ITAT Delhi Quashes Revision Order, Says Tax Dept. Cannot Expand Limited Scrutiny Assessment

The Income Tax Appellate Tribunal, Delhi Bench, has quashed a revision order passed against an individual taxpayer, holding that the tax department cannot expand a limited scrutiny assessment by invoking its revisionary powers.

A coram comprising Judicial Member Yogesh Kumar U.S. Accountant Member S. Rifa'ur Rahman held that the Principal Commissioner of Income Tax had wrongly invoked Section 263 of the Income Tax Act which allows revision of an assessment only if it is both erroneous and prejudicial to the interests of the Revenue.

The tribunal made it clear that this provision cannot be used to introduce new issues in a case selected for limited scrutiny. “the issue raised by the ld. PCIT is outside the selection criteria; hence, the provisions of section 263 are not applicable in this case,” the tribunal said.

The case relates to Assessment Year 2015–16 and concerns Harun Ali, an individual taxpayer based in Dehradun, Uttarakhand, who was engaged in work involving labour and material supplies. He filed his income tax return, declaring a total income of about Rs 1.25 crore.

His return was picked up for limited scrutiny under the computer-assisted selection system. The tax department flagged only three specific issues for verification: a mismatch between the tax credit claimed in the return and Form 26AS, a mismatch in sales turnover reported in the audit report and the return, and a substantial increase in capital and sundry creditors during the year.

The Assessing Officer examined these issues and completed the assessment under Section 143(3) in November 2017. While doing so, the officer made an addition of around Rs 19.4 lakh after finding that certain credit balances shown against labour suppliers or contractors could not be fully verified. With this addition, the assessment was finalized.

The matter took a turn later when the Principal Commissioner of Income Tax stepped in and invoked his revisionary powers under Section 263. The Commissioner said the Assessing Officer had failed to examine whether tax should have been deducted at source on payments made to labour suppliers and contractors.

Treating this as a serious lapse, he set aside the assessment and directed the Assessing Officer to re-examine the issue, including whether a disallowance of expenses was required under Section 40(a)(ia) for non-deduction of TDS.

Challenging this move before the Income Tax Appellate Tribunal, the assessee argued that his case was selected only for limited scrutiny and that the Assessing Officer had examined every issue he was required to examine. He said the Commissioner was trying to introduce a completely new line of enquiry through revision, which the law does not permit.

The tax department defended the revision order and relied on the Commissioner's findings.

After examining the record, the tribunal noted that in a limited scrutiny case, the Assessing Officer has no mandate to go beyond the specific issues for which the case is selected. The tribunal pointed out that the question of TDS on labour payments was never part of the limited scrutiny.

“There is no mandate for the Assessing Officer to go beyond the selection criteria,” the tribunal observed.

Holding that the basic conditions for invoking Section 263 were not met, the tribunal quashed the revision order and allowed the taxpayer's appeal.

Case Title: Harun Ali vs. R. CIT Dehradun

Citation: 2026 LLBiz ITAT (DEL) 6

Case Number: ITA No.3444/Del/2025 A.Y. 2015-2016

For Appellants/Assessee: Advocates Rano Jain, Venketesh Chaurasia, Mansi Jain, A

For Respondents/Revenue: Amisha S. Gupt, CIT DR