Reassessment proceedings cannot be initiated merely on basis of internal audit report objections

Delhi High Court in an important case namely CIT V. Simbhaoli Sugar Mills Ltd. has held that reassessment proceedings u/s 147 cannot be initiated merely  on the basis of  internal audit report objections when no new fact has come to light. This is very important decision as many a times the objections are raised by internal audit department on the Assessment orders.

The implication of this judgement would be that if a case is reopened for reassessment u/s 147 merely on the basis of internal audit report objections, when the assessee has made full disclosure of information in the original assessment proceedings and no new material has come to light then such reopening of case will be a mere change of opinion, for which action u/s 147/148 is not allowed.

Brief Facts of case: On the basis of information available with the Department primarily based on the audit report, it surfaced that certain income chargeable to tax has escaped assessment for the assessment year under consideration and based on this, the Assessing Officer issued a notice dated 31.03.2004 under Section 148 of the Act followed by another notice under Section 143(2) read with section 148 of the Act dated 20.10.2004. Accordingly, re-assessment proceedings were completed on a total income of Rs.56,23,890/-.

Simultaneously, penalty proceedings were also initiated against the assessee under Section 271(1)(c) of the Act allegedly for furnishing inappropriate particulars of income and a penalty of Rs.2.54 crore was imposed by the Assessing Officer.

Held: There is also catena of judgments to the effect that initiation of reassessment proceedings on the basis of audit report objections is bad in law. A reference in this regard can be made to judgment of our High Court titled Transworld International Inc. v. Joint Commissioner of Income Tax, (2005) 273 ITR 242 and also judgments of Supreme Court in Indian and Eastern Newspaper Society v. Commissioner of Income Tax, New Delhi, (1979) 119 ITR 996 and Commissioner of Income Tax v. Lucas T.V.S. Ltd., (2001) 249 ITR 306. 
The sum and substance of discussion is that reassessment proceedings under Section 147 read with 148 of the Act cannot be initiated merely based on the audit report . An audit is principally intended for the purpose of satisfying the auditor with regard to sufficiency of rules and procedures prescribed for the purpose of securing an effective check on the assessment,  collection and proper allocation of revenue. As per para (3) of the circular issued by the Board on July 28, 1960, also an audit department should not in any way substitute itself for the revenue authorities in the performance of their statutory duties.
In view of our foregoing discussion, we are in complete agreement with the conclusion arrived at by the Tribunal in the impugned orders.
 As we do not find any infirmity in the aforesaid impugned orders, no substantial question of law arises. Consequently, all the appeals are dismissed. 
Full Judgemment can be downloaded herebelow:
CIT V. Simbhaoli Sugar Mills Ltd.


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