[Opinion] Reassessment Proceedings on the Basis of Audit Objections

Anil Chachra – [2025] 175 taxmann.com 166 (Article)

1. Brief Facts

Pre 01-04-2021 –’Era’

Reassessment is allowed if the Assessing Officer [“herein referred to as AO“] has reasons to believe [substituted with ‘information’ w.e.f. 01-04-2021] that any income chargeable to tax has escaped assessment for any assessment year he may subject to the provisions of section 148 to 153 assess or reassess such income.

1.1 In this write up we will discuss about the role of the audit party/audit objections based on which the reassessment can be initiated or assessment can be re-opened.

1.2 It is a settled law that in every case, the Assessing Officer 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 come to his notice he can reasonably believe that income had escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered 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. Therefore, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Assessing Officer.

2. Analysis Through Judicial Pronouncements

2.1 Audit Observations Cannot be the Information Under Section 147

Reliance is placed on judicial prouncements wherein it was held that audit observations cannot be the information under section 147 of the Act.

(i) The Hon’ble Supreme Court in Indian & Eastern Newspaper Society [1979] 119 ITR 996 [SC] has held that:

“Therefore, whether considered on the basis that the nature and scope of the functions of the internal audit organisation of the Income-tax Department are co-extensive with that of receipt audit or on the basis of the provisions specifically detailing its functions in the Internal Audit Manual Vol. 2, we hold that the opinion of an internal audit party of the Income-tax Department on a point of law cannot be regarded as “information” within the meaning of section 147(b) of the Income-tax Act, 1961″

(ii) The Hon’ble Bombay High Court in PCIT v. Yes Bank Ltd. [2022] 135 Taxmann.com 161 [Bom] relying on the Indian & Eastern Newspaper Society case has held that:

“It is settled law that the opinion of the Internal Audit party of the Income Tax Department cannot be recorded as information within the meaning of section 147(b) of the Act for the purpose of opening the assessment. The courts have also held that notice of reassessment cannot be issued based on information received from audit objection. [Emphasis Supplied]

2.2 Reassessment is Based on Audit Objections Will be Borrowed Satisfaction, Without Application of Mind Not Allowable

(i) The Hon’ble Gujarat High Court in the case of Adani Power Maharashtra Ltd. vs ACIT [2023] 454 ITR 720 [Guj] against which the SLP dismissed by Hon’ble Supreme Court [2024] 165 Taxmann.com 455 [SC] has held that reassessment cannot be opened merely on the basis of audit objection:

“On the contrary, it is covered by those decisions which have been discussed in reopening on the part of the Assessing Officer essentially on the audit party opinion and not on the basis of his own conviction. There is no material worth the name emerging that to indicate any independent application of mind could be noticed. On the contrary, there are glaring facts which have been pointed out that the Assessing Officer had no subjective satisfaction while issuing the notice of reopening. Therefore also, in this background, it is a settled law that any notice of reopening issued by the Assessing Officer without any independent application of mind would lay the validity.

it quite clear that the Assessing Officer himself initiated the reassessment proceedings without his own conviction and only at the instance of the audit party which was termed to be a colourable exercise of jurisdiction and the same was not sustained.

(ii) The Hon’ble Bombay High Court in Jainam Investments v ACIT [2021] 439 ITR 154 [Bom] and which is followed in Oriental Aromatics Ltd. vs DCIT [2023] 154 Taxmann.com 437 [Bom] has held that:

In the circumstances, it is viewed that, the reasons for re-opening assessment were not that of the Assessing Officer alone issuing notice but he has acted merely on the dictates of another person for issuing the notice, i.e., audit department. Therefore, impugned notice dated has to be quashed and set aside. [Emphasis Supplied]

2.3 Reassessment Based on Audit Objections Would Be Change of Opinion Would not Allowable

A mere change in the opinion would not confer jurisdiction upon the Assessing Officer to initiate a proceeding under section 147. AO has power to reassess not power to review as held in Kelvinator of India Limited [2010] 187 Taxmann.com 312 [SC].

(i) The Hon’ble Delhi High Court in PCIT vs. Network Programme India Ltd. [2023] 154 Taxmann.com 592 [Delhi] has held that

There is no dispute about the fact that the original assessment was completed under section 143(3). Given this factual position, the Tribunal was right that this was a case of change of opinion and, therefore, the reassessment proceeding could not have been triggered merely on the basis of audit objection, without any fresh tangible material. [Emphasis Supplied]

(ii) The Hon’ble Bombay High Court in Bennett Coleman & Co Ltd. v DCIT [2022] 145 Taxmann.com 228 [Bom]

Moreover, it is not at all a case that petitioner has not disclosed anything in his response. Petitioner had given the full particulars. The stand taken by petitioner was also accepted by respondents on merits. The Assessing Officer even disagreed with the audit objections but on second thought, to the objections from the auditors he has re-opened the assessment. In our view, re-opening of the assessment without any basis and merely change of opinion is not permissible while exercising the powers under section 147 read with section 148 of the Act. [Emphasis Supplied]

(iii) The Hon’ble Bombay High Court in Castrol India Ltd. v DCIT [2024] 161 Taxmann.com 75 [Bom] wherein it was held that

The documents on record also indicate that the Audit Wing of the Department raised certain objections to the original assessment order including the issue of deduction under section 80G. It is seen that the AO justified the original assessment order to the audit party without accepting any adjustment to the same would lead to change in Opinion and not allowable. [Emphasis Supplied]

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