2016 (8) TMI 1550 - AT - Income Tax

Reopening of assessment u/s 147 - validity of audit objections in re-opening of assessments - disallowance of Provision on investment, under section 14A and disallowance u/s. 35D - reliance on Audit scrutiny of computation of income - HELD THAT - As the part of the note of an audit party, which mentions the law that escaped the notice of the AO constitutes information and the part which emboides the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the AO. A completed scrutiny assessment should not be disturbed in a light manner. If an audit objection points out some mistake in the original order provisions of section 154 have to be invoked and not of section 147. Both the sections find place in the Act for specific purposes. Similarly, if the order passed by an AO is found to be erroneous and prejudicial to the interest of Revenue, a notice u/s.148 should not be issued. Section 147 is not panacea for all the ills. We would like to discuss the limitations of an audit objection in subsequent parargraphs. But, at present it is sufficient to say that re-opening should be done only in certain circumstances, as envisaged by the section. The entire approach of the AO and the FAA, in the background of the present case, is misconceived. The re-assessment order is based on allowability of provision of bad and doubtful debts. Perusal of the assessment order reveals that such details were called for by the AO. It is further found that the details of the provisions for bad and doubtful debts furnished by the assessee were scrutinized during the original assessment proceedings. In the notes accompanying the return of income the assessee had specifically mentioned the fact and basis of treating the amount in question in a particular manner - there does not appear to the tangible material/reason for the AO to reopen the assessment proceedings in the facts of the present case. He himself admits that scrutiny of the records revealed that there was escapement of income. So, the reasons, recorded by him, have to be analysed considering the post scrutiny events. AO was not convinced about the reasons given by the audit party for disallowing the claim. Not only he stated that claim was sustainable as per the provisions of the Act, but, also indirectly questioned the validity of the objection. But, it is a fact that he had issued a notice u/s.148 of the Act.A comparison of the audit objection raised by the audit party and the notice issued by the AO as per the provisions of section 148 clearly prove that it was solely based on the audit objecttions. Thus, the AO has taken two diagonally opposite stands in the original assessment/ in the reply sent to the audit party and while issuing the notice u/s.148 of the Act. There is not an iota of doubt that it is a clear case of change of opinion. Audit authorities, an outside agency, definitely has an important role to point out irregularities of assessment orders. But, a Laxamn-Rekha has to be there for audit party. It is not the job of an audit party to interpret the law with regard to facts of a case. Act does not give mandate to the audit personnel to hold that the provisions should be interpreted in a particular manner or to assess the income of an assessee in a particular manner. It is the prerogative of an AO. In the case under consideration the it was not the case of the audit that the AO, while completing the scrutiny assessment, had ignored the judgment of the Hon ble Apex Court or the Hon ble jurisdictional High Court resulting in under assessment of the taxable income. No arithmetical mistake or calculation error was also pointed out by the audit party. It had interpreted the law with regard to provisions of section 35D and 36(viiia)of the Act in a particular manner and held taxable income had escaped assessment. In our opinion, such an observation is beyond the power of any audit party and same cannot be termed information for the purposes of section 147 of the Act. Such an observation is not a reliable material-leave apart the tangible material that can be legally relied upon for disturbing a scrutiny assessment. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 based on audit objections.
2. Allowability of provisions for bad and doubtful debts under section 36(1)(viia).
3. Deduction of preliminary and share issue expenses under section 35D.

Detailed Analysis:

1. Validity of Reopening of Assessment:
The primary issue is whether the reopening of the assessment under section 147 was valid, given that it was based on audit objections. The assessee argued that the reopening was based on a mere change of opinion and was bad in law. The initial assessment was completed under section 143(3), and all necessary details were furnished by the assessee. The reopening was challenged on the grounds that it was based on an audit report and not on any new tangible material. The Tribunal referred to several judgments, including Kelvinator India Ltd. (320 ITR 561), which emphasized that reassessment on mere change of opinion is not permissible. The Tribunal concluded that the reopening was not justified as it was solely based on audit objections and lacked new tangible material.

2. Allowability of Provisions for Bad and Doubtful Debts:
The assessee claimed a deduction under section 36(1)(viia) for provisions made for bad and doubtful debts. The AO disallowed the claim, stating that the provisions were not for actual bad debts but for standard assets/advances, which are unascertained liabilities. The FAA upheld the AO’s decision, stating that the provisions made by the assessee were not in accordance with section 36(1)(viia) and were not supported by any account in the nomenclature "provision for bad and doubtful debts". The Tribunal, however, noted that the AO had scrutinized these details during the original assessment, and the reopening based on the same facts was not valid. The Tribunal emphasized that an audit objection cannot constitute tangible material for reopening an assessment.

3. Deduction of Preliminary and Share Issue Expenses:
The AO disallowed the deduction claimed under section 35D for preliminary and share issue expenses, stating that the assessee was not an industrial undertaking. The FAA upheld this disallowance. However, the Tribunal noted that the AO had accepted these expenses during the original assessment and had defended this position against the audit objections. The Tribunal reiterated that reassessment based on the same material without any new tangible evidence amounts to a change of opinion, which is not permissible.

Conclusion:
The Tribunal held that the reopening of the assessment was invalid as it was based solely on audit objections and constituted a change of opinion without any new tangible material. Consequently, the reassessment order was quashed. The appeal filed by the assessee was allowed, and the appeal filed by the AO was dismissed.