The Hindu Business Line : Validity of audit objections

Of late, a spate of reassessment proceedings have been initiated as a result of audit objections. The moment the audit party raises an objection to the assessment made by the assessing officer (AO), the tax authority, as a matter of ritual, resorts to issue of notice under Section 148. This practice could be partly attributed to lack of understanding of the various court decisions which have consistently held that the audit objections do not bind the officers unless it fa lls within their domain, that is, eligible for raising such objections.

Apex court’s view

The Supreme Court, in Indian & Eastern Newspaper Society vs CIT (1979 119 ITR 996 SC), held that the audit party cannot interpret the provisions of law as it has no power to do so. The audit party however is eligible to bring to the attention of the AO the correct provisions of law applicable to the case and any apparent errors therein so that the AO can either rectify such order or go in for reassessment proceedings.

In CIT vs P. V.S. Beedies (P) Ltd (1999 237 ITR 13 SC), the apex court upheld the findings of the audit party as the AO granted deduction under Section 80G overlooking the fact of the approval which had expired before the relevant assessment year. In this case, the apex court held that the audit party is correct in pointing out factual error or omission in the assessment and the AO, based on such audit objection, could invoke provisions meant for reassessment of income.

Plight of windmills

Recently, the admissibility for higher rate of depreciation for power-generating entities became a familiar issue of audit objection. Merely because the taxpayers have not indicated their option as per further proviso to rule 5(1A), on the basis of audit objections reassessment proceedings were initiated to withdraw the benefit of higher rate of depreciation which were originally allowed in the assessments.

In Jindal Steel & Power Ltd vs Additional CIT (2007 106 TTJ 943 Delhi Tribunal) it was held that there is no particular format or procedure laid down in the second proviso to rule 5(1A) and if the assessee has filed a return claiming higher rate of depreciation on windmills it is eligible for deduction and the mere claim in the return is to be taken as sufficient compliance with the requirements of law.

The argument of the taxpayers that filing of return by claiming higher rate of depreciation as a tacit method of indicating the option was accepted by some of the appellate authorities, and in some instances merely because such returns were filed on the ‘due date’ mentioned in Section 139(1), the benefits were denied.

That is why the further proviso to rule 5(1A) states that option for higher rate of depreciation is to be exercised ‘before the due date’ of filing the return and the return filed exactly on the ‘due date’ became a disqualification. This reasoning is contrary to the meaning of the term ‘before the due date’ explained by the Bombay High Court in the CIT vs Vijaya Hirasa Kalamkar (HUF 229 ITR 772 Bombay) case.

(The author is an Erode-based chartered accountant.)