Friday 2 March 2018

Reopening based on fresh materials found during Special Audit report is valid, even after four years of assessment: HC

 THE issue before the Bench is - Whether notice of reopening of assessment u/s 148, based on fresh tangible material in special audit report, which was not available at the time of original assessment order, can be termed void by taking shelter of the first proviso to Section 147, if issued after four years of relevant AY. And the HC verdict is NO.   


Facts of the case
The Assessee-company, an electronic spot exchange for commodities, filed its return for the relevant AY and accordingly assessment was completed u/s 143(3). However, the AO issued notice u/s 148 seeking to re-open the assessment for AY in question. The reasons recorded in support of the notice for reopening indicates the basis of the reasonable belief on the part of the AO that income chargeable for tax had escaped assessment was the special audit report of PwC at the direction of the Forward Markets Commission, where it was observed that several officers of one entity named Financial Technologies India Ltd. (FTIT) and its associate and group companies were in control and management of Assessee and that erstwhile management of Assessee had executed several dubious and illegal transactions with several related parties and entities in which the management had significant interests. The observations in the audit report made it apparent that persons associated with FTIL and erstwhile officers of MCX were acting at the behest of FTIL, and had conspired to commit a large scale economic fraud for their own benefit at the cost of MCX and its shareholders. According to the report, the new management of the Assessee had also filed various criminal complaints against the concerned companies and persons who where involved in the commission of the offence. Thereafter, the AO perused the report of the auditor and found that the Assessee had not disclosed fully and truly all material facts during the assessment proceedings u/s. 143(3) and hence, he had reason to believe that the income chargeable to tax for the year under consideration had escaped assessment.
After hearing the parties, the High Court held that,
++ the assessment for the subject Assessment Year 2010-11 was completed on 22nd March 2013 under Section 143(3) of the Act. At that time admittedly the report of the special auditor dated 21st April 2014 was not available. Therefore, it is contended that the notice would be hit by the proviso as it is beyond the period of four years relevant to the Assessment Year 2010-11, as there was no failure on the part of the assesee to truly and fully disclose material facts necessary for assessment. This was at the time when the assessment was completed on 22nd March 2013. In support reliance is placed upon the decision of the Apex Court in the case of Indian Oil Corporation v. Income Tax Officer. Such decision will have no application, as in that case during the regular assessment proceeding allocation of expenses had been done on the basis of the auditor's opinion. During the regular assessment proceedings auditor's opinion was sought for, but not produced. Nevertheless the regular assessment was completed without awaiting the auditor's opinion. In such circumstances, the Court held that there is no failure to disclose fully and truly all basic facts;
++ however, in this case the special audit report dated 21st April 2014 is not available during the regular assessment, leading to order dated 22 March 2013. The special audit report is the fresh tangible material now available with the Assessing Officer. On examination of the special audit report dated 21 August 2014, the Assessing Officer found that claims made by the assessee for deduction and expenditures were excessive and to that extent the claims made were prima facie bogus (subject to examination in assessment proceedings). Therefore in such circumstances prima facie the assessee cannot take shelter of the first proviso to Section 147 of the Act. Further the reasons recorded does indicate that the special audit report dated 21 April 2014 is the basis of the reopening notice. Thus in such facts, it cannot be said that the Assessing Officer did not have reasonable belief that prima facie income chargeable to tax has escaped assessment. 

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