Department Is Not Allowed To Travel Beyond The Issues Involved In Limited Scrutiny Cases: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the department is not allowed to travel beyond the issues involved in limited scrutiny cases.

The two-member bench of N.K. Choudhary (Judicial Member) and Pradip Kumar Kedia (Accountant Member) have observed that the assessee was selected for limited scrutiny, and the addition in hand does not emanate from the grounds on which the case of the assessee was picked up for limited scrutiny.

The appellant/assessee filed its return of income and declared its total income. The case was selected for limited scrutiny, and in response to the notice issued by the Assessing Officer, the assessee filed the necessary details, information/documents, along with books of account and vouchers, before the Assessing Officer, which were examined on a test check basis.

During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited expenses to its profit and loss account under the heading "commission to others." Therefore, the assessee was issued a show cause notice to explain the commission expenses incurred by the assessee, who is a medical doctor by profession.

The Assessing Officer, after considering the reply of the Assessee, observed that the Assessee is a doctor and is barred by Medical Council Rules from giving or receiving any commission, gift, gratuity, or bonus paid to any person/entity. Therefore, the commission paid to others was not a valid business expense, and ultimately, by passing an order, it was disallowed and added to the income of the assessee.

The assessee appealed before the CIT (A). The Commissioner sustained the disallowance made by the Assessing Officer on the premise that there was the contradiction between the statements of the assessee made before the Assessing Officer and those made in the appeal proceedings. The assessee claimed the expenses under the head commission to others and submitted that in order to remain in practice in a competitive market, he must incur various expenses to generate new cases, whereas, in the appeal proceedings, he stated that the amount was paid to a marketing agency hired by the assessee to improve business, patient management, surgery coordination to improve efficiency, and patient counseling.

The tribunal held that the payment of commission by the assessee for referring patients to it cannot, by any stretch of the imagination, be accepted as legal or as per public policy in India. Hence, the commission is not an allowable expense. Consequently, the assessee in this case is not entitled to any relief on merit.

"As it is settled law that the Revenue Authorities are not allowed to travel beyond the issues involved in limited scrutiny cases, except in exceptional circumstances and by completing the relevant formalities before proceeding to other issues, which in the instant case does not appear to have adhered to. Hence, we deem it appropriate to delete the addition in hand. Consequently, the appeal of the assessee is liable to be allowed," the ITAT said.

Case Title: Sudhir Chadha Versus ACIT

Citation: ITA No. 6118/Del/2019

Date: 28.11. 2022

Counsel For Appellant: Advocate Atul Puri

Counsel For Respondent: Sr. DR Pradeep Gautam

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