Introduction
The scope of a limited scrutiny assessment has been a persistent flashpoint in Indian income tax jurisprudence. In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Chennai Bench, addressed whether an Assessing Officer can expand the enquiry beyond the specific issues flagged under CASS. The case of AEON Formulations Pvt. Ltd. v. The Income Tax Officer (ITA No.2481/Chny/2026) for Assessment Year 2018-19 directly tackles this question. The Tribunal quashed a disallowance of Rs.2,45,55,010 made under section 35(2AB) of the Income-tax Act, 1961, holding that the AO travelled beyond the permissible scope of a limited scrutiny assessment. This commentary analyses the ITAT’s reasoning, the distinction between statutory provisions, and the procedural safeguards mandated by the CBDT.
Facts of the Case
The assessee, AEON Formulations Pvt. Ltd., is engaged in formulations research and the manufacture of pharmaceutical, nutraceutical, and ayurceutical products. For A.Y. 2018-19, it filed its return declaring a loss of Rs.82,11,268 after claiming a deduction under section 35(2AB) for expenditure on its in-house R&D facility. The case was selected for limited scrutiny under CASS for two specific issues: (i) deduction on account of donation for scientific research, and (ii) duty drawback.
During assessment, the AO examined the assessee’s claim under section 35(2AB) for its own in-house R&D. The assessee had claimed Rs.3,21,66,010. Based on Form No.3CL issued by the DSIR, which quantified eligible expenditure at Rs.50.74 lakhs, the AO allowed a weighted deduction of Rs.76.11 lakhs and disallowed the balance of Rs.2,45,55,010. The assessment order dated 22.02.2021 determined the total income at Rs.1,75,39,990.
Aggrieved, the assessee appealed before the Ld. CIT(A), NFAC, raising an additional legal ground that the AO lacked jurisdiction to examine an issue outside the limited scrutiny scope. The CIT(A) admitted the ground but rejected it, holding that the enquiry into section 35(2AB) was intrinsically connected with the subject of scientific research deduction under section 35. On merits, the CIT(A) sustained the disallowance, relying on Form No.3CL. The assessee then appealed to the ITAT.
Reasoning and Legal Analysis
The core dispute before the ITAT was whether the AO could expand a limited scrutiny assessment to examine a claim under section 35(2AB) when the CASS notice specifically mentioned “Deduction on account of Donation for Scientific Research.” The Tribunal’s analysis rested on three pillars: the distinct nature of statutory provisions, the binding nature of CBDT guidelines, and the procedural lapses of the AO.
1. Distinction Between Donation and In-House R&D
The ld. AR argued that “Donation for Scientific Research” and expenditure on an assessee’s own in-house R&D facility under section 35(2AB) are distinct and independent issues. The Tribunal accepted this submission. Under the scheme of section 35, a donation for scientific research typically falls under section 35(1), which deals with contributions to approved research associations or universities. In contrast, section 35(2AB) provides a weighted deduction for expenditure incurred by a company on its own in-house R&D facility, subject to certification by the prescribed authority (DSIR) in Form No.3CL. The ITAT held that the mere fact that both may fall within the broader statutory framework of section 35 does not authorise the AO to enlarge the specific issue for which the case was selected. The reasons for selection under limited scrutiny must be construed strictly and cannot be expanded by giving them a wider or generic meaning.
2. CBDT Guidelines and Procedural Safeguards
The ld. AR further submitted that the applicable CBDT guidelines governing CASS-2019 specifically prohibit the AO from expanding the scope of enquiry beyond the issue for which the case was selected for limited scrutiny. The only exception is where credible specific information regarding tax evasion is received from a prescribed law-enforcement, intelligence, or regulatory authority, and the prescribed procedure—including prior administrative approval of the Pr.CIT/CIT—is followed. In the present case, neither the assessment order nor the remand report nor the order of the ld. CIT(A) indicated that any such credible information was received or that prior approval was obtained. The AO, in his remand report dated 15.09.2025, sought to justify the examination on the ground that the CASS issue and in-house scientific research fell broadly within section 35. He also relied on sections 292 and 124(3)(a) of the Act. However, the Tribunal found that these justifications did not cure the jurisdictional defect. The CIT(A) had itself accepted that the challenge related to the scope of enquiry permissible in a limited scrutiny assessment and was not a challenge to territorial or functional jurisdiction under section 124. Yet, the CIT(A) rejected the additional ground by holding that the enquiry was intrinsically connected. The ITAT disagreed, noting that the AO did not follow the mandatory procedure for converting limited scrutiny into complete scrutiny.
3. Participation and Acceptance of Form No.3CL
The CIT(A) had also relied on the assessee’s participation in the assessment proceedings and its acceptance of the eligible amount as per Form No.3CL. The Tribunal, however, did not treat this as a waiver of the jurisdictional challenge. The additional ground was a pure question of law going to the root of the assessment. The ITAT’s decision reinforces that participation in proceedings cannot confer jurisdiction where none exists. The AO’s reliance on Form No.3CL to restrict the deduction was a merits-based conclusion, but the foundational jurisdiction to examine the issue was absent.
4. Merits and Alternative Grounds
On merits, the CIT(A) had confirmed the restriction of deduction to Rs.76.11 lakhs, principally on the ground that Form No.3CL certified eligible expenditure of Rs.50.74 lakhs and no material was produced to establish that the certification was erroneous. The assessee had also raised an alternative ground seeking depreciation under section 32 for capitalised R&D expenditure not allowed under section 35(2AB). The CIT(A) restored this issue to the AO for verification. Similarly, the issue of adopting the loss determined under section 143(1) instead of the returned loss was restored to the AO. However, the principal disallowance was sustained. The ITAT’s quashing of the disallowance on jurisdictional grounds means that the merits of the Form No.3CL certification were not conclusively decided by the Tribunal.
Conclusion
The ITAT Chennai’s ruling in AEON Formulations is a robust affirmation of the strict boundaries of limited scrutiny assessments. It clarifies that the AO cannot conflate distinct statutory provisions—such as donation for scientific research under section 35(1) and in-house R&D under section 35(2AB)—to expand the scope of enquiry. The decision underscores that CBDT guidelines are binding and that any deviation requires credible information and prior approval from the Pr.CIT/CIT. By quashing the disallowance of Rs.2,45,55,010, the Tribunal has reinforced the principle that jurisdiction cannot be assumed by implication. This case serves as a cautionary tale for tax authorities and a vital precedent for assessees facing similar overreach.