Naresh Kumar Agrawal vs ITO: ITAT Raipur on Limited Scrutiny Scope Under Section 143(3)

This case examines a recurring fault-line in income-tax assessments completed under "limited scrutiny": whether an Assessing Officer can travel beyond the narrow issue for which the case was selected — here, cash deposits during demonetization — and make additions on an entirely different ground (turnover computation) without first obtaining the required permission to convert the matter to a "complete scrutiny" in accordance with CBDT Instruction No. 5/2016. The ITAT Raipur's order in ITA No. 461/RPR/2024, pronounced on 19 November 2024, allowed the assessee's appeal, making it a significant reference point for taxpayers and practitioners dealing with limited-scrutiny assessments under Section 143(3).

This page is a research summary of one specific Indian tax judgment, NOT legal advice. Always verify against the full judgment and consult a professional for case-specific guidance.

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The case at a glance

• Parties: Naresh Kumar Agrawal, Raigarh, Raigarh vs Income Tax Officer, Ward-3, Raigarh
• Bench: Income Tax Appellate Tribunal - Raipur
• Date: 19 November 2024
• Court level: Tribunal (ITAT)
• Sections engaged: 143(3)
• Outcome: Taxpayer succeeded

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Facts of the case

Shri Naresh Kumar Agrawal, proprietor of Shri Ram Rice Mill, Junadih, filed his return of income for Assessment Year 2017-18 declaring an income of Rs. 7,76,060/-. The case was selected for "limited scrutiny" through the Computer-Aided Scrutiny Selection (CASS) system specifically to examine cash deposits made by the assessee during the demonetization period. During assessment proceedings, the Assessing Officer accepted the assessee's explanation that cash deposits of Rs. 7 lacs made during the demonetization period were sourced from closing cash balance held as on 08.11.2016.

However, in the course of verification, the assessee himself disclosed that while his return declared a turnover of Rs. 93,46,866/-, his actual turnover was Rs. 2.18 crore — a fact the AO confirmed from the bank statement. The AO did not accept the assessee's claim to compute business income at 6% of gross receipts, instead computing it at 8% of gross turnover of Rs. 217.64 lacs, arriving at Rs. 17,41,120/-. Since the assessee had already offered income of Rs. 7,69,521/- on a presumptive basis, the AO made an addition of Rs. 9,71,599/- and passed an order under Section 143(3) dated 14.12.2019 determining the assessee's income at Rs. 17,47,659/-.

Aggrieved by the addition, the assessee sought to file an appeal before the CIT(Appeals). On the advice of his then-counsel, the assessee had initially accepted the assessment order. It was only on receipt of a penalty order under Section 270A dated 26.03.2022 — when new counsel was engaged — that the jurisdictional infirmity in the assessment was identified: the addition had been made on an issue (turnover computation) entirely outside the limited-scrutiny scope, without the AO obtaining the requisite permission from the Principal Commissioner of Income Tax to convert the matter to complete scrutiny as mandated by CBDT Instruction No. 5/2016 dated 14.07.2016. The assessee filed the appeal before the CIT(Appeals) on 23.06.2022, entailing a delay of approximately two and a half years beyond the original statutory deadline of 13.01.2020. The ADDL/JCIT(A)-3, Bengaluru, dismissed the appeal on the ground that no sufficient or reasonable cause had been shown to justify condonation of the inordinate delay. The assessee then carried the matter to the ITAT Raipur.

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Issues raised

• Whether the ADDL/JCIT(A)-3, Bengaluru, erred in dismissing the appeal on the ground of limitation without condoning the delay, given that the assessee's initial inaction was attributable to incorrect advice from his previous counsel and that penalty proceedings under Section 270A were the proximate cause of the assessee engaging new counsel.
• Whether the Assessing Officer exceeded the permissible scope of a "limited scrutiny" assessment by making an addition of Rs. 9,71,599/- on the basis of turnover computation — an issue unrelated to the cash deposits for which the case was CASS-selected — without converting the matter to "complete scrutiny" in accordance with CBDT Instruction No. 5/2016 dated 14.07.2016.
• Whether the consequential assessment order under Section 143(3) dated 14.12.2019 was, on that jurisdictional ground, void ab initio, bad in law, and liable to be quashed.

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What the court held

The ITAT Raipur allowed the appeal. The outcome recorded by the Tribunal is that the appeal was allowed, consistent with the operative result in CASE_FACTS.outcome_direction.

