Treaty entitlement claims must be examined on merits despite limited scrutiny, and failure to do so warrants remand for fresh adjudication.

A substantiated claim for tax treaty entitlement and related notional relief raised during assessment proceedings must be examined on its merits even in a limited scrutiny selection; an assessing officer or appellate authority cannot decline adjudication solely because the case was selected for limited scrutiny. Where the AO and ITA(C) failed to record reasons or adjudicate the treaty claim despite documentary support, the correct remedy is to set aside the impugned orders and remit the matter for fresh consideration with an opportunity to be heard and appropriate recomputation.

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Issues: (i) Whether the assessee's claim for taxation under the India Germany tax treaty (Article 12) and related notional relief could be examined despite the assessment being selected for limited scrutiny; (ii) Whether the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals) should be set aside and the matter remitted for fresh examination of the treaty benefit.

Issue (i): Whether the treaty based claim and associated notional relief require examination notwithstanding the limited scrutiny scope.

Analysis: The assessee asserted tax residency of a foreign jurisdiction, absence of a permanent establishment in India, and a claim effectively resulting in a 10% tax rate under the treaty; documentary evidence including tax residency certificate and the assessee's tax workings were on record. The assessment record shows the AO accepted the declared income but computed tax at statutory rates while also allowing a notional relief under unilateral provisions without explaining the basis. Coordinate authority recognises that limited scrutiny restricts the AO from initiating examination beyond identified issues but does not bar adjudication of claims raised by the assessee during proceedings where material is placed on record. The appellate authority declined to examine the treaty claim on the view that its powers were limited by the AO's limited scrutiny scope; no specific findings on the treaty claim were recorded by the AO or the appellate authority.

Conclusion: In favour of the assessee. The treaty based claim and the notional relief called for examination on merits despite limited scrutiny, and the AO and the appellate authority erred in not examining the claim with supporting material.

Issue (ii): Whether the impugned assessment and appellate orders should be set aside and remitted for reconsideration.

Analysis: The AO did not record reasons for allowance of unilateral relief and did not examine the treaty claim, and the appellate authority declined to adjudicate the treaty issue. Where a legitimate claim is raised with supporting material, remand to the assessing and appellate authorities for fresh consideration and opportunity to be heard is an appropriate remedy; relevant precedent supports remand rather than summary dismissal when claim merits adjudication.

Conclusion: In favour of the assessee. The matters are set aside and remitted for fresh examination of the treaty claim with opportunity to be heard.

Final Conclusion: Both appeals are allowed for statistical purposes and the matters are remitted to the Commissioner of Income Tax (Appeals) for fresh adjudication of the treaty entitlement and related computations in accordance with law.

Ratio Decidendi: Where an assessee raises a substantiated claim during assessment proceedings, including in limited scrutiny cases, the claim must be examined on its merits and, if not so examined, the appropriate remedy is to set aside and remit for fresh adjudication rather than deny adjudication on the ground of limited scrutiny alone.

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