2016 (1) TMI 234 - HC - Income Tax

Reopening of assessment - reopening of the assessment is under the directives of the audit party - Held that - Bare perusal of the correspondence reveals that the assessment was completed and, upon scrutiny, the internal audit party found certain errors. These errors were highlighted and pointed out to the Assessing Officer for his consideration. The Assessing Officer in his letter dated 03.12.2013 in no uncertain terms wrote back to the audit party stating that he did not agree to most of the objections of the audit party. He agreed to a limited extent of the excess claim of depreciation which the assessee had pointed out was a mistaken claim and agreed for rectification. The Assessing Officer, therefore, believed that this was the only ground which merited consideration and that too by way of exercising the power of rectification. This was abundantly clear and quite undisputably emerges from his letter dated 03.12.2013. Despite the clear stand of the Assessing Officer, the audit party persisted with the issues. On 14.02.2014, the audit party did not accept the view of the Assessing Officer and, as noted above, directed the Assessing Officer to take appropriate action and submit an action taken report on finalization of the proceedings, with supporting evidences through proper channel. This was a clear directive to the Assessing Officer not only to initiate action but also to finalize the same and report finalization with supporting evidences. As if this much was not enough to hold that the Assessing Officer was being controlled by the audit party, his letter dated 20.02.2014 to the audit party left no possibility of any doubt. In such letter, he recorded the objection of the audit party at length and finally meekly stated that, in view of the above, the internal audit party has not accepted the reply on the said issues and ultimately proceeded to record that the most suitable remedial action in such case would be to reopen the assessment under section 147 of the Act which is contrary to his earlier view where on a limited ground of depreciation he had advocated measures of rectification.- Decided in favour of assessee

Issues Involved:
1. Legality of the notice for reopening the assessment.
2. Non-deduction of TDS under section 194-A of the Income Tax Act.
3. Excess claim of depreciation.
4. Interest earned from associated concern not offered to tax.

Detailed Analysis:

1. Legality of the notice for reopening the assessment:
The petitioner challenged the notice dated 28.03.2014 issued by the Assessing Officer (AO) for reopening the assessment for the assessment year 2010-2011, which was previously completed after scrutiny. The petitioner argued that the notice was issued under the directives of the audit party and not based on the AO's independent belief. The court emphasized that the AO must exercise quasi-judicial functions independently and not be influenced by any external agency, including the audit party. The court referred to the case of Adani Exports v. Deputy Commissioner of Income-Tax, where it was held that reopening based solely on audit party directives is impermissible. The court concluded that the AO's reopening notice was invalid as it was issued under the audit party's directives without the AO's independent belief.

2. Non-deduction of TDS under section 194-A of the Income Tax Act:
The AO noted that no TDS was made under section 194A from interest payments made to IFCI Ltd., except for a payment made under section 194J for professional services. The AO concluded that the remaining interest expense of Rs. 13,82,25,530 should be disallowed under section 40a(ia) of the Act. However, the court found that the AO initially did not agree with the audit party's objection regarding this issue and only changed his stance after being directed by the audit party, indicating a lack of independent belief.

3. Excess claim of depreciation:
The AO identified an excess claim of depreciation of Rs. 44,857 due to a discrepancy between the depreciation claimed in the statement of total income and the final accounts. The AO initially suggested rectifying this mistake under section 154 of the Act but later included it as a ground for reopening the assessment under the audit party's directive. The court noted that the AO's initial belief was to rectify the error through section 154, and the subsequent inclusion in the reopening notice was influenced by the audit party, lacking independent judgment.

4. Interest earned from associated concern not offered to tax:
The AO observed that the petitioner did not offer the entire interest income of Rs. 1,52,44,044 to tax, resulting in an underassessment of Rs. 1,38,60,497. The AO initially disagreed with the audit party's objection on this issue but later included it in the reopening notice under the audit party's directive. The court found that the AO's change in stance was due to the audit party's influence, indicating a lack of independent belief.

Conclusion:
The court held that the reopening notice was invalid as it was issued under the audit party's directives without the AO's independent belief. The court quashed the impugned notice dated 28.03.2014, stating that the AO's actions were not permissible under the law. The petition was disposed of accordingly.

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