Re-Assessment cannot be made on the basis of error in law pointed out by the Audit Party: Gujarat HC [Read Judgment]

Excise- Gujarat High Court -Tax Scan

In a recent decision, the division bench of the Gujarat High Court opined that re-assessment cannot be made only on the basis of the audit party opinion on a point of law. The While quashing the notices issued for re-assessment, the Court, based on various case laws,clarified that the audit party is allowed to point out the factual errors only.

The petitioners, in the instant case, challenged the notice for re-opening of assessment under the provisions of Income Tax Act on ground that excess deduction of 80IB of the Income Tax Act, 1961 had been allowed to the assessee. Further, it is proposed to disallow the interest on loans paid by the assessee. The petitioners contended that these issues were brought to the notice by the audit party. These were not duly examined during the original assessment and no opinion was formed by the Assessing Officer.

The Court found that the claim of deduction under Section 80IB of the Income Tax Act was examined by the Assessing Officer during the course of original assessment and has committed error in allowing deduction with respect to several amounts which may not be eligible for such deduction. Therefore, it was opined that the erroneous decision of the Assessing Officer is widely different from non-consideration of an issue at the time of assessment. It therefore cannot be stated that this issue was not scrutinized by the Assessing Officer during the original assessment.

Regarding the second ground for re-assessment, the Court noted that there is no direct proof that the issue was examined during the assessment.

Verification of the original files transpired that the audit party had raised two objections- regarding the excess claim of deduction under Section 80IB of the Income Tax Act and the other was of not disallowing the interest expenditure.it was further revealed that the Assessing Officer noted the two audit objections with respect to the interest expenditure, which in her opinion is not acceptable. Brief reasons for not accepting the suggestions had been recorded by the AO during the course of original assessment.

Considering the above facts, the Court arrived at a conclusion that on the vital issue of disallowance of interest expenditure, the Assessing Officer was not convinced about the audit objection.In the light of various judicial decisions, the Court observed that the opinion of the audit party on a point of law cannot be regarded as information enabling the income tax officer to initiate reassessment proceedings.

The Court found that in the instant case, it is clear that the audit party not only brought a certain issue to the notice of the Assessing Officer but compelled her to issue notice of reopening despite her clear opinion that the issue was not valid and that there has been no escapement of income on the grounds so urged by the audit party.In view of the above findings, the Court set aside the impugned notices.

Read the full text of the Judgment below.

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