Court Quashes Reassessment Proceedings Initiated Solely on Audit Objections

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Case Name:

Shree Ram Builders vs Assistant Commissioner of Income Tax (High Court of Gujarat)

Special Civil Application No. 17581 of 2014

Key Takeaways:

1. Reassessment proceedings initiated solely on audit objections, without independent assessment by the Assessing Officer, are not sustainable.

2. The Assessing Officer's attempt to justify the original assessment while simultaneously initiating reassessment proceedings indicates a lack of subjective satisfaction.

3. The court's decision reinforces previous rulings on similar issues, emphasizing the importance of the Assessing Officer's independent judgment in initiating reassessment proceedings.

Issue:

Can reassessment proceedings be sustained if they are initiated solely based on audit party objections and without independent application of mind by the Assessing Officer?

Facts:

1. The assessee, Shree Ram Builders, filed a return of income for A.Y. 2009-2010, which was finalized by order dated 09.12.2010.

2. The income was assessed under Section 143(3) (of Income Tax Act, 1961) at Rs.49,62,230/-.

3. Within four years from the assessment year, the assessee was served with a notice under Section 148 (of Income Tax Act, 1961) on 04.03.2014.

4. The assessee requested reasons for reopening the assessment and subsequently raised objections against the reopening.

5. The Assessing Officer disposed of the objections on 18.09.2014.

6. The assessee filed a petition under Article 226 of the Constitution of India challenging the reassessment proceedings.

Arguments:

1. The assessee argued that:

a. The reopening was a change of opinion by the Assessing Officer, which is not permissible.

b. The reassessment proceedings were initiated solely based on audit objections.

2. The Department denied that the reopening was done because of audit objections.

Key Legal Precedents:

1. Commissioner of Income-Tax, Ahmedabad–IV V/s. Shilp Gravures Ltd. reported in (2013) 40 Taxmann 309 (Gujarat)

2. Vodafone West Ltd. V/s. Assistant Commissioner of Income-tax reported in (2013) 37 Taxmann 158 (Gujarat)

3. Mayur Wovens Pvt. Ltd. V/s. Income Tax Officer & 1 in Special Civil Application No. 3707 of 2014 with 3708 of 2014

These precedents established that reassessment proceedings initiated solely at the instance of the audit party, without independent application of mind by the Assessing Officer, cannot be sustained.

Judgement:

1. The court found that the Assessing Officer had initially justified the original assessment order and stated there was no substance in the audit objections.

2. The reassessment proceedings were initiated thereafter at the instance of the audit party and solely on the audit objections.

3. Even after initiating reassessment proceedings, the Assessing Officer tried to justify the original assessment order.

4. The court concluded that the subjective satisfaction of the Assessing Officer while reopening the assessment was vitiated.

5. Based on previous decisions in similar cases, the court quashed and set aside the impugned reassessment proceedings.

FAQs:

Q1: What was the main reason for quashing the reassessment proceedings?

A1: The main reason was that the reassessment was initiated solely based on audit objections without independent application of mind by the Assessing Officer.

Q2: Can the Income Tax Department initiate reassessment proceedings based on audit objections?

A2: While audit objections can be considered, the Assessing Officer must independently apply their mind and form their own opinion before initiating reassessment proceedings.

Q3: What is the significance of this judgment for taxpayers?

A3: This judgment protects taxpayers from arbitrary reassessment proceedings and emphasizes the need for proper justification and independent assessment by tax authorities before reopening closed assessments.

Q4: Does this judgment prevent all reassessment proceedings?

A4: No, it only prevents reassessment proceedings that are initiated solely based on audit objections without independent assessment by the Assessing Officer.

Q5: What should taxpayers do if they receive a reassessment notice?

A5: Taxpayers should carefully review the reasons for reassessment and, if applicable, raise objections if they believe the reassessment is not based on the Assessing Officer's independent judgment.

1. Rule. Shri Nitin Mehta, learned advocate waives service of notice of Rule on behalf of the respondent.

2. In the facts and circumstances of the case and with the consent of the learned advocates appearing on behalf of the respective parties, the present petition is taken up for final hearing today.

3. By way of this petition under Article 226 of the Constitution of India, the petitioner – assessee has prayed for an appropriate writ, order or direction to quash and set aside the impugned reassessment proceedings initiated under Section 147 (of Income Tax Act, 1961)/148 of the Income Tax Act (hereinafter referred to as the ‘Act’).

4. That the assessee filed return of income for A.Y.2009- 2010 which came to be finalized by order dated 09.12.2010. It appears that the assessee filed return of income declaring income of Rs.43,87,671/- and by order of assessment, the income was assessed under Section 143(3) (of Income Tax Act, 1961) at Rs.49,62,230/-. That thereafter, within a period of four years from the date of assessment year, the assessee was served with the notice under Section 148 (of Income Tax Act, 1961) on 04.03.2014. That the assessee asked for the reasons recorded for reopening of assessment vide communication dated 05.04.2014. That thereafter, the assessee was served with the reasons recorded for reopening of the assessment and for notice under Section 148 (of Income Tax Act, 1961). That the assessee raised objections against reopening of assessment for A.Y. 2009-2010 mainly contending, inter alia, that reopening of the proceedings is nothing but a change of opinion by the Assessing Officer which is not permissible. It was also contended that the reopening of assessment proceedings is at the instance of the audit party and on the basis of the audit objections. That thereafter, vide communication dated 18.09.2014, the Assessing Officer has disposed of the objections against the reasons recorded for reopening of assessment proceedings. Hence, the petitioner – assessee has preferred the present petition under Article 226 of the Constitution of India challenging the initiation of reopening of the assessment for A.Y. 2009-2010.

