AO exceeded jurisdiction by denying section 54F deduction in limited scrutiny without full approval, appeal allowed

ITAT RAJKOT held that the AO exceeded jurisdiction by denying deduction u/s 54F during a limited scrutiny assessment without converting it into a full scrutiny with proper approval. The AO's rejection of the exemption was beyond the scope of the limited scrutiny notice and violated statutory provisions and CBDT circulars. Since no disallowance under other sections or additions on sale consideration were made, the AO's action was set aside. The appeal by the assessee was allowed, affirming that the AO cannot expand the scope of limited scrutiny assessment unilaterally.

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ISSUES:

Whether the gain of Rs. 1,01,04,063/- assessed as business income instead of long-term capital gain, thereby disallowing exemption under section 54F of the Income Tax Act, 1961, is correct.Whether the claim of deduction under section 54F is excessive by Rs. 14,84,766/- and rightly disallowed.Whether the Assessing Officer exceeded the jurisdiction by disallowing the claim under section 54F during limited scrutiny assessment under CASS.

RULINGS / HOLDINGS:

On the characterization of gain as business income rather than capital gain, the Court held that the Assessing Officer's treatment of the asset as stock-in-trade and consequent denial of exemption under section 54F was not upheld due to jurisdictional issues.Regarding the excess claim of deduction under section 54F, the Court found that the Assessing Officer's calculation disallowing Rs. 14,84,766/- as excessive was part of the disallowance which was set aside on jurisdictional grounds.The Court held that the Assessing Officer "has travelled beyond the scope of his jurisdiction" in disallowing the claim under section 54F during limited scrutiny assessment, as the issue was not part of the reasons for limited scrutiny communicated to the assessee.Consequently, the Court quashed the assessment proceedings on the ground of jurisdictional overreach, rendering other issues academic.

RATIONALE:

The legal framework applied includes section 2(47) and section 45(2) of the Income Tax Act, 1961, which govern the conversion of capital assets into stock-in-trade and the timing of capital gains recognition.Section 54F provides exemption on capital gains arising from transfer of long-term capital assets, subject to reinvestment conditions.The Court emphasized the principle that in limited scrutiny assessments under CASS, the Assessing Officer is bound by the scope of scrutiny as communicated and cannot travel beyond those issues without administrative approval to convert to full scrutiny.The Court relied on precedents establishing that additions or disallowances beyond the scope of limited scrutiny are invalid.No administrative approval was taken to enlarge the scope of assessment from limited to full scrutiny, thus rendering the Assessing Officer's action invalid.The Court did not rule on the substantive merits of the characterization of income or the correctness of the deduction calculation due to quashing of the assessment on jurisdictional grounds.

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