Assessment reopening under Section 147 set aside after audit objections deemed insufficient without independent evaluation

The HC set aside the reopening of assessment u/s 147 based on audit objections. The court found that during original assessment proceedings, the AO had issued detailed notices u/s 142(1) requiring comprehensive documentation and explanations regarding various disallowances including u/s 14A. The assessee provided detailed replies and assessment was completed with specific disallowances. Since the grounds for reopening were already considered during original assessment and the assessee had made full disclosure of primary facts, the reopening was impermissible under the proviso to Section 147. The court emphasized that AO cannot merely rely on audit objections without independent evaluation.

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Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Alleged failure to fully and truly disclose necessary facts for assessment.
3. Reopening of assessment based on audit objections.
4. Change of opinion by the Assessing Officer.

Summary:

Issue 1: Validity of the notice issued under Section 148 of the Income Tax Act, 1961

The petitioner challenged the notice dated 27th March 2021 issued under Section 148 of the Income Tax Act, 1961, alleging escapement of income assessable to tax for AY 2015-16. The reasons for the notice included delayed remittance of Employees' Provident Fund, debiting consultancy fees, and Registrar and Share Transfer agent fees, resulting in underassessment of Rs. 79,55,843/-. Additionally, it was observed that the independent auditor had expressed a qualified opinion on the investment in subsidiaries, leading to a proportionate interest reversal and underassessment of Rs. 9,68,15,356/-.

Issue 2: Alleged failure to fully and truly disclose necessary facts for assessment

The court noted that the notice under Section 148 was issued more than four years after the expiry of the relevant Assessment Year. According to the proviso to Section 147, reassessment is not permissible unless there has been a failure to truly and fully disclose necessary facts. The court observed that the reasons recorded for reopening were based on the records filed by the petitioner, indicating no failure to disclose material facts.

Issue 3: Reopening of assessment based on audit objections

The court found that the reopening was based on audit objections. The petitioner had explained why there was no escapement of income in response to the audit objections. The court referenced the Indian & Eastern Newspaper Society v. CIT case, stating that the Assessing Officer (AO) must determine for himself the effect and consequence of the law mentioned in the audit note. The AO cannot reopen the assessment relying solely on audit objections.

Issue 4: Change of opinion by the Assessing Officer

The court noted that during the original assessment proceedings, the petitioner had furnished all necessary details, and the assessment order was passed after considering these details. The court referenced the Aroni Commercials Limited case, which held that once a query is raised and replied to during assessment proceedings, reopening the assessment on the same grounds constitutes a change of opinion, which is not permissible.

Conclusion:

The court ruled in favor of the petitioner, quashing the notice dated 27th March 2021 and the order rejecting the petitioner's objections. The court emphasized that the reopening of assessment was not justified as there was no failure to disclose material facts, and the reopening was based on audit objections and a change of opinion. The petition was allowed, and no costs were awarded.

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