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2015 (9) TMI 753 - ALLAHABAD HIGH COURT

2015 (9) TMI 753 - ALLAHABAD HIGH COURT - TMI - Reopening of assessment - certain expenses were not allowable under Section 36(1)(viia) - reliance on opinion rendered by the audit party - Held that:- In the instant case, we find that there has been an assessment under Section 143(3) of the Act. The books of account were produced and the same were scrutinized. The profit and loss account was checked and only thereafter net loss of ₹ 66,70,410/- was determined. Merely, because the audit repo .....

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the opinion rendered by the audit party, the Income Tax Officer could not assume jurisdiction to issue a notice under Section 148 of the Act. He must, on its own wisdom, come to a conclusion and hold a belief that an income had escaped assessment to tax. Since this belief was not recorded by the Assessing Officer the issuance of the notice was done mechanically without any application of mind. Such action amounts to change of opinion, which is not permissible. Since the foundational requirement .....

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e Tarun Agarwala And Hon'ble Surya Prakash Keserwani, JJ. ORDER (Per: Tarun Agarwala, J.) The petitioner has challenged the reassessment proceeding under Sections 147 and 148 of the Income Tax Act (hereinafter referred to as the Act). For the said assessment year 2007-08, the assessee filed a return declaring a net loss of ₹ 7,48,180/-. The return was processed under Section 148(1) of the Act, but subsequently, the case was taken under scrutiny and a notice under Section 148(2) of the .....

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an objection being filed, the proceedings were dropped and, thereafter, a notice dated 23.02.2011 was issued under Section 148 of the Act contending that the internal Revenue Audit Party in its report had submitted that the petitioner had debited an amount of ₹ 5,87,16,00/- and ₹ 31,63,868/-, which was not allowable under Section 36 (1) (viia) of the Act and, therefore, the Department has "reasons to believe" that an income of ₹ 6,18,79,868/- had escaped assessment. .....

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e reassessment proceedings could not be initiated on the basis of an audit report. According to the learned counsel, such audit report does not amount to "information" nor does it give any "reasons to believe" that income had escaped assessment to tax. The learned counsel contended that on the basis of an audit report, assessment proceedings could not be reopened, inasmuch as the Assessing Officer had not applied its own mind nor came to any conclusion that based on such audi .....

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ew Delhi Vs. Commissioner of Income Tax, New Delhi, 1979 AIR SC 1960, Commissioner of Income Tax Vs. Lucas T.V.S.Ltd, 234 I.T.R. 296 (Mad.), Commissioner of Income Tax Vs. Lucas T.V.S. Ltd., 249 I.T.R. 306 SC and Indian Oil Corporation Limited Vs. Income Tax Officer, Central Circle V, Calcutta, AIR 1987 SC 1897. On the other hand, the learned counsel for the Department submitted that the condition precedent for initiating reassessment proceedings existed in the instant case and that the Assessin .....

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ge from 1.4.1989. The learned counsel in support of his submission has relied upon a decision of the Supreme Court in Assistant Commissioner Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., 2007 AIR SC 2163. Having heard the learned counsel for the parties, we find that Section 147 of the Act authorises and permits the Assessing Officer to assess or reassess the income chargeable to tax, if he has reasons to believe that the income for any assessment year has escaped assessment. The phrase "reas .....

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on 147 of the Act laid down the circumstances under which income escaped assessement could be assessed or reassessed. Section 147 contemplated two conditions which were required to be satisfied, namely, that the Assessing Officer must have reasons to believe that income, profit or gain chargeable to tax have escaped assessment, and secondly, he has reasons to believe that such escapement had occurred by reason of omission or failure on the part of the assessee to disclose fully or truly all mate .....

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ase is covered by main section and not by the proviso. In the light of the aforesaid, the Supreme Court while considering the provision of Section 147 of the Act, as existed prior to 01.04.1989, held in Indian And Eastern Newspaper Society, New Delhi (Supra) as follows: "9. In that view, therefore, when section 147 (b) of the Income Tax Act is read as referring to "information" as to law, what is contemplated is information as to the law created by a formal source. It is law, we m .....

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g a check over the arithmetical accuracy of the computation of income and the determination of tax, and now, because of the audit of income-tax receipts being entrusted to the Comptroller and Auditor-General of India from 1960, it is intended as an exercise in removing mistakes and errors in income tax records before they are submitted to the scrutiny of the Comptroller and Auditor-General. Consequently, the nature of its work and the scope of audit have assumed a dimension co-extensive with tha .....

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is entitled to examine the accounts in order to ascertain whether the rules and procedures are being duly observed, and he is required, upon such examination, to submit a report. His powers in respect of the audit of income-tax receipts and refunds are outlined in the Board's Circular No. 14/19/ 56-II dated July 28, 1960. Paragraph 2 of the Circular repeats the provisions of section 16 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. And para .....

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rocedure. 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 fu .....

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of a declaration of law binding on the Income Tax Officer. Whether it is the internal audit party of the Income Tax Department or an audit party of the Comptroller and Auditor- General, they perform essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of income tax authorities. The Income Tax Act does not contemplate such power in any internal audit organisation of the Income Tax Department; it recognises it in .....

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, 1961. 12. But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the Income Tax officer to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communicator of the law is carefully maintained, the confusion which often results in applying section 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the .....

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It is not a declaration by a body authorised to declare the law. That part alone of the note of an audit party which mentions the law which escaped the notice of the Income Tax officer constitutes "information" within the meaning of section 147 (b); the part which embodies the opinion of the audit parts in regard to the application or interpretation of the law cannot be taken into account by the Income Tax Officer. In every case, the Income Tax officer must determine for himself what i .....

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be made directly and solely by the Income Tax officer. 14. Now, in the case before us, the Income Tax officer had, when he made the original assessment, considered the provisions of sections 9 and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion of material already considered by him. The Revenue contends that it is open to him to do so, and on that basis to reopen the assessment under section 147(b). Reliance is placed on .....

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that if, on reappraising the material considered by him during the original assessment, the Income Tax officer discovers that he has committed an error in consequence of which income has escaped assessment it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this Court in Kamal Singh v. Commissioner of Income Tax (supra), Commissioner of Income Tax v. Raman .....

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report was intended for the purpose of satisfying itself with regard to the sufficiency of the rules and the procedures prescribed for the purpose of securing an effective check on the assessment, collection and proper allocation of revenue and to ascertain whether the rules and the procedures were duly observed. The Supreme Court further held that whether it is the internal audit party of the Income Tax Department or an audit party of Comptroller and Auditor General, they perform essentially a .....

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the Income-tax Officer and that the Income Tax Officer must determine as to what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which had not come to his notice he could reasonably believe that income had escaped assessment. The Supreme Court held that the basis of this belief must be recorded. In the light of the aforesaid decision, the Gujarat High Court in Adani Exports Vs. Deputy Commissioner of Income Tax (Assessments),240 ITR 224 .....

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