2004 (9) TMI 26 - HC - Income Tax

Invalid Notice under Income-tax Act: Change of opinion without valid reasons. Audit objection not lawful for reopening assessment.

Transworld International Inc. Versus Joint Commissioner of Income-tax.

The court held that the notice issued under Section 148 of the Income-tax Act was invalid as it was based on a mere change of opinion without valid ... Validity of notice issued u/s 148 - Assessing Officer has issued the notice merely relying on the audit objection - It is the bounden duty of the Revenue to discharge the onus of showing that there was any failure on the part of the petitioner. - When the assessee has placed on record sufficient material to show that machinery was used, then in that case there is no failure on the part of the petitioner. - In our opinion, on the same material a different view is sought to be taken and this is nothing but a mere change of opinion and that would not amount to escapement of income. Mere change of opinion would not confer jurisdiction upon the Assessing Officer to initiate proceedings under section 147 – impugned notice are quashed Issues Involved:1. Legality of the notice issued under Section 148 of the Income-tax Act, 1961.2. Whether the Assessing Officer had valid reasons to believe that income had escaped assessment.3. Reopening of assessment based on audit objections.4. The concept of 'change of opinion' in reassessment proceedings.Detailed Analysis:1. Legality of the Notice Issued Under Section 148:The petitioner, a non-resident foreign company, filed a writ petition under Article 226 of the Constitution of India, challenging the notice dated May 10, 2001, issued by the Assessing Officer under Section 148 of the Income-tax Act, 1961. The petitioner argued that the notice was based on a purported audit objection and did not disclose the process of reasoning for believing that income had escaped assessment. The court examined whether the notice met the legal requirements for reopening an assessment.2. Valid Reasons to Believe Income Had Escaped Assessment:The petitioner contended that all material facts necessary for assessment were fully and truly disclosed during the original assessment proceedings. The Assessing Officer had made an assessment order on March 29, 2000, after considering all the information provided. The notice under Section 148 was issued on the basis of an audit objection, which claimed that excessive depreciation had been allowed, leading to an escapement of income. However, the court found that the Assessing Officer had not applied his mind independently and had merely relied on the audit objection without proper reasoning.3. Reopening of Assessment Based on Audit Objections:The court referred to the Supreme Court decision in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, which held that an audit party's opinion on law cannot form the basis for reopening an assessment. The court emphasized that the primary function of audit is to ensure the sufficiency of internal procedures and not to substitute itself for the revenue authorities in performing their statutory duties. The audit party's role is administrative and cannot exercise judicial supervision over the quasi-judicial acts of the income-tax authorities. The court found that the audit objection in this case was based on the assumption that the plant and machinery could only be used after the Reserve Bank of India granted permission to open a branch office, which was not a valid ground for reopening the assessment.4. Change of Opinion in Reassessment Proceedings:The court reiterated that a mere change of opinion does not confer jurisdiction on the Assessing Officer to initiate reassessment proceedings. The court cited the Full Bench decision in CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1, which held that Section 147 of the Income-tax Act does not allow the Assessing Officer to initiate reassessment proceedings based on a mere change of opinion. The court also referred to the principles that must be met for exercising reassessment powers, including the need for honest reasons to believe that income has escaped assessment and the requirement for the Assessing Officer to record reasons showing the application of mind.Conclusion:The court concluded that the notice issued under Section 148 and the subsequent proceedings were based on a mere change of opinion and not on any fresh material or valid reasons to believe that income had escaped assessment. The court found that the Assessing Officer had not independently examined the matter and had merely relied on the audit objection, which was contrary to the requirement of law. Consequently, the court allowed the petition, quashed the impugned notice and subsequent proceedings, and awarded costs to the petitioner.