5. Shri Umaidsingh Bhati, learned advocate appearing for the assessee has vehemently submitted that the reopening of assessment is nothing but a change of opinion by the Assessing Officer on a particular issue on which, the assessment proceedings are reopened. It is submitted that the assessment proceedings were concluded by the Assessing Officer after detailed questionnaire and thereafter, the Assessing Officer disallowed expenditure of Rs.1,19,00,000/- being labour charges paid to the sub-contractors. It is submitted that the assessee did furnish all the particulars with respect to VAT expenses which came to be considered by the Assessing Officer and thereafter, disallowed the expenditure of Rs.41,23,784/- under Section 43B (of Income Tax Act, 1961). It is submitted that therefore, the reopening of assessment for the reasons recorded is nothing but change of opinion by the Assessing Officer and, therefore, the reopening of assessment is not permissible.

5.1. It is further submitted by Shri Bhati, learned advocate appearing for the assessee that in any case, the reassessment proceedings are on the basis of the audit objections raised by the audit party only. It is submitted that though, in the objections against reopening of assessment, it was specifically mentioned that as the reassessment proceedings are on the basis of the audit objections raised by the audit party and, therefore, the same is not permissible, the Assessing Officer while dealing with the objections against the reasons recorded for reopening of the assessment, has deliberately not dealt with the same. It is submitted that even in the present petition also, though it is specifically mentioned that the reassessment proceedings are initiated on the basis of the audit objections raised by the audit party, even in the affidavit-in-reply, the same has not been dealt with by the Department. Relying upon the decision of this Court in the case of Commissioner of Income-Tax, Ahmedabad–IV V/s. Shilp Gravures Ltd. reported in (2013)40 Taxmann 309(Gujarat), in the case of Vodafone West Ltd. V/s. Assistant Commissioner of Income-tax reported in (2013)37 Taxmann 158 (Gujarat) and the decision of the Division Bench of this Court in the case of Mayur Wovens Pvt. Ltd. V/s. Income Tax Officer & 1 in Special Civil Application No.3707 of 2014 with 3708 of 2014, it is requested to allow the present petition and quash and set aside the impugned reassessment proceedings.

6. At the outset, it is required to be noted that after hearing at length the learned advocate appearing for the petitioner on the issue whether the reassessment proceedings for the reasons recorded can be said to be change of opinion by the Assessing Officer or not?, after considering the material on record, we were not satisfied that the reassessment proceedings for the reasons recorded can be said to be change of opinion.

6.1. However, the petition is to succeed on the second ground i.e. the contention of the learned advocate for the petitioner that the reassessment proceedings are on the basis of the audit objections raised by the audit party. At the outset, it is required to be noted that though the objections raised by the assesese against the reassessment proceedings and against the reasons recorded, the Assessing Officer had not dealt with the aforesaid aspect at all though, in the affidavit-in-reply filed by the Assessing Officer it is denied that reopening is being done because of the audit objections and, therefore, reopening is bad in law as it is not based on the opinion of the respondent. However, to satisfy ourselves whether the reassessment proceedings have been initiated solely at the instance of the audit party and solely on the audit objections, we called for the original file from the office of the Assessing Officer. Shri Mehta, learned counsel appearing for the Revenue has produced the relevant files from the office of the Assessing Officer. On perusal of the files and notings and even reply filed by the Assessing Officer, it appears that as such, the Assessing Officer justified the original assessment order and categorically stated that there is no substance in the audit objections. Therefore, as such, from the relevant documents, it appears that the reassessment proceedings have been initiated thereafter at the instance of the audit party and solely on the audit objections. It is also found that as such, the Assessing Officer tried to sustain his original assessment order and even submitted to the audit party to drop the objections. Under such factual aspects, the present petition is required to be considered.

6.2. Not only that, even subsequently also, i.e. even after the initiation of the reassessment proceedings, by communication dated 23.01.2015, the Assessing Officer- Deputy Commissioner of Income Tax Circle-3(3), Ahmedabad has tried to support/justify the original assessment order and has categorically stated that the audit objections are not acceptable as the objections are raised on presumption and surmises. If that be so, then it is worst. On one hand, the Assessing Officer is trying to justify/support the original assessment order and on another hand, he is reopening the assessment and/or initiating the reassessment proceedings. Therefore, as such, the subjective satisfaction of the Assessing Officer while reopening the assessment is vitiated.

7. The issue involved in the present petition is squarely covered by the decisions of the Division Bench of this Court in the case of Shilp Gravures Ltd. (Supra), in the case of Vodafone West Ltd. (Supra) and in the case of Mayur Wovens Pvt. Ltd. (supra) by which a view is taken that if the reassessment proceedings are initiated merely and solely at the instance of the audit party and when the Assessing Officer tried to justify the Assessment Orders and requested the audit party to drop the objections and there was no independent application of mind by the Assessing Officer with respect to subjective satisfaction for initiation of the reassessment proceedings, the impugned reassessment proceedings cannot be sustained and the same deserves to be quashed and set aside.

8. In view of the above and for the reasons stated hereinabove, the impugned reassessment proceedings are required to be quashed and set aside and accordingly, the present petition is allowed. The impugned reassessment proceedings for A.Y. 2009-2010 are hereby quashed and set aside on the aforesaid ground alone. Rule is made absolute to the aforesaid extent. However, in the facts and circumstances of the case, there shall be no order as to costs.

(M.R.SHAH, J.)

(S.H.VORA, J.)