2016 (10) TMI 324 - HC - Income Tax

Reopening of assessment - non deduction of tds on advertisement, rent, courier services and event expenses - violation of principles of natural justice - Held that - The petitioner deserves no relief. Before the original assessment order dated 19.12.2012 was passed, the relevant record of the assessee had been destroyed in fire. On perusal of the profit and loss account finding the expenses shown therein, when compared with the previous assessment year to be higher, the assessing officer imposed a lump-sum deduction of ₹ 10,00,000/-. On 03.03.2014, an audit objection was raised qua the above assessment which was to the effect that as required, no TDS had been deducted by the petitioner qua expenses on advertisement, rent, courier services and event expenses. Thus, as per the provisions of Section 40(a)(ia) of the Act these expenses were liable to be disallowed and added back to the assessee s income. The Commissioner by this letter merely sought reasons from the assessing officer. He did not direct him to initiate proceedings for re-assessment. The assessing officer could have furnished reasons and reiterated his decision not to reopen the assessment. It is also important to note an aspect regarding the annotated reply. The audit objections were specifically with respect to the issue of TDS. The assessing officer s response was silent on this issue except for stating that he was informed that the record had been destroyed. He had admittedly not seen any other record pertaining to the issue. The Commissioner as a superior officer, in his administrative capacity was well within his rights to ask his subordinate to back his recommendation with reasons when the same were found lacking, especially when such recommendation was made contrary to the audit objections which contained both reasons and provisions of law. After the receipt of the above quoted letter, the assessing officer apparently now acting in a more responsible manner through a communication dated 23.09.2014 addressed to the TDS wing of the department sought the record pertaining to the deposit of TDS by the petitioner with regard to the expenses on which the petitioner was supposed to deduct TDS at the time of release of payments. The record was supplied by the TDS wing to the assessing officer through letter dated 17.10.2014 on the examination of which the assessing officer found that the petitioner had, in fact, not deducted TDS as required by law on the expenses incurred by it towards advertisement, rent, courier services and event expenses. This information which would come under tangible material was not before him at the time when the original assessment was made and on the basis whereof, on recording of reasons, which were later supplied to the petitioner, the re-assessment proceedings were initiated. It may be noted that at the time of framing of the original assessment, the assessing officer had sought record from the petitioner which was not produced on the ground that the same had been destroyed in a fire which took place in the premises of the petitioner. This fact would have also contributed towards the escapement of the above income from tax. The plea of violation of principles of natural justice raised on behalf of the petitioner, needs to be considered only to be rejected. It is the admitted position that the petitioner was permitted to inspect the relevant record before he filed his objections to the initiation of re-assessment proceedings. Even otherwise, the entire record, as asked for by the petitioner, was made available under the Right to Information Act, 2005. The petitioner has also not shown any prejudice on this ground. - Decided against assessee

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Alleged violation of principles of natural justice.
3. Legitimacy of re-assessment proceedings based on audit objections.
4. Whether the re-assessment proceedings were a result of a change of opinion by the assessing officer.

Issue-wise Detailed Analysis:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 24.10.2014 issued under Section 148 of the Income Tax Act, 1961, and the subsequent order dated 16.04.2015 rejecting their objections. The notice was issued following audit objections raised on 03.03.2014, which pointed out non-compliance with TDS provisions on certain expenses. The petitioner argued that the re-assessment proceedings were initiated solely based on audit objections without independent application of mind by the assessing officer, which is impermissible in law. The court held that the assessing officer, after receiving the audit objections, sought further information from the TDS department and formed an independent opinion before issuing the notice. Thus, the notice was valid as it was based on new tangible material that was not available during the original assessment.

2. Alleged violation of principles of natural justice:
The petitioner contended that the denial of certain documents by the respondents violated the principles of natural justice. The court noted that the petitioner was allowed to inspect the relevant records and later obtained the documents through the Right to Information Act, 2005. The court found no prejudice caused to the petitioner due to the initial denial of documents and held that there was no violation of the principles of natural justice.

3. Legitimacy of re-assessment proceedings based on audit objections:
The petitioner argued that the re-assessment proceedings were solely based on audit objections, which is not permissible. The court referred to the Supreme Court's decision in Indian & Eastern Newspaper Society Vs. Commissioner of Income Tax, which held that the view expressed by an internal audit party is only information and cannot solely form the basis for re-assessment. The assessing officer must form an independent opinion. In this case, the assessing officer, after receiving the audit objections, sought additional records and formed an independent opinion that there was non-compliance with TDS provisions, justifying the initiation of re-assessment proceedings.

4. Whether the re-assessment proceedings were a result of a change of opinion by the assessing officer:
The petitioner claimed that the re-assessment proceedings were based on a change of opinion by the assessing officer, which is not allowed. The court referred to the Supreme Court's ruling in Commissioner of Income Tax, Delhi Vs. Kelvinator of India Ltd., which stated that re-assessment cannot be based on a mere change of opinion and must be supported by new tangible material. The court found that the re-assessment in this case was not based on a change of opinion but on new information obtained from the TDS department, which indicated non-compliance with TDS provisions. Therefore, the re-assessment proceedings were legitimate.

Conclusion:
The court concluded that the re-assessment proceedings were valid as they were based on new tangible material and not merely on a change of opinion. The petitioner's plea of violation of principles of natural justice was rejected, and the writ petition was dismissed for lack of merit.