2018 (12) TMI 131 - HC - Income Tax

Reopening of assessment - disallowance of expenditure under section 14A of the Act read with rule 8D had not been correctly worked out - Held that - AO has not accepted the objections raised by the audit party and on the contrary, has objected to such objections by communicating internally as referred to hereinabove. Evidently therefore, the Assessing Officer has not formed any independent belief that the income chargeable to tax has escaped assessment and on the contrary has stated that he had considered the applicability of provisions of section 14A and was satisfied in adopting 0.5% of average value of investment for disallowance under section 14A of the Act. It is by now well settled that the assessment cannot be reopened merely on the basis of an audit report without the Assessing Officer independently forming the belief, may be on the basis of such report, that income chargeable to tax has escaped assessment. The above referred decision would, therefore, be squarely applicable to the facts of the present case. The impugned notice issued by the respondent under section 148 of the Act being based merely upon the audit objection and not because the Assessing Officer had reason to believe that any income chargeable to tax has escaped assessment, cannot be sustained. - Decided in favour of assessee.

Summary

Issues:
Challenge to notice under section 148 of the Income Tax Act, 1961 for reopening assessment year 2012-13.

Analysis:

1. Background and Facts: The petitioner, a Private Limited Company in real estate, challenged a notice dated 23.03.2018 to reopen its assessment for the year 2012-13 under section 148 of the Income Tax Act, 1961. The initial assessment was completed under section 143(3) with additions and disallowances, including under section 14A read with rule 8D of the Income Tax Rules, 1962.

2. Petitioner's Arguments: The petitioner contended that the notice of reopening was illegal and lacked jurisdiction. The main argument was that the reopening was not based on the Assessing Officer's satisfaction but on an audit objection, which, according to the petitioner, cannot be the basis for reopening an assessment.

3. Legal Precedent: The petitioner relied on the case of Jagat Jayantilal Parikh v. Deputy Commissioner of Income Tax, [2013] 355 ITR 400 (Guj.), which emphasized that the Assessing Officer needs to form an independent belief for reopening an assessment. However, if the Officer decides to reopen based on audit objections, the reopening's validity cannot be challenged solely on this ground.

4. Respondent's Position: The respondent, through the Senior Standing Counsel, defended the notice by stating that the Assessing Officer had not accepted the audit objections. The Officer had given reasons for rejecting the objections and had independently considered the applicability of section 14A of the Act.

5. Court's Decision: After analyzing the facts and legal arguments, the court found that the Assessing Officer had not formed an independent belief that income had escaped assessment. The court concluded that the notice of reopening was solely based on the audit objection, without the Officer's requisite belief as per section 147 of the Act. Hence, the court quashed and set aside the impugned notice dated 23.03.2018, allowing the petitioner's challenge.

6. Conclusion: The judgment highlighted the importance of the Assessing Officer's independent belief for reopening assessments and emphasized that audit objections alone cannot be the basis for reopening. The court's decision in this case focused on upholding the legal requirement of the Officer's satisfaction before initiating reassessment proceedings, ultimately ruling in favor of the petitioner and setting aside the notice of reopening.