The assessee received salary income and income from other sources.  The case of the assessee was selected for limited scrutiny for examination of deduction claimed under the head capital gains. During the year assessee has claimed deduction under Section 54 of the Income Tax Act, 1961.

The AO noted that the assessee had set off the short term capital loss earned on the sale of two scripts, namely, Tech Mahindra Ltd and Infosys Ltd with the short term capital gain on sale of the other securities such as mutual funds etc.  The ld. AO noted that assessee has purchased these scripts with cum bonus and sold ex-bonus and, therefore, has notionally de-valued the same as assessee has received the bonus shares having the ‘NIL’ value as cost. Therefore, the loss amounting to Rs. 7,61,581/- claimed by the assessee against the profit from other transactions of sale of securities was disallowed

The CIT (Appeals) held that the transactions of purchase and sale of Tech Mahindra and Infosys ltd is chargeable to tax under the head business income and not capital gain.  He prepared trading account of both the scripts and determined profit by valuing closing stock of each script.  The CIT(A) thus, enhanced the income of the assessee.

Before the ITAT, the Assessee contended that its case was selected under the limited scrutiny criteria, without converting same into complete scrutiny, the AO as well as the CIT(A) could not have gone on making additions and adjustments on issues other than issues of limited scrutiny.

On a query from the bench, that whether the case of the assessee was converted into complete scrutiny from the limited scrutiny, the answer was categorically ‘No’. The assessment order as well as the appellate order also did not show that any such exercise was carried out

The ITAT observed that it is apparent that the reasons for selection of the limited scrutiny was for verifying the deduction claimed under the head capital gain by the assessee, which was examined by the AO.  Since AO was satisfied, the claim was allowed.  However, the AO disallowed the bonus stripping loss which was set off against the capital gain earned by the assessee in mutual funds and other securities.  The ITAT held that this was not the issue of limited scrutiny before the AO.

The ITAT held that there is no evidence placed before us that such a limited scrutiny assessment proceedings have been converted into complete scrutiny proceedings.  If the AO desires to look into any other adjustment or examination of any issue, then what is mentioned as reasons for limited scrutiny, the CBDT has issued a clear instruction No. 5 of 2016 dated 14.07.2016 wherein after obtaining the administrative approval from the Pr. Commissioner of Income Tax or CIT, as the case may be, he can embark upon other issues by converting it into a ‘complete scrutiny’ case from ‘limited scrutiny’ case.  

The ITAT observed that in the present case, no such exercise has been shown to us. Further, the above instruction clearly shows that only after conversion of case to complete scrutiny and after following the detailed procedure contained therein, the AO may examine the issues other than limited scrutiny issue. The AO is also required to intimate the assessee regarding such conversion of case into complete scrutiny.  In the present case, it is apparent that the AO has touched upon the issues, which are not part of the limited scrutiny. Therefore, the disallowance of set off of capital loss deserves to be deleted. With respect to the enhancement made by the CIT(A), the ITAT held that when the case of the assessee was selected for limited scrutiny, the CIT(A) can make enhancement only with the aspect of issues that were part of the limited scrutiny.  Otherwise, it may happen that the AO may pass an order on the issues related to limited scrutiny and the CIT(A) may enhance the income of the assessee on issues other than limited scrutiny issues. This will amount to bypassing the above quoted instructions of the CBDT. It also shows that if that happens then without obtaining the approval of Commissioner of Income Tax and CCIT, the whole assessment of the assessee remains open, despite the fact that the learned assessing officer has looked into the issues contained in the limited scrutiny notice.  The ITAT observed that it does not find such an intention of the CBDT in issuing the instructions of limited scrutiny case.  The ITAT held that it does do not approve the enhancement made by the CIT(A) on issues, which were not part of limited scrutiny. 

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