₹8 Lakh Cash Deposited in Bank – Man Gets Tax Notice! Assessing Officer Deems It Presumptive Business Income, But Taxpayer Wins Case in ITAT – Ruling Explained (Mr. Kumar vs. Income Tax Officer, ITAT Delhi)

₹8 Lakh Cash Deposited in Bank – Man Gets Tax Notice! Assessing Officer Deems It Presumptive Business Income, But Taxpayer Wins Case in ITAT – Ruling Explained (Mr. Kumar vs. Income Tax Officer, ITAT Delhi)

Issue: Whether an Assessing Officer (AO) conducting a “limited scrutiny” assessment (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, Mr. Kumar, deposited ₹8.68 lakh in his bank account, which attracted a tax notice.
• The Income Tax Department initially selected the case for “limited scrutiny” specifically to verify the source of the cash deposit.
• During the assessment (AY 2017-18), the Assessing Officer (AO) estimated Kumar’s business income under Section 44AD and added the amount of ₹8,68,799 to his income, thereby exceeding the original limited scope of inquiry.
• The taxpayer lost the appeal before the CIT(A) and subsequently approached the ITAT Delhi.

Decision:

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, allowed the assessee’s appeal and deleted the impugned addition of ₹8,68,799, ruling that the lower authorities had exceeded their jurisdiction.

Key TakeDowns:

• Jurisdiction Cannot Be Exceeded: The ITAT ruled that the AO’s jurisdiction was strictly confined to verifying the source of cash deposits. Making an addition unrelated to the limited scrutiny issue without proper approval is considered exceeding jurisdiction.
• Mandatory Conversion Procedure: Any inquiry or addition beyond the limited scope necessitates recording reasons and obtaining prior approval from a Principal Commissioner (PCIT) to convert the case into a complete scrutiny, as mandated by CBDT instructions (e.g., Instruction No. 5/2016).
• Relief for Taxpayers: This ruling serves as a major benchmark, reinforcing that limited scrutiny cases are intended to be narrow and efficient, preventing tax officers from subjecting small taxpayers to unnecessary harassment or overstepping their prescribed authority.