2011 (3) TMI 701 - HC - Income Tax

Addition - Penalty - Reopening of assessment - There is also catena of judgments to the effect that initiation of reassessment proceedings on the basis of audit report objections is bad in law - The sum and substance of discussion is that reassessment proceedings under section 147 read with 148 of the Act cannot be initiated merely based on the audit report - An audit is principally intended for the purpose of satisfying the auditor with regard to sufficiency of rules and procedures prescribed for the purpose of securing an effective check on the assessment, collection and proper allocation of revenue - all the appeals are dismissed

Issues Involved: Reassessment proceedings, addition of excise duty to closing stock, interest on term loan, penalty under section 271(1)(c), validity of reassessment based on audit report.

Detailed Analysis:

1. Reassessment Proceedings:
The reassessment proceedings for the assessment year 1997-98 were initiated after the original assessment was completed under section 143(3) of the Income-tax Act. The reassessment was based on an internal audit report which indicated that certain income had escaped assessment. The Tribunal held that the reassessment proceedings under section 148 could not be sustained because they were initiated beyond four years from the end of the assessment year, and the assessee had made full and complete disclosure during the original assessment. The Tribunal emphasized that the reassessment was based on a mere change of opinion and not on any valid material, citing that an opinion of an internal audit party on a point of law cannot be regarded as information within the meaning of section 147 of the Act. Consequently, the reassessment proceedings were canceled.

2. Addition of Excise Duty to Closing Stock:
The CIT(A) had added Rs. 3,89,33,833 to the income of the assessee, representing excise duty payable on the stock of finished goods, based on the audit report. The Tribunal found that the particulars regarding the excise duty were already available before the Assessing Officer during the original assessment proceedings, and the assessee had made complete disclosure. The Tribunal held that reopening the assessment on this ground was not permissible as it was based on a change of opinion. The penalty levied on this addition was canceled by the CIT(A) and upheld by the Tribunal.

3. Interest on Term Loan:
The CIT(A) had upheld the addition of Rs. 1,99,96,463, claimed by the assessee as interest on a term loan, stating that it was capital expenditure and not revenue expenditure. The Tribunal noted that the issue of allowability of interest on monies borrowed for acquiring fixed assets for business purposes had been decided in favor of the assessee in another assessment year. The Tribunal concluded that this was not an addition in respect of which a penalty could be validly levied under section 271(1)(c) on the charge of concealment. Consequently, the penalty on this addition was also canceled.

4. Penalty under Section 271(1)(c):
The CIT(A) had canceled the penalty related to the addition of excise duty but sustained the penalty related to the interest on the term loan. The Tribunal, however, canceled the penalty in relation to both additions, stating that there was no element of mens rea pertaining to either concealment or furnishing of inaccurate particulars. The Tribunal emphasized that the reassessment proceedings were based on an internal audit report and not on any new material evidence.

5. Validity of Reassessment Based on Audit Report:
The Tribunal and High Court held that reassessment proceedings based solely on an internal audit report are not permissible. They cited several judgments, including CIT v. Kelvinator of India Ltd. and CIT v. Goetze (India) Ltd., which established that reassessment cannot be initiated merely on a change of opinion or based on an audit report. The High Court reiterated that an audit report is intended to check the sufficiency of rules and procedures and should not substitute the statutory duties of revenue authorities.

Conclusion:
The High Court upheld the Tribunal's decision, finding no infirmity in the impugned orders. The reassessment proceedings were invalidated as they were based on an internal audit report and initiated beyond the permissible period. Both the additions and the penalties related to excise duty and interest on the term loan were canceled. Consequently, all the appeals were dismissed.

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