RE-ASSESSMENT ON THE BASIS OF AUDITOR’S REPORT

[Mr. M. GOVINDARAJAN]

Every person who earns is required to furnish his return of income to the Income Tax Department, provided the earning is chargeable to tax. Return of income tax is then examined by the income tax department and consequently they specify correction, if any. Such process in which the return is examined by the Income Tax Department is called “Assessment” . This Assessment includes re-assessment as well under section 147 in accordance with the section 2(8) of the Income Tax Act, 1961 (‘Act’ for short).  Sections 147 and 148 of Income Tax Act empowers the Income Tax Department to assess, re-assess or re-compute income, etc., when there is likelihood of escapement of the same.

Chapter XIV of the Act provides the procedure for assessment.  Section 147 provides the procedure for assessment or re-assessment for the income escaped assessment.  Section 148 of the Act provides the procedure for issuing of notice where income has escaped assessment.  Explanation 1 to section 148 of the Act provides that the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,-

• any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;
• any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act; or
• any information received under an agreement referred to in section 90 or section 90A of the Act; or
• any information made available to the Assessing Officer under the scheme notified under section 135A; or
• any information which requires action in consequence of the order of a Tribunal or a Court.

From the above it is evident that the Assessing Officer may re-open the assessment based on the Audit objection.  This provision has been inserted in the Act with effect from 01.04.2022.

In M/S. SREE NARAYANA GURU MEMORIAL EDUCATIONAL AND CULTURAL TRUST VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM, THE PRINCIPAL COMMISSIONER OF INCOME TAX (EXEMPTIONS) KERALA - 2024 (3) TMI 39 - KERALA HIGH COURT, the petitioner is a trust registered under Section12A of the Act.  The petitioner filed the income tax return for the Assessment Year 2016 - 17 on 15.10.2016 declaring NIL income.  The Assessing Officer completed the assessment under Section 143(3) of the Act on 21.12.2018. 

The Audit party of the Department has objected the finalization of return as NIL by the Assessing Officer.  The Audit party found that the petitioner received corpus donation to the tune of Rs.10.30 crores.  The same has not been included in the income of the petitioner under Section 11 of the Act.  Therefore the corpus donation should have been reduced from the current year application.  The Audit party further reported that the expenditure of earlier years to the tune of Rs.8.30 crores considered in the current year should also have been disallowed from the claim of application.  The Audit party reported that the income to the tune of Rs.1.60 crores as escaped assessment. 

Notice was issued to the petitioner based on the audit objections on 05.12.2022 with the prior approval of the Principal Income Tax Commissioner of Income Tax (Exemption), Kerala.    The petitioner was directed to file a revised return within 30 days of the receipt of the notice. The petitioner filed a detailed reply to the show cause notice.  The petitioner contended that the returns filed by the petitioner were subjected to complete scrutiny before the assessment was finalized at ‘nil’ income.  There could not be any scope for fresh information that has come to the notice of the Assessing Authority.    The petitioner had already furnished all the information required for completion of the assessment under Section 143(3) of the Act.  The notice issued under Section 148A(b) of the Act was merely a change of opinion which would not warrant re-opening of the assessment completed.

The Assessing Officer relied on clause (ii) of Explanation 1 to Section 148 of the Act which provides that any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of the Act, could be the basis for issuing the notice under Section 148A(b) of the Act.  The audit objection was based on the information submitted by the assessee during the assessment proceedings under Section 143(3) of the Act.  From the documents submitted by the petitioner himself the revenue audit concluded that there was a deficiency in the application of income of Rs.1.60 crore which had escaped assessment.  Therefore the Assessing Officer recorded the reason that the income of Rs.1.60 crore had escaped assessment for the Assessment year 2016 - 17 and it was a fit case to issue notice for reassessment.  The Assessing Officer passed the assessment order on 07.02.2023

Being aggrieved against the said order the petitioner filed a writ petition before the High Court, challenging the order of Assessing Officer re-opening of assessment based on the report of Audit.  The petitioner submitted the following before the High Court-

• The corpus fund received by the petitioner could not be part of the income of the petitioner under Section 11 of the Act.
• The petitioner replied to the notice issued under Section 148A(b), bringing to the notice of the Assessing Officer the applicability
• under Section 148A(d) is bad in law and liable to the set-aside of Section 11 to the corpus fund, and, therefore, the reasons recorded for reopening of the assessment are incorrect.
• The petitioner’s reply has not been considered and no proper consideration has been given to Section 11 of the Income Tax Act.
• Therefore, the Order passed.

The Department submitted the following before the High Court-

• With effect from 01.04.2022, Section 148 has been amended and clause (ii) of Explanation 1 has been inserted which provides that any audit objection to the effect that the assessment in the case of an assessee for the relevant assessment year has not been made in accordance with the provisions of the Act would be a ground for re-opening of the assessment.
• The impugned order, recording the satisfaction for re-opening of the assessment in the case of the petitioner, is perfectly in accordance with the statutory prescription as provided under Clause (ii) of Explanation 1 of Section 148.
• There is no error of law or jurisdiction for this Court to interfere with the impugned order passed under Section 148A(d) of the Act.
• If there is a revenue audit objection, the Assessing Officer cannot ignore the same, and the Assessing Officer has to consider the revenue audit objection for recording the reasons for re-opening of the assessment.

The High Court considered the submissions of the petitioner as well as by the Department.  The High Court analyzed the judgment of the Supreme Court in the case of INDIAN AND EASTERN NEWSPAPER SOCIETY VERSUS COMMISSIONER OF INCOME-TAX, NEW DELHI - 1979 (8) TMI 1 - SUPREME COURT.  The High Court considered that the said judgment is not relevant to this case since at the time of judgment there was no amendment to Section 148 which inserted a clause to Explanation 1 to Section 148.  The audit objection is one of the reasons for reopening the assessment.  If the revenue audit raises an objection that the assessment was not completed in accordance with the provisions of the Act, it cannot be treated as a change of opinion because this is the statutory prescription and statutory ground/reason for re-opening the assessment. The Assessing Authority has proceeded strictly in accordance with the provisions of Clause (ii) of Explanation 1 to Section 148 of the Act.  The High Court did not find any error in the impugned order.  The High Court dismissed the writ petition.

The High Court further directed the petitioner to file the return within a period of four weeks, if the same has not been filed.  The same shall be examined in accordance with law and assessment order will be finalized after giving a reasonable opportunity to the petitioner of being heard.