The Hindu Business Line : Audit objections and reopening of assessment

To allow any assessment to be reopened based on the opinion of the revenue audit or the Ministry of Law or the Central Board of Direct Taxes would mean depriving the assessment orders of their finality. This would introduce a dangerous element of uncertainty in the administration of a fiscal law, says H. P. Ranina.

ONE OF the common reasons for reopening assessments under Section 147 of the Income-Tax Act, 1961 is that the audit cell of the IT Department has raised an objection to the assessment being made in a particular manner. Is such action based on audit objections valid in law? This is a question which has been agitated before courts time and again.

In cases where the assessee has filed a return of income, the Assessing Officer may take action under Section 147 if he has reason to believe that the income has escaped assessment. Such reason need not be in consequence of information received after the original assessment. However, to preserve the finality of an assessment, the amended law should not be interpreted as empowering an Assessing Officer to reopen an assessment merely because he happens to change his opinion — or to hold an opinion different from that of his predecessor — on the same set of facts, (CIT v Kelvinator 256 ITR 1; IPCA v Gajanand Meena 251 ITR 416).

It is important to note that the controlling words `the Assessing Officer has reason to believe' still apply (United Electrical v CIT 258 ITR 317; Vishnu Borewell v ITO 257 ITR 512) and should be given their full effect; the belief of a reasonable man familiar with the basic values of justice and fairness is expected to be the basis for re-opening an assessment.

The above position of law was accepted by the Central Board of Direct Taxes in its Circular No. 549 (182 ITR St. 1, 29) dated October 31, 1989, which explained the amendments in Section 147 made by the Direct Tax Laws (Amendment) Act 1989.

In CIT v Kelvinator (256 ITR 1), a Full Bench of the Delhi High Court examined the legal impact of this Circular and after exhaustively examining the case law held that even after the amendment (i) the Assessing Officer must have `reason to believe' that income has escaped assessment, (ii) a mere change of opinion does not justify a reassessment, and (iii) the Assessing Officer does not have the power of review on the same set of facts and law. The Bombay (IPCA Laboratories v Gajanand 251 ITR 416), Allahabad (Foramer v CIT 247 ITR 436) and Gujarat (Garden Silk v DCIT 237 ITR 668) High Courts have also taken the view that a mere change of opinion does not justify the initiation of reassessment proceedings under the amended law.

The proviso to the amended Section 147 provides that no action can be taken under this Section after the expiry of four years from the end of the relevant assessment year unless the escapement is by reason of the failure of the assessee to disclose fully and truly all material facts necessary for the assessment.

Thus, even under the present law, in all cases, there must exist reason to believe that income has escaped assessment and a mere change of opinion on the same facts and law does not justify a reassessment. For an action to be initiated after four years, it must further be established that no return has been filed or the escapement was by reason of failure of the assessee to disclose fully and truly all material facts.

In Indian and Eastern Newspaper Society v. CIT (119 ITR 996), the Apex Court had the occasion to consider the validity of a notice issued based on an audit report. For the purpose of imposing a check over the arithmetical accuracy of the computation of income and the determination of tax, an internal audit organisation was set up. From 1960 onwards the audit was entrusted under the Comptroller and Auditor Generals (Duties, Powers and Conditions of Service) Act, 1971. The audit by the Comptroller and Auditor General, as pointed out by the Apex Court, is principally intended for the purpose of satisfying him about the sufficiency of the rules and procedures prescribed for the purpose of securing an effective check on the assessment and collection of revenue. Paragraph 3 of the Circular issued by the Board on July 28, 1960 warned that "the audit department should not in any way substitute itself for the revenue authorities in the performance of their statutory duties".

Paragraph 4 of the circular being relevant is reproduced: "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 recognised 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."

The Court also pointed out 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. The Court further held that whether it is the internal audit party of the IT 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.

The duty of the Assessing Officer is that he himself should examine the material placed on record and arrive at a prima facie belief in this behalf. He must record a conclusion that there is escapement of income on account of excessive allowance being granted and is required to give reasons in this behalf. He has to justify the exercise of reassessment. Where an assessment has been made and there is purported excessive depreciation, its allowance would require examination of facts and that must be reflected in a well-reasoned document before issuance of notice for reassessment.

Section 148 of the Act specifically requires the Assessing Officer to record reasons. The validity of initiation of reassessment proceedings has to be judged with regard to the material available with the authority at the point of time of issuing the notice under Section 148 of the Act. When the assessee has disclosed fully and truly all material facts necessary for the assessment and on the basis of which the assessment is made, then exercise of powers under Section 148 contemplates that: (a) there must be material for the belief; (b) circumstances must exist and cannot be deemed to exist for arriving at an opinion; (c) reasons to believe must be honest and not based on suspicion or conjecture; (d) reasons referred to must disclose the process of reasoning; and (e) change of opinion does not confer jurisdiction to reassess. Further, there must be a nexus between material and belief and the reasons recorded must show application of mind by the Assessing Officer (see Sheth Brothers v Jt. C.I.T 251 ITR 270; Guj).

In short, mere change of the opinion by the Assessing Officer or a different opinion being expressed by the Audit Department does not confer jurisdiction upon the Assessing Officer to initiate proceedings under Section 147 of the Act. To allow any assessment to be reopened based on the opinion of the revenue audit or the Ministry of Law or the Central Board of Direct Taxes would result in giving powers which deprive assessment orders of their finality. This would introduce a dangerous element of uncertainty in the administration of a fiscal law.

(The author is a Mumbai-based advocate. He can be contacted atranina@bom2.vsnl.net.in)

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