2023 (3) TMI 987 - HC - Income Tax

Reopening of assessment u/s 147 - reopening on the base of a factual error pointed out by the audit party - Independent application of mind by AO or not? - HELD THAT - Whether the reopening is permissible after audit party expresses an opinion on a question of law was considered by a larger Bench of the Apex Court in the case of Lucas T.V.S.Ltd. ( 2000 (12) TMI 102 - SC ORDER wherein, the Court held that the reopening of the case on the base of a factual error pointed out by the audit party is permissible under the law and there can be no dispute that the audit party is entitled to point out such factual error or omission in the assessment. Admittedly, audit party had expressed the opinion on a question of law. It had also pointed out to the Assessing Officer and that information which had been given was on question of law. Facts of the instant case clearly make out that when the audit party had pointed out to the Assessing Officer, it not only was disagreeing with the information given on the law point, it had completely disagreed after examining the objections raised by the audit party. AO without any conviction, when has issued the notice, this surely is not a case where the reopening of the case is on the basis of any factual error pointed out by the audit party so as to be covered by the decision of the P.V.S.Beedies (P) Ltd 1997 (10) TMI 5 - SUPREME COURT . It is covered by those decisions which have been discussed in reopening on the part of the Assessing Officer essentially on the audit party opinion and not on the basis of his own conviction. There is no material worth the name emerging that to indicate any independent application of mind could be noticed. On the contrary, there are glaring facts which have been pointed out that the Assessing Officer had no subjective satisfaction while issuing the notice of reopening. It is a settled law that any notice of reopening issued by the Assessing Officer without any independent application of mind would laid the validity. Accordingly, this petition is allowed

Summary

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act.
2. Validity of the reassessment proceedings initiated based on audit objections.
3. Independent application of mind by the Assessing Officer.

Detailed Analysis:

Legality of the Notice Issued under Section 148 of the Income Tax Act:
The petitioner challenged the notice dated 21.3.2021 issued under Section 148 of the Income Tax Act, directing the petitioner to furnish the return of income for the assessment year 2017-18. The petitioner argued that the notice was contrary to law and without jurisdiction. The petitioner also challenged the order disposing of the objections dated 25.10.2021. The petitioner, a limited company, had filed its return of income for A.Y. 2017-18 declaring a total loss, which was accepted without any addition or disallowance of expenses in the assessment order under Section 143(3) dated 21.12.2019. The respondent issued the notice under Section 148 asking the petitioner to file a return of income for A.Y. 2017-18, which the petitioner complied with under protest and subsequently sought the reasons for reopening and the approval obtained under Section 151.

Validity of the Reassessment Proceedings Initiated Based on Audit Objections:
The petitioner contended that the reopening was based on an audit party objection and that the reason to believe must be that of the Assessing Officer alone, which cannot be substituted by an objection from the audit department. The petitioner argued that the Assessing Officer had objected to the audit party's communication, indicating that the reasons recorded were not in accordance with the law, making the reassessment proceedings under Section 147 impermissible. The petitioner relied on previous decisions of the Court where similar grounds led to the quashing of the notice. The respondent argued that the petition was premature as only the notice under Section 148 had been issued and that there was an alternative remedy available by way of appeal. The respondent also denied the absence of new tangible material and independent opinion.

Independent Application of Mind by the Assessing Officer:
The Court noted that the audit objection raised during the audit scrutiny was related to the computation of income and the disallowance of CSR expenses. The audit party found that the CSR expenses were not added back while computing the taxable income, which should have been disallowed under Section 37(1). The Assessing Officer, in his communication to the Principal Commissioner of Income Tax, stated that the objections raised by the audit party were examined and found to be not acceptable, as the CSR expenses were connected with business expediency and were allowable under Section 37(1). The Court observed that the Assessing Officer had no reason to believe that the income had escaped assessment and had only issued the notice at the instance of the audit party despite his unwillingness, which amounted to a lack of independent application of mind.

Conclusion:
The Court held that the reassessment proceedings initiated solely at the instance of the audit party, without the Assessing Officer's independent conviction, were not sustainable. The Court quashed the notice dated 21.3.2021 and the order dated 25.10.2021, concluding that the Assessing Officer had no subjective satisfaction while issuing the notice of reopening, making it a colorable exercise of jurisdiction.