Limited Scrutiny Means Limited Powers: Additions Beyond CASS Scope Quashed by ITAT

Ladderup Finance Limited Vs Circle 14(1)(1) (ITAT Mumbai)

Limited Scrutiny Means Limited Powers: Additions Beyond CASS Scope Quashed by ITAT

The Mumbai Bench of the ITAT held that in a case selected for limited scrutiny under CASS, the Assessing Officer has no jurisdiction to examine or make additions on issues beyond the specific reasons for selection, unless the case is formally converted into complete scrutiny with prior written approval of the Pr. CIT/CIT, as mandated by CBDT Instruction No. 20/2015 dated 29.12.2015.

In the present case, the assessee’s return for AY 2015-16 was selected for limited scrutiny for verification of short-term capital gains, foreign remittances (Form 15CA), and sale of property (Form 26QB). However, the AO proceeded to make extensive additions and disallowances relating to section 14A read with Rule 8D, addition to book profits under section 115JB, and interest disallowance under section 36(1)(iii)—issues admittedly outside the limited scrutiny mandate. There was no material on record to show conversion of the case into complete scrutiny with requisite approval.

Relying on binding CBDT instructions, the decision of the Mumbai ITAT in Arjun Transport Company Pvt. Ltd., and the Calcutta High Court ruling in PCIT v. Weilburger Coatings (India) (P.) Ltd., the Tribunal held that such action amounted to a jurisdictional defect going to the root of the assessment. Since the issue was purely legal and based on undisputed facts, the ITAT adjudicated it directly and set aside all additions made beyond the scope of limited scrutiny, without examining the merits.

Accordingly, the assessee’s appeal was allowed in full, and all other grounds were left open.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against the order dated 29.09.2025 passed by the Addl./JCIT (A)-1, Delhi from the Office of Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as “CIT(A)”] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]for Assessment Year 2015–16, arising out of the assessment order dated 29.12.2017 passed by the Ld. Assessing Officer under section 143(3) of the Act.

Facts of the Case

2. The assessee is a company engaged in the business of investment and finance and financial and management consultancy. The assessee filed its return of income for the year under consideration on 29.09.2015, declaring a total income of Rs. 73,59,060/-.The case was selected for limited scrutiny under CASS for the following reasons:

i. Large short term capital gains declared under section 111A,

ii. Receipt of large value foreign remittance as reported in Form 15CA, and

iii. Sale of property reported in Form 26QB.

iv. Notice under section 143(2) was issued and served upon the

3. assessee. During the course of assessment proceedings, the Ld. Assessing Officer issued several notices under section 142(1) along with questionnaires calling for details and explanations. The assessee furnished submissions and supporting details from time to time, which were placed on record.

4. During the course of assessment, the Ld. Assessing Officer noted that the assessee had earned dividend income of Rs. 15,06,989/-, claimed exempt under section 10(34), and long-term capital gains of Rs. 2,73,06,313/-, claimed exempt under section 10(38).The assessee had suo motu made a disallowance of Rs. 2,95,770/- under section 14A read with Rule 8D, which according to the Ld. Assessing Officer was not commensurate with the expenditure incurred in relation to exempt income.

4.1. The Ld. Assessing Officer, after recording dissatisfaction with the assessee’s working, invoked the provisions of section 14A read with Rule 8D and computed total disallowance at Rs. 41,94,302/-, out of which an amount of Rs. 38,98,532/- was added back to the total income, after reducing the amount already disallowed by the assessee.

4.2. The Ld. Assessing Officer further held that the disallowance made under section 14A was also required to be added to the book profit computed under section 115JB, in terms of clause (f) of Explanation 1 thereto.

4.3. The Ld. Assessing Officer also observed that the assessee had taken interest-bearing loans and advanced interest-free funds to its director and a related concern. According to the Ld. Assessing Officer, the assessee failed to establish that such advances were made out of its own funds. Accordingly, interest expenditure of Rs. 7,08,213/- was disallowed under section 36(1)(iii) of the Act.

4.4. Further, a sum of Rs. 2,800/- was disallowed under section 94(7) of the Act on account of dividend stripping, which was accepted by the assessee during the course of assessment proceedings. Penalty proceedings under section 271(1)(c) were initiated separately.

