2024 (2) TMI 1343 - HC - Income Tax

Reopening of assessment u/s 147 - reason to believe - Reliance on audit objection - assessee had debited an amount under the head Employee benefit expenses on account of reimbursement of proportionate expenses paid to the ultimate holding company, for ESOP granted to the assessee s employees and break-up of income from arbitrage business shown under the head Other Operating Revenues on account of delivery based purchase and sale of shares - HELD THAT - In the reason to believe itself, it has been admitted that Assessee had filed a copy of audited Profit and Loss Account and Balance-sheet along with return of income where information/ material was disclosed. Reason to believe does not, however, disclose the fact that these two items mentioned in the reason to believe, i.e., the debit under the head Employee Benefit Expenses and the break-up of income from arbitrage business shown under the head Other Operating Revenues on account of delivery based purchase and sale of shares were subject of consideration during the assessment proceedings. Petitioner had received a communication dated 11th January 2016 calling upon Petitioner to produce the accounts and/or documents specified in the annexure to said notice. As regards, the employee benefit expenses on account of Employee Stock Option ( ESOP ), there is no discussion in the assessment order. As held by this Court in Aroni Commercials Limited 2014 (2) TMI 659 - BOMBAY HIGH COURT once a query is raised during the assessment proceedings and Assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. The Court held that only requirement is that AO ought to have considered the objections now raised in the grounds for issuing notice under Section 148 of the Act during the original assessment proceedings. If that has been done, it would follow that the reopening of assessment by impugned notice will merely be on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and that change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment. Since both the issues raised in the reason to believe for reopening the assessment have been subject matter of consideration during the assessment proceedings, it can be based only on change of opinion which is not permissible. Reopening as based on audit objections - It is settled law as laid down in Indian Eastern Newspaper Society 1979 (8) TMI 1 - SUPREME COURT that in every case, the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has come to his notice, he can reasonably believe that income has escaped assessment - the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer. Therefore, the AO cannot reopen the assessment relying on audit objections. Moreover, there is nothing on record to indicate that the AO had applied his mind afresh without being influenced by the audit objections. The reason to believe should be of the AO and he cannot be acting on the dictates of other parties. Decided in favour of assessee.

Summary

Issues involved:
The issues involved in this case are the validity of a notice dated 30th March 2021 under Section 148 of the Income Tax Act, 1961 for Assessment Year 2013-2014, the rejection of objections to reopening in an order dated 10th February 2022, and a notice dated 21st February 2022 issued under Section 142(1) of the Act.

Details of the Judgment:

1. The petitioner challenged the notice under Section 148 of the Income Tax Act, 1961, for Assessment Year 2013-2014, along with an order rejecting objections to reopening and a notice under Section 142(1) of the Act.

2. The petitioner filed a return of income for AY 2013-14, which was subsequently revised. The case was selected under the Computer Assisted Scrutiny Scheme, and an assessment order was passed. Later, a notice under Section 148 was issued alleging income escapement due to ESOP expenses and losses from arbitrage business.

3. The proviso to Section 147 of the Act applies as over four years had passed since the assessment year, requiring a failure to disclose necessary material facts for reopening.

4. The reason to believe did not disclose that the mentioned items were considered during the assessment proceedings. The petitioner's responses were elaborate and considered by the Assessing Officer, leading to disallowances in the assessment order.

5. The AO cannot reopen assessment based solely on audit objections without independent evaluation. The impugned notice was quashed, and the order rejecting objections was set aside.

Separate Judgment by the Judges:
None.