench has taken a view which is against the assesse. The ld. AR further argued that where two decisions are conflicting, the earlier decision of the coordinate bench should be followed in preference to the latter decision of the coordinate bench as in the latter decision the earlier decision was neither noticed nor referred to. In defense of his arguments the ld counsel relied on the decision of the coordinate bench in the case of M/S Royal Calcutta Turf Club Vs DCIT ITA No. 231/Kol/2013 dated 01.09.2017. He has further submitted that even otherwise as per the decision of the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 88 ITR 192 (SC) where two contrary views are possible, the view in favouring the assessee should be taken. 6. On the other hand, the Ld. D.R submitted that the notice issued u/s 143(2) of the Act for examination of three items covers the share premium too which upon convertion become normal profits of the LLP and therefore there is no infirmity in the order passed by the AO and as affirmed by the ld CIT(A). 7. Having heard the rival submissions and perusing the material on record including the impugned order and decision of the Co-ordinate Bench, we find that the 5 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. issue is squarely covered in favour of the assessee by the decision of the coordinate bench as referred to by the ld AR in which similar issue was decided in favour of the assessee. The operative part is reproduced as under: “5. We have perused the case records, heard the rival contentions, and analyzed the facts and circumstances in this case and have considered the judicial pronouncements placed before us on record. In this appeal filed by the Revenue, the grievance is that the Ld. CIT(A) has deleted the addition on converted premium reserve and also deleted additions on salary and rent paid. At the time of hearing before us, the assessee had filed a petition under Rule 27 of the ITAT Rules, 1963 and submitted that in the case of the assessee it was selected for limited scrutiny but the assessment order finally framed by the Assessing Officer under section 143(3) of the Act by making additions / disallowances which were not subject-matter of that limited scrutiny. Therefore, the assessment order itself stands bad in law void ab initio and liable to be quashed. 6. That on perusal of the case records we find that the notice issued under 143(2) of the Act to the assessee, the heading itself mentions as “notice u/s 143(2) of the Income Tax Act, 1961 limited scrutiny”. The issue for which the limited scrutiny were to be done are the following: “i. Interest expenses ii. Low income and high loans / advances / investments.” 7. That, therefore, the AO should have restricted his jurisdiction while making the assessment order under 143(3) of the Act in respect to these areas only. This is so because the assessee after receiving the notice under 143(2) of the Act was ready for his defence in respect of those issues which appeared therein and not with regard to any other issues. That as a matter of principle of natural justice, the assessee has always the right to know the exact charge or the areas in which he is proceeded against by the department so that, the assessee is ready with his defence. In this case, however in the assessment order, that the Assessing Officer has made additions on grounds of share premium reserve, salary cost, rent paid cost which were not at all the subject-matter of 143(2) notice issued to the assessee. In this legal back ground, Kolkata Tribunal in ITA No. 1361/Kol/2016 for A.Y. 2011-12 in the case of Sanjeev Kr. Khemka vs Pr. CIT has observed that when the assessment u/s 143(3) of the Act was completed by receiving information gathered through AIR, the said order under section 143(3) of the Act which travel beyond the point of AIR was invalid in law and so the same also with the order passed u/s 263 of the Act. The Tribunal, further observed that there was no whisper in the order of the AO expanding the scope of limited scrutiny after obtaining the permission from the administrative CIT. In such a scenario, the Tribunal held that the revisionary jurisdiction order u/s 263 of the Act passed by the Ld. CIT exceeded jurisdiction and provided relief to the assessee. This order of the Tribunal was followed in another decision of the Kolkata Bench in ITA No. 812/Kol/2019 for A.Y. 2014-15 in the case of M/s. Chengmari Tea Co. Ltd. vs ACIT, Circle – 4(1), Kolkata. The relevant paras of this decision is