AO Cannot Travel Beyond Limited Scrutiny Without Pr. CIT’s Consent: ITAT reiterates CBDT Instruction, Deletes Addition u/s 36(1)(iii) [Read Order]
The bench found that the AO failed to seek the mandatory prior approval from the PCIT to expand the scope of scrutiny into a full-fledged one, as required under the Board’s instructions.
![AO Cannot Travel Beyond Limited Scrutiny Without Pr. CIT’s Consent: ITAT reiterates CBDT Instruction, Deletes Addition u/s 36(1)(iii) [Read Order]](https://images.taxscan.in/h-upload/2025/07/01/2057401-scrutiny-cbdt.webp "AO Cannot Travel Beyond Limited Scrutiny Without Pr. CIT’s Consent: ITAT reiterates CBDT Instruction, Deletes Addition u/s 36(1)(iii) [Read Order]")
The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has quashed an addition of over ₹3.83 crore made by the Assessing Officer ( AO ) under Section 36(1)(iii), holding that the AO exceeded his jurisdiction by going beyond the scope of issues for which the case was originally selected.
B.K. Sales Corporation, the assessee, for Assessment Year 2015-16, where the AO disallowed interest expenses claimed under Section 36(1)(iii), citing that the assessee used borrowed funds for investments unrelated to its core business. The AO concluded that the interest claimed against such borrowed capital was inadmissible and made an addition of ₹3.83 crore to the total income.
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However, the assessee contended that the AO’s action violated CBDT Instruction No. 5/2016 dated 14 July 2016, which strictly limits the scope of examination in cases picked up for “limited scrutiny.”
According to the case records, the scrutiny was initiated for five specific reasons, none of which included a mandate to test the allowability of interest under Section 36(1)(iii) in isolation. The assessee pointed out that while “high interest expenditure” was listed, it was only in the context of new capital added to work-in-progress or fixed assets, which was not the basis of the AO’s addition.
Agreeing with the assessee’s argument, the ITAT found that the AO failed to seek the mandatory prior approval from the Principal Commissioner of Income Tax (Pr. CIT) to expand the scope of scrutiny into a full-fledged one, as required under the Board’s instructions. The Tribunal observed that the phrase “high interest expenditure” must be read in context and cannot be stretched to justify an unrelated disallowance.
The bench of Mahavir Singh (Judicial member) and Amitabh Shukla (Accountant member) stressed that CBDT directives have statutory force and bind assessing authorities, citing well-established precedents from the jurisdictional High Court in Best Plastics Pvt. Ltd. as well as comparable decisions from the Punjab & Haryana and Calcutta High Courts. It referenced the vigilance guidelines issued by CBDT, which caution AOs against going beyond their mandate without the necessary approval and documentation.
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The bench ordered the complete disallowance under Section 36(1)(iii) to be deleted after concluding that the AO's action had an irreversible jurisdictional flaw.
The decision clarified that if a case is chosen for limited scrutiny, any attempt to go beyond the issues listed without changing the case to full scrutiny after obtaining the required permissions makes the additions legally untenable.
Accordingly, the Tribunal dismissed the Revenue’s appeal.
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