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2016 (1) TMI 234 - GUJARAT HIGH COURT

2016 (1) TMI 234 - GUJARAT HIGH COURT - TMI - Reopening of assessment - reopening of the assessment is under the directives of the audit party - Held that:- Bare perusal of the correspondence reveals that the assessment was completed and, upon scrutiny, the internal audit party found certain errors. These errors were highlighted and pointed out to the Assessing Officer for his consideration. The Assessing Officer in his letter dated 03.12.2013 in no uncertain terms wrote back to the audit party .....

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stand of the Assessing Officer, the audit party persisted with the issues. On 14.02.2014, the audit party did not accept the view of the Assessing Officer and, as noted above, directed the Assessing Officer to take appropriate action and submit an action taken report on finalization of the proceedings, with supporting evidences through proper channel.

This was a clear directive to the Assessing Officer not only to initiate action but also to finalize the same and report finalization .....

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uld be to reopen the assessment under section 147 of the Act which is contrary to his earlier view where on a limited ground of depreciation he had advocated measures of rectification.- Decided in favour of assessee - Special Civil Application No. 5440 of 2015 - Dated:- 30-11-2015 - Akil Kureshi And Mohinder Pal, JJ. For the Appellant : Mr B S Soparkar, Adv For the Respondent : Mrs Mauna M Bhat, Adv JUDGMENT ( Per : Honourable Mr. Justice Akil Kureshi ) 1. Petitioner has challenged notice dated .....

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anies Act and is regularly assessed to tax. For the assessment year 2010-2011, the petitioner filed return of income which was taken in scrutiny by the Assessing Officer. The Assessing Officer framed assessment under section 143(3) of the Income Tax Act, 1961 (for short, "the Act") on 22.03.2013. To reopen such assessment previously framed under scrutiny, the Assessing Officer issued the impugned notice on 28.03.2014. The reasons recorded by the Assessing Officer for issuing such notic .....

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nal services hence not from interest payment. As per Form No.26Q placed on record TDS on interest on term loan has been made of ₹ 53,02,142/- which suffices to interest payment of ₹ 5,12,01,542/-. The remaining interest expense of term loan which works out to ₹ 13,82,25,530/- (189527072 - 51301542) needs to be disallowed u/s.40a(ia) of the Act....." 2.1 The second ground was of excess claim of depreciation and read as under: "Excess claim of depreciation: In the state .....

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the expenses incurred during the year and included in the WIP. The assessee's WIP therefore requires to be reduced to the extent of depreciation of ₹ 2,88,369/- claimed therein whereas the assessee has disallowed the depreciation of ₹ 2,43,512/- instead of ₹ 2,88,369/- in computation of income filed along with revised return of income. Therefore, the difference of ₹ 44,857/- (Rs.2,88,369 - ₹ 2,43,512) is required to be disallowed...." 2.2 The third ground w .....

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. It would not be out of place to point out that the income to be later on earned from the project would be income from business and would be thus covered u/s.28 of the Act whereas, interest income earned from surplus funds before implementation of the project would be charged as interest from other sources and would be covered u/s.56 of the Act. The entire interest income of ₹ 1,52,44,044/- should have therefore been assessed to tax as against ₹ 13,63,547/- offered by the assessee. .....

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Income Tax Act is issued". 4. The petitioner raised objections under communication dated 01.07.2014 to the notice of reopening. Such objections, however, were rejected by the Assessing Officer by his order dated 20.08.2014. The petitioner has, therefore, filed this petition challenging the notice of reopening issued by the Assessing Officer. 5. Learned counsel for the petitioner drew our attention to the correspondence on record to contend that the notice for reopening has been issued only .....

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notice of reopening was issued by the Assessing Officer at the instance of the audit party, the Court held that such notice was impermissible. Counsel pointed out that this view was reiterated in case of Commissioner of Income-tax, Ahmedabad v. Shilp Gravures Ltd. Reported in (2013) 40 Taxmann.com.309 (Gujarat). Counsel also relied on the decision of Division Bench of this Court in case of Damodar H.Shah v. Assistant Commissioner of Income-tax reported in (2000) 245 ITR 774 in which it is obser .....

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tiate his decision. She relied on the decision of the Supreme Court in case of Commissioner Of Income Tax vs P.V.S. Beedies Pvt. Ltd. reported in 237 ITR 13. 7. Having heard learned counsel for the parties and having perused the documents on record, we find that the law on the subject is sufficiently clear. It is by now well settled by series of judgments that exercise of issuing notice for reopening by the Assessing Officer has to be based on reasons for reopening to be recorded by him. Such re .....

