Reopening on audit objection invalid when AO had all information during assessment

Reopening based on audit objection invalid when AO had all the information at the time of assessment

In a recent judgment, High Court held that reopening of assessment based on audit objection would be invalid being a change of opinion where the Assessing Officer had all the information relating to the said transaction at the time of assessment

ABCAUS Case Law Citation:
5047 (2026) (02) abcaus.in HC

In The instant case the Petitioner/assessee had challenged the order passed under Section 148A(d) of the Income Tax Act, 1961 (the Act) and notice under Section 148 of the Act.

The issue involved was validity of reopening of assessments based on audit objections. The subject matter of the notice under Section 148 of the Act was a transaction which according to the Revenue, had escaped assessment, as flagged by the Audit Party.

The case of the assessee was that during the assessment proceedings u/s 143(3), specific queries were put by the assessing officer to the petitioner regarding the said transaction and the queries were answered by the petitioner by submitting relevant documents. The case of the petitioner was that, as the assessing officer had all the information relating to the said transaction/expenditure at the time of assessment, the Revenue cannot initiate reassessment citing the same issue, even pursuant to audit objections.

The Revenue relied upon the judgment of the Hon’ble Supreme Court to contend that an Audit Party is entitled to point out a factual error or omission in the assessment, and reopening of the case on the basis of such factual error pointed out by the Audit Party is permissible under law.

Therefore, the question to be decided was whether assessment can be reopened based on an audit objection on the ground that expenses claimed were not allowable, when the assessing officer had all the material/ documents before him with respect to the transactions made while passing the assessment order?

The Hon’ble High Court noted that the assessee had relied upon the judgment of the Hon’ble Supreme Court in which it had been held that when specific queries were raised, which were answered by the assessee, it was not open for the Revenue to reopen the assessment proceedings on the same ground.

Agreeing with the Petitioner, the Hon’ble High Court opined that reopening the assessment on the basis of the objections of the Audit Party, shall in the facts of the case, amounted to reviewing the assessment already made, as the relevant material was available with the assessing officer during that assessment.

The Hon’ble High Court observed that it is necessary to draw a distinction between a case where the assessee failed to provide some material /information during the assessment, which was flagged by the Audit Party, as against a case where all information was provided by the assessee, but was not considered or commented upon by the assessing officer in the assessment order, resulting in a subsequent audit objection. The latter cannot be subject matter of reassessment, as it shall have the effect of reconsidering the same material to arrive at a different conclusion, which cannot be permitted.

The Hon’ble High Court noted that it is trite law that the Revenue can reopen assessments based on audit objections to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of the Act. In fact, Clause (ii) to Explanation 1 of Section 148 of the Act, which was incorporated into the Act by virtue of the Finance Act, 2022 empowers the assessing officer to issue notice reopening the assessment when audit objections suggests that income has escaped assessment. However, the first proviso to Section 148 states that no notice shall be issued under the provision, unless the assessing officer has information with him which suggests that income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year.

The Hon’ble High Court concluded that the audit objection pointing out that there is no justification available in the file as to why the amounts were paid, cannot be said to be ‘information’ for the respondent to initiate reassessment proceedings, when the assessing officer was in possession of the information and necessary documents at the time of the assessment proceedings. As such, the impugned action of the respondents was unsustainable.

Accordingly, the impugned notice and order were set aside. The assessment proceedings initiated were also quashed.  

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