The Income Tax Appellate Tribunal (ITAT) in Chennai has delivered a significant ruling concerning the jurisdictional limits of tax authorities, holding that an Assessing Officer (AO) cannot expand the scope of a " Limited Scrutiny " assessment to investigate additional deductions simply because they fall under the same broader statutory provision . The tribunal reversed a disallowance of over ₹2.45 crore against Aeon Formulations Pvt. Ltd., finding that the revenue department had acted beyond its mandate by examining in-house research and development expenditure when the case was specifically selected only for issues regarding scientific research donations and duty drawbacks.

The dispute originated from the assessment year 2018-19 , during which the assessee, a company specializing in pharmaceutical and nutraceutical formulations, claimed a deduction of approximately ₹3.21 crore under Section 35(2AB) of the Income Tax Act for expenditure on its in-house research and development facility. While the case was selected under the Computer Aided Scrutiny Selection (CASS) system for Limited Scrutiny on the narrow grounds of duty drawback and donations for scientific research, the AO during the assessment process demanded details of the in-house R&D expenses. Following a review of the company's Form 3CL, which certified eligible R&D costs at a lower amount, the AO restricted the claim and disallowed ₹2,45,55,010.

On appeal, the assessee challenged the jurisdictional validity of this disallowance, arguing that the AO had improperly bypassed the restrictions of Limited Scrutiny . The ITAT bench, consisting of Judicial Member Aby T. Varkey and Accountant Member S. R. Raghunatha, observed that the fundamental purpose of Limited Scrutiny is to provide a safeguard against indiscriminate tax inquiries. The tribunal emphasized that the Central Board of Direct Taxes (CBDT) has established stringent procedural requirements for expanding such scrutiny, which include the possession of credible information regarding tax evasion and the requirement for prior administrative approval from a superior officer.

Addressing the revenue's contention that both the donation and the in-house R&D expenditure were logically related under Section 35, the tribunal rejected this broad interpretation. It noted that the two categories of expenditure are distinct in nature, governed by different eligibility criteria, and require different types of supporting documentation. The tribunal stated, "The distinction between ‘ Limited Scrutiny ’ and ‘ Complete Scrutiny ’ would lose its significance if an AO, after receiving jurisdiction over specified issues, were permitted to enlarge those issues by adopting a broad or generic description of the statutory provision under which they arise."

The Chennai bench further clarified that the specific labeling of the scrutiny issue in the notice issued under Section 143(2) of the Act serves as a constraint on the AO’s investigative powers. By examining the R&D expenditure—a claim that was not flagged in the CASS selection—the AO had engaged in a " fishing and roving " inquiry that contradicted binding CBDT instructions. The bench highlighted that the presence of the word "donation" in the notified scrutiny issue was not redundant; it explicitly delimited the scope of the audit to that specific type of payment.

Furthermore, the tribunal dismissed the revenue's argument that the assessee’s participation in the assessment process or its submission of Form 3CL in response to a questionnaire amounted to a waiver of jurisdictional rights . The tribunal observed that taxpayers often provide information to protect their interests during audits, and such compliance cannot be construed as a voluntary expansion of the scrutiny’s scope. The ITAT reasoned, "Jurisdiction to enquire into an additional issue must precede the enquiry. The issuance of a questionnaire on an issue beyond the permissible scope cannot retrospectively confer jurisdiction upon the AO to examine that issue."

The order also scrutinized the role of Section 292B of the Income Tax Act , which the revenue attempted to use to save the assessment from being struck down due to technical defects. The ITAT ruled that the error in this case was not a mere formal irregularity but a substantive jurisdictional infirmity . Because the AO failed to document reasons for the expansion or obtain the necessary approval from the Principal Commissioner or Commissioner of Income Tax, the entire exercise regarding the additional claim was deemed legally untenable.

The final decision of the ITAT marks a firm stance against administrative overreach in the faceless assessment regime . By reversing the order of the Commissioner of Income Tax (Appeals) , which had upheld the AO's action, the tribunal confirmed that the procedural integrity of Limited Scrutiny must be maintained to uphold the tax structure’s predictability for corporations.

Consequently, the tribunal directed the Assessing Officer to delete the disallowance of ₹2,45,55,010 entirely. The ruling reinforces the principle that when the tax department selects a return for Limited Scrutiny , the inquiry must strictly adhere to the flagged parameters. For organizations engaged in ongoing R&D projects, this decision provides much-needed clarity, ensuring that tax authorities cannot unilaterally shift the goalposts of an investigation without adhering to the formal, mandated safeguards designed to balance the department’s right to audit with the taxpayer’s right to a defined and limited assessment process. The order concluded with the formal setting aside of the contentious disallowance, providing finality to the issue of the assessee's jurisdictional challenge.