2015 (9) TMI 753 - HC - Income Tax

Reopening of assessment - certain expenses were not allowable under Section 36(1)(viia) - reliance on opinion rendered by the audit party - Held that - In the instant case, we find that there has been an assessment under Section 143(3) of the Act. The books of account were produced and the same were scrutinized. The profit and loss account was checked and only thereafter net loss of ₹ 66,70,410/- was determined. Merely, because the audit report has opined that certain expenses were not allowable under Section 36(1)(viia) does not entitle the Assessing Officer to issue a notice under Section 148 of the Act. We find from a perusal of the reasons to believe that the Assessing Officer had not applied its own mind and has not considered as to what would be the effect of the audit report nor had come to any conclusion which he could reasonably believe that an income had escaped assessment. Consequently, merely on the basis of the opinion rendered by the audit party, the Income Tax Officer could not assume jurisdiction to issue a notice under Section 148 of the Act. He must, on its own wisdom, come to a conclusion and hold a belief that an income had escaped assessment to tax. Since this belief was not recorded by the Assessing Officer the issuance of the notice was done mechanically without any application of mind. Such action amounts to change of opinion, which is not permissible. Since the foundational requirement for issuance of a notice was lacking and the condition precedent for initiating a valid reassessment proceedings were not existing, we are of the opinion that the impugned notice issued under Section 148 of the Act initiating reassessment proceeding for the assessment year 2007-08 could not be sustained and is quashed. The order dated 19.09.2011 rejecting the objections is also quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings initiated under Sections 147 and 148 of the Income Tax Act.
2. Whether an audit report can constitute "reasons to believe" for income escaping assessment.
3. Applicability of judicial precedents on the interpretation of Section 147 of the Act.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The petitioner challenged the reassessment proceedings initiated under Sections 147 and 148 of the Income Tax Act for the assessment year 2007-08. The original assessment was completed under Section 143(3) with a declared net loss of Rs. 66,70,410/-. Subsequently, a notice under Section 148 was issued based on an audit report suggesting that certain debits were not allowable under Section 36(1)(viia), leading to a belief that Rs. 6,18,79,868/- had escaped assessment. The petitioner contended that the reassessment proceedings were erroneous and constituted a change of opinion, which is impermissible.

2. Audit Report as "Reasons to Believe":
The petitioner argued that an audit report does not amount to "information" nor does it provide "reasons to believe" that income had escaped assessment. The counsel for the petitioner relied on several judicial precedents, including Indian And Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, which held that an audit report, whether internal or from the Comptroller and Auditor General, does not possess the power to declare law and cannot be the basis for reopening assessments. The Supreme Court in this case emphasized that the Income Tax Officer must independently determine the effect and consequence of the law mentioned in the audit note and not merely rely on the audit party's opinion.

3. Judicial Precedents on Section 147:
The court noted the significant changes in Section 147 post-01.04.1989, where only the condition of "reasons to believe" that income had escaped assessment is required, unlike the earlier requirement of both "reasons to believe" and omission or failure by the assessee. The court referred to the Supreme Court's ruling in Indian And Eastern Newspaper Society, which clarified that an audit report's opinion on the application of law is not binding and does not constitute "information" under Section 147(b). The Gujarat High Court's decision in Adani Exports Vs. Deputy Commissioner of Income Tax also supported the view that reassessment proceedings cannot be initiated merely based on an audit report.

Conclusion:
In the present case, the court found that the Assessing Officer did not apply his own mind to the audit report and did not form an independent belief that income had escaped assessment. The issuance of the notice under Section 148 was deemed mechanical and without proper application of mind, amounting to a change of opinion, which is not permissible. Consequently, the court quashed the impugned notice and the order rejecting the petitioner's objections, allowing the writ petition.