Audit objection cannot justify reassessment, and a bonus reserve for contingent liability remains taxable income

An internal audit note does not constitute information for reassessment under section 147(b) where it merely reflects a different view on the same material already considered; reopening on a change of opinion is not permitted, so reassessment was unjustified. A reserve created under section 15(1) of the Payment of Bonus Act for a future contingent liability is not expenditure actually incurred, remains with the assessee, and is not diverted at source; it is therefore part of assessable income and not an allowable deduction as bonus or as a residuary business expense.

---

---

Issues: (i) Whether an internal audit note constituted information enabling reassessment under section 147(b) of the Income-tax Act, 1961. (ii) Whether the amount set apart under section 15(1) of the Payment of Bonus Act, 1965 formed part of the assessee's assessable income and was an allowable deduction under the Income-tax Act, 1961.

Issue (i): Whether an internal audit note constituted information enabling reassessment under section 147(b) of the Income-tax Act, 1961.

Analysis: Reassessment under section 147(b) requires information that brings to notice material not already considered, and does not permit reopening on a mere change of opinion on the same material. An audit party's view on the application or interpretation of law is not information for this purpose, and discovery of an error in the original assessment on reconsideration of the same material is insufficient.

Conclusion: The reassessment was not justified and this issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the amount set apart under section 15(1) of the Payment of Bonus Act, 1965 formed part of the assessee's assessable income and was an allowable deduction under the Income-tax Act, 1961.

Analysis: The reserve created under section 15(1) is a provision for a future contingent liability and not an expenditure actually incurred during the accounting year. The amount remains with the assessee, is not diverted at source, and is not an accrued liability deductible either as bonus payment or as a residuary business deduction.

Conclusion: The amount set apart was held to be part of the assessable income and not an allowable deduction, so this issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered partly for the assessee and partly for the Revenue, with the reassessment question decided in favour of the assessee and the bonus-provision deduction question decided in favour of the Revenue.

Ratio Decidendi: A mere audit objection on the same material already considered by the assessing authority is not information for reassessment, and a provision created to meet a future contingent liability remains taxable income unless it represents an actual accrued liability or diversion at source.

---