AO exceeded scrutiny limits by disallowing expenses without approval under Income Tax rules

The ITAT Kolkata held that the AO exceeded the limited scrutiny scope by making disallowances without proper justification and without converting the case into a complete scrutiny with requisite approvals. The assessee had submitted adequate documents, and no discrepancies or rejection of books of account occurred. The AO's disallowance of salary, administrative, staff welfare, and other expenses was unsustainable. The AO's failure to record reasons or obtain PCIT approval for expanding the scrutiny scope rendered the additions invalid. The ITAT directed deletion of these disallowances and allowed the assessee's appeal.

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ISSUES:

Whether delay in filing the appeal can be condoned when the impugned order was communicated late due to mismatch of email address and lack of proper service.Whether the Assessing Officer exceeded the scope of limited scrutiny without prior approval for complete scrutiny.Whether disallowances of salary and administrative expenses can be sustained in absence of substantive evidence questioning the genuineness or business relation of such expenses.Whether the Assessing Officer can disallow expenses without converting limited scrutiny to complete scrutiny and without obtaining necessary approval from the PCIT.

RULINGS / HOLDINGS:

The delay of 324 days in filing the appeal was condoned as there was a "reasonable cause behind such delay" due to late communication of the order and improper service caused by email mismatch.The Assessing Officer "exceeded the scope of limited scrutiny" by making disallowances without prior approval for complete scrutiny, which is impermissible.The disallowances on account of salary expenses and administrative and other expenses are "not sustainable" as the assessee furnished all necessary details and supporting documents, and no discrepancies were identified.The Assessing Officer cannot disallow expenses beyond the scope of limited scrutiny "without converting the case into complete scrutiny" and without obtaining approval from the PCIT, which was lacking in the present case.

RATIONALE:

The legal framework applied includes provisions under the Income Tax Act relating to assessment proceedings, specifically sections 143(2), 142(1), and 250, and the procedural requirement that limited scrutiny cases cannot be expanded to complete scrutiny without prior approval from the Principal Commissioner of Income Tax (PCIT).The Tribunal relied on precedent from the assessee's own case for assessment year 2017-18, where similar facts led to the deletion of disallowances, reinforcing the principle that disallowances must be supported by substantive evidence and proper procedural compliance.The Tribunal emphasized that the books of account were not rejected and that the Assessing Officer failed to provide reasons or obtain approval for expanding the scope of scrutiny, thereby violating procedural safeguards.No dissenting or concurring opinions were recorded.

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