The Income Tax Appellate Tribunal (ITAT), Chennai, has recently held that an Assessing Officer (AO) cannot expand the scope of a limited scrutiny assessment to examine a separate deduction merely because it falls under the same provision of the Income Tax Act as the issue flagged for scrutiny.
A Bench of Judicial Member Aby T. Varkey and Accountant Member S.R. Raghunatha observed that limited scrutiny restricts the AO's enquiry to the specific issues for which a return is selected, unless the conditions prescribed by the Central Board of Direct Taxes (CBDT) for expanding its scope are fulfilled.
The tribunal observed: "The distinction between 'Limited Scrutiny' and 'Complete Scrutiny' would lose its significance if an AO, after receiving jurisdiction over specified issues, were permitted to enlarge those issues by adopting a broad or generic description of the statutory provision under which they arise."
The tribunal was dealing with Aeon Formulations Pvt. Ltd., which is engaged in formulations research and the manufacture of pharmaceutical, nutraceutical and ayurceutical products.
The company had claimed a deduction of ₹3.21 crore under Section 35(2AB) of the Income Tax Act for expenditure incurred on its approved in-house research and development facility.
Its return was selected under the Computer Aided Scrutiny Selection (CASS) for limited scrutiny on two issues: "Duty Drawback" and "Deduction on Account of Donation for Scientific Research".
The AO restricted the ₹3.21 crore deduction to ₹76.11 lakh based on Form 3CL, disallowing ₹2.45 crore. The company challenged this, arguing that the AO had exceeded the scope of limited scrutiny. The Revenue maintained that both claims fell under Section 35. Rejecting this, the tribunal held that they were distinct deductions.
They involved different transactions, eligibility conditions and evidentiary requirements.
It observed, "The mere circumstance that two distinct deductions find place under different limbs of the same statutory provision does not make them one and the same issue for the purposes of Limited Scrutiny."
The tribunal noted that the scrutiny notice specifically identified the issue as a deduction on account of donations for scientific research. It was not a general scrutiny of all deductions claimed under Section 35.
The tribunal also noted that the company's return showed Nil claims under Sections 35(1)(ii), 35(1)(iia), 35(1)(iii) and 35(2AA) in Schedule ESR. The ₹3.21 crore claim was separately made under Section 35(2AB) for expenditure on its own in-house R&D facility.
The tribunal further examined the CBDT guidelines applicable to CASS-2019. These permitted examination of an additional issue where credible specific information regarding tax evasion was received from a law enforcement, intelligence, or regulatory authority or agency, subject to the prescribed procedure and prior administrative approval.
However, neither the assessment order nor the remand report referred to any such information. There was also no evidence of reasons being recorded, prior administrative approval being obtained, or the assessee being informed about the proposed expansion of scrutiny.
The tribunal also rejected the argument that the company's participation in the assessment proceedings and submission of Form 3CL could confer jurisdiction on the AO to examine an issue beyond the permissible scope of limited scrutiny.
Holding that the AO had travelled beyond the notified scrutiny parameters, the tribunal reversed the CIT(A)'s finding and directed the AO to delete the disallowance of ₹2.45 crore. It accordingly allowed the company's appeal.