4.5. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A).Before the Ld. CIT(A), the assessee challenged the validity of the assessment on the ground that the Assessing Officer travelled beyond the scope of limited scrutiny and other disallowances as detailed above.

4.6. The assessee contended that adequate interest-free funds were available to cover investments, investments were largely strategic in nature, no further expenditure was incurred for earning exempt income beyond what was already disallowed, Rule 8D was invoked without proper satisfaction, and disallowance under section 14A could not exceed exempt income. With respect to section 36(1)(iii), it was submitted that the advances were for business considerations and that additional disallowance over and above the amount agreed during assessment was unjustified. The assessee also raised an additional legal ground contending that additions made by the Assessing Officer were beyond the issues for which the case was selected for limited scrutiny.

4.7. The Ld. CIT(A) held that adequate opportunity of being heard had been granted by the Assessing Officer and rejected the challenge to the validity of the assessment proceedings. On the issue of disallowance under section 14A, the Ld. CIT(A) upheld the action of the Assessing Officer, observing that the assessee had earned exempt income during the year, the Assessing Officer had recorded detailed reasons for invoking Rule 8D, and the computation of disallowance was in accordance with law. The Ld. CIT(A) further confirmed the addition of disallowance under section 14A to the book profit computed under section 115JB.On the issue of disallowance under section 36(1)(iii), the Ld. CIT(A) held that the assessee failed to establish that interest-free advances were made out of own funds and confirmed the disallowance of Rs. 7,08,213/-.The additional ground relating to limited scrutiny was also rejected. In view of the above, the Ld. CIT(A) dismissed the appeal in entirety.

4.8. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us raising following grounds of appeal:

(a) The assessment order passed u/s.143(3) of the Income Tax Act, 1961 (“the Act”) by the Ld. Assessing Officer is without jurisdiction, invalid, bad-in-law and against the principles of natural justice.

(b) The ld. CIT(A) erred in facts and law in not appreciating the fact that assessment proceedings completed by the learned Assessing Officer are beyond jurisdiction since the case was selected for limited scrutiny under CASS having reasons “large short term capital gains declared u/s 111A, receipt of large value foreign remittance (Form 15CA) and Sale of property reported in Form 26QB” and the Ld.

Assessing Officer travelled beyond the scope of such limited scrutiny by making additions/disallowances not covered in the reasons for selection under CASS.

2. (a) The ld. CIT(A) has erred in facts and law in invoking the provisions of section 14A read with Rule 8D of the Income-tax Rules, 1962, and sustaining the disallowance of Rs.38,98,532/- over and above the suo moto disallowance of Rs.2,95,770/- offered by the appellant in its return of income.

(b) Without prejudice to ground no.2 (a) above, the ld. CIT(A) erred in law in confirming the action of the Ld. Assessing Officer in applying Rule 8D without giving any specific finding and reasons as to inadequacy of disallowance of Rs.2,95,770/- made u/s. 14A in the return of income filed and in not appreciating explanations offered during the course of assessment proceedings.

3. Without prejudice to ground no.2 (a) and (b) above, the ld. CIT(A) erred in law in confirming application of Rule 8D by the Ld. Assessing Officer in disallowing:

i) Direct expenses amounting to Rs. 3,12,501/- under Rule 8D(2)(i) without providing any justification in this regard.

ii) Interest expenditure amounting to Rs. 26,42,434/- under Rule 8D(2)(ii) despite the fact that adequate interest free funds were available with the appellant to finance the investments and even that specific disallowance u/s. 36(1)(iii) is made separately for the interest expenditure.

iii) Expenses amounting to Rs. 12,39,367/- under Rule 8D(2)(iii) without appreciating the fact that no disallowance was called for in relation to strategic investments.

(a) Without prejudice to disallowance made u/s. 14A r.w.r 8D, the ld. CIT(A) erred in facts and law in upholding the addition made by the Ld. Assessing Officer amounting to Rs.38,98,532/- to the Book Profit computed u/s. 115JB of the Act.

