Limited Scrutiny Means Limited Powers: ITAT Delhi Quashes Section 263 Revision in Harun Ali vs Pr. CIT
A recent decision of the Hon’ble Income Tax Appellate Tribunal, Delhi Bench in Harun Ali vs Principal Commissioner of Income Tax (ITA No. 3444/Del/2025, Assessment Year 2015–16) once again reinforces a crucial but often misunderstood principle of income-tax law: a limited scrutiny assessment cannot be converted into a roving or comprehensive enquiry, either by the Assessing Officer or by the revisional authority under section 263.
This ruling carries significant importance for taxpayers facing scrutiny proceedings under the CASS framework and for those confronted with revisionary action by the PCIT on issues never forming part of the original scrutiny.
Background of the Case
The assessee’s return was selected for limited scrutiny under CASS, specifically on three well-defined parameters-mismatch in TDS, issues relating to turnover, and increase in capital. During the course of assessment, the Assessing Officer called for explanations and supporting documents strictly confined to these issues. After examining the material placed on record, the AO completed the assessment under section 143(3).
At this stage, the matter should ordinarily have ended. However, the Principal Commissioner of Income Tax invoked revisionary powers under section 263, alleging that the assessment order was erroneous and prejudicial to the interests of the Revenue.
Grounds Taken by the PCIT under Section 263
The PCIT raised two fresh concerns which were not part of the original CASS selection. First, he questioned the labour creditors appearing in the books, amounting to more than Rs. 3.15 crore, alleging lack of proper verification. Second, he raised doubts regarding TDS compliance on payments to contractors, particularly where such payments were described as “daily wage” expenses.
Despite the assessee producing audit certificates, evidence of cess payments, and other supporting documents to address these concerns, the PCIT remained unconvinced. He ultimately set aside the assessment order and directed the AO to conduct a fresh examination.
Issue before the ITAT
The core issue before the Tribunal was whether the PCIT could invoke section 263 to revise an assessment framed under limited scrutiny by introducing entirely new issues which were never part of the original CASS mandate.
Findings of the ITAT
The ITAT categorically rejected the action of the PCIT. It observed that limited scrutiny assessments are governed by clear administrative and legal boundaries. When a case is selected for limited scrutiny, the AO is empowered to examine only those specific issues for which the case was picked up, unless the procedure for conversion into complete scrutiny is formally followed.
The Tribunal held that the PCIT cannot do indirectly what the AO himself was not permitted to do directly. Introducing a fresh TDS angle and questioning labour creditor balances-issues wholly outside the original scope of scrutiny-amounted to exceeding jurisdiction.
The ITAT further noted that the AO had duly examined the issues for which the case was selected and had taken a plausible view after verification. Merely because the PCIT held a different opinion or wanted a deeper enquiry on unrelated issues could not justify invocation of section 263.
Section 263 Cannot Override the Nature of Scrutiny
The Tribunal emphasized that section 263 is not a tool for fishing or roving enquiries. For revision to be valid, the assessment order must be both erroneous and prejudicial to the interests of the Revenue, and such error must relate to matters within the permissible scope of assessment. In a limited scrutiny case, that scope itself is restricted.
By attempting to widen the enquiry beyond the original CASS reasons, the PCIT’s action was held to be legally unsustainable. Consequently, the revisionary order passed under section 263 was quashed and the assessee’s appeal was allowed.
Key Takeaways for Taxpayers
This decision offers strong protection to taxpayers against overreach in limited scrutiny cases. It clarifies that once the AO confines himself to the specified CASS issues and completes the assessment after due verification, the matter cannot be reopened on unrelated grounds under section 263.
For taxpayers, it underlines the importance of understanding the nature of scrutiny—limited versus complete—and asserting their rights when authorities attempt to travel beyond jurisdiction. For the Revenue, it serves as a reminder that administrative discipline and statutory boundaries must be respected.
Conclusion
The ruling in Harun Ali vs Pr. CIT reaffirms a vital principle of tax administration: limited scrutiny must remain limited. Neither the Assessing Officer nor the Principal Commissioner can enlarge the scope at their convenience. The decision strengthens certainty, fairness, and rule of law in scrutiny assessments, and stands as a valuable precedent against unwarranted revisionary action under section 263.
The copy of the order is as under:
