2013 (9) TMI 270 - AT - Income Tax

Tribunal Invalidates Assessment Reopening Based on Audit Objections

INCOME TAX OFFICER ROHTAK Versus SHRI SATYA PARKASH AGGARWAL & SONS

The Tribunal quashed the reopening of assessment, finding it invalid due to the Assessing Officer's lack of independent application of mind and reliance ... Re-opening of assessment u/s 147 for the reason of legal opinion expressed by the audit party and not the factual error found by the audit team – Held that:- Relying upon the judgment in the case of Xerox Modicorp Ltd.[ 2013 (1) TMI 160 - DELHI HIGH COURT]; Air India[1994 (10) TMI 33 - BOMBAY High Court] and Indian Eastern and Newspaper Society [1979 (8) TMI 1 - SUPREME Court], it has been held in the present case that re-opening of assessment is not valid. In the instant case, audit party has not pointed out any factual error or omission but has expressed the opinion on the analysis of the balance sheet of one of the two concerns of the assessee that the interest paid by the assessee needs to be disallowed because the borrowed funds were diverted by providing interest free loans to others - The decision of Hon’ble Apex Court in the case of P.V.S. Beedies Pvt.Ltd. [1997 (10) TMI 5 - SUPREME Court] would not apply because in that case, there was only a factual error – Decided against the Revenue. Issues Involved:1. Validity of the reopening of assessment under Section 147/148 of the Income Tax Act.2. Whether the reopening of assessment based on audit objections is valid.Detailed Analysis:1. Validity of the Reopening of Assessment under Section 147/148 of the Income Tax ActThe assessee challenged the validity of the reopening of assessment under Section 147, arguing that all relevant particulars were disclosed in the return of income, and the initiation of proceedings under Section 148 was merely for making fishing enquiries, which is illegal. The authorities below were accused of not properly interpreting Section 148/147, as no new information had come to the knowledge of the Assessing Officer (AO) except the audit objection. The authorities did not address the objections raised by the assessee against the initiation of reassessment proceedings by a speaking order, and the AO did not independently apply his mind but merely followed the audit objections.The counsel for the assessee pointed out that the reasons recorded for reopening the assessment were identical to the audit objection, indicating that the AO reopened the assessment based on the audit objection without independent application of mind. The AO's reasons for reopening were that borrowed money had been diverted for non-business purposes, and interest should be disallowed. However, the assessment order did not record any such finding, and all expenses were disallowed on the ground that the business was discontinued. The counsel argued that reopening is invalid when no addition/disallowance is made based on the grounds for reopening. The counsel cited several decisions to support this contention, including Indian and Eastern Newspaper Society Vs. CIT, Delhi High Court decision in Xerox Modicorp Ltd. Vs. DCIT, Air India Vs. V.K.Srivastava, CIT & Others, and Transworld International Inc. Vs. JCIT.2. Whether the Reopening of Assessment Based on Audit Objections is ValidThe Revenue argued that the reopening was valid as there was escapement of income, and the AO had applied his mind after the audit objection. The sufficiency of material cannot be examined while judging the validity of reopening. The Revenue cited decisions including CIT Vs. Kelvinator of India Ltd., Raymond Woollen Mills Ltd. Vs. ITO & Others, CIT Vs. P.V.S. Beedies Pvt. Ltd., and CIT Vs. Usha International Ltd.The Tribunal noted that the reasons recorded for the notice under Section 148 were identical to the audit objection, indicating no independent application of mind by the AO. The Tribunal was not convinced by the Revenue's argument that the AO's verbatim copying of the audit objection was due to independent application of mind. The Tribunal held that reopening based on audit objections without independent application of mind is invalid.The Tribunal examined the legal position on the validity of reopening based on audit objections. It referred to several decisions, including Indian and Eastern Newspaper Society (where the Supreme Court held that the opinion of an internal audit party on a point of law cannot be regarded as 'information' for reopening an assessment), Air India (where the Bombay High Court held that reopening based on audit objections is without jurisdiction), and Xerox Modicorp Ltd. (where the Delhi High Court held that audit objections cannot constitute tangible material for reopening).The Tribunal distinguished the case of P.V.S. Beedies Pvt. Ltd., where the Supreme Court allowed reopening based on audit objections pointing out a factual error, from the present case where the audit objection was based on legal opinion. The Tribunal concluded that the reopening of assessment was not valid and quashed the same.ConclusionThe Tribunal allowed the cross-objection of the assessee, quashing the reopening of assessment as invalid due to lack of independent application of mind by the AO and reliance solely on audit objections. Consequently, the Revenue's appeal was dismissed as infructuous.