extracted as under: “8. Next comes the assessee’s second substantive argument that since the Assessing Officer had framed his regular assessment involving limited scrutiny on the above stated issues not including sec. 33AB deduction to the purpose of the impugned withdrawals. We find that the 6 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. same is duly covered in its favor as per this tribunal’s co-ordinate bench’s decision in ITA No.1361/Kol/2016 in Sanjeev K.Khemka vs. Pr. Commissioner of Income-Tax-15, Kolkata decided on 02.06.2017 as under:- “4. We have heard the rival contentions of the parties and perused the materials on record. The primary issue in the case on hand revolves whether it is a case selected under CASS for limited scrutiny or regular scrutiny. It can be seen from the grounds of appeal that the assessee wants to contend that the very initiation of proceedings u/s 143(3) of the Act on the basis of regular scrutiny under the Act was bad in law. The proceedings under section 143(3) of the Act should have been limited to the extent of the information gathered through AIR. Accordingly the proceedings u/s 263 of the Act cannot be expanded beyond the issue raised in AIR. Thus the order u/s 143(3) of the Act beyond the points of AIR is invalid in law and so the same is with the order passed u/s 263 of the Act. It is the further contention of the assessee that in the items which are not subject matter of AIR cannot subject matter of scrutiny. Such matters include salary of the assessee, loans & interest on loans, payment of LIC, Commission & brokerage income etc. It is the case of the assessee that in the assessment order passed u/s 143(3) of the Act, the AO has travelled beyond the points of the AIR on the basis of which the case of scrutiny was selected under CASS module. It is the plea of the assessee that when no addition/disallowance can be made beyond the points mentioned in AIR in the assessment proceedings then same is the case with proceedings initiated u/s 263 of the Act. 9. This tribunal’s yet another decision in ITA No.1011/Kol/2017 in Sri Hartaj Sewa Singh vs. DCIT,(IT),Circle1(1), Kolkata decided on 27.04.2018 also decides the instant issue in assessee’s favour on identical reasoning. We conclude in these facts and circumstances that the PCIT has erred in law and on facts in holding the impugned assessment as erroneous causing prejudice to the interest of Revenue on the ground which nowhere formed subject-matter of the CASS scrutiny as it is evident from the case records. We reiterate the learned co-ordinate bench’s detained reasoning hereinabove that the sec. 263 revision proceedings ought not to have been set into motion for expanding the jurisdiction of the Assessing Officer to examine the issues beyond the scope of limited scrutiny. We therefore reverse the PCIT’s action assuming sec. 263 revision jurisdiction in these facts and circumstances.” 8. In the case of JDB Finance vs DCIT, Circle – 3, Guwahati in ITA 127/Gau/2019 had observed as follows: “The ld. Counsel also drew our attention to the notice issued by assessing officer under section 142(1) dated 07.06.2016 which is placed at page no. 45 & 46 of the Paper Book wherein the assessee was directed to reconcile the sales turnover reported in the audit report vis-à-vis turnover in the Income Tax Return. We note that in order to make the compliance of the notice under section 142(1) dated 07.06.2016 (supra), the assessee appeared before the Assessing Officer along with the books of accounts and has reconciled the mismatch between turnover reported in the audit report vis-à-vis turnover in the Income Tax Return and the Assessing Officer has not taken any adverse view in respect of this issue for which the CASS has selected the return of income of the assessee for scrutiny u/s 143(3) of the Act. We note that the CBDT Circular issued u/s 119 of the Income Tax Act is binding on the Income Tax Authorities.The Assessing Officer’s jurisdiction is limited to the issue identified by the CASS in case of ‘Limited Scrutiny’ cases. In the assessee`s case under consideration the issue of mismatch of sales shown in the audit report vis-à-vis ITR was for ‘Limited Scrutiny’ but the assessing officer has expanded the scope of limited scrutiny without taking permission from the concerned Pr.CIT/CIT, since there is no whisper of any sanction or approval of the Pr.CIT/CIT therefore action of Assessing Officer to assess the loss of Rs.42,97,440/- is beyond his jurisdiction and in violation of the CBDT circular which he was bound to obey. Therefore, we find merit in the 7 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. assessee’s grounds of appeal that the action of the Assessing Officer to make addition on account of loss of Rs.42,97,440/- is beyond jurisdiction and therefore null in the eyes of law and hence we delete the addition of Rs.42,97,440/-.” 