2016 (9) TMI 1038 - HC - Income Tax

Reopening of assessment - deduction under Section 80IB - Held that - The claim of deduction under Section 80IB of the Act was examined by the Assessing Officer. The matter was verified from the records and only thereafter the claim was accepted as it is. It may be that in the process, the Assessing Officer committed an error in allowing deduction with respect to several amounts which may not be eligible for such deduction. The erroneous decision of the Assessing Officer is widely different from nonconsideration of an issue at the time of assessment. It therefore cannot be stated that this issue was not scrutinized by the Assessing Officer during the original assessment. Disallowance of interest expenditure - objection of audit party - Held that - On the vital issue of disallowance of interest expenditure, the Assessing Officer was not convinced about the audit objection. She gave her brief but precise reasons for her stand. In the case of Indian and Eastern Newspaper Society V/s Commissioner of Income-Tax, New Delhi 1979 (8) TMI 1 - SUPREME Court held that the opinion of the audit party on a point of law cannot be regarded as information enabling the income tax officer to initiate reassessment proceedings. In the same judgment, however, it was clarified that the audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of ITO to it. In case of Commissioner of Income-Tax V/s P.V.S.Beedies Pvt.Ltd., 1997 (10) TMI 5 - SUPREME Court it was found that the audit party had merely pointed out the fact which was overlooked by the income tax officer in the assessment. It was observed that there is no dispute that the audit party is entitled to point out a factual error or omission in the assessment. Reopening the case on the basis of factual error pointed out by the audit party is permissible under the law. The present case falls in the former category where the audit party not only brought a certain issue to the notice of the Assessing Officer but compelled her to issue notice of reopening despite her clear opinion that the issue was not valid and that there has been no escapement of income on the grounds so urged by the audit party. - Decided in favour of assessee.

Summary

Issues:
1. Challenge to the notice dated 16.1.2006 reopening the assessment for the assessment year 2001-02.
2. Excess deduction under Section 80IB of the Act.
3. Disallowance of interest paid by the assessee.

Analysis:

Issue 1: Challenge to the notice reopening the assessment
The petitioner challenged the notice reopening the assessment for the assessment year 2001-02. The Assessing Officer had issued the notice based on reasons related to excess deduction under Section 80IB of the Act and disallowance of interest paid by the assessee. The petitioner raised objections to the notice, which were rejected, leading to the petition. The petitioner argued that the issues were examined during the original assessment and could not be reopened within four years. The department contended that the issues were not examined during the original assessment, and the Assessing Officer had the authority to reopen the assessment based on valid reasons.

Issue 2: Excess deduction under Section 80IB of the Act
The Assessing Officer had allowed a deduction under Section 80IB of the Act to the petitioner, which was challenged in the notice for reopening the assessment. The petitioner claimed that the deduction was examined during the original assessment. The court observed that the deduction claim was indeed scrutinized during the original assessment, and the Assessing Officer made a decision based on verification from records. Although an error was made in allowing certain amounts not eligible for deduction, it did not imply nonconsideration of the issue during the original assessment.

Issue 3: Disallowance of interest paid by the assessee
The second ground for reopening the assessment was the disallowance of interest paid by the assessee on borrowed money. The petitioner argued that the interest was not disallowed during the original assessment as it was given out of owned funds and not borrowings. The court noted conflicting arguments and lack of direct proof that the issue was examined during the original assessment. However, it was highlighted that the Assessing Officer had opposed the audit party's suggestion regarding the disallowance of interest expenditure, indicating a valid reason for not reopening the assessment based on this issue.

In conclusion, the court set aside the impugned notice dated 16.1.2006, allowing the petition and disposing of the case in favor of the petitioner. The court emphasized the importance of valid reasons for reopening assessments and the need for issues to be thoroughly examined during the original assessment process.