(b) The Ld. CIT(A) erred in law in not following the decision of Hon‟ble Jurisdictional Bombay High Court in the case of CIT v/s. M/s. Bengal Finance & Investments Pvt Ltd. (Income Tax Appeal No. 337 of 2013) which is directly covered in favour of appellant.

(a) The ld. CIT(A) erred in facts and law in confirming the disallowance of Rs.1,81,035/- u/s. 36(1)(iii) of the Act over and above Rs.5,27,178/- agreed in the course of assessment proceedings on the premise that interest bearing loan taken by the appellant are utilised for non-business purposes without appreciating the submission and the explanations of the appellant company and solely driven by his own surmises and conjectures without any justification.

6. All the grounds raised are without prejudice to one another.

7. Your appellant craves leave to add, amend, alter or drop all or any of the above grounds of appeal.”

5. During the course of hearing before us, the learned Authorised Representative (AR) of the assessee submitted that the case of the assessee was selected for “Limited Scrutiny”, as is specifically evident from para 1 of the assessment order passed by the Assessing Officer. It was contended that, in spite of such limited scrutiny selection, the Assessing Officer travelled beyond the scope of the issues for which the case was picked up under CASS and made additions and disallowances which were not covered by the reasons for selection.

5.1 The learned AR further invited our attention to the Instructions issued by the Central Board of Direct Taxes governing CASS-2015, and in particular relied upon CBDT Instruction No. 20/2015 dated 29.12.2015. Drawing specific reference to para 3 of the said Instruction, it was submitted that the Board has clearly demarcated the distinction between “Limited Scrutiny” and “Complete Scrutiny” cases and has placed express restrictions on the scope of enquiry in cases selected for limited scrutiny. Placing reliance on the above Instruction, the learned Authorised Representative submitted that, in the present case, there is no reference in the assessment order to any written approval of the Pr. CIT/CIT for conversion of the case from limited scrutiny to complete scrutiny, and therefore the additions made by the Assessing Officer on issues beyond the limited scrutiny reasons are without jurisdiction and liable to be quashed.

5.2. During the course of hearing, the learned Departmental Representative submitted that the jurisdictional ground relating to the case being selected for limited scrutiny was not raised before the learned CIT(A) and, therefore, could not be entertained at this stage.

5.3. In response, the learned AR invited our attention to the additional ground of appeal raised before the CIT(A), as recorded on page 9 of the appellate order, wherein the assessee had specifically challenged the action of the Assessing Officer in making additions beyond the scope of limited scrutiny. It was submitted that although the said additional ground was duly raised before the CIT(A), the learned CIT(A) has not adjudicated upon the same.

5.4. Upon this, the learned Departmental Representative fairly accepted the factual position and submitted that, since the additional ground was raised before the CIT(A) but remained undecided, the matter may be restored to the file of the learned CIT(A) for the limited purpose of adjudicating the said ground in accordance with law.

5.5. On this jurisdictional issue, the learned Authorised Representative further placed reliance on the decision of the Co- ordinate Bench in the case of M/s. Arjun Transport Company Pvt. Ltd. vs. ITO, rendered in ITA No. 4984/Mum/2019 for A.Y. 2016–17, wherein the Tribunal had an occasion to examine the scope of powers of the Assessing Officer as well as the first appellate authority in cases selected for limited scrutiny under CASS. It was submitted that the co-ordinate Bench has categorically held that, in the absence of conversion of limited scrutiny into complete scrutiny in accordance with CBDT Instructions, neither the Assessing Officer nor the CIT(A) can travel beyond the issues for which the case was selected for limited scrutiny. The learned AR further placed reliance on the judgment of the Hon’ble Calcutta High Court in the case of Principal Commissioner of Income-tax v. Weilburger Coatings (India) (P.) Ltd., reported in [2023] 155 taxmann.com 580 / [2024] 296 Taxman 205 / [2024] 463 ITR 89 (Cal.), in support of the contention that the Assessing Officer cannot travel beyond the scope of issues for which the case was selected for limited scrutiny, in the absence of conversion of the case into complete scrutiny in accordance with the CBDT Instructions.

