Why are there limits on scholarship amounts for graduate students?
It's likely not coming out of the PI's personal pocket but out of a grant they have.

The purpose of that grant is probably to advance some research project. Paying you double is probably not an efficient use of those funds when they could instead be used towards 1 more student. One of the things universities do is to administer grants and see that the funds are spent according to the goals of the university and granting organization.

Additionally, the merit scholarship you received is not coming out of nowhere. I don't know exactly where that money is coming from in your specific case, but in my experience these scholarships are often endowed from some donation to a university/professional organization/some other administering body. Those donations are typically to further some cause, such as education in a particular field. For example, a longtime politician and businessman just gave a large donation to my institution to fund graduate students researching public policy.

Giving these funds to someone who is already funded in another way doesn't really advance the educational goal of the donation intended to increase/support scholarship in some area. If I was a donor, I'd want to know that my donation was going to lead to more research.

In my experience these limits also apply to graduate student work (i.e., assistantships), not only to scholarships, for some of the same reasons. If a student is already funded by scholarships, and a teaching assistant position is available, the university likely prefers that the position is filled by a student who is without full funding rather than someone who already has a funded position.