ITAT Mumbai: CIT(A) Cannot Enhance Income on Issues Not Examined by AO; Sets Aside WIP Adjustment in Skyline Greathills Case

April 17, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Commissioner of Income Tax (Appeals) [CIT(A)] cannot enhance taxable income by introducing a new issue that was never examined by the Assessing Officer (AO), reaffirming the limited scope of powers under Section 251(1) of the Income Tax Act, 1961.

The ruling came in the case of M/s Skyline Greathills v. DCIT, Central Circle-8(2), Mumbai, involving cross appeals for Assessment Year 2012–13. The Bench comprising Vice President Saktijit Dey and Accountant Member Arun Khodpia delivered the order on April 17, 2026.

Enhancement Beyond AO’s Scope Held Invalid

The dispute arose from a survey conducted under Section 133A, during which the assessee disclosed ₹12 crore as unaccounted income linked to unexplained expenditure. Although the amount was offered to tax, it was simultaneously capitalised as work-in-progress (WIP) in the books.

During appellate proceedings, the CIT(A) observed that such capitalisation neutralised the impact of the disclosure and proceeded to reduce WIP by approximately ₹11.97 crore, thereby enhancing taxable income.

The Tribunal found this approach legally unsustainable. It noted that the AO had not examined the issue of capitalisation of disclosed income into WIP during the original assessment proceedings. Even the CIT(A) acknowledged that the AO “did not examine other components of the financial statement,” confirming that the issue was entirely new.

Relying on established judicial principles, the Tribunal held that enhancement powers under Section 251(1) are restricted to matters considered by the AO, either expressly or by necessary implication. Introducing a new source of income or issue falls outside appellate jurisdiction.

Accordingly, the enhancement made by reducing WIP was set aside.

Alternative Remedies Clarified

The Tribunal clarified that if the Revenue seeks to examine issues not considered during assessment, it must resort to other statutory mechanisms such as reassessment (Sections 147/148), revision (Section 263), or rectification (Section 154), rather than invoking enhancement powers.

Revenue’s Appeal Dismissed

On the Revenue’s appeal, the Tribunal upheld the deletion of addition under Section 2(22)(e) relating to deemed dividend. It held that the assessee firm was neither a registered nor beneficial shareholder of the lending company, and therefore, such provisions were not applicable. This position was consistent with earlier decisions in the assessee’s own case, affirmed by the Bombay High Court.

The Tribunal also upheld deletion of the addition relating to the joint development agreement (JDA). It found that the AO erred in adopting the stamp duty value of the entire land parcel. Since the assessee was entitled only to a specified constructed area (FSI) under the agreement, taxation had to be based on the value of such entitlement, not the full land value.

Outcome

The Tribunal allowed the assessee’s appeal and dismissed the Revenue’s appeal, holding that the CIT(A)’s enhancement was beyond jurisdiction and that the deletions granted by the appellate authority were legally justified.