Court quashes notice under Income Tax Act, finding lack of independent assessment

The Court quashed the notice issued under Section 148 of the Income Tax Act and the order disposing of objections, finding that the reassessment proceedings initiated solely based on audit objections lacked independent application of mind by the Assessing Officer. The Court held that the Assessing Officer's reliance on audit objections without forming his own belief rendered the reopening unsustainable, deeming it a colorable exercise of jurisdiction.

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Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act.
2. Validity of the reassessment proceedings initiated based on audit objections.
3. Independent application of mind by the Assessing Officer.

Detailed Analysis:

Legality of the Notice Issued under Section 148 of the Income Tax Act:
The petitioner challenged the notice dated 21.3.2021 issued under Section 148 of the Income Tax Act, directing the petitioner to furnish the return of income for the assessment year 2017-18. The petitioner argued that the notice was contrary to law and without jurisdiction. The petitioner also challenged the order disposing of the objections dated 25.10.2021. The petitioner, a limited company, had filed its return of income for A.Y. 2017-18 declaring a total loss, which was accepted without any addition or disallowance of expenses in the assessment order under Section 143(3) dated 21.12.2019. The respondent issued the notice under Section 148 asking the petitioner to file a return of income for A.Y. 2017-18, which the petitioner complied with under protest and subsequently sought the reasons for reopening and the approval obtained under Section 151.

Validity of the Reassessment Proceedings Initiated Based on Audit Objections:
The petitioner contended that the reopening was based on an audit party objection and that the reason to believe must be that of the Assessing Officer alone, which cannot be substituted by an objection from the audit department. The petitioner argued that the Assessing Officer had objected to the audit party's communication, indicating that the reasons recorded were not in accordance with the law, making the reassessment proceedings under Section 147 impermissible. The petitioner relied on previous decisions of the Court where similar grounds led to the quashing of the notice. The respondent argued that the petition was premature as only the notice under Section 148 had been issued and that there was an alternative remedy available by way of appeal. The respondent also denied the absence of new tangible material and independent opinion.

Independent Application of Mind by the Assessing Officer:
The Court noted that the audit objection raised during the audit scrutiny was related to the computation of income and the disallowance of CSR expenses. The audit party found that the CSR expenses were not added back while computing the taxable income, which should have been disallowed under Section 37(1). The Assessing Officer, in his communication to the Principal Commissioner of Income Tax, stated that the objections raised by the audit party were examined and found to be not acceptable, as the CSR expenses were connected with business expediency and were allowable under Section 37(1). The Court observed that the Assessing Officer had no reason to believe that the income had escaped assessment and had only issued the notice at the instance of the audit party despite his unwillingness, which amounted to a lack of independent application of mind.

Conclusion:
The Court held that the reassessment proceedings initiated solely at the instance of the audit party, without the Assessing Officer's independent conviction, were not sustainable. The Court quashed the notice dated 21.3.2021 and the order dated 25.10.2021, concluding that the Assessing Officer had no subjective satisfaction while issuing the notice of reopening, making it a colorable exercise of jurisdiction.

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