Limited Scrutiny Assessment: ITAT Deletes Rs. 8.68 Lakh Presumptive Income Addition u/s 44AD, Holding AO Exceeded Jurisdiction [Read Order]

The Delhi bench of Income Tax Appellate Tribunal (ITAT) deleted Rs. 8.68 Lakh presumptive income addition under Section 44AD, holding that the AO exceeded its jurisdiction when the matter was only taken up for a limited scrutiny assessment.

The assessee, Devendra Kumar, filed his return of income for the relevant assessment year. His case was selected for limited scrutiny under the Computer-Assisted Scrutiny Selection (CASS) system solely to examine cash deposits in his bank account. During the course of assessment, the AO, while examining the cash deposits, proceeded to estimate the assessee’s business income under section 44AD on a presumptive basis, computing an addition of Rs. 8,68,799.

The assessment was completed, and the addition was subsequently confirmed by the CIT(A) in appellate proceedings. Aggrieved, the assessee approached the Tribunal, contending that the addition was made beyond the scope of the limited scrutiny permitted by the CBDT instructions.

The assessee argued that the limited scrutiny was confined exclusively to verifying the source and nature of cash deposits. The AO was not authorised to make any other inquiries or additions unless the case was converted into a complete scrutiny with the prior approval of the Principal CIT, as mandated under CBDT Instructions.

It was submitted that the addition made under Section 44AD was outside the jurisdiction of the AO, since no such issue formed part of the original reasons for selection. The assessee relied on the Calcutta High Court’s ruling in PCIT v. Weilburger Coatings India Pvt. Ltd. (2023), wherein it was held that any addition made on an issue not covered by limited scrutiny is without jurisdiction and liable to be quashed.

The Revenue contended that the AO had examined the case properly and had the power to consider issues arising incidentally from the scrutiny of cash deposits. It was further argued that since the assessee had participated in the assessment proceedings and submitted explanations regarding business income, the AO’s action could not be treated as invalid merely on technical grounds.

The Revenue relied on the fact that the assessee was put to notice and had the opportunity to explain his income, and therefore, any procedural lapse should not render the assessment order void.

The Tribunal observed that the assessment was categorically limited to the verification of cash deposits, and the AO had no jurisdiction to make additions under section 44AD without first converting the limited scrutiny into a complete scrutiny with the requisite administrative approval.

Placing reliance on Weilburger Coatings India Pvt. Ltd. and the CBDT instructions, the bench of Satbeer Singh Godara (Judicial Member) held that the AO had exceeded his jurisdiction by making an addition on an issue not forming part of the limited scrutiny mandate. Since the addition was made contrary to the procedural safeguards and CBDT directions, it was declared invalid in law.

Accordingly, the Tribunal deleted the addition of Rs. 8,68,799 and allowed the assessee’s appeal in full.

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