By TIOL News Service

KOLKATA, MAR 28, 2017: THE ISSUE IS - Whether proceeding u/s 148 can be initiated by a competent authority on the order and direction of his higher authority, without applying his/her own mind to the cause for initiation of the proceeding. NO is the verdict.

Facts of the case:

The assessee had filed its return and the same was processed determining a net amount of Rs. 31,132/- required to be paid by assessee. Subsequently, the case was selected for scrutiny and a notice u/s 143(2) was issued calling upon the assessee to attend the office of the assessing officer with all relevant documents, accounts and other evidence which he intended to rely in support of his disclosure of the facts in the return submitted to the officer. Thereafter, scrutiny proceeding was disposed of by the AO enhancing the liability of assessee from Rs.31,132/- to Rs.1,09,210/-. The assessee complied the said order and deposited the amount so determined. Subsequent to the same, a notice u/s 148 was again issued upon the assessee seeking to reopen the assessment on the ground that the assessee had showed profit of investment as long term gain and claimed exemption u/s 10(38), though the same should be treated as business income.

On appeal, the HC held that,

++ it is manifest that the AO may assess or reassess if he has a reason to believe that any income chargeable to tax has escaped assessment which comes to the notice subsequently in course of the proceeding. Once the AO arrives at the decision, he is required to serve a notice u/s 148 upon assessee to furnish all the materials and documents indicated in the said notice. What transpires from the writ petition as well as from the objection filed by the ITO are that the AO was not convinced with the audit objection and categorically signifies his inability to accept the same. The matter was placed before the CIT as per the omnivorous direction of the CBDT and it is the CIT who suddenly formed an opinion that the assessment should be reopened and directed the AO to issue notice upon the assessee u/s 148. The point emerges from the aforesaid undisputed facts are whether proceeding u/s 148 can be initiated by a competent authority on the order and direction of his higher authority and whether the audit objection which was unacceptable to the AO may be treated as escapement of assessment order on mere change of opinion. Taking second point first; the notice u/s 148 was issued containing a categorical averments that the exemption on account of capital gain cannot be claimed but should be treated as the business income. In the impugned order, the AO though observed that the change of opinion did not confer jurisdiction upon him to initiate proceeding under the aforesaid provision but it is detected that there has been an erroneous nature of earlier assessment. The AO has the jurisdiction to proceed with the reassessment u/s 147. What has been observed therein that no assessment of an item of income can warrant formation of requisite believe u/s 147 if there is a material placed on record which would show existence of income chargeable to tax;

++ admittedly, the assessment was made u/s 143(1) and thereafter the assessee's case was considered for a scrutiny and upon recording satisfaction of the material documents and the accounts produced before the AO, the reassessment was made and the scrutiny proceeding came to an end by assessing the amount which the assessee is liable to deposit as an income. It is not that the AO subsequently found that there has been no escapement which forms the basis u/s 147 but the entire case hinges on the audit objection and the matter was referred to the AO. Even the AO showed his inability to accept such objection and communicated the same to the concerned Authority. The Delhi High Court in case of Carlton Overseas (P.) Ltd. Vs. Income Tax Officer, held that the audit report raising objection is mere an opinion and, therefore, cannot form basis of a reassessment u/s 147. So far as the other point is concerned, indubitably the AO did not accept the audit objection warranting the assessment u/s 147. The matter was placed before the CIT who suggested that the assessment must be reopened u/s 147 and consequently direction was passed upon the AO to cause a notice u/s 148 and proceed to reassess. There is no hesitation that the AO simply acted on the dictate of his superior officer without applying his/her mind to the cause for which the proceeding was initiated. The Apex Court in case of Orient Paper Mills Ltd. Vs. Union of India, deprecated such action of the subordinate officer to act and proceed on the dictate of the superior office. Admittedly the AO simply act on the instruction of the CIT despite signifying his opinion that the audit objection is unacceptable and proceeding should not be initiated simply on the basis thereof. This court, therefore, finds that preliminary objection raised by the assessee petitioner has been wrongly decided by the AO in upholding its jurisdiction on both the counts. Thus, the notice u/s 148 is hereby quashed and set aside.

(See 2017-TIOL-586-HC-KOL-IT)