By TIOL News Service

AHMEDABAD, JULY 20, 2017: THE ISSUE BEFORE THE COURT IS - Whether notice for reopening issued under the directives and compulsion of the audit party, is not sustainable. YES is the verdict.

Facts of the case:

The assessee, engaged in the business of manufacturing pharmaceuticals, had manufacturing units located in Kheda and Kazipura. For the A.Y 2009-10, the assessee filed its return declaring total income of Rs.14.75 crores under the normal provisions of Income Tax Act. The book profit of assessee computed u/s 115JB of the Act came to Rs.47.98 crores. The AO took the return in scrutiny and various claims of company were examined which included the assessee’s claim of deduction u/s 10A. The AO thereafter passed order u/s 143(3) making certain additions. The claim of deduction u/s 10A of the Act was, however, accepted. Subsequently, the AO noticed from assessment records that the assessee had included 'Freight & Insurance amounting to Rs.15253173/- in the 'export turnover’ which resulted in over statement of export turnover to that extent and incorrect computation of deduction u/s 10A. Thus there was excess allowance of deduction to the tune of Rs.1,14,59,450/-, which resulted in short levy of tax of Rs.38,95,067/- plus interest u/s 234B of Rs. 8,17,950/- aggregating to Rs.47,13,017/-. Therefore, the AO had reason to believe that income of assessee had escaped assessment for A.Y 2009-10 within the meaning of u/s 147.

On appeal, the HC held that,

++ it is true that in the present petition, the assessee has not specifically taken the contention regarding the reopening notice being issued at the instance of the audit party. However, as noted earlier, such contention was very much taken in the objections raised by the petitioner and the order passed by the Assessing Officer rejecting such objection did not deal with this ground at all. Therefore, we had called upon the counsel for the revenue to produce the original file to put this factual aspect beyond controversy. Upon perusal of the file, we notice that the audit party had raised an objection of the freight and insurance charges being included in the export turnover for computation of benefit u/s 10A of the Act. We may recall, this was the sole ground on which notice for reopening of the assessment has been issued. In response to such audit query, the then AO had conveyed to the CIT. It can, thus, be seen that the AO, then incharge of the assessment of the petitioner, did not accept the audit objection. In fact he gave detailed reasons why the stand was incorrect. He pointed out that the amount in question is really not in the nature of freight and insurance charges. In any case, if such amount is to be deducted from the export turnover forming the numerator part of the formula the same will also have to be deducted from the total turnover forming the denominator part. On such grounds, he opposed the audit objection. He, however, lastly conveyed that in any case this would be a case where exercise of revisional powers would be appropriate;

++ once again, the AO wrote to the Deputy Accountant General of Audit and conveyed that if the freight and insurance is to be excluded from the export turnover the same should also be excluded from the total turnover to arrive at the actual claim of deduction u/s.10A. The Assessing Officer in the meantime changed. The new AO also asserted that the audit objection is not valid. Despite such internal correspondences, apparently the notice for reopening came to be issued which was passed solely on the ground of the assessee’s claim of deduction u/s 10A and reduction of the freight and insurance charges from the export turnover. Thus, clearly the notice for reopening was issued under the directives and compulsion of the audit party, a mode which is not permissible as held by the decision of this Court in the case of Adani Exports vs. Deputy Commissioner of Income Tax (Assessments) reported in [1999] 240 ITR 224. In the result, the impugned notice dated 27.01.2014 is set aside.

(See 2017-TIOL-1347-HC-AHM-IT)