TMI Blog2014 (12) TMI 1114X X X X Extracts X X X X X X X X Extracts X X X X ..... is devoid of any application of mind on the part of AO - AO has no reason to believe that income has escaped assessment or the assessee has filed inaccurate particulars of income as no new facts are brought on record - all the expenses claimed by the assessee have been verified in detail in the original assessment therefore the reopening of assessment to disallow the same merely on the basis of audit report is not justifiable. The Tribunal proceeded to consider the correctness of the submission of the departmental representative that compliance u/s 148 was made in this case and by relying on the audit report - The audit objections could form the basis for initiation of the proceedings was the Department's stand and further that reasons are recorded in the letter which has been addressed by the AO to the Commissioner - an opinion was given by the audit party with regard to the receipts from the occupation of conference hall and rooms - in every case, the ITO must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax-12, Mumbai, the assessments were reopened. Since the ITAT restored the addition made under section 69C of the IT Act for reverification, the Assessing Officer merged the reopening with the directions of the ITAT. A notice under section 148 of the IT Act was issued and served upon the Assessee, in response to which, return of income was filed on 29th November, 2006. This was objected to on the ground that all the points raised by the audit party were considered at the first assessment stage itself. The Assessee contended that it had filed detailed explanation in relation to the expenditure and also furnished all details. The Assessing Officer, after examining the records and the documents filed by the Assessee, allowed the expenses as revenue expenditure and merely because the audit party has raised objections in relation to the allowability of the expenditure, the assessment cannot be reopened on the basis of change of opinion. Additionally, it was contended that the Assessing Officer has not recorded his independent satisfaction. That is how the process is vitiated in law. However, an order was passed by the Assessing Officer rejecting these submissions on 28th May, 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of audit report is not justifiable. Therefore, ground 1 is allowed. 4. Mr. Chhotaray appearing for the Revenue submits that the substantial question of law is whether the Tribunal was justified in questioning the reassessment because the reasons therefor have not been assigned and independent of the audit objections . Mr. Chhotaray endeavors to submit that the objections raised by the audit party are enough and to undertake the exercise as undertaken by the Assessing Officer. In that he relied upon a Judgment of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. P. V. S. Beedies Pvt.Ltd. reported in (1999) 237) ITR 13 . He also relied upon an earlier Judgment in the case of Kalyanji Mavji and Co. vs. Commissioner of Income Tax, West Bengal II reported in (1976) 102 ITR 287 . 5. Ms. Sathe appearing for the Assessee, on the other hand, submits that the Appeal does not raise any substantial question of law. She submits that the audit party objections could form the basis for reopening of the assessment is what is urged before the Tribunal and before us by the Revenue. However, that alone would not suffice. The requirement of recording inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment. The reopening of a case on the basis of factual error pointed out by the audit party was permissible under law. In recording that conclusion, the Supreme Court held as under: 1. These cases relate to Assessment Years 1974-75 and 1975-76. The relevant accounting years ended on 31-3-1974 and 31-3-1975 respectively. Originally the assessment was completed on 21-6-1977. There were various other proceedings which ended in the Tribunal. The Tribunal after considering all aspects of the cases remanded the cases back to the Income Tax Officer for passing a fresh order in accordance with law. One of the points raised before the Income Tax Officer was that of justification for reopening of the assessment. It was pointed out that reopening has been done on the basis of the report made by the Audit Department. The contention which found favour with the Tribunal was that reopening under Section 147(b) is not permissible on the basis of a report given by the Audit Department. This view was also taken by the High Court. 2. We have considered the matter. It appears that the reopening was done because in the original assessment donations made to a body known as P.V.S. Memorial Char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of the legal provision, namely, section 148 of the IT Act and the satisfaction that is required to be recorded therein was not in issue in the decisions relied upon by Mr. Chhotaray. Section 147 of the IT Act enables the Assessing Officer to record his reasons and for a belief that any income chargeable to tax has escaped assessment for any year, he may subject to the provisions of section 148 and 153 of the IT Act, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recommpute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. We are not concerned with the proviso in this case and the Explanations which have been inserted in section 147. What is required by law further is issuance of notice, where income has escaped assessment. That is a provision and to be found in section 148. Subsection (1) thereof states that before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the Assessee a notice requiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in that case found that the Assessing Officer/Income Tax Officer had before him a view of the internal audit party that the money realised by the Assessee on account of the occupation of its conference hall and rooms should not have been assessed as income from business. It should have been made under the head income from property . The Income Tax Officer treated the contents of the report as 'information' in his possession for the purpose of section 147(b) of the IT Act and reassessed the income on that basis. The ITAT noticed a conflict of judicial opinion on the question whether the internal audit report could be treated as information for the purpose of section 147(b) and therefore sought a reference. Thereafter, the Hon'ble Supreme Court held that an assessment proceeding is a quasi judicial proceeding. It acquires finality on the assessment order being made. The finality of such an order can be disturbed only in proceedings and within the confines, provided by law. An appeal, revision and rectification are proceedings in which the finality may be questioned. The provision enabling reassessment is then referred and which is peculiar, na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Conditions of Service) Act, 1971. And para 3 warns that the audit department should not in any way substitute itself for the revenue authorities in the performance of their statutory duties Paragraph 4 declares: 4. Audit does not consider it any part of its duty to pass in review the judgment exercised or the decision taken in individual cases by officers entrusted with those duties, but it must be recognized that an examination of such cases may be an important factor in judging the effectiveness of assessment procedure . It is, however, to forming a general judgment rather than to, the detection of individual errors of assessment etc., that the audit enquiries should be directed. The detection of individual errors is an incident rather than the object of audit. Other provisions stress that the primary function of audit in relation to assessments and refunds is the consideration whether the internal procedures are adequate and sufficient. It is not intended that the purpose of audit should go any further. Our attention has been invited to certain provisions of the Internal Audit Manual more specifically defining the functions of internal audit in the incometax depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. In short, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer. It is his belief and the statutory exercise contemplated by section 147(1) and 148(2) must be carried out by him. That requirement is not dispensed with merely because he has before him the views of the audit party. 11. We do not see, how the Tribunal, in the case before us, while relying on such decision, erred in law in reversing the order of the Commissioner of Income Tax (Appeals). We do not multiply this Judgment with further decisions and cited by Ms. Sathe. Suffice it for our purpose that if an independent exercise expected to be undertaken by the Assessing Officer has not been undertaken, then, the Tribunal was in no error in setting aside the proceedings that were initiated by him. The Tribunal has rightly held that once the audit party raised objections, one of which was not accepted, then, the Assessing Officer was expected and in the given facts and circumstances to record reasons for his belief. Those rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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