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observed as under: "..... The ratio fully governs the present case and the record illuminates the failure of the AO to adhere to this principle while issuing notice under s. 148 in the present case. It is true that satisfaction of the AO for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of .....

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apers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be abuse of such authority. As the aforesaid decision of the Supreme Court indicates that though audit objection may serve as information, the basis of which the ITO can act, ultimate action must depend directly and solely on the formation of belief by the ITO on his own where such information passed on to him by the audit that income has escaped assess .....

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ers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdict .....

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uot; 8. This view flowing from the judgment of the Supreme Court in case of Indian & Eastern Newspaper Society (supra) and elaborated by this Court in Adani Exports (supra) has been consistently followed by this Court. 9. We are not unmindul of the decision of the Supreme Court in case of P.V.S. Beedies Pvt. Ltd. (supra) where a distinction has been drawn in a case wherein it was held and observed as under: "We are of the view that both the Tribunal and the High Court were in error in h .....

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missible after audit party expresses an opinion on a question of law is now being considered by a larger Bench of this Court. There can be no dispute that the audit party is entitled to point out a factual error or omission in the assessment. Reopening of the case on the basis of a factual error pointed out by the audit party is permissible under law. In view of that we hold that reopening of the case under Section 147(b) in the facts of this case was on the basis of factual information given by .....

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tiny by the internal audit party. On 24.09.2013, the audit party wrote to the Assessing Officer in which following three issues were raised: (1) disallowance under section 41-A of the Act, (2) excess claim of depreciation, and (3) interest earned from associated concern. The audit party outlined its objections on these three counts. 12. In response to such communication, the Assessing Officer replied to the audit party on 03.12.2013 and contended in no uncertain terms giving detailed reasons tha .....

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the assessee and facts of the case, it is seen that the mistake is being apparent from the record and disallowance of depreciation should be made of ₹ 2,88,369 instead of ₹ 2,43,512. Therefore, such mistake may be rectified by passing order under section 154 of the I.T.Act". 12.1 In the concluding portion of the said communication, the Assessing Officer stated as under: "In view of the above, the audit objection raised by the internal audit party on various issues is not ac .....

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fication is required. In this regard, I am directed to state that the AO's reply is acceptable with regard to issue (1)(b) & (c) of this report. As regard the reply submitted in respect of issue (1) (a) regarding non-deduction of TDS from interest payment of ₹ 18,95,27,072/- made to IFCI Ltd., the same is not acceptable due to the following reasons: (i) IFCI Ltd. ceases to fall under the category provided in section 194A3(iii)(b) following its Repeal Act in 1993 and since then is a .....

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) & © of the report is accepted in view of details submitted & are hence treated as dropped. On issue (ii), AO has stated that the mistake in respect of excess depreciation allowed may be rectified by passing order u/s 154 of the I.T.Act. On issue (III) regarding interest earned from associate concern, the reply submitted in the A.O's report is not acceptable as the assessee has snot been able to prove that earning such interest was the company's normal business activity or .....

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ii) of Instruction No.3/2007, to this office for consideration of the objections to treated as settled/dropped or otherwise." 13. Learned counsel for the revenue pointed out from original records that in response to such letter of the audit party, the Assessing Officer had replied on 20.02.2014 (a copy of which is taken on record). Perusal of such letter shows that, in the first portion the Assessing Officer has recorded the stand of the audit party on different contentious issues. After re .....

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he most suitable remedial action, in my opinion, would be reopening of assessment u/s.147 of the IT Act. Therefore, necessary approval for the same may kindly be granted, if deemed fit." 14. Bare perusal of the correspondence reveals that the assessment was completed and, upon scrutiny, the internal audit party found certain errors. These errors were highlighted and pointed out to the Assessing Officer for his consideration. The Assessing Officer in his letter dated 03.12.2013 in no uncerta .....

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er dated 03.12.2013. Despite the clear stand of the Assessing Officer, the audit party persisted with the issues. On 14.02.2014, the audit party did not accept the view of the Assessing Officer and, as noted above, directed the Assessing Officer to take appropriate action and submit an action taken report on finalization of the proceedings, with supporting evidences through proper channel. This was a clear directive to the Assessing Officer not only to initiate action but also to finalize the sa .....

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