Limited scrutiny cannot expand to disallow depreciation expenses; section 57(iii) addition quashed, assessee's appeal allowed

ITAT Delhi-AT held that in a case selected for "limited" scrutiny restricted to verification of registration/approval under specified sections of the IT Act, the authorities could not make a disallowance under section 57(iii) on depreciation or related expenses, as this issue was outside the permitted scrutiny scope. Relying on a recent HC ruling that prohibits expansion of issues beyond the reasons for limited scrutiny, ITAT deleted the disallowance. The assessee's appeal was allowed and the impugned addition stood quashed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a disallowance (section 57(iii) depreciation claim) can be sustained where the assessment was selected for "limited scrutiny" and the issue did not form part of the limited scrutiny scope.

2. Whether the Assessing Officer exceeded jurisdiction by enquiring into and disallowing items not covered by the limited scrutiny selection without converting the assessment into complete scrutiny or obtaining required approvals.

3. Whether such jurisdictional excess can be raised at any stage of appeal despite procedural objections by the revenue.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of disallowance where issue was outside limited scrutiny

Legal framework: Section 143 assessment scheme distinguishes limited scrutiny selections from complete scrutiny; CBDT instructions require that issues beyond limited scrutiny must follow prescribed procedures (recording reasons, approvals, conversion to complete scrutiny) before the AO expands scope.

Precedent treatment: The Court followed and adopted the reasoning in PCIT v. Weilburger Coatings India Pvt. Ltd., which held that an AO completing assessment on grounds not part of limited scrutiny exceeded jurisdiction; the Weilburger decision was applied mutatis mutandis. The reasoning in Sukhdham Infrastructures LLP (distinguishing procedural vs. substantive code) was noted and considered, with the court rejecting revenue's attempt to treat the scheme as merely procedural and upholding the limited-scrutiny constraints.

Interpretation and reasoning: Where the selection is for limited scrutiny, the AO must confine inquiry to specified issues; initiating inquiries or making disallowances on issues not included in that scope without recording reasons and obtaining required approvals violates the statutory and administrative framework. CBDT instructions and supervisory practice emphasize strict adherence to the limited-scrutiny boundary; departure without following conversion procedures indicates excess of jurisdiction and may suggest mala fides or irregularity.

Ratio vs. Obiter: Ratio - an addition/disallowance made on an issue that was not part of the limited scrutiny selection and without conversion or required approvals is beyond the AO's jurisdiction and cannot be sustained. Observational/obiter - administrative disciplinary remarks and factual notes on malafide instances in CBDT circulars serve to underscore the need for compliance but are ancillary.

Conclusion: The impugned disallowance of the depreciation claim was invalid because the issue was not part of the limited scrutiny scope and the AO failed to convert the assessment to complete scrutiny or comply with required procedures; the disallowance must be deleted.

Issue 2: Jurisdictional consequences of exceeding limited-scrutiny scope and requirement for conversion

Legal framework: The statutory scheme of Section 143 requires the AO, when conducting assessment under subsection (3) after notice under subsection (2), to act within the objects specified for the scrutiny selection; administrative instructions supplement by requiring reasons and authority approval before scope expansion.

Precedent treatment: Weilburger (followed) determined that acting beyond limited scrutiny is jurisdictional; Sukhdham was considered on its distinction between procedural irregularity and substantive jurisdiction, with the Court rejecting a narrow procedural characterization that would permit such additions.

Interpretation and reasoning: The assessment code is self-contained; compliance with its limits is jurisdictional rather than mere procedure. Where the AO exceeds those limits without conversion/approvals, the resulting addition is not merely a defect but an absence of jurisdiction to make that addition. Hence appellate fora may entertain jurisdictional objections even if raised late.

Ratio vs. Obiter: Ratio - exceeding the limited-scrutiny scope without conversion/approval vitiates the assessment to that extent. Obiter - discussion of the CBDT's disciplinary findings illustrating consequences of non-compliance.

Conclusion: The AO's action in disallowing the depreciation without requisite conversion/approvals constituted excess of jurisdiction and required deletion of the disallowance.

Issue 3: Permissibility of raising jurisdictional objection at appellate stages

Legal framework: Jurisdictional defects can be raised at any stage; appellate authorities can entertain additional grounds where the issue goes to jurisdiction.

Precedent treatment: Weilburger and subsequent authorities were relied upon to permit an assessee to raise the limited-scrutiny jurisdictional objection before the Tribunal despite objections by revenue that the ground was raised belatedly.

Interpretation and reasoning: Because exceeding limited-scrutiny scope affects the AO's jurisdiction, the objection is not barred as a mere procedural defect and may be asserted at any appellate level. The Tribunal and appellate authorities are empowered to examine whether the issue fell within the limited scrutiny and to correct jurisdictional excess by deleting additions made on that basis.

Ratio vs. Obiter: Ratio - jurisdictional objections to actions beyond limited scrutiny are admissible at any stage and justify interference. Obiter - procedural nuances about entry of additional grounds in specific factual permutations.

Conclusion: The jurisdictional objection was rightly entertained and decided in favour of the assessee; the lower authorities erred in upholding the disallowance.

Cross-references

See Issue 1 and Issue 2 analysis: issues of limited scrutiny scope, CBDT instructions, and statutory scheme of Section 143 are interlinked - jurisdictional limitation under Section 143 governs whether an AO may disallow items not included in limited scrutiny; failure to comply with conversion procedures results in jurisdictional invalidity (Issues 1-2). See Issue 3 for appellate timing of jurisdictional objections.

Final disposition

The Court deleted the disallowance and allowed the appeal by holding that the AO exceeded jurisdiction by disallowing depreciation not included in limited scrutiny, applying Weilburger and related authorities; the disallowance was set aside accordingly.

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