2016 (9) TMI 338 - HC - Income Tax

Reopening of assessment - discrepancy in the turnover - Held that - AO was not agreeable to the objection of the audit party from the beginning and even during the process between issuance of notice for reopening and rejecting the objections of the petitioner, he had satisfied himself about the correctness of the petitioner s contention in this regard. We have reproduced the relevant portion of the petitioner s objections. The explanation of the petitioner in such objections to the discrepancy in the turnovers convinced the Assessing Officer that there had been no escapement of income chargeable to tax. He accepted the petitioner s ground that the excise turnover would show MRP price less 35% discount. If the turnover figures are adjusted accordingly, there would be hardly a discrepancy of 8% which in case of such a large turnover could easily occur. He in fact argued that if such discrepancy of 8.42% is extrapolated over the total turnover; the assessee s turnover from the eligible unit would match the correct figures. We have therefore no hesitation in coming to the conclusion that neither the reasons recorded by the Assessing Officer, nor the decision to issue notice for reopening were those of the Assessing Officer himself. He had acted under the compulsion of the audit party which held a belief that on account of discrepancy in the turnover figures, income chargeable to tax had escaped assessment. The Assessing Officer was inclined to believe the petitioner s explanation that such discrepancy could be reconciled. If the department was not convinced about the opinion of the Assessing Officer, it was always open for the Commissioner to take the order of assessment in revision. The action of reopening of assessment however, stands on entirely different footing and as per settled law, can be resorted to by the Assessing Officer only if he has tangible material at his command to form a reasonable belief that income chargeable to tax had escaped assessment. Such belief of the Assessing Officer cannot be substituted by that of the opinion of the audit party. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of reopening assessment based on audit party's objection.
2. Validity of the Assessing Officer's belief regarding income escapement.
3. Discrepancy in turnover figures between excise records and financial statements.

Issue-wise Detailed Analysis:

1. Legality of reopening assessment based on audit party's objection:
The petitioner challenged the reopening of the assessment for the year 2010-11, arguing that the Assessing Officer (AO) acted under compulsion from the audit party rather than forming an independent belief. The court cited the Supreme Court's decision in "Indian and Eastern Newspaper Society v. Commissioner of Income Tax" which held that an audit party's opinion on legal matters does not constitute information under section 147(d) of the Income Tax Act. The AO must independently determine the effect and consequence of the law mentioned in the audit note. The court also referred to "Adani Exports v. Deputy Commissioner of Income Tax," emphasizing that the AO must form his own belief regarding the escapement of income and cannot merely rely on the audit party's opinion.

2. Validity of the Assessing Officer's belief regarding income escapement:
The court examined whether the AO genuinely believed that income had escaped assessment. The petitioner argued that the AO did not hold such a belief independently and was compelled by the audit party. The court scrutinized the original departmental files and found that the AO consistently disagreed with the audit party's view. The AO's letter dated 13.07.2015, written after issuing the reopening notice, reiterated his disagreement with the audit party's objection. The court concluded that the AO did not independently believe that income had escaped assessment, and his decision to reopen the assessment was influenced by the audit party.

3. Discrepancy in turnover figures between excise records and financial statements:
The discrepancy in turnover figures between the excise records and the financial statements was central to the case. The petitioner explained that the turnover reported to excise authorities was based on the Maximum Retail Price (MRP) minus a 35% abatement, while the financial statements reflected actual sales prices, which were generally higher. The AO, in his letter dated 13.07.2015, accepted this explanation, noting that the discrepancy was approximately 8%, which was reasonable given the large turnover. The court found that the AO was convinced by the petitioner's explanation and did not believe that the discrepancy indicated income escapement.

Conclusion:
The court concluded that the AO did not independently believe that income had escaped assessment and acted under compulsion from the audit party. The reopening of the assessment was therefore invalid. The court set aside the impugned notice dated 12.03.2015, allowing the petition and disposing of the case.