AO cannot mechanically issue Section 148 notices based solely on audit objections without considering established facts and assessee's response

Gujarat HC quashed reassessment proceedings initiated under Section 148 based solely on audit objection. Court held AO lacked jurisdiction as audit objection contradicted established facts, particularly when department had previously accepted assessee's depreciation claims on goodwill. Despite amended provisions allowing audit objections as information for reopening, AO cannot mechanically issue notices without considering case facts and assessee's reply under Section 148A(b). Order under Section 148A(d) unsustainable due to non-application of mind by AO who ignored assessee's response. Appeal allowed.

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Issues Involved:

1. Validity of the notice issued under Section 148A(b) of the Income Tax Act.
2. Consideration of audit objections as a basis for reopening assessment.
3. Application of mind by the Assessing Officer in issuing the notice.
4. Consistency in allowing depreciation on goodwill from previous assessment years.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148A(b):

The petitions challenged the notice issued under Section 148A(b) of the Income Tax Act for the Assessment Years 2017-18 and 2018-19, arguing that the notice was based solely on audit objections. The petitioner contended that the notice was invalid as it contained factual inaccuracies and was issued despite the fact that the depreciation on goodwill had been accepted in prior assessments. The court found that the notice was not tenable as the Assessing Officer had not considered the petitioner's detailed reply and had issued the notice based on incorrect audit objections, thereby lacking jurisdiction.

2. Consideration of Audit Objections as a Basis for Reopening Assessment:

The court examined whether audit objections could serve as a valid basis for reopening assessments. While acknowledging that post-2021 amendments allow audit objections to be considered as "information" for reopening assessments, the court emphasized that this does not obligate the Assessing Officer to issue a notice based solely on such objections. The court criticized the reliance on audit objections without independent verification or consideration of the facts and evidence on record, particularly when the department had previously accepted the depreciation claims.

3. Application of Mind by the Assessing Officer:

The court highlighted the lack of application of mind by the Assessing Officer in issuing the notice under Section 148A(d). It was noted that the Assessing Officer merely reiterated the audit objections without addressing the petitioner's response, which pointed out that the depreciation on goodwill had been consistently allowed since the Assessment Year 2015-16. The court found this approach to be indicative of non-application of mind, rendering the notice and subsequent order unsustainable.

4. Consistency in Allowing Depreciation on Goodwill:

The petitioner argued that the depreciation on goodwill had been granted from the Assessment Year 2015-16 onwards, and thus, the reassessment notice was unjustified. The court agreed, noting that the Assessing Officer could not reopen assessments for subsequent years based on facts that were already available and accepted in earlier assessments. The court concluded that the reassessment proceedings initiated on the basis of the audit objection were contrary to the established facts and prior assessments.

Conclusion:

The court quashed the notices and orders issued under Sections 148A(b), 148A(d), and 148 of the Income Tax Act, finding them to be based on incorrect audit objections and issued without proper consideration of the petitioner's responses and the factual record. The petitions were allowed, and the rule was made absolute, with no order as to costs.

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