Valid Conversion of Limited to Complete Scrutiny Based on System Records

Issue

Whether an assessment proceeding can be treated as a “Complete Scrutiny” despite the notice under Section 143(2) initially categorizing it as “Limited Scrutiny” on specific issues, particularly when internal auto-generated records demonstrate the case was selected for complete scrutiny and the issues examined have a direct nexus.

Facts

The Notice: The assessee, a trust, was issued a notice under Section 143(2) of the Income-tax Act. The notice stated that the case was selected for “Limited Scrutiny” on the specific issue of “Receipts of trust.”
The Assessment: During the proceedings, the Assessing Officer (AO) expanded the scope and completed the assessment as a “Complete Scrutiny,” examining issues beyond just the receipts.
Assessee’s Challenge: The assessee contended that converting a limited scrutiny case into a complete scrutiny without following the strict protocol (approval from PCIT/CIT) was impermissible.
Revenue’s Defense: The Revenue produced internal documents, specifically an auto-generated document from the tax system, which clearly classified the case under the “Complete Scrutiny” category. They argued the notice mentioning “Limited” was a technical error that did not override the system’s actual selection.
The Nexus: The additional issue examined by the AO pertained to the “appropriation of amount” (application of income).

Decision

The Tribunal/Court ruled in favour of the Revenue.
Intent to Scrutinize: The Court held that the internal auto-generated documents conclusively proved that the case was selected for “Complete Scrutiny” by the system from the very beginning. The discrepancy in the notice did not invalidate the inherent jurisdiction to conduct a full assessment.
Nexus of Issues: The Court rejected the assessee’s argument that “appropriation” was a separate issue from “receipts.” It held that discrepancies regarding the appropriation of amounts are intrinsically linked to the “Receipts of trust.” To verify if receipts are exempt or taxable, one must necessarily examine if they were validly appropriated for charitable purposes.
Conclusion: There was no justifiable reason to treat the scrutiny as limited when the evidence pointed to a complete scrutiny selection. The assessment order was upheld.

Key Takeaways

System Records Prevail: If there is a contradiction between the manual/printed notice and the backend system status (CASS), courts may rely on the system records (like the scrutiny selection sheet) to determine the true scope of the assessment.
Interconnected Issues: An AO can examine issues that are naturally connected to the primary reason for scrutiny. “Receipts” and “Application/Appropriation” of a trust are two sides of the same coin; checking one often necessitates checking the other.
Scrutiny Categories: Taxpayers should verify the scrutiny category (Limited vs. Complete) on the e-filing portal, as the physical notice might sometimes contain clerical errors.

HIGH COURT OF KERALA

Marymatha Province of Vincentian Congregation

Additional/Joint/Deputy/Assistant Commissioner of Income-tax/Income-tax Officer, NFAC Delhi^*

ZIYAD RAHMAN A.A., J.

WP(C) Nos. 10020 and 18676 OF 2024

SEPTEMBER 24, 2025

Abraham Joseph Markos, V. Abraham Markos, Isaac Thomas, P.G. Chandapillai Abraham, Alexander Joseph Markos, Sharad Joseph Kodanthara, John Vithayathil and Aibel Mathew Siby, Advs. for the Petitioner. Jose Joseph, Sr. SC for the Respondent.

JUDGMENT

1. Both these writ petitions were filed by different petitioners but a common issue arises. The petitioners are ‘Trusts’ exempted under Sec.12A of the Income Tax Act. The challenge raised in these writ petitions pertains to the assessment orders issued and the appellate orders passed by the statutory authorities. The reason for challenging the said orders by resorting to the remedy under Article 226 of the Constitution of India is that, according to the petitioners, the proceedings which ultimately culminated in the impugned orders were commenced as limited scrutiny, by issuing notices in this regard on a specific issue. However, during the course of scrutiny, the assessing officer went beyond the issues specifically highlighted in the first notice, and completed the assessments in respect of the issues which are not within the issues raised in the original notice. Thus, the contention is that, the limited scrutiny, was in due course, converted to a complete scrutiny which was not permissible as per the various Circulars issued by the Central Board of Direct Taxes in this regard.

