Opinion rendered by audit party alone can not be considered as belief of escapement of income which must be made directly and solely by the Income Tax Officer.
In a recent judgment, the Hon’ble Supreme Court dismissed SLP of the Revenue against the judgment of the Bombay High Court that opinion rendered by the audit party can not be considered as belief of escapement of income which must be made directly and solely by the Income Tax Officer.
ABCAUS Case Law Citation:
4398 (2025) (02) abcaus.in SC
Important Case Laws relied upon by Parties:
Crompton Greaves Ltd. Vs. Assistant Commissioner of Income Tax
Indian and Eastern Newspaper Society Vs. Commissioner of Income Tax
Aroni Commercials Limited Vs. Deputy Commissioner of Income Tax
In the instant case, the respondent, assessee was a Private Limited Company engaged in the business of purchase and sale of share. It filed return of income for relevant Assessment Year declaring loss. The assessment was finalized under Section 143(3) of the Income Tax Act, 1961 (“the Act”) by making few additions to the returned income i.e. reducing the loss declared.
Subsequently, the assessee received a notice under Section 148 of the Act that there was reason to believe Petitioner’s income chargeable tax had escaped assessment. The reasons recorded for reopening stated that since the assessee was engaged exclusively in the business of purchase and sale of shares, under provisions of section 73, the gains or losses arrived on account of purchase and sale of shares should have been be considered as speculation gain or loss.
The assessee filed a Writ Petition before the Hon’ble High Court and contended that notice was issued after the expiry of four years from the end of relevant assessment year and assessment under Section 143(3) of the Act had already been completed. There was not even an allegation in the reasons recorded that there was any failure on the part of Petitioner to truly and fully disclose all material facts necessary for its assessment for the relevant assessment year, on which ground alone the notice should be quashed and set aside.
The assessee submitted that the AO had admitted that issue of loss in derivative and share business was a subject matter of consideration during the assessment proceedings u/s 143(3) and the assessee had vide letter submitted to AO categorically stated that it had rightly consider the loss in derivatives as well as share business loss as normal business loss and in this case Section 73 of the Income Tax Act was not applicable.
The Hon’ble High Court observed that it had held that once a query is raised during the assessment proceedings and assessee has replied to it, it follows that the query raised was a subject of consideration of the AO while completing the assessment. It is also not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. Therefore, the reopening of the assessment, in our view, is merely on the basis of change of opinion of the AO from that held earlier during the course of assessment proceedings and this change of opinion does not constitute justification and/or reason to believe that income chargeable to tax has escaped assessment.
The assessee further submitted that reopening was based on audit objections and the AO had strongly objected to the audit query and in response had filed a detailed reply in support of his action of allowing the claim. This fact had not been denied by the AO in the affidavit-in-reply filed before the Hon’ble High Court.
The Hon’ble High Court observed that reasons recorded to believe that there was escapement of income from assessment did not even make an allegation that there was failure to truly and fully disclose material fact and on this ground alone, the notice issued under Section 148 is liable to be quashed and set aside.
The Hon’ble High Court further observed that Hon’ble Supreme Court had held that the Income Tax 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. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer.
The Hon’ble High Court further noted that the AO had not denied that he had strongly objected to the audit query and had filed detailed reply in support of his action of allowing the claim. Accordingly, the Hon’ble High Court quashed and set aside the notice u/s 148 of the Act.
Not satisfied with the quashing of the notice u/s 148, the Income Tax Department challenged the order of the High Court before the Hon’ble Supreme Court by way of filing a Special Leave Petition (SLP).
However, the Hon’ble Apex Court dismissed the SLP of the Revenue with the following observations,
“We do not find any good ground and reason to interfere with the impugned judgment and, hence, the special leave petition is dismissed.”
Download Full Judgment Click Here >>
- SC upheld constitutional validity to section 34, 47 & 58 of Consumer Protection Act 2019
- Appointment of internal auditor in GCE, Keonjhar for FYs 2009-10 to 2023-24
- Empanelment of Stock & Receivable Auditors in State Bank Of India, Thiruvananthapuram.
- If a contribution is not voluntary, it cannot be taxed as income u/s 11 r.w.s. 12(1) – ITAT
- Additional evidence wrongly rejected merely because application not made before AO/ CIT(A)
