2016 (11) TMI 1562 - HC - Income Tax

Reopening of assessment - AO reopen the concluded scrutiny assessment based upon a satisfaction that income has escaped assessment - addition on basis of audit report - Held that - It is quite evident that the AO did not receive any objective material warranting reopening of a concluded scrutiny assessment and that the re-assessment was based upon the observations of the audit report which had scrutinized the return for the concerned year on standalone basis. These observations were entirely on the basis of that scrutiny. It is now settled law that audit reports cannot be the sole basis for reopening of assessment (refer Indian and Eastern Newspaper Society v. CIT (1979 (8) TMI 1 - SUPREME COURT) Xerox Modicorp Ltd. v. DCIT (2013 (1) TMI 160 - DELHI HIGH COURT) and CIT v. Lucas TVS Ltd.(2000 (12) TMI 102 - SUPREME COURT). In the circumstances the audit report could not have been the sole basis for reopening the concluded assessment for AY 2008-09. - Decided in favour of assessee

Summary

Issues:
1. Validity of re-assessment proceedings under Section 143 and 147.
2. Allegation of non-disclosure of material facts leading to escaped assessment.
3. Reliance on audit report as the basis for re-assessment notice.

Analysis:

Issue 1: Validity of re-assessment proceedings under Section 143 and 147
The judgment concerns the challenge to re-assessment proceedings initiated under Section 143 and 147 by the assessee. The reasons for reopening the assessment included discrepancies in the treatment of certain deductions claimed by the assessee, specifically related to merger expenses and deductions under section 10A. The Assessing Officer alleged that the assessee had not fully disclosed material facts during the original assessment, resulting in an alleged escape of income. The re-assessment notice was issued based on these discrepancies, leading to the dispute before the court.

Issue 2: Allegation of non-disclosure of material facts leading to escaped assessment
The core contention revolved around the allegation that the assessee had not fully and truly disclosed all material facts during the assessment proceedings, leading to an escape of income. The Assessing Officer claimed that the assessee had under-reported income and over-reported losses by not accurately reflecting the consolidated profits of all units in the computation of taxable income. This alleged non-disclosure formed the basis for the re-assessment notice. The court examined the validity of this claim and the adequacy of reasons provided for reopening the assessment.

Issue 3: Reliance on audit report as the basis for re-assessment notice
The court scrutinized the reliance placed by the revenue on an audit report as the primary basis for initiating re-assessment proceedings. It was argued by the petitioner that the re-assessment notice amounted to a change of opinion and lacked tangible material to justify reopening the concluded scrutiny assessment. The court emphasized that audit reports alone cannot serve as sufficient grounds for reopening assessments, citing established legal precedents. The judgment highlighted that the mere observations in an audit report, without independent verification or additional material, cannot form the sole basis for reopening assessments.

In conclusion, the court allowed the writ petition, quashing the impugned notice and subsequent proceedings stemming from the re-assessment. The judgment underscored the importance of tangible material and adherence to legal principles in initiating re-assessment proceedings, emphasizing that audit reports alone are insufficient grounds for reopening assessments.