AO exceeded limited scrutiny scope making section 68 additions without PCIT approval for complete scrutiny

The ITAT Delhi held that the AO exceeded the scope of limited scrutiny by making additions under section 68 for unsecured loans and unaccounted expenditure, when the case was selected only for verifying large interest expenses related to exempt income under section 14A and high interest expenses compared to business turnover. The tribunal ruled that while AOs can widen scrutiny scope, they must obtain prior approval from PCIT and record satisfaction about merits necessitating complete scrutiny. Since no such approval was obtained and CBDT circulars were disregarded, the assessment order was set aside and additions deleted in favor of the assessee.

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Issues Involved: Jurisdiction of the Assessing Officer (AO), Unexplained Cash Credit u/s 68, Unaccounted Expenditure u/s 69C, Interest Disallowance u/s 36(1)(iii), and Scope of Limited Scrutiny.

Jurisdiction of the Assessing Officer (AO):
The Assessee contended that the AO made additions beyond the scope of "limited scrutiny" without proper jurisdiction, which is contrary to CBDT circulars. The Tribunal found that the AO traveled beyond the issues involved in the limited scrutiny and made additions without obtaining the required approval from the Principal Commissioner of Income Tax (PCIT), thus violating CBDT instructions. The Tribunal quashed the assessment framed by the AO on issues beyond the limited scrutiny.

Unexplained Cash Credit u/s 68:
The AO added Rs. 4,96,00,000/- as unexplained cash credit, treating it as unsecured loans from bogus companies. The Tribunal noted that the AO failed to confine the enquiry to the limited scrutiny issues and made the addition without proper jurisdiction. Consequently, the addition was deleted.

Unaccounted Expenditure u/s 69C:
The AO made an addition of Rs. 11,52,000/- on account of unaccounted commission expenditure. The Tribunal found this addition beyond the scope of the limited scrutiny and without the necessary approval for expanding the scrutiny. Hence, the addition was deleted.

Interest Disallowance u/s 36(1)(iii):
The AO disallowed Rs. 36,66,823/- as interest expenses, claiming the loans were from bogus companies. The Tribunal held that this disallowance was also beyond the scope of the limited scrutiny and lacked the required approval for a complete scrutiny. Therefore, the disallowance was deleted.

Scope of Limited Scrutiny:
The Tribunal emphasized the importance of adhering to CBDT instructions regarding limited scrutiny. It reiterated that the AO must seek prior approval from the PCIT to expand the scope of scrutiny, which was not done in this case. The Tribunal relied on judicial precedents to support its decision to quash the additions made by the AO beyond the scope of limited scrutiny.

Conclusion:
The Tribunal allowed the appeal of the Assessee, deleting all the additions made by the AO due to the lack of jurisdiction and non-compliance with CBDT instructions on limited scrutiny.

Order Pronounced:
The order was pronounced in open Court on 21st December, 2023.

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