2. For the purpose of considering the issues involved in these writ petitions, W.P.(C) No.10020/2024 is taken as the leading case, and the Exhibits and the parties are hereinafter referred to based on the respective descriptions in the said writ petition.

3. The facts that led to the filing of the W.P.(C) No.10020/2024 are as follows:

The petitioner was served with Ext.P1 notice under Section 143(2) of the Income Tax Act with a specific caption, ” Scrutiny (Computer Aided Scrutiny Selection)”. In the said notice, the petitioner was intimated that the Department has selected the petitioner for scrutiny and the issue initially raised therein was “Receipts of Trust”.

4. According to the petitioner, ultimately, when the assessment was completed as per Ext.P7, the assessing officer had gone into the question of appropriation of the receipts of the fund and found that the petitioner had carried out certain transactions which do not come within the purview of exemption under Section 12AA of the Income Tax Act. Thus, the assessment was completed against the petitioner and the same was challenged by filing a revision before the Commissioner of Income Tax (Exemption), the 2^nd respondent, as evidenced by Ext.P8. Ext.P9 is the additional grounds raised in the appeal before the revisional authority. Ext.P10 is the order passed under Section 264 of the Act by the revisional authority, in which, the revisional authority found that the case of the petitioner was not a limited scrutiny and it was a complete scrutiny. Therefore, the contentions of the petitioner with regard to the same were rejected. However, taking note of the fact that the petitioner could not submit a reply to the Shaw Cause Notice issued, the matter was remitted to the assessing authority, to enable the petitioner to submit an objection and to directed the assessing authority to finalise the assessment afresh. Accordingly, the petitioner submitted an objection and proceedings were finalised as evidenced by Ext.P12. The petitioner is challenging Exts.P10 and P12 in this writ petition.

5. In W.P.(C) No. 18676/20,24 also, Ext.P2 is the notice issued intimating about the scrutiny to be conducted and the issue mentioned in Ext.P2 notice for which the scrutiny was to be conducted was shown as “Receipts of Trust” as in the case of W.P. (C) No.10020/2024. The assessment proceedings were completed per Ext.P7, which was taken up in appeal, and Ext.P12 order was passed in appeal. The said writ petition was submitted challenging Ext.P7 assessment order and Ext.P12 appellate order on the same grounds that are raised in W.P.(C) No. 10020/2024 as well.

6. A detailed statements have been submitted by the respondents, denying the averments contained in the writ petition and opposing the reliefs sought. According to them, the scrutiny that was conducted was not a limited scrutiny but it was a complete scrutiny. To substantiate the same, reliance was placed on Annexure R2(A), the screen shot, auto-generated in the system, while the petitioners’ case was selected for scrutiny. It was pointed out that in Annexure R2(A), it is specifically mentioned that this is not a limited scrutiny.

7. A reply affidavit was submitted by the petitioner wherein, they produced Ext.P13(a) notice issued to another assessee which according to the petitioner, is the format for a complete scrutiny, as it does not contain any specific issues for conducting that scrutiny. Thus, it was contended that, since a specific issue was raised in Ext.P1 notice, the officer concerned should have confined his jurisdiction into the matters referred to in the said issue only.

8. I have heard Sri. Joseph Markose. The learned Senior Counsel appearing for the petitioner and Sri. Jose Joseph, the learned Standing Counsel appearing for the respondents.

9. The learned Senior Counsel specifically highlighted the lack of jurisdiction for the assessing officer to go beyond the specific issues in the notices issued to the petitioners, when it comes to the case of a limited scrutiny. The learned senior counsel also brought to the attention of this Court, Exts.P1 to P4 circulars issued by the Central Board of Direct Taxes, wherein, it was specifically instructed the officers that, in a case of limited scrutiny, the same can be converted into a complete scrutiny only after issuing a notice after getting concurrence from the Commissioner of Income Tax. In this case no such procedure was followed.

10. On the other hand, the learned Standing Counsel reiterated the contentions raised in the statement, and supported the view taken by the 2^nd respondent in Ext.P12 produced in W.P. (C) No.10020/2024.

