Limited scrutiny limits assessment scope; partner-routed credits cannot be treated as firm income without proof of business receipts.

In a limited scrutiny assessment, the Assessing Officer cannot widen the enquiry beyond the specific issue selected unless the prescribed conditions for expansion and prior approval are satisfied; additions made outside that scope are therefore unsustainable. Credits routed through partners' bank accounts were also not taxable as the firm's undisclosed business income where the records showed those receipts in the partners' hands and no material established that they represented the firm's turnover or business receipts. The assessment was thus held invalid to the extent it travelled beyond limited scrutiny, and the substantive additions were deleted.

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Issues: (i) Whether the Assessing Officer could enlarge the scope of a limited scrutiny assessment and make additions on issues beyond the specific reason for selection without the prescribed administrative approval; (ii) whether the credits received through the partners' bank accounts could be assessed as the assessee firm's undisclosed business income.

Issue (i): Whether the Assessing Officer could enlarge the scope of a limited scrutiny assessment and make additions on issues beyond the specific reason for selection without the prescribed administrative approval.

Analysis: The case was selected under CASS for limited scrutiny on the issue of cash deposits. The assessment order, however, proceeded to examine the entire bank credits and to make additions on issues beyond that limited purpose. The CBDT instructions governing limited scrutiny restrict enquiry to the specific issue for which the case is selected and permit expansion only in the circumstances and manner prescribed, including prior approval of the competent authority. No such approval or qualifying material from an external law-enforcement or regulatory source was shown.

Conclusion: The expansion of scrutiny was beyond jurisdiction and the assessment, to that extent, was unsustainable in favour of the assessee.

Issue (ii): Whether the credits received through the partners' bank accounts could be assessed as the assessee firm's undisclosed business income.

Analysis: The record showed that the impugned credits were routed through the partners' bank accounts and were reflected in their respective returns and capital accounts. The assessee's explanation was that the receipts belonged to the partners in their individual capacity and that no business income of the firm was shown for the year. No material was brought to show that the receipts represented the firm's business turnover or that the firm had carried on the relevant contracts in its own right. In those circumstances, the routing of funds through banking channels did not, by itself, justify treating the whole amount as the firm's business income.

Conclusion: The additions treating the partner-related credits as the assessee firm's business income were deleted in favour of the assessee.

Final Conclusion: The assessment was vitiated for want of valid jurisdiction over issues outside limited scrutiny, and the substantive additions were also found unsustainable on the facts.

Ratio Decidendi: In a limited scrutiny assessment, the Assessing Officer cannot travel beyond the issue for which the case was selected unless the prescribed conditions for expansion are satisfied, and credits not shown to be the firm's income cannot be assessed as the firm's business receipts merely because they pass through banking channels.

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