ITAT Ahmedabad Quashes Assessment: AO Cannot Exceed Limited Scrutiny Scope Without Prior Approval
Case Reference
Narendrakumar Rameshbhai Patel Vs DCIT (ITAT Ahmedabad)
Assessment Year: 2015-16
Order Date: 20/03/2020
Background and Overview
A significant ruling has emerged from the Income Tax Appellate Tribunal, Ahmedabad, addressing a recurring jurisdictional concern in limited scrutiny assessments — whether an Assessing Officer can recharacterize the nature of a transaction and alter the applicable head of income when the case was selected only for limited scrutiny, and without obtaining mandatory prior approval for converting it into a complete scrutiny assessment.
The assessee, an individual, held a 30% share in a jointly owned parcel of land measuring 4234 square meters. During the relevant financial year, this land was sold along with four co-owners. The assessee declared income under the head capital gains and also claimed a deduction of Rs. 2,03,58,578/- under Section 54 of the Income Tax Act, 1961. After the deduction, the net capital gain declared stood at Rs. 1,48,86,543/-.
The return was subsequently flagged and selected for limited scrutiny through CASS (Computer Assisted Scrutiny Selection), and a notice was issued under Section 143(2) of the Income Tax Act, 1961, identifying four specific issues for examination.
Issues Selected for Limited Scrutiny
The notice under Section 143(2) identified the following four issues for verification:
- Sale of property mismatch
- Mismatch in income/capital gain on sale of land or building
- Deduction claimed under the head capital gains
- Increase in capital
These four issues formed the entire permissible scope of the Assessing Officer's enquiry under the limited scrutiny framework.
What the Assessing Officer Did
During the course of assessment proceedings, the AO obtained information from Revenue authorities and examined documents submitted by the assessee. Based on this, the AO observed that:
- The land had originally been purchased as agricultural land bearing three different survey numbers
- Subsequently, the land was converted to non-agricultural (NA) status
- The three survey numbers were merged into a single survey number
- The assessee and co-owners had applied for and received plotting approval
- Thereafter, both residential and commercial building projects were initiated on the land
Drawing from these observations, the AO concluded that the activities undertaken by the assessee and co-owners collectively amounted to business activity in the nature of property development. On this basis, the AO:
- Treated the sale proceeds as business receipts rather than capital gains
- Disallowed the deduction claimed under
Section 54of the Act - Reassessed total income at Rs. 3,57,65,520/- as against the returned income of Rs. 1,50,64,250/-
Proceedings Before CIT(Appeals)
The assessee challenged the AO's action before the Commissioner of Income Tax (Appeals), Gandhinagar, primarily on a jurisdictional ground — that the AO had converted the limited scrutiny into a complete scrutiny without obtaining prior approval from the competent authority, in direct violation of CBDT Instructions No. 7/2014 and No. 20/2015.
The assessee argued that the entire assessment was void and bad in law due to this procedural non-compliance.
The AO, in response to the remand report called by the CIT(A), maintained that all enquiries had remained confined to the sale of property — one of the four issues already specified in the limited scrutiny notice — and therefore no conversion to complete scrutiny was necessary.