2014 (12) TMI 1114 - HC - Income Tax

Reopening of assessment u/s 147 - AO after examining the records and the documents filed by the Assessee, allowed the expenses as revenue expenditure Whether, merely because the audit party has raised objections in relation to the allowability of the expenditure, the assessment cannot be reopened on the basis of change of opinion Held that - The Tribunal was rightly of the view that there is much substance in the contention of Assessee s representative revenue could not produce the reasons recorded for reopening the assessment and opportunity was given to the departmental representative by the Tribunal to produce these reasons or a copy of thereof - However, beyond producing a copy of the letter written by the AO to the CIT seeking permission for reopening the assessment, nothing was produced by the revenue - the AO has initially given his own reason in the body of assessment order - the AO in the assessment has mentioned that the assessment was reopened with the prior approval of CIT(A) on the objections raised by the audit - the assessment made u/s. 143(3) r.w.s. 147 is devoid of any application of mind on the part of AO - AO has no reason to believe that income has escaped assessment or the assessee has filed inaccurate particulars of income as no new facts are brought on record - all the expenses claimed by the assessee have been verified in detail in the original assessment therefore the reopening of assessment to disallow the same merely on the basis of audit report is not justifiable. The Tribunal proceeded to consider the correctness of the submission of the departmental representative that compliance u/s 148 was made in this case and by relying on the audit report - The audit objections could form the basis for initiation of the proceedings was the Department s stand and further that reasons are recorded in the letter which has been addressed by the AO to the Commissioner - an opinion was given by the audit party with regard to the receipts from the occupation of conference hall and rooms - in every case, the ITO must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment - The basis of his belief must be the law of which he has not become aware - The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law - the true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO - It is his belief and the statutory exercise contemplated by section 147(1) and 148(2) must be carried out by him - The Tribunal has rightly held that once the audit party raised objections, one of which was not accepted, then, the AO was expected to record reasons for his belief - Those reasons have not been recorded, as is clear from the material placed before the Tribunal as such no substantial question of law arises for consideration Decided against revenue.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 148 of the Income Tax Act.
2. Requirement of independent satisfaction and recording of reasons by the Assessing Officer for reopening.
3. Reliance on audit objections for reopening the assessment.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 148 of the Income Tax Act:
The Revenue questioned the Tribunal's decision regarding the reopening of assessments for the years 2000-01 to 2002-03. The Assessee's original assessment was completed with an addition of Rs. 21,60,000/- under Section 69C of the Income Tax Act. The ITAT restored this issue for reverification, and the Assessing Officer (AO) reopened the assessments based on audit objections. The Tribunal found that the AO did not independently record reasons for reopening, relying solely on the audit objections. The Tribunal concluded that the reopening was devoid of any application of mind by the AO and was merely based on the audit report, which is not justifiable.

2. Requirement of Independent Satisfaction and Recording of Reasons by the Assessing Officer:
The Tribunal emphasized that the AO must record independent satisfaction and reasons for reopening the assessment, even if the basis is audit objections. The Tribunal noted that the departmental representative failed to produce the reasons recorded by the AO for reopening. The Tribunal held that the AO's action lacked application of mind and was solely based on audit objections, which is insufficient for reopening the assessment. The Tribunal's decision was supported by the Supreme Court's ruling in the case of Indian and Eastern Newspaper Society vs. Commissioner of Income Tax, which stated that the AO must independently evaluate the law and record reasons for his belief that income has escaped assessment.

3. Reliance on Audit Objections for Reopening the Assessment:
The Revenue argued that audit objections could form the basis for reopening the assessment, citing the Supreme Court's judgment in Commissioner of Income Tax vs. P. V. S. Beedies Pvt. Ltd. However, the Tribunal and the High Court found that while audit objections can be a basis, they cannot substitute the AO's independent satisfaction and recording of reasons. The Tribunal noted that the AO had rejected one of the audit objections, indicating that he was aware of the need to record reasons independently. The Tribunal concluded that the AO's failure to record reasons and his reliance solely on audit objections invalidated the reopening of the assessment.

Conclusion:
The High Court upheld the Tribunal's decision, stating that the AO must independently record reasons for reopening the assessment and cannot rely solely on audit objections. The Court found no substantial question of law in the Revenue's appeal and dismissed it, affirming that the Tribunal did not err in reversing the order of the Commissioner of Income Tax (Appeals). The High Court emphasized the necessity of the AO's independent exercise in recording reasons for reopening assessments under Section 148 of the Income Tax Act.