9. That in all the aforesaid judicial pronouncements, it is crystal clear that the scope of limited scrutiny enshrined in the notice issued u/s 143(2) of the Act to the assessee has to be adhered to by the Assessing officer while completing the assessment framed u/s 143(3) of the Act and he cannot travel beyond such scope of limited scrutiny. That if he intends to expand the scope in that case he had to take appropriate permissions from the concerned superior authority. In the instant case before us, there is no whisper of any permission taken from higher authorities of the department by the AO nor the ld. DR could place any evidence on record neither could demonstrate from assessment order that such permission was taken. Considering these facts of the case and the legal principles enshrined in the aforesaid judicial decisions, we are of the considered view that the assessment order passed u/s 143(3) of the Act is bad in law and liable to be quashed as void ab initio, we order accordingly. 10. That when the assessment order framed u/s 143(3) of the Act itself is quashed as void ab initio the question of any additions raised therefrom does not arise. In such scenario the order of the Ld. CIT(A) becomes academic in nature. The grounds raised by the Revenue in appeal before us from such order of the Ld. CIT(A) are thus dismissed. 11. In the result, the appeal of the Revenue is dismissed .” We also note that in the subsequent decision in the case of ITO Vs. M/S Godhuli Dealcom LLP ITA No. 2307/Kol/2018 & CO No.16/Kol/2021 dated 28.06.2022 the coordinate bench has taken a view which is against the assessee but in that decision the earlier decision as cited above was neither noticed nor referred. Under the present facts we are guided by the decision of the coordinate bench in the case of M/S Royal Calcutta Turf Club Vs DCIT ITA No. 231/Kol/2013 dated 01.09.2017, wherein it has been held that where there are two conflicting decisions, then in that scenario the earlier has to be followed as in the latter decision the earlier one was neither noticed nor referred. Even the ratio laid down by the Hon’ble Supreme Court in the case of Vegetable Products Ltd. (supra) is applicable in this case. Since the facts of the case before us are quite similar to one as decided by Co-ordinate Bench in ITO vs. M/s Dhanterash Financial Advisory LLP, we are .therefore, inclined to allow the cross- objection by the assesse. 8 I.T.A. No.2309/Kol/2018 CO No. 17/Kol/2021 Assessment Year: 2015-16 M/s Cityiwings Dealers Pvt. Ltd. 8. Since we have allowed the plea of the assessee in the cross objection, the revenue’s appeal becomes infractuous and is dismissed. 9. In the result, the appeal of the revenue is dismissed and the cross-objection of the assessee is allowed. Order is pronounced in the open court on 16 th November, 2022 Sd/- Sd/- (Sanjay Garg /संजय गग ) (Rajesh Kumar/राजेश क ु मार) Judicial Member/ या यक सद य Accountant Member/लेखा सद य Dated: 16 th November, 2022 SB, Sr. PS Copy of the order forwarded to: 1. Appellant- ITO, Ward-34(3), Kolkata 2. Respondent – M/s Citywings Dealers Pvt. Ltd., 9, Lal Bazar Street, Mercantile Building, Block-A, 3 rd Floor, Kolkata-700001. 3. Ld. CIT(A)- 10, Kolkata (Sent through e-mail) 4. Pr. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail) True Copy By Order Assistant Registrar ITAT, Kolkata Benches, Kolkata
Other Referred Cases
ITO vs. M/s Dhanterash Financial Advisory LLP, ITO Vs. M/S Godhuli Dealcom LLP, M/S Royal Calcutta Turf Club Vs DCIT, CIT vs. Vegetable Products Ltd.
Laws Referred To
Income Tax Act, 1961
1:1 Consultation on Business Valuations
₹1
1:1 Consultation on Salary Structuring
₹1
1:1 Consultation on FEMA Compliance
₹1
Memorandum Amendment Resolution
₹0
Affidavit - Application for condonation of delay in filing the appeal before ITAT - Type 2
Mehul₹0
Why Meesho got ₹1,500 Crore Tax Demand ?
Team Counselvise - March 09, 2026
Finance Bill, 2026: Key Direct Tax Amendments on Assessments and Appeals
Team Counselvise - February 06, 2026
Transfer Pricing and International Tax Reforms under Finance Bill, 2026: A Practical Overview
Team Counselvise - February 07, 2026