1994 (1) TMI 116 - AT - Income Tax

Assessment Proceedings, Assessment Year, Chargeable To Tax, In Part, Original Assessment, Reassessment Proceedings

Summary

Issues:
Reopening of assessment based on audit report, Validity of reassessment under section 147(b), Interpretation of "information" for reopening assessment, Judicial precedents on audit reports as information for reassessment, Proper grounds for reassessment under section 147(b).

Analysis:
The appellate tribunal heard a departmental appeal against the CIT(A)'s order canceling a re-assessment under section 143(3)/147(b) based on an audit report. The original assessment was completed in 1976, with a reassessment in 1978 prompted by the Audit Party's advice to disallow interest on partners' debit balances. The CIT(A) found the reopening invalid, citing the Supreme Court's judgment in Indian & Eastern Newspaper Society's case, which held that an audit report is not valid "information" for section 147(b) purposes.

The Departmental Representative relied on the Supreme Court's decision in R. K. Malhotra v. Kasturbhai Lalbhai, where the Audit Department's advice was deemed valid information for reassessment. However, a subsequent Supreme Court judgment in Indian & Eastern Newspaper Society's case disapproved of this, stating that only the part of an audit note mentioning the law overlooked by the ITO constitutes "information" for section 147(b) purposes.

The tribunal noted conflicting High Court decisions: the Rajasthan High Court upheld reassessment based on an audit note pointing out factual omissions, while the Madras High Court supported reopening due to factual errors pointed out by the audit. The Delhi High Court in Duncan Services Ltd. case quashed a notice under section 147(b) as the audit note was seen as an erroneous interpretation of law.

In the present case, the audit report pointed out factual matters regarding partners' debit balances but made an erroneous inference on disallowing interest payments. The tribunal found the reassessment invalid due to insufficient facts and lack of proper grounds for believing income had escaped assessment. The CIT(A)'s decision to cancel the reassessment was upheld, leading to the dismissal of the departmental appeal.

The tribunal's decision was based on the inadequacy of facts in the audit report and the absence of proper circumstances for the ITO to reasonably believe income had escaped assessment. The judgment aligns with the principles established by the Supreme Court regarding what constitutes valid "information" for reassessment under section 147(b).