The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that the CIT(A) cannot enhance taxable income by making disallowance on issues other than covered by limited scrutiny.
The assessee, M/s. Arjun Transport Company Private Limited has assailed enhancement made by CIT(A) on a new source of income. The assessee made two fold submissions.
Firstly, the CIT(A) after deleting disallowance of interest expenditure under Rule 8D(2)(ii) invoked the provisions of section 36(1)(iii) of the Act. It was a case of limited scrutiny to examine disallowance of interest expenditure under section 14A of the Act, therefore, the CIT(A) could not have made disallowance under section 36(1)(iii) which was not subject to limited scrutiny.
Secondly, the CIT(A) has no jurisdiction to enhance taxable income by discovering a new source of income. The Assessing officer in limited scrutiny assessment proceedings made addition/disallowance only under section 14A of the Act. The CIT(A) could not have enhanced taxable income of the assessee by making disallowance/addition from a source other than what was the subject matter of assessment.
On the other hand, Ms. Smita Verma representing the Department submitted that the Assessing Officer has made disallowance under section 14A read with Rule 8D in accordance with the provisions of the Act. As regards enhancement made by CIT(A) invoking provisions of section 36(1)(iii) of the Act, the Departmental Representative submitted that the CIT(A) has not made disallowance on new source of income. The assessee in appeal had raised the issue of disallowance of interest under section 14A made by the Assessing Officer.
The Judicial Member Vikas Awasthy ruled that the Assessing Officer completed the assessment by making enquiries etc. only on the issue covered by limited scrutiny, in First Appellate proceedings the CIT(A) made addition/adjustment on issue other than covered by limited scrutiny and at no point of time limited scrutiny was converted into complete scrutiny.
The ITAT while setting aside the impugned order said that the CIT(A) has travelled beyond his jurisdiction to make disallowance on an issue not covered by ‘limited scrutiny’.
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