Reassessment : Audit Objection That is Another Opinion is Not Good Enough !

Finance Act 2021 brought in a definition of “information” , based on which the AO can initiate the proceeding of reassessment of income u/s 148A of the Income Tax Act . One of the reasons considered as “information” is the Audit Objection .

As per Finance Act 2021 , Explanation 1 of section 148 provides :

Explanation 1.—For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,—

  (i) ……………

((ii)  any final objection raised by the Comptroller and Auditor General of India 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 this Act

Meaning of Audit Objections for Action u/s 148A

From literal reading , of the law introduced by Finance Act 2021 , it looks like the moment Comptroller & Audit General (CAG ) puts an objection which reached draft stage which CAG did not agree with the explanation from CBDT, the Income Tax Department takes the action u/s 148A with the backing of Explanation 1 under section 148 of the Income Tax Act .

It must be noted that from Finance Act 2022 , the government substituted the Explanation (ii) to section 148 as under :
ii)  any audit objection 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 this Act

It means that From 1st April 2022 onwards , the technical arguments that information only includes objection raised by CAG will not be very strong objection . Yes , it is still challengeable in High Courts if word “audit” includes “internal audit” which is at best , another official of income tax department.

Mumbai High Court : No 148 if Audit Objection is Mere Change of Opinion

In a Writ potion NO.4574 OF 2022 by Hasmukh Estates Pvt. Ltd vs ACIT , the Hon’ble High Court agreed with the petitioner’s counsel that an objection by the Internal Auditor of the department is not an “information” within the meaning of Explanation 1 of section 148 if the objection is merely a change of opinion .

The reassment notice was issued in July 2022 , which means amendment to Explanation (ii) was applicable . The counsel for the petitioner raised the issue that audit objection was not raised by CAG and that the objection was merely an opinion change.

Relevant portion of the order of High Court is given below :

11. The admitted facts clearly indicate that the basis of which the AO issued notice alleging that there was “information” that suggests escapement of income was an internal audit objection. What is information is explained in Section 148 of the Act to mean “any objection raised by the Comptroller and Auditor General of

India…….” and no one else. This itself makes the re-opening of assessment in the present case impermissible.

12. Consequently, de-hors any audit objection raised by the CAG, a view deviating from that which was already taken during the course of issuing the original assessment order is nothing but a ‘change of opinion’ which is impermissible under the provisions of the Act.

Quick Takeaway

If you find that the issue was already dealt at the stage of scrutiny proceedings and the AO has served notice u/s 148A wherein he informs that information is based on audit objection, ascertain if it is CAG objection or Internal Audit objection. To ascertain , you should ask for a copy of the objection which is taken as information by the AO .

If internal objection, then write an objection that this is in violation of Explanation 1 , where only CAG’s audit objection is mentioned.

Even if it is CAG objection , see if the issue was considered earlier or not . If issue was already considered and CAG is merrily giving its own view on the issue , such objections are “mere change of opinion” and not information u/s 148 , as held in the High Court cited above.