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Limited Scrutiny - A
taxpayer friendly move

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As it is said, a fine is a tax for doing wrong, a tax is a
fine for doing well. In connotation to that, it may be
said that scrutiny is the punishment for this well doing
and consequent filings with tax authorities.
A scrutiny has thus far been a matter of concern for
assessees because of multitude of hearings and
voluminous documents required to be submitted before
an Assessing Officer (AO). Many a times, an assessee's
return of income was selected for scrutiny for minor
issues. To add to the plight, some AOs conduct scrutiny
proceedings by issuing a routine notice. Further, in
certain cases, the core issues which formed the basis
for selection of a case for scrutiny were not examined
in the right context and spirit. This caused undue
harassment to assessees which in turn drew a lot of
criticism for the AOs. In this regard, representations
were made by various industrial bodies before the
Central Board of Direct Taxes (CBDT).
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To put the criticism at rest, the CBDT came up with certain criteria, on the basis of which, an
electronic platform, i.e., Computer Aided Scrutiny Selection (CASS) was set up for selection of
return of income for scrutiny. CASS is a risk based system which selects a return of income for
scrutiny, on following criteria (illustrative):
multiple cash transactions in quick time
transactions of large unexplained sums and
credit or debit of money from assessees account to overseas location
Through CASS, selection of return of income for scrutiny has become a non-intrusive and nondiscriminatory affair. On account of CASS, the focus has shifted on quality selection of cases with
revenue potential, thus increasing the revenue and reducing the work load.
To further simplify the scrutiny process and to allay the fear of assesses, the CBDT by virtue of its
powers under section 119 of the Income-tax Act (IT Act), issued instruction introducing the
concept of limited scrutiny. CBDT directed that cases selected for scrutiny under CASS on
following basis shall fall within the ambit of limited scrutiny:
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1. Annual Information Report (AIR)
2. Central Information Branch (CIB) information
3. Non-reconciliation with Form No. 26AS data
In such cases, the scope of enquiry shall be limited to verification of particular aspects only.
With respect to cases selected on above basis, the instruction directs an AO to confine the
questionnaire, enquiry, investigation, etc. only to relevant parameters which formed the basis
for selecting the case for scrutiny. Accordingly, the AO while issuing notice under section
142(1) of the IT Act would proceed to seek information/documents only for the specific aspects,
which are identified under CASS.
Prescription of a notice format for limited scrutiny
The CBDT issued letter prescribing format for issue of notice for limited scrutiny. As per the
notice, an assessee shall be provided an opportunity to produce evidence which is deemed
necessary in support of the return of income filed. If the assessee does not seek to furnish any
evidence, a communication in this regard, would be considered as a sufficient compliance. The
format further provides that the scrutiny could be conducted by communicating through e-mail
ID mentioned in the return of income. Additionally, an opportunity is given to the assessee to
opt out of the scheme at any subsequent stage on account of technical challenges, if any,
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faced by
the No.
assessee.

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Concern areas
It may be noted that limited scrutiny assessment proceedings is confined only to issues listed in
the section 143(2) notice. If at the time of issue of such notice the AO does not provide reasons,
the assessee could request the AO to provide such reasons for initiating limited scrutiny.
It was noticed that in certain cases selected for limited scrutiny, the AOs have not been following
the instructions issued by CBDT. Even though notices are issued for limited scrutiny, the AOs
conduct a detailed scrutiny. Even appellate authorities do not interfere in cases where
assessment is made in violation of instructions. It has been held in various judicial
pronouncements that the instructions issued by CBDT are binding on AOs subordinate to it.
Amongst others, one may refer to the following judicial precedents:
Varghese (KP) v. ITO [131 ITR 597 (SC)]
C.C.E v. Dhirendra Chemical Industries [2002] 254 ITR 554 (SC)
Navnit Lal C. Javeri v. K.K. Sen, Appellate Asstt. Commissioner of Income-tax 65 ITR 198 (SC)

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To ensure that the sanctity and spirit of introducing limited scrutiny is kept, the Department
may resort to the following:
adherence to instructions issued to AOs in letter and spirit to be ensured by appellate
authorities
no standard questionnaire to be issued. The AO ought to go through the records of an
assessee and then seek further details/documents
the AO ought to avoid undertaking actual assessment proceeding at the far end of the
limitation period
reason for selection of a case under limited scrutiny should be provided in the section
143(2) notice and section 142(1) of the IT Act
AOs must ensure that a limited scrutiny case is not subjected to a detailed scrutiny, unless,
the procedure as prescribed by the CBDT is adhered to.

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