The central jurisdictional challenge raised by the assessee before the Tribunal was that the Assessing Officer had travelled outside the scope of the limited scrutiny by making an addition on the ground of turnover computation — an issue entirely distinct from the cash-deposit issue for which the case had been CASS-selected — without following the procedure for converting the limited scrutiny to a complete scrutiny as mandated by CBDT Instruction No. 5/2016 dated 14.07.2016. The assessee's position was that the assessment was, on this basis, void ab initio and liable to be quashed. An additional ground before the Tribunal also addressed the propriety of the first appellate authority's refusal to condone the delay, with the assessee attributing the late filing to erroneous advice from his original counsel and to the fact that the jurisdictional infirmity only came to light upon receipt of the penalty order under Section 270A.

The Tribunal's recorded outcome — "appeal was allowed" — reflects that these contentions succeeded. The source order, as reproduced in the text preview, extensively sets out the delay-condonation narrative and the grounds of appeal asserting that the addition was made without jurisdiction, providing the factual foundation on which the Tribunal's allowance rests.

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Strategy observations

1. Jurisdictional ground raised as primary ground: An additional ground asserting that the assessment was void ab initio due to the AO's failure to comply with CBDT Instruction No. 5/2016 before expanding the scope of limited scrutiny was placed before the Tribunal. The Tribunal disposed of the appeal on the basis that the appeal was allowed, indicating this ground was effective.

2. Delay attributed to prior counsel's advice: Before both the first appellate authority and the Tribunal, the assessee placed on record that the failure to file a timely appeal was attributable to incorrect advice received from his previous counsel, who had advised acceptance of the assessment order. This explanation formed the basis of the condonation application under Section 249(3).

3. Penalty order as the trigger for re-examination: The record shows that the initiation of penalty proceedings under Section 270A in March 2022 was what prompted the assessee to engage new counsel, who identified the jurisdictional defect in the assessment. The appeal was filed shortly thereafter in June 2022.

4. CBDT Instruction No. 5/2016 as the normative anchor: The assessee's ground of appeal expressly cited CBDT Instruction No. 5/2016 dated 14.07.2016 as the procedural requirement that the AO had bypassed. Grounding the jurisdictional challenge in a specific, named CBDT instruction — rather than a general "excess of jurisdiction" argument — gave the ground textual specificity before the Tribunal.

5. Covid-19 extended limitation period: The first appellate authority's show-cause notice acknowledged that the Supreme Court of India had extended compliance deadlines on several occasions up to 31.05.2022 due to the Covid-19 pandemic. The assessee's appeal was filed on 23.06.2022, slightly after the extended outer limit, which the first appellate authority treated as unexcused. At the ITAT stage, the cumulative circumstances — prior counsel's advice, the penalty-order trigger, and the Covid-19 period — collectively formed the delay-condonation narrative.

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Why this case matters

The order in Naresh Kumar Agrawal vs ITO, Ward-3, Raigarh articulates a principle that has appeared with increasing frequency in ITAT benches across the country: a limited-scrutiny assessment selected under CASS for a specific issue (here, demonetization-era cash deposits) does not confer on the Assessing Officer a roving mandate to examine and make additions on unrelated issues. CBDT Instruction No. 5/2016 prescribes a specific procedure — requiring prior permission from the Principal Commissioner of Income Tax — before a limited-scrutiny case can be elevated to complete scrutiny. Where that procedure is bypassed, the resulting additions on the expanded issue are jurisdictionally infirm. The Tribunal's allowance of the appeal reinforces that this procedural safeguard is not merely directory but goes to the root of the AO's jurisdiction.

The case is also notable for its delay-condonation dimension. The first appellate authority dismissed the appeal solely on limitation, without examining the merits of what was, on the face of the record, a potentially decisive jurisdictional point. The Tribunal's intervention — allowing the appeal — demonstrates that where an assessment order is assailed on a ground that renders it void ab initio, appellate authorities cannot shut the door purely on limitation grounds without weighing the gravity of the jurisdictional infirmity. For practitioners and in-house tax teams advising on legacy assessments where limited-scrutiny scope was exceeded, this order provides a concrete reference for the proposition that the violation of CBDT Instruction No. 5/2016 vitiates the assessment order.

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Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals.

Original document: https://indiankanoon.org/doc/180776053/