2025 (10) TMI 344 - AT - Income Tax

Assessment under s.144 quashed for AY 2014-15 where AO exceeded limited-scrutiny by reworking construction costs

ITAT held the assessment framed under s.144 for AY 2014-15 invalid and quashed it because the AO exceeded the limited-scrutiny scope by reworking the cost ... Scope of limited scrutiny - Validity of assessment order passed u/s 144 - disallowance of the cost of improvement/construction in respect of the same property (jointly owned by the assessee) - AO had disturbed the cost of construction/improvement from Rs. 2,20,57,920/- to Rs. 65,32,500/- - HELD THAT:- AO expanded the scope of limited scrutiny by tinkering with the cost of construction/improvement and totally recasting the capital gains shown by the assessee, whereas, the scope of limited scrutiny was “Sale consideration of the property in ITR is less than sale consideration of property as reported in AIR”. Nothing has been brough on record by the Department to show that the AO had obtained any permission to convert limited scrutiny into complete scrutiny. Therefore, we hold that the assessment order passed u/s 144 for AY 2014- 15 in the case of the assessee is in violation of the CBDT Instructions and therefore the same is quashed. Ground No.1 of the appeal raised by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer, in a return selected for limited scrutiny under CASS for the reason 'sale consideration of the property in ITR is less than sale consideration of property reported in AIR', was entitled to expand the scope of enquiry to recast the cost of construction/improvement and recompute capital gains without prior approval as required by CBDT Instructions? 2. If such expansion of enquiry is impermissible, whether the assessment order framed under section 143(3)/144 of the Income Tax Act is vitiated and requires quashing. 3. Consequence of quashing the assessment order on adjudication of substantive/merit grounds raised by the assessee (i.e., disallowance of construction, labour and registration expenses). ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the AO exceeded the scope of limited scrutiny by investigating cost of construction/improvement and related bank/business details without prior conversion to complete scrutiny. Legal framework: CBDT Instructions governing Computer Aided Scrutiny Selection (CASS) and the procedure for limited scrutiny require that, when a return is selected for limited scrutiny on specific issues (e.g., mismatch in sale consideration as per AIR), the questionnaire, notices and enquiries remain confined to those specified issue(s). Expansion of scrutiny into additional matters is permissible only after following prescribed procedure and obtaining prior approval to convert the case into complete scrutiny. Precedent treatment: The Tribunal relied on coordinate-bench and High Court authorities that interpreted and enforced CBDT Instructions to restrict AO actions in limited scrutiny cases (decisions treating expansion without prior approval as impermissible and setting aside assessments-examples include reported coordinate-bench decisions and a High Court ruling summarized in the judgment). A coordinate-bench decision involving an identically situated co-owner was specifically relied upon and followed. Interpretation and reasoning: The record showed selection for limited scrutiny solely on the ground of understatement of sale consideration. Notices issued under sections 142(1) and 143(2) sought broad information (nature of business, all bank accounts with narration of entries above Rs.1 lakh, computation and statement of affairs), evidencing enquiries beyond the stated limited-scrutiny issue. The assessment order recomputed capital gains by reducing claimed cost of construction/improvement-a matter not within the narrow reason for selection. The AO did not produce evidence of having sought or obtained prior approval to widen the scope to complete scrutiny. Applying the CBDT Instructions and the cited precedents, the Tribunal concluded the AO expanded the scope impermissibly. Ratio vs. Obiter: Ratio - where a return is selected for limited scrutiny on a specific CASS parameter, the AO must confine enquiries to the stated issue unless prior approval to convert to complete scrutiny is obtained; expansion into unrelated areas (e.g., recasting cost of construction) without such approval violates CBDT Instructions. Obiter - observations on the content of particular notices and on what specific documents ought to have been sought, insofar as they are case-specific. Conclusion: The AO exceeded the scope of limited scrutiny by probing cost of construction/improvement and other matters not encompassed by the stated reason for selection, without prior approval to convert to complete scrutiny; such conduct contravened CBDT Instructions and applicable precedents. Issue 2: Whether the assessment order is vitiated and must be quashed as a consequence of the impermissible expansion of scope. Legal framework: The validity of an assessment depends not only on the correctness of tax computation but also on compliance with statutory and administrative procedural safeguards, including CBDT Instructions concerning limited scrutiny. Non-compliance with mandatory procedural prerequisites may render an assessment voidable/quashable. Precedent treatment: Tribunal and High Court authorities cited hold that when an AO, in a case selected for limited scrutiny, expands the scope without requisite approval and conducts wider enquiries, the resultant assessment is not in consonance with CBDT Instructions and requires quashing. The Tribunal expressly followed those precedents and the coordinate-bench decision in the co-owner's case with identical facts. Interpretation and reasoning: Given the AO's unapproved expansion and the resulting recomputation of capital gains by reworking cost of construction, the Tribunal found the assessment order to be in violation of CBDT Instructions. The absence of any record showing permission to convert to complete scrutiny was decisive. The Tribunal treated the violation as a jurisdictional/procedural defect going to the validity of the assessment order itself rather than a mere error of fact or discretion. Ratio vs. Obiter: Ratio - where an AO, without requisite approval, expands limited scrutiny and reframes issues beyond the CASS-selected reason, the assessment so framed is vitiated and liable to be quashed. Obiter - remarks concerning the particular manner in which the AO recast capital gains or the broader policy rationale for limited scrutiny guidance. Conclusion: The assessment order framed under section 143(3)/144 is quashed for violation of CBDT Instructions; the ground challenging the legality of the expanded inquiry is allowed. Issue 3: Effect of quashing on adjudication of substantive disallowances (construction, labour, registration expenses) raised on merits. Legal framework: When an assessment is quashed on jurisdictional or procedural grounds, subsequent adjudication of substantive issues becomes academic until a fresh valid assessment or enquiry is made in conformity with applicable procedures. Precedent treatment: Consistent with prior decisions, the Tribunal declined to entertain detailed merits on disallowances after quashing the assessment on legal/procedural grounds. Interpretation and reasoning: Because the assessment was quashed for non-compliance with mandatory CBDT Instructions, re-examination of documentary sufficiency or quantum of disallowances at this stage would be premature and academic. Accordingly, the Tribunal refrained from deciding merits of additions claimed to be based on bogus bills or quantum disputes. Ratio vs. Obiter: Ratio - quashing on procedural grounds precludes concurrent adjudication of substantive merits in that proceeding; merits must be addressed, if at all, in fresh proceedings consistent with procedure. Obiter - none beyond case-specific observations about the documentary record. Conclusion: The Tribunal did not decide the merits of the additions (construction, labour, registration charges) because the assessment was quashed on legal grounds; those substantive grounds remain unadjudicated and academic in the present appeal.