1. RE-OPENING OF ASSESSMENT ON ACCOUNT OF AUDIT OBJECTIONS
One of the key sources of dispute is the existing arrangement for follow up on audit objections by Internal Audit Party and the Revenue Audit Party. In terms of the existing arrangement, the Assessing Officer is required to take corrective steps following audit objections. The corrective measures take the form of rectification or reassessment (by reopening the case under section 147 or revision by the Principal Commissioner or Commissioner under section 263). In the case of rectification, these are generally in the nature of correction for arithmetical errors and other mistakes which are apparent from the record. The problem arises when the Assessing Officer seeks to take corrective measures by invoking the provisions of section 147 or 263 of the Income tax Act. Since the audit objections are based on material on record and there is no occasion for any new material to be brought on record in the course of audit, any reopening of assessment or review by the Principal Commissioner constitutes “change of opinion” in the eyes of the law. This being so, the corrective measure under section 147 or section 263 of the Income tax Act is held to be invalid by Courts.
In Indian & Eastern Newspaper Society vs CIT (1979) 119 ITR 996 the Supreme Court extensively considered the powers and duties of both the internal audit party of the Income-tax Department (prior to 1960) and those of the C & AG under the Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 and opined that neither statute recognises the power on such authorities to pronounce on the law and that their pronouncements on law cannot amount to “information” on the basis of which assessments can be reopened under Section 147. The same principle in our opinion should hold good for Section 263. It is also noticed that often the income-tax authorities are not in a position to overlook the audit objection on a point of law though they have taken a view after due application of mind to the legal position, due to several reasons. This has led to avoidable litigation, even though the ruling of the Supreme Court is clear and categorical.
Moreover, the Ministry of Law by its advice dated 24th June, 1982 to the Ministry of Finance (Department of Revenue) has opined, after referring to the ruling of the Supreme Court, that the ………audit objection as well as the note of the Ministry of Law cannot be the basis for the re-opening of the assessments made under section 59 of the Estate Duty Act. Therefore, the instructions referred to by the Department in para (a) of their note based on the audit objection directing the reopening of the assessments already concluded runs counter to the decision of the Supreme Court referred to above”. (Source: Page No. 996/ of Volume 6, //th Edn. Law of 1ncome Tax by Sampath Iyengar)
In spite of several court judgments to this effect, the CBDT has issued a circular to the effect that in all cases of audit objections, the Assessing Officer should initiate corrective steps irrespective of whether the objection is valid or not in the eye of law. Consequently, steps are initiated by the Assessing Officer to reopen the completed assessment or by the Principal Commissioner for revision of assessment orders. These steps give rise to several rounds of litigation; first the assessee challenges the very act of reopening or revision, as the case may be, and upon losing, the Department files appeal before the higher Courts thereby clogging the judicial system. While this process is on, the Assessing Officer proceeds to complete the assessment on merit leading to another round of litigation. In large number of cases, the assessments on merit are completed even though the Department is in disagreement with the audit objection. This Committee was informed that more than 25%of the litigation in the Department is on account of mandatory corrective measures initiated following audit objections.
In view of the above, it is recommended that to the extent the audit objections are mistakes apparent from record, it should be mandatory for the Assessing Officer to take corrective steps. However, where the correction of the audit objections require re-opening or revision of completed assessments, the same should not be permitted since it amounts to change of opinion and creates uncertainty for the taxpayer. Such audit objections may be used as material for knowledge dissemination and system improvement. In other words, such audit objections may be given prospective effect by amending the law or issuing circular, as the case may be, to remove ambiguity and eliminate all scope for litigation.
The Committee is of the view that this recommendation, if accepted, will substantially reduce litigation, will infuse certainty in the interpretation of the statute by conforming to the judicial opinion of the Supreme Court and also foster finality to the assessment proceedings.
2. Based on the above, the Committee recommends that section 147 of the Income-tax Act, 1961 should be amended as follows:-
Amendment of section 147
In section 147 of the Income-tax Act, after Explanation 2, the following Explanation shall be inserted with effect from the 1st day of April, 2017, namely:-
“Explanation 2A. – For the removal of doubts, it is hereby declared that for the purposes of this section, it shall be deemed that no income chargeable to tax has escaped assessment merely on the ground that an objection has been raised, or observation made, by any authority in the course of any audit of any assessment or re-assessment, to the effect that the assessment has not been made in accordance with the provisions of this Act.”.
3. RECOMMENDATION FOR AVOIDING REVISION OF ASSSESSMENT ON ACCOUNT OF AUDIT OBJECTIONS
Based on the discussion above, it is recommended that section 263 of the Income-tax Act, 1961 should be amended as follows:-
4. Amendment of section 263
In section 263 of the Income-tax Act, in sub-section (1), the Explanation shall be renumbered as Explanation / thereof and after Explanation / as so numbered , the following Explanation shall be inserted with effect from the 1st day of April, 2017, namely:-
“Explanation 2. – For the removal of doubts, it is hereby declared that for the purposes of this section, it shall be deemed that the order passed by the Assessing Officer is not erroneous in so far as it is prejudicial to the interests of the revenue merely on the ground that an objection has been raised, or observation made, by any authority, on a point of law, in the course of any audit of any assessment or re-assessment, to the effect that the assessment (has not been made in accordance with the provisions of this Act) or re-assessment made was erroneous in so far as it is prejudicial to the interests of the revenue”.