If A.O Objects to Audit, Notice U/s 148 Can’t Be Issued !

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Audit objections to assessment orders are very routine and equally routine is the manner in which these audit observation is handled within the tax department. Usually , the assessing officer first do not agree with the observation of audit objection, but later on account of CBDT instraution and guideline, issue notice u/s 148 on the same very ground which he did not agree with the CAG auditor.

Facts Related to Reassessment Case under Section 147

The assessee received a notice under section 148 of the Income-tax Act, 1961.The A.O was requested for copy of the reasons to believe, which were communicated. The reasons recorded was that considering the judgment of the Rajasthan High Court in the case of CIT v. Arawali Constructions Co. P. Ltd. [2003] 259 ITR 30 the nature of the expenses incurred by the assessee in a sum of Rs. 62,79,638 needs to be examined and is required to be capitalised.

However, the Assessing Officer himself did not agree with the Auditors as he objected to audit observation saying that the judgment of the Rajasthan High Court would not apply to the facts of the petitioner’s case. This view taken by the Assessing Officer was endorsed by the Commissioner of Income Tax-II by communication dated October 12, 2006, addressed to the Director, C/o. Principal Auditor, Central Audit and Accounts Department.

The issue before , Mumbai High Court in Asian Cerc Information Services (p) Ltd vs ITO 293 ITR 271 (Bom)(2007) was

Whether when A.O is not satisfied with audit’s observation , his notice u/s 148 based on the same audit obseravtion is bad in law?

 

Mumbai High Court held on issue of Reassessment Proceeding under Section 147

The Mumbai High Court held vide its order 17-Jul-07 as under :

We have gone through the said order. We find that while disposing of the objections the Assessing Officer has not given any reason as to why the Assessing Officer had now come to the view, from the earlier view taken while addressing the letter to the auditor to remove the objections as to why the judgment of the Rajasthan High Court which earlier in his opinion was not applicable, became applicable. It is possible that the officer may have further reconsidered the judgment, but some reasons ought to have been disclosed. In our opinion this discloses total non-application of mind on the part of the Assessing Officer.

In the light of that we are clearly of the view that the impugned communication dated November 29, 2006, has to be set aside and is hereby set aside and the matter is remanded back to respondent No.1, to reconsider the matter de novo and according to law. If there be any adverse order against the petitioner that shall not be acted upon for a period of eight weeks from the date of communication of the same.

 

Thus , the assessee and taxpayer should always take note of the aforesaid judgment of the Mumbai High Court in a case of reassessment proceeding under section 147