5.6. On merits of the additions sustained by the learned CIT(A), the learned AR submitted that the assessee has placed on record a detailed statement of facts along with a compilation of judicial precedents, as contained in the paper book. It was submitted that the additions made under section 14A read with Rule 8D and the consequential addition to book profits under section 115JB, as well as the disallowance of interest, are unsustainable in law and on facts.

6. We have carefully considered the rival submissions and perused the material available on record. The primary jurisdictional issue raised before us is whether the Assessing Officer was justified in making additions and disallowances beyond the scope of issues for which the case was selected for limited scrutiny under CASS.

7. It is an admitted position on record that the assessee’s case was selected for limited scrutiny, a fact which stands specifically recorded in para 1 of the assessment order. The reasons for selection were confined to verification of large short-term capital gains declared under section 111A, receipt of large value foreign remittance as reported in Form 15CA, and sale of property reported in Form 26QB. There is no dispute before us on this factual aspect.

8. The learned Authorised Representative has drawn our attention to the Instructions issued by the Central Board of Direct Taxes governing CASS-2015, and in particular placed reliance on CBDT Instruction No. 20/2015 dated 29.12.2015. It was submitted that the Board has consciously created a clear distinction between “Limited Scrutiny” and “Complete Scrutiny” cases and has imposed express and mandatory restrictions on the scope of enquiry in cases selected for limited scrutiny, which are binding on the Assessing Officer by virtue of section 119 of the Act.

9. For the sake of completeness, the relevant portion of para 3 of CBDT Instruction No. 20/2015 dated 29.12.2015 is reproduced verbatim below:

“3. As far as the returns selected for scrutiny through CASS-2015 are concerned, two type of cases have been selected for scrutiny in the current Financial Year – one is ^„Limited Scrutiny‟ and other is ^„Complete Scrutiny‟. The assessees concerned have duly been intimated about their cases falling either in ^„Limited Scrutiny‟ or ^„Complete Scrutiny‟ through notices issued under section 143(2) of the Income-tax Act, 1961 (^„Act‟). The procedure for handling ^„Limited Scrutiny‟ cases shall be as under:

a. In ^„Limited Scrutiny‟ cases, the reasons/issues shall be forthwith communicated to the assessee concerned.

b. The Questionnaire under section 142(1) of the Act in ^„Limited Scrutiny‟ cases shall remain confined only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope of enquiry shall be restricted to the ^„Limited Scrutiny‟ issues.

c. These cases shall be completed expeditiously in a limited number of hearings.

d. During the course of assessment proceedings in ^„Limited Scrutiny‟ cases, if it comes to the notice of the Assessing Officer that there is potential escapement of income exceeding Rs. five lakhs (for metro charges, the monetary limit shall be Rs. ten lakhs) requiring substantial verification on any other issue(s), then, the case may be taken up for ^„Complete Scrutiny‟ with the approval of the Pr. CIT/CIT concerned. However, such an approval shall be accorded by the Pr. CIT/CIT in writing after being satisfied about merits of the issue(s) necessitating ^„Complete Scrutiny‟ in that particular case.”

10. A plain reading of the above Instruction makes it abundantly clear that, in a case selected for limited scrutiny, the questionnaire under section 142(1) as well as the scope of enquiry are mandatorily required to remain confined to the specific issues for which the case has been selected. The only exception carved out by the Board is where the Assessing Officer, during the course of proceedings, notices potential escapement of income beyond the prescribed monetary threshold and, thereafter, obtains prior written approval of the Pr. CIT/CIT for conversion of the case into complete scrutiny. In the absence of such approval, the Assessing Officer has no jurisdiction to travel beyond the limited scrutiny issues.

11. In the present case, we find that there is no reference whatsoever in the assessment order to any written approval of the Pr. CIT/CIT for conversion of the case from limited scrutiny to complete scrutiny. There is also nothing on record to demonstrate compliance with clause (d) of para 3 of the Instruction. In such circumstances, the Assessing Officer was legally bound to confine himself strictly to the issues forming part of limited scrutiny.

