ITAT Quashes ₹2.45 Cr R&D Addition, AO Exceeded Limited Scrutiny

ITAT Quashes ₹2.45 Crore R&D Addition

The Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹2.45 crore made by the Assessing Officer (AO) disallowing in-house research and development (R&D) expenditure, ruling that the AO exceeded the scope of limited scrutiny. The tribunal held that the AO could not raise additional issues not notified under Section 143(2) of the Income Tax Act, 1961, without prior approval under Rule 46A of the Income-tax Rules, 1962.

The assessee had claimed deductions under Section 35(2AB) for in-house R&D activities. While the AO issued a notice under Section 143(2) limited to verification of specified parameters, the tribunal found that the department sought to re-examine the eligibility of the R&D unit itself — a substantial issue not included in the original notice. Citing binding precedents, including CIT v. Magma HDFC Finance Ltd., the ITAT emphasized that limited scrutiny restricts the AO to issues specifically raised, and any deviation requires compliance with procedural safeguards under Rule 46A.

"The AO cannot travel beyond the issues mentioned in the notice under Section 143(2) unless specific approval is obtained for additional scrutiny."

The ruling reinforces the principle of fairness in tax assessments and limits arbitrary expansion of scrutiny proceedings. Taxpayers may rely on this decision to challenge additions arising from non-notified issues in limited scrutiny assessments, especially in cases involving technical eligibility for incentive-based deductions like R&D.