ITAT: Assessment Quashed as AO Exceeded Scope of Limited Scrutiny Without Mandatory Approval

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has quashed an assessment order after holding that the Assessing Officer (AO) exceeded the scope of a limited scrutiny assessment by examining issues beyond the reason for selection without first converting the case into complete scrutiny as mandated by CBDT Instructions.

The appeal arose from the assessment of Shamim Khan for AY 2017-18. The assessee had filed a return declaring income of ₹6.59 lakh. The case was selected under the Computer Assisted Scrutiny Selection (CASS) mechanism for limited scrutiny to verify cash deposits made during the year. During the assessment proceedings, the assessee furnished bank statements and supporting documents relating to the cash deposits. The AO ultimately did not make any addition on account of the cash deposits—the very issue for which the case had been selected.

Instead, the AO examined the total credits appearing in the assessee’s bank account, compared them with the gross receipts disclosed in the return, and concluded that substantial bank credits remained unexplained. Treating these deposits as undisclosed business receipts, the AO applied the assessee’s disclosed profit rate of 42.68% and made an addition of Rs.90.63 lakh under Section 143(3). The Commissioner (Appeals) later dismissed the appeal ex parte.

Before the Tribunal, the assessee argued that the AO had travelled beyond the limited scrutiny mandate without obtaining approval from the competent authority for conversion into complete scrutiny, as required under CBDT Instruction No. 5/2016 dated 14 July 2016. Since the assessment remained a limited scrutiny throughout, the AO lacked jurisdiction to investigate issues unrelated to the original reason for selection.

The Tribunal accepted the contention. It observed that CBDT Instructions clearly require the AO to first form a reasonable belief of potential income escapement based on credible material, obtain written approval from the Principal Commissioner or Commissioner, and formally convert the case into complete scrutiny before examining additional issues. The instructions also prohibit fishing and roving enquiries in limited scrutiny cases.

Relying on earlier Tribunal decisions, including Dev Milk Foods Pvt. Ltd. v. Addl. CIT and Shri Vijay Kumar v. ITO, the Bench held that the AO had conducted enquiries beyond the limited scrutiny issue without following the mandatory conversion procedure prescribed by the CBDT. Such action amounted to a clear violation of the binding administrative instructions governing limited scrutiny assessments.

Holding that the assessment proceedings had been conducted without jurisdiction, the Tribunal declared the assessment order to be null and void, quashed the assessment, and allowed the assessee’s appeal.

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