Reopening done at the insistence of CIT held as change of opinion and vitiated in law

Reopening done at the insistence of CIT held as change of opinion and was vitiated in law as it did not satisfy the legal requirement of Section 147 of the Act

ABCAUS Case Law Citation:
ABCAUS 3124 (2019) (08) HC

Important case law relied upon by the parties:
Larsen and Toubro v. State of Jharkhand (2017) 103 VST 1 (SC)
Adani Infrastructure & Developers (P.) Ltd. v. ACIT (2019) 101 256 (Gujarat)

The instant appeal was filed by the Income Tax Department (the Revenue) against the order of the ITAT in quashing the reassessment proceedings under Section 147 of the Income Tax Act, 1961 (the Act) on the ground of change of opinion on the applicability of Section 40(a)(ia) of the Act.

In the instant case, the return of the respondent assessee was picked up for scrutiny and notice was issued by the Assessing Officer (AO) under Section 143(2) and 142(1) of the Act along with a detailed questionnaire to the assessee.

Consequently an assessment order was passed by the AO who disallowed one percent of wage expenses to cover up the leakage in the income. There was also disallowance of miscellaneous expenses.

Thereafter, on the same day, a notice was issued to the assessee under Section 147/148 of the Act. Finally, in the order of reassessment the AO disallowed amount under Section 40(a)(ia) on the ground that the assessee non deduction of TDS on the payments made to the labour, job work charges and rent.

CIT (A) allowed the appeal of the assessee essentially on the ground that the reopening by the AO was based on change of opinion. The Revenue’s appeal against the order of the CIT (A) was dismissed by the ITAT.

The Hon’ble High Court observed that the entire exercise of reopening of the assessment was triggered by objections raised by the audit party.

The Assessing Officer had replied to the above audit objections specifically addressing the issue of non deduction of TDS. The facts and figures were set out by the AO and it was concluded that ‘the Assessee had correctly accounted for its turnover also by the Income Tax Laws. Accordingly, the AO requested the ACIT audit to treat the said issue as ‘settled’.   

Reopening done at the insistence of CIT held as change of opinion and vitiated in law

The Hon’ble High Court noted that the CIT Audit wrote a letter to the AO wherein he rejected the explanation of the AO as not acceptable and directed him to take the necessary remedial. As a result the AO, after approval of Commissioner of Income Tax, issued notice u/s 148 and requested that the audit objection may be treated as settled.

The Hon’ble High Court opined that there was no independent decision arrived at by the AO to form “reasons to believe‟ for reopening of the assessment after being satisfied that there was an escapement of income. Not once but on two separate occasions the AO clearly formed the opinion that this was not a case fit for reopening of the assessment and that the AO was constrained, notwithstanding that opinion, to reopen the assessment on the express instructions issued to him by the Addl. CIT Audit,

The Hon’ble High Court found that the AO had in fact applied his mind to the audit party objection and formed a clear opinion that there was no justification for reopening of the assessment and yet it was only on the insistence of the Addl. CIT Audit that the AO changed his opinion and decided to reopen the assessment. Consequently, the reopening of the assessment in the present case, which was based on a change of opinion was vitiated in law as it did not satisfy the legal requirement of Section 147 of the Act

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