12. This legal position is squarely supported by the decision of the co-ordinate Bench of the Tribunal, Mumbai, in the case of Arjun Transport Company Pvt. Ltd. v. ITO (supra), wherein it has been categorically held that in the absence of conversion of limited scrutiny into complete scrutiny in accordance with CBDT Instructions, neither the Assessing Officer nor the CIT(A) can examine or adjudicate issues beyond the limited scrutiny parameters, as doing so would defeat the very object of the CASS mechanism.

13. The above view also finds authoritative affirmation from the judgment of the Hon’ble Calcutta High Court in Principal Commissioner of Income-tax v. Weilburger Coatings (India) (P.) Ltd.(supra), wherein the Hon’ble High Court upheld the order of the Tribunal holding that the Assessing Officer is bound by CBDT Instructions and that any enquiry or addition made beyond the scope of limited scrutiny, without following the prescribed procedure for expansion of scrutiny, is without jurisdiction. The Hon’ble High Court has expressly approved the principle that CBDT Instructions issued under section 119 are binding on the departmental authorities and cannot be ignored.

14. Viewed in the light of the binding CBDT Instruction No. 20/2015, the decision of the co-ordinate Bench, and the judgment of the Hon’ble Calcutta High Court, we are of the considered view that the action of the Assessing Officer in examining and making additions on issues beyond the scope of limited scrutiny, without conversion of the case into complete scrutiny in the manner prescribed by law, suffers from a jurisdictional infirmity. Such an infirmity goes to the root of the assessment and cannot be cured by appellate affirmation.

15. Insofar as the objection of the learned DR that the said jurisdictional ground was not urged before the learned CIT(A) is concerned, we find that the assessee had, in fact, raised an additional ground before the CIT(A) challenging the jurisdiction of the Assessing Officer to travel beyond the scope of limited scrutiny. The said additional ground is duly recorded in the appellate order, though it has not been adjudicated upon by the learned CIT(A).

16. Be that as it may, it is well settled that a pure question of law, which goes to the root of the jurisdiction of the Assessing Officer and does not require any fresh investigation of facts, can be raised at any stage of appellate proceedings. The issue involved in the present case pertains to the very assumption of jurisdiction by the Assessing Officer in a limited scrutiny assessment, based on undisputed facts emanating from the assessment order itself, namely the nature of scrutiny selection and the absence of conversion of the case into complete scrutiny in accordance with CBDT Instructions.

17. Since all the relevant facts necessary for adjudication of this ground are already available on record and are not in dispute, and the issue is purely legal in nature, we consider it appropriate to adjudicate the jurisdictional ground ourselves, rather than restoring the matter to the file of the learned CIT(A). Accordingly, the objection raised by the learned DR on this count is rejected.

18. In view of the detailed discussion and findings recorded hereinabove on the jurisdictional issue relating to limited scrutiny, we hold that the Assessing Officer, in the facts of the present case, lacked jurisdiction to examine and make additions on issues beyond the scope of limited scrutiny for which the case was selected under CASS. It is an admitted position that the assessment was not converted into complete scrutiny in the manner prescribed under the binding CBDT Instructions, nor is there any material on record evidencing prior written approval of the Pr. CIT/CIT for such conversion.

19. The jurisdictional defect noticed herein goes to the very foundation of the assessment. Once the Assessing Officer travels beyond the limits of authority conferred upon him in a limited scrutiny case, the additions so made cannot be sustained in law. Such a defect is not curable by appellate affirmation.

20. We further hold that, notwithstanding the fact that the learned CIT(A) has not adjudicated the additional ground raised before him on this issue, the same does not preclude us from deciding the matter. The jurisdictional ground raised before us involves a pure question of law, arising from undisputed facts already on record, and does not require any further factual verification. In exercise of our powers under section 254 of the Act, and to avoid multiplicity of proceedings, we have adjudicated the issue ourselves.

21. Accordingly, the additions and disallowances made by the Assessing Officer beyond the scope of limited scrutiny, and sustained by the learned CIT(A), are held to be without jurisdiction and are hereby set aside. In view of our decision on the jurisdictional ground, the other grounds raised on merits do not survive for adjudication and are left open.

In the result the appeal filed by the assessee is allowed. Order pronounced in the open court on 27.01.2026.