Reassessment Based on Audit Objection without AO’s application of mind is Invalid: Supreme Court Decides in favour of Adani Power [Read Order]

The Supreme court, in the matter of Adani Power Rajasthan has confirmed the principle that any income tax reassessment initiated based on Audit party objection without application of mind of the Assessing officer is invalid.

The bench of Justice Dipankar Datta and JusticeSatish Chandra Sharma of the apex court dismissed the petition of the income tax department filed against the Adani Power Rajasthan Ltd - Respondent even though the delay was condoned.

The petition came before the apex court from the Gujarat High Court. The department was not satisfied with the decision of the high court which stood firmly that the reassessment without proper application of mind is unsustainable.

Adani Power Rajasthan Ltd. had filed its return for Assessment Year 2016 -17 declaring losses. The returns were scrutinised in detail and accepted by the AO under Section 143(3) of the Income Tax Act without any additions.

After that, an internal audit raised an objection alleging that certain CorporateSocial Responsibility (CSR) expenses were wrongly allowed as deductible expenditure. However, initially AO rejected the opinion of the audit part.

Later, even though it objected, a reassessment notice was issued to the Adani Power based on these objections. Therefore, the reassessment notice and the order rejecting objections were challenged before the Gujarat High Court.

Before the high court, the counsel for the Adani Power Rajasthan submitted that “reason to believe” must be that of the Assessing Officer alone and cannot be substituted by the opinion of the audit party.

It was asserted that the AO had disagreed with the audit objection on merits and yet proceeded to reopen the assessment This amounted to a colourable exercise of jurisdiction and a mere change of opinion, said the counsel.

The counsel submitted the case CIT v. Kelvinator of India Ltd. and Lucas TVS Ltd. where it was held that audit objections on questions of law cannot form the sole basis for reopening.

However, the department, on the contrary, stated the decision in P.V.S. Beedies (P) Ltd that audit objections constitute “information” and that reopening was permissible. It contended that the reassessment was within jurisdiction.

The bench of then Chief Justice Sonia Gokani and Justice Sandeep N Bhatt of Gujarat High Court, vide its judgment dated 20th February 2023, noting the situation of the case ruled that “it is a settled law that any notice of reopening issued by the Assessing Officer without any independent application of mind would laid the validity.” The high court quashed the reassessment initiated against Adani Power Rajasthan Ltd.

After that, the income tax department moved before the apex court challenging the decision of the Gujarat High Court which is now dismissed. Through the dismissal, the supreme court is upholding the decision of the high court that AO cannot initiate reassessment without application of mind.

Mr. Kanakamedala Ravindra Kumar, A.S.G. and Ms. Madhulika Upadhyay, AOR along with other advocates appeared for the department and Mr. Amar Dave, Sr. Adv., Mr. P. S. Sudheer, AOR along with other advocates appeared for the Respondent.

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