2024 (2) TMI 163 - HC - Income Tax

Reopening of assessment u/s 147 - Reopening based on audit objections - reasons to believe - HELD THAT - We noted that during the course of the original assessment proceedings, two notices u/s 142(1) were issued calling upon Petitioner to furnish complete set of copy of the return of income, computation of income, audited P L Account, balance-sheet, tax audit report, Form 3CEB, details of professional/technical fees, commission on sales, etc. in the prescribed format, details of all statutory liability covered by Section 43(b) together with proof of payment and explanation as to how these were paid, details regarding finance cost, working of disallowance u/s 14A r.w.r. 8D, etc. Petitioner was also called upon to show cause as to why the disallowance u/s 14A of the Act, disallowance of penalty expenses and mismatch in Section 26AS be added to Petitioner s income. Petitioner admittedly gave detailed reply and an assessment order came to be passed. In the assessment order, there was a disallowance u/s 14A of the Act and the same was added to the total income of Petitioner under the normal provision as well as under Section 115JB. Therefore, as correctly submitted by assessee, the points raised in the reasons recorded for reopening were also the subject of consideration during the assessment proceedings. Admittedly, the reopening has been made based on audit objections. It is settled law as laid down in Indian Eastern Newspaper Society 1979 (8) TMI 1 - SUPREME COURT that in every case, the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice, he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. Therefore, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer. Therefore, AO cannot reopen the assessment relying on audit objections. One thing is quite clear that in the affidavit also, it is admitted primary details were filed by assessee. Therefore, the reopening of assessment is not permissible in view of the proviso to Section 147 of the Act. As held in Calcutta Discount Company Limited 1960 (11) TMI 8 - SUPREME COURT the duty of an assessee does not extend beyond the full and truthful disclosure of all primary facts. The Court held that while the duty of assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond that. A Division Bench of this Court in Aroni Commercials Limited 2014 (2) TMI 659 - BOMBAY HIGH COURT has held that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. Thus reopening proceddings set aside - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Alleged failure to fully and truly disclose necessary facts for assessment.
3. Reopening of assessment based on audit objections.
4. Change of opinion by the Assessing Officer.

Summary:

Issue 1: Validity of the notice issued under Section 148 of the Income Tax Act, 1961

The petitioner challenged the notice dated 27th March 2021 issued under Section 148 of the Income Tax Act, 1961, alleging escapement of income assessable to tax for AY 2015-16. The reasons for the notice included delayed remittance of Employees' Provident Fund, debiting consultancy fees, and Registrar and Share Transfer agent fees, resulting in underassessment of Rs. 79,55,843/-. Additionally, it was observed that the independent auditor had expressed a qualified opinion on the investment in subsidiaries, leading to a proportionate interest reversal and underassessment of Rs. 9,68,15,356/-.

Issue 2: Alleged failure to fully and truly disclose necessary facts for assessment

The court noted that the notice under Section 148 was issued more than four years after the expiry of the relevant Assessment Year. According to the proviso to Section 147, reassessment is not permissible unless there has been a failure to truly and fully disclose necessary facts. The court observed that the reasons recorded for reopening were based on the records filed by the petitioner, indicating no failure to disclose material facts.

Issue 3: Reopening of assessment based on audit objections

The court found that the reopening was based on audit objections. The petitioner had explained why there was no escapement of income in response to the audit objections. The court referenced the Indian & Eastern Newspaper Society v. CIT case, stating that the Assessing Officer (AO) must determine for himself the effect and consequence of the law mentioned in the audit note. The AO cannot reopen the assessment relying solely on audit objections.

Issue 4: Change of opinion by the Assessing Officer

The court noted that during the original assessment proceedings, the petitioner had furnished all necessary details, and the assessment order was passed after considering these details. The court referenced the Aroni Commercials Limited case, which held that once a query is raised and replied to during assessment proceedings, reopening the assessment on the same grounds constitutes a change of opinion, which is not permissible.

Conclusion:

The court ruled in favor of the petitioner, quashing the notice dated 27th March 2021 and the order rejecting the petitioner's objections. The court emphasized that the reopening of assessment was not justified as there was no failure to disclose material facts, and the reopening was based on audit objections and a change of opinion. The petition was allowed, and no costs were awarded.

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