ITAT Quashes Presumptive Income Addition Made in Limited Scrutiny

ITAT Quashes Presumptive Income Addition Made in Limited Scrutiny

Issue: Whether an Assessing Officer (AO) conducting a “limited scrutiny” assessment (specifically opened only to examine cash deposits)can subsequently travel beyond the stated scope and make an addition to the taxpayer’s income under the presumptive business income section (Section 44AD), without following the mandatory procedure to convert the case into a complete scrutiny.

Facts:

• The taxpayer, Devendra Kumar ⁵, was subjected to a “limited” scrutiny assessment for the Assessment Year (AY) 2017-18.
• The original scope of the scrutiny was strictly limited to examining the taxpayer’s cash deposits.
• In the course of the assessment, the Assessing Officer (AO) went beyond the limited scope and made an addition of ₹8,68,799by estimating the taxpayer’s profits as presumptive business income under Section 44AD. 
• The addition was confirmed by the lower appellate authority before the taxpayer appealed to the Tribunal.

Decision:

The Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘SMC’, allowed the assessee’s appeal and deleted the impugned addition of ₹8,68,799. 12121212The Tribunal held that since the issue of presumptive business income was not part of the original limited scrutiny, the lower authorities had exceeded their jurisdiction in making the addition.

Key TakeDowns:

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  Jurisdiction Cannot Be Exceeded: The primary takeaway is that an AO cannot travel beyond the scope defined in the notice for “limited scrutiny. The scheme of assessment under Section 143 is a complete code, and the AO must abide by the mandatory requirements of the relevant CBDT instructions.

• Mandatory Conversion: To introduce a new issue, the AO must first record reasons for expanding the scope and obtain the necessary approval from the Principal Commissioner of Income Tax (PCIT) to convert the limited scrutiny case into a complete scrutiny case. 
• CBDT’s Strict View: The ITAT endorsed the view taken by the CBDT in its instruction (F.No. DGIT(Vig.)/HQ/SI/2017-18) ¹⁷, which had “viewed seriously” instances where AOs travel beyond the issues specified in a limited scrutiny case without complying with mandatory requirements.
• Jurisdictional Issue is Timeless: The Tribunal noted that the question of the AO exceeding their jurisdiction is a jurisdictional issue that the assessee can raise at any point of time (even as an additional ground on appeal).