1981 (1) TMI 120 - AT - Income Tax

Summary

Issues:
Reopening of assessment under section 147(b) of the Income Tax Act based on audit notes, eligibility of deduction under section 80J for a firm not exclusively engaged in manufacturing, failure to fulfill conditions under section 80J(4) and 80J(6A), validity of re-assessment proceedings, interpretation of law by audit party, communication of legal provisions by audit party.

Analysis:
The appeals by the assessee were against the orders of the CIT (A) for the assessment years 1975-76, 1976-77, and 1977-78, where the Income Tax Officer (ITO) had reopened the assessments under section 147(b) of the IT Act based on audit notes. The audit pointed out that the firm had received benefits under section 80J despite not being exclusively a manufacturing concern, as the utensils were manufactured by others. The ITO justified the reopening, stating that audit's communication of legal mistakes constituted valid information for section 147(b). The CIT (A) found that the audit notes raised concerns about the firm's eligibility for section 80J deductions due to outsourcing manufacturing and failure to meet conditions under section 80J(4) and 80J(6A).

The CIT (A) determined that the audit notes contained both legal information and opinions on the law. He held that the initiation of proceedings under section 147(b) was legal based on the information provided by the audit. However, he directed the ITO to reexamine the facts before passing orders. The reasons recorded by the ITO for reopening assessments highlighted discrepancies in claiming section 80J deductions for each assessment year, based on the audit party's observations.

The Tribunal observed that the audit party's opinion on the firm's eligibility for section 80J deductions constituted an interpretation of law, rendering the initiation of reassessment proceedings invalid for the assessment years 1975-76 and 1976-77. However, for the assessment year 1977-78, where the audit merely communicated the failure to file the auditor's report as required under section 80J(6A), the reassessment proceedings were deemed valid. The Tribunal allowed the appeals for the assessment years 1975-76 and 1976-77 but dismissed the appeal for the assessment year 1977-78, based on the merits of the case.