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Facts
The assessee appealed an order from the NFAC regarding assessment year 2017-18. The primary issue was the disallowance of interest on borrowed capital amounting to Rs. 873760. The assessee argued that the Assessing Officer (AO) exceeded the scope of limited scrutiny by making additions not covered by the initial notice.
Held
The Tribunal held that the assessment order had travelled beyond the scope of the limited scrutiny notice issued under Section 143(2) of the Act. This was based on judicial precedents that an AO cannot expand the assessment scope beyond the issues identified in the initial notice for limited scrutiny.
Key Issues
Whether the AO exceeded the scope of limited scrutiny by making additions beyond the issues mentioned in the notice issued under Section 143(2) of the Act?
Sections Cited
143(2), 263
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Income Tax Appellate Tribunal, DELHI BENCH “SMC’’ : NEW DELHI
Before: SHRI MAHAVIR SINGH, HON’BLE
ORDER This appeal by the assessee is emanating from the order of the NFAC, Delhi in Appeal No. ITBA/NFAC/S/250/2022-23/1044561646(1) dated 08.08.2022 relating to assessment year 2017-18. Heard both the sides and perused the records.
The assessee has originally filed the following grounds of appeal:-
“1. That on the facts and in the circumstances of the case and in law the order passed by the Ld. CIT(A) is bad in law.
2. That the Ld. CIT(A) has grossly erred in not deleting the addition of Rs. 873760 on account of disallowance of interest on borrowed capital even though there was no nexus proved by the AO between loan borrowed and amount advanced for purchase of land.
3. That the Ld. CIT(A) has grossly erred in confirming an addition of Rs. 873760/- merely on assumption / presumption and without any categorical finding either in the assessment order or in the appellate order in respect of nexus between
borrowed funds and fund used for advance for purchase of land given in FY 2007- 08.”
At the time of hearing Ld. AR for the assessee submitted an application U/R 11 of the ITAT Rules 1963 for admission of following additional grounds by submitting that the said additional grounds are purely questions of law and the relevant to the facts of the case already on record by relying upon the decision of the Hon’ble Supreme Court of India in the case of NTPC (229 ITR 383).
"1. On the facts and circumstances of the case and in law the AO has exceeded the scope of limited scrutiny without taking approval of concerned authorities in view the CBDT Instruction No. 20/2015 dated 29.12.2015 and CBDT Instruction No. 5/2016 dated 14.7.2016 read with DGIT (Vigilance) letter dated 30.11.2017 thus the proceedings are without jurisdiction and therefore vitiated in law.
2. On the facts and in the circumstances of the case and in law the AO erred in issuing notice u/s. 143(2) of the Act dated 22.9.2019 in violation of CBDT Instruction F. NO. 225//157/2017/ITA-II dated 23.06.2017. Therefore the said notice is invalid and assessment framed pursuant thereto is vitiated in law.
3. On the facts and in the circumstances of the case and in law the AO has made an entirely new addition in the final assessment order without an opportunity of being heard to the assessee in the show cause notice. Thus being violative of principles of natural justice, the proceeding are null and void.”
During the hearing, Ld. AR for the assessee has only argued the Additional Ground No. 1 as reproduced above. After hearing both the parties and perusing the records, I am of the considered that in view of the NTPC decision, the Additional Ground No. 1 to 3 are admitted, however, the Additional Ground No. 1 was only argued by the assessee’s counsel, the same is being adjudicated. The counsel for the assessee at the threshold submitted that on perusal of the notice issued by the AO u/s 143(2) of the Act dated 22- 09-2019 shows that the case was selected for "limited scrutiny" for examination of the following issues:
2 | P a g e i) Claim of any other amount allowable as deduction in schedule BP. ii) Bonus or commission to employee. iii) Investments/ Advances / Loans. 5 However, the assessment order was passed on a totally different basis as compared to the reasons enumerated in the notice issued under section 143(2) of the Act, The counsel for the assessee drew my attention to the assessment order and submitted that AO held as under:- “Since the issue of giving loan relates to FY 2007-08, hence no action is being taken in this regard for the year under consideration. However, the interest paid by the assessee company Rs. 8,73,760/- is disallowed, as had the company not diverted its own funds to this large extent without receiving any interest, there was no need for payment of interest on borrowed funds” 5.1 However, in the notice referred to above, there was no mention of the same. Accordingly, the counsel for the assessee submitted that the AO, during the course of assessment proceedings clearly travelled beyond the scope of "limited scrutiny assessment", which is not permissible in law. The counsel for the assessee placed reliance on judicial precedents in support of the contention that if the order passed under "limited scrutiny assessment" is on the grounds which were not on the reasons for which the "limited scrutiny" assessment was initiated, the assessment order was without jurisdiction and hence liable to be set aside.
Per contra, Ld. DR relied upon the orders of the authorities below.
I have heard the rival contentions and perused the material on record. In my considered view, the additional ground of appeal which is being pressed for the first time before me, is a purely legal issue and the assessee can be permitted to press any legal issue which goes to the root of the matter or challenge legality of the jurisdiction of the assessment itself, at the appellate stage before us as well. Now on the issue whether, in the instant set of facts, it can be stated that the assessment order has travelled beyond the 3 | P a g e scope of notice issued under section 143(2) of the Act, I am in agreement with the contention that the assessment order was initiated as "limited scrutiny assessment" and it is settled law that unless the limited scrutiny assessment is converted into full scrutiny assessment, after taking due approval as mandated under the Act, such assessment order has to be restricted in scope to the issues on which the notice was issued/assessment was initiated, which is missed in the instant case. Accordingly, the assessment order has been passed in respect of issues which were not the subject matter of "limited scrutiny assessment" notice section 143(2) of the Act.In the case of Commissioner Of Income Tax v. Padmavathi dated 06.10.2020 decided in Tax Case Appeal No. 359 of 2020, the Hon’ble Madras High Court held that in a limited scrutiny assessment, an Assessing Officer (AO) cannot expand the scope of the assessment beyond the specific issues identified in the initial notice. The court also limited the revisionary powers of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Act, preventing its arbitrary use to revisit an assessment that had been adequately examined within its original limited scope. Further, in the case of Chaitanya Bansi bhai Nagori Vs Principal Commissioner of Income Tax (ITAT Ahmedabad) in ITA number 377/Ahd/2020, the Ahmedabad ITAT held that in limited scrutiny, AO cannot go beyond dispute raised in the notice section 143(2) of the Act. Further, in the case of Dharmin N. Thakkar v. ITO in Ahmedabad ITAT quashed the assessment order on the ground that the order was passed beyond the scope of limited scrutiny as there was no question the said notice for the limited scrutiny under section 143(2) of the Act, for the balance additions. This position of law was further elaborated by the CBDT in its Circulars on the subject.
4 | P a g e 7.1 In view of the above, since the assessment order has travelled beyond the scope of notice issued under section 143(2) of the Act, the Additional Ground No. 1 argued by the Ld. AR for the assesse is allowed and accordingly the assessment is set aside. Since no other issues have been argued, the same have become infructuous and dismissed as such.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 15.10.2025.