|C. M. Garg (JM), R. S. Syal (AM)
|Audit Objection, Reopening
|August 6, 2015 (Date of pronouncement)
|August 10, 2015 (Date of publication)
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|S. 147: The revenue audit cannot perform functions of judicial supervision and a reopening based on the interpretation of the audit cannot be sustained. However, a reopening based on communication of the law or factual inaccuracy by the audit is valid
(i) The logic in not sustaining the initiation of reassessment on the basis of interpretation of law by the audit party is that the internal auditor cannot be allowed to perform functions of judicial supervision over the Income-tax authorities by suggesting to the Assessing Officer about how a provision should be interpreted and whether the interpretation so given by the AO to a particular provision of the Act is right or wrong. An interpretation to a provision given by the internal audit party cannot be construed as a declaration of law binding on the AO. When an internal audit party objects to the interpretation given by the AO to a provision and proposes substitution of such interpretation with the one it feels right, it crosses its jurisdiction and enters into the realm of judicial supervision, which it is not authorized to do. In such circumstances, the initiation of reassessment, based on the substituted interpretation of a provision by the internal audit party, cannot be sustained. It has been categorically held by the Hon’ble Supreme Court in Indian & Eastern Newspaper Society (1979)119 ITR 996 (SC) that the internal audit party of the IT Department ‘performs essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of IT authorities. The IT Act does not contemplate such power in any internal audit organisation of the IT Department …. The statute supports the conclusion that an audit party can’t pronounce on the law, and that such pronouncement does not amount to “information” within the meaning of s. 147(b) of the IT Act, 1961′. Having made the above observations in para 6 of its judgment, the Hon’ble Summit Court then made an exception in the same para to the effect that : `But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communicator of the law is carefully maintained, the confusion which often results in applying s. 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose’. When we read the judgment in Indian & Eastern Newspaper Society (1979)119 ITR 996 (SC) in entirety, what unfolds is that albeit the audit party is not entitled to judicially interpret a provision, but at the same time, it can communicate the law to the AO, which he omitted to consider. This position has been aptly explained in CIT vs. First Leasing Co. of India Ltd. (2000) 241 ITR 248 (Mad) by holding that : `The Supreme Court in Indian and Eastern (supra), has made a distinction between the interpretation of the law and bringing to the attention of the ITO the relevant provision of law and if the audit party interpreted the law, then the report by the audit party cannot be regarded as “information” for the purpose of reopening an assessment under s. 147(b) of the Act. However, if the audit party has merely drawn the attention of the ITO to the existence of the law, the opinion of the audit party would be regarded as information and the Supreme Court has made a distinction between the communication of law and interpretation of law.’ That is how, the Hon’ble Madras High Court held that the audit report should be regarded as a communication of law and there is no interpretation of law involved in the matter. The tribunal order, holding that the audit party had interpreted the relevant provisions relating to the granting of extra depreciation allowance and thus the AO had no jurisdiction under s. 147(b) of the Act to reopen the assessment, was set aside.
(ii) It is discernible from a close look at the above three judgments rendered by the Hon’ble Apex Court that where the audit party interprets the provision of law in a manner contrary to what the AO had done, it does not lay down a valid foundation for the initiation of re-assessment proceedings. If however, the audit party does not offer its own interpretation to the provisions and simply communicates the existence of law to the AO or any other factual inaccuracy, then the initiation of reassessment proceedings on such basis cannot be faulted with. It can be seen that in the case of Indian and Eastern Newspapers Society (1979)119 ITR 996 (SC), the otherwise taxability of receipt from occupation of conference hall and rooms was not disputed. Whereas the AO held such amount to be taxable as ‘Business income’, the audit party held it to be taxable as ‘Income from house property.’ It was this adoption of a different interpretation by the internal audit party to the existing factual position, which was not approved by the Hon’ble Supreme Court as a good ground to initiate a valid re-assessment. Similarly, in the case of Lucas TVS Ltd. (supra), the AO allowed deduction u/s 35(2) for the amounts spent in this year as well as the earlier years and the internal audit party opined that only the amount spent during the year was allowable as deduction u/s 35(2). It is obvious that in both these cases, the AO’s opinion on the interpretation of the relevant provision was overruled by the internal audit party. In contrast, in the case of PVS Beedis Pvt. Ltd. (supra), the assessee claimed deduction u/s 80G and the internal audit party pointed out that such deduction was not permissible because the registration of the trust to which contribution was made, had already expired. It is manifest that in the case of PVS Beedis Pvt. Ltd. (1999) 237 ITR 13 (SC), the audit party did not interpret section 80G in a different manner, but, simply drew the attention of the AO to the existence of law. The Hon’ble Supreme Court in Indian and Eastern Newspapers Society (supra) having held that the interpretation of the internal audit party on a point of law does not constitute ‘information’ u/s 147, drew a line of distinction between the cases of interpretation of law and communication of existence of law. If the audit party merely draws the attention of the AO to the existence of law, the opinion of the audit party can be regarded as ‘information’ leading to a valid initiation of reassessment. In a nutshell, whereas the initiation of re-assessment proceedings on the basis of an interpretation to the provisions of law by the audit party is forbidden, the communication of law or the factual inconsistencies by the internal audit party, do not operate as a hindrance in the initiation of re-assessment proceedings.