Bombay HC: Audit Objection Cannot Justify Reopening of Assessment under Section 148A

The assessee, a registered charitable trust under Section 12A of the Income Tax Act, 1961, was assessed for Assessment Year 2016-17 under Section 143(3). Thereafter, the Assessing Officer issued a notice under Section 148A(b) alleging income had escaped assessment. The basis of reopening was an audit objection stating that the trust had made investments in violation of Section 11(5), resulting in loss of exemption under Section 11.

The trust challenged the notice before the Bombay High Court, contending that the assessment had been completed after full disclosure and scrutiny and that the reopening was founded solely on an internal audit objection. The department argued that the audit note constituted “information” justifying reopening and that the issue went to the root of exemption eligibility.

Issue Before Court: Whether a reassessment notice under Section 148A(b) based solely on an audit objection, without any independent application of mind or new tangible material, can be sustained in law.

HC’s Ruling: The Court allowed the writ petition and held that the reassessment proceedings were invalid and without jurisdiction. The Court observed that the original assessment under Section 143(3) had examined the same investment details, and the reopening was a reappraisal of the same facts on an audit’s opinion. It reiterated that an audit objection by itself cannot constitute “information” under Section 147 for reopening an assessment.

It also observed that the AO had initially disagreed with the audit objection and proceeded only upon higher-ups’ insistence, revealing the absence of independent satisfaction. Relying upon Indian and Eastern Newspaper Society v. CIT (1979) and Adani Exports Ltd. v. DCIT, the Court held that such “borrowed satisfaction” renders the entire reopening process void.

Therefore, the reassessment notice and all subsequent proceedings were quashed.

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