Elecon Engineering Co Ltd vs. ACIT (Gujarat High Court)

DATE: August 31, 2016 (Date of pronouncement)
DATE: December 8, 2016 (Date of publication)
AY: 2009-10
FILE: Click here to download the file in pdf format
S. 147: If the AO reopens the assessment on information supplied by the audit party without application of mind, the reopening is invalid. Likewise, if the AO disputes the findings of the audit party, he is not entitled to reopen the assessment. The reasons must show independent application of mind of the AO

(i) Even if one ground succeeds, as in the present case, reopening would have to be permitted. It is in this context, the question of notice of reopening having been issued by the Assessing Officer at the behest of the audit party assumes significance. The law on the point laid down by the Supreme Court in judgement in case of Commissioner of Income-tax v. P.V.S. Beedies Pvt. Ltd. reported in (1999) 237 ITR 13 and in case of Indian and Eastern Newspaper Society v. Commissioner of Income-tax reported in (1979) 119 ITR 996 is well settled. We also have the decision of this Court in case of Adani Exports v. Deputy Commissioner of Income Tax reported in (1999) 240 ITR 224(Guj) on this issue. In case of Indian and Eastern Newspaper Society (supra), the Supreme observed that the opinion of the audit party on a point of law could not be regarded as information enabling the Assessing Officer to initiate reassessment proceedings. This aspect was elaborated by Division Bench judgement of this Court in case of Adani Exports (supra) observing that it is the satisfaction of the Assessing Officer for the purpose of reopening which is subjective in nature but when the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficient of the material to such a belief is not open to be scrutinised. However, the decision of the Supreme Court would indicate that though audit objection may serve as an information, the basis on which the ITO can act, ultimate action must depend directly and solely on the formation of belief by ITO on his own, where such information passed on to him by the audit party that income has escaped assessment. In the said case, it was held that Assessing Officer had acted at the behest of audit party and that notice for reopening was therefore, bad in law.

(ii) Thus there is clear distinction between a situation where the Assessing Officer acts on information supplied by the audit party and issues a notice for reopening the assessment. In some cases, we have also noticed that the Assessing Officer is himself convinced that the audit objection do not form valid reasons to form a belief that income chargeable to tax has escaped assessment. He nevertheless, issues a notice for reopening clearly indicating compulsion to do so. In such cases, decision in case of Indian and Eastern Newspaper Society (supra) and Adani Exports (supra) would squarely apply. However, situations may also arise where the audit party merely brings to the notice of Assessing Officer, a certain element having relation to the income of the assessee. If the Assessing Officer on the basis of such information forms an independent belief that income chargeable to tax has escaped assessment, there is nothing preventing him from exercising power of reassessment, as was held by the Supreme Court in case of P.V.S. Beedies Pvt. Ltd. (supra) and also noted in judgement in case of Adani Exports (supra).

(iii) It would therefore, be necessary for us to ascertain in which category the present case would fall. The petitioner has been contending from the outset that the entire exercise was undertaken by the Assessing Officer at the instance of audit party. The denials on these aspects by the Assessing Officer while rejecting the objections and in the reply to this petition were rather muted. Instead of therefore, relying on the pleadings, we had called for the original files to satisfy ourselves. We notice that the audit party had raised several objections to the assessment carried out in case of the assessee and these objections were brought to the notice of the Assessing Officer. The file shows that this was followed by the reasons recorded by the Assessing Officer for issuing the notice. If we compare the audit objections and the reasons recorded, we find that the Assessing Officer has included all objections pointed out by the audit party but has also included one more ground namely, of the escaped capital gain on sale of land by the petitioner to Shri Ashwin Kumar B. Patel. This ground was not part of the audit objection. In our opinion, this would indicate that the Assessing Officer had independently applied his mind and formed a belief that on the grounds mentioned by the audit party in its objection letter and additional ground which is recorded in the reasons, the income chargeable to tax in case of assessee had escaped assessment.

One comment on “Elecon Engineering Co Ltd vs. ACIT (Gujarat High Court)
  1. sec 147 is so dicey why just because of the ‘satisfaction paradigm’ that is involved, just because the ITO or the AO ought to defend his views himself, as he cannot get any support from any one say CCIT or r=the Audit party.

    If AO cannot defend himself adequately in sec 147 case his application of sec 147 is indeed ‘bad in law’ is well brought out by the honorable court here in this case.

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