11. I have carefully gone through the records. As mentioned above, the question that arises here is whether the scrutiny which commenced based on Ext.P1 in W.P.C No.10020/2024 and based on Ext.P2 in W.P.C No.18676/2024, were limited scrutiny or a complete scrutiny. The specific finding of the authorities concerned is that, the same is a complete scrutiny and therefore, nothing precluded the assessing authority from going beyond the issues mentioned in the respective notices.

12. Of course, it is true that, in the respective notices issued to the petitioners, it was clearly conveyed to the respective petitioners that, the return of income submitted by them has been selected for scrutiny and such issues initially are as under and thereafter the issue was mentioned as “Receipts of Trust”. Annexure R2(A), which is produced by the learned Standing Counsel along with the statement, would indicate that the scrutiny was categorized as per the system while selection being made, as a complete scrutiny, since in Annexure R2(A), in response to a specific question as to whether it is limited scrutiny, the answer given was ‘no’. Thus, the documents produced by the respondents would indicate that, the proceedings were intended to be commenced as a complete scrutiny. On going through Ext.P1 notice in W.P.C No.10020/2024 and Ext.P2 in W.P.C No.18676/2024, there is nothing to indicate that the same was intended to be conducted as a limited scrutiny, apart from the fact that the issue based on which the scrutiny to be conducted, was shown as “Receipt of trust”. In this regard, the specific contention raised by the learned Standing Counsel also has to be taken into account, which is that, in the notice itself a specific indication has been given to the effect that the issue mentioned herein is an initial issue, which clearly conveys that the other issues can also be considered. According to the learned Standing Counsel, the same is a clear indication that the proceedings initiated based on the said notices were not to be continued as a limited scrutiny but it was a complete scrutiny. The 2^nd respondent in W.P.C No. 10020/2024 also found this to be a complete scrutiny. I find merits in the said contention.

13. Even otherwise, when going through the specific issue raised in Ext.P1, and the discrepancies found in the assessment order, I am of the view that, this could be a case which falls under the issue raised in Ext.P1 i.e. “Receipts of Trust”. Since that issue was framed in a notice which was issued for the purpose of initiating a scrutiny of the returns furnished by the assessee so as to complete the assessment, the appropriation of the receipts of the trust, also could be a matter falling within the same. This is because, unless the appropriation of the amount is taken into account, an assessment based on receipts of trust cannot be made. Therefore, the only conclusion possible is that, the discrepancies highlighted in the notices which were ultimately resulted in the assessment order, were pertaining to the appropriation of the amount, which would fall under issue “Receipts of trust”, as the ultimate purpose is to determine the tax liability of the assesee, based on the same. Therefore, on that reason also, I do not find that any illegality has been committed by the assessing officer, when carrying out the assessment in respect of the appropriation of the amounts.

14. In such circumstances, taking note of the aforesaid aspects, I am of the view that, the contentions raised by the petitioners cannot be accepted, as I do not find any justifiable reasons to treat this scrutiny to which the petitioners were subjected to, as a limited scrutiny and not a complete scrutiny. As mentioned above, Annexure R2(A), the document which is autogenerated, clearly indicates the category under which the scrutiny was included, and it is also evident that the discrepancies highlighted are coming within the purview of the issue raised in Ext.P1 as well. Therefore, I do not find any merit in these writ petitions. However, it is to be clarified that, in these writ petitions, the question that is considered by this Court is confined to the powers of the assessing officer to make the assessment as a complete scrutiny, as it is the contention of the petitioners that, while making the assessment, in respect of the appropriation of the receipts of the trust, the officer concerned had gone beyond the scope of the relevant notices issued under Section 143 of the Income Tax Act. However, as I found that, the said contention cannot be accepted, the petitioner should be granted an opportunity to contest the assessment already made, on merits, for which the petitioner can invoke the statutory remedies available.

Accordingly, these writ petitions are dismissed, by granting liberty to the petitioners to invoke the statutory remedies against Ext.P12 assessment order in W.P(C) No. 10020/2024 and Ext.P12 appellate order in W.P (C)No.18676/2024. It is ordered that, in case the petitioner is submitting the appeals within a period of three weeks from the date of receipt of a copy of this judgment, the same shall be entertained by the appellate authority/appellate Tribunal as if the same are filed in time.