Adani Power Rajasthan Limited Vs ACIT (Gujarat High Court)
The Gujarat High Court allowed the writ petition filed by Adani Power Rajasthan Limited and quashed the notice issued under Section 148 of the Income-tax Act for Assessment Year 2016-17, along with the order rejecting the assessee’s objections. The Court held that the reassessment proceedings were initiated solely at the instance of the audit party without the Assessing Officer (AO) independently applying his mind or forming the statutory “reason to believe” that income had escaped assessment.
Read SC Judgment in this case: HC Order Quashing Section 148 Reopening Upheld; SLP Dismissed: SC
The assessee had originally filed its return declaring a loss, which was selected for scrutiny. After detailed examination, the AO completed the assessment under Section 143(3) accepting the returned income without making any additions. Subsequently, a notice under Section 148 was issued proposing reassessment on the ground that Corporate Social Responsibility (CSR) expenditure had been wrongly allowed as a deduction.
The assessee contended that the reopening was entirely based on an audit objection. Information obtained under the Right to Information Act revealed that the audit party had objected to the allowance of CSR expenditure. Significantly, the AO had responded to the audit objection by expressly recording that the objection was “not acceptable.” The AO reasoned that the company was not required to incur CSR expenditure under Section 135 of the Companies Act, 2013, the expenditure was incurred voluntarily for business purposes, Explanation 2 to Section 37(1) was therefore inapplicable, and the deduction had rightly been allowed. The AO requested that the audit objection be dropped.
The High Court observed that although an audit party may bring factual information to the notice of the AO, it is the AO alone who must independently examine the material and form his own belief that income has escaped assessment. The statutory satisfaction under Section 147 cannot be substituted by the opinion of the audit party. Where the AO himself does not believe that income has escaped assessment but proceeds only because of the audit objection, the reassessment proceedings are without jurisdiction.
Examining the record, the Court found that the AO had consistently maintained that the audit objection was legally unsustainable and had twice recorded that it was not acceptable. Despite this clear opinion, the AO subsequently issued the reassessment notice without any fresh material or independent reasoning. The Court concluded that there was no independent application of mind by the AO and no subjective satisfaction required under Section 147. The notice represented a colourable exercise of jurisdiction undertaken solely at the insistence of the audit party.
The Court distinguished cases where audit objections merely pointed out factual errors overlooked by the AO, observing that the present case involved an audit opinion on a legal issue which the AO himself had rejected. Since the reassessment was initiated without the AO’s independent conviction, the notice under Section 148 and the order disposing of objections were quashed.
