Delhi High Court Stays Reassessment Order Based On Internal Audit Objection

The Delhi High Court has stayed the reassessment order based on an internal audit objection.

The division bench of Justice Rajiv Shadher and Justice Tara Vitasta Ganju has observed that the expression "any audit objection" was introduced only by the Finance Act, 2022, although with effect from April 1, 2012. Prior to the amendment, the expression obtained in Explanation 1(ii) appended to Section 148 referred to the "Comptroller and Auditor General of India."

"We are, prima facie, also of the view that if the AO, according to the respondents or revenue, had committed an error in law, perhaps they could have taken recourse, at the appropriate time, to the provision of Section 263 of the Act," the court said.

The petitioner/assessee sold shares and earned long-term capital gains. Long-term capital gains were taxed in the previous fiscal year 2014-15. In the AY in issue, the petitioner claimed exemption under Section 54F of the Income Tax Act.

The petitioner has assailed the order dated July 23, 2022, passed under Section 148A(d), and the consequential notice of even date, i.e., July 23, 2022, issued under Section 148 of the Income Tax Act, 1961.

The petitioner contended that the reassessment proceedings were based on an internal audit objection, whereas, at the relevant point in time, reassessment proceedings, if at all, could have been triggered based on an objection raised by the Comptroller and Auditor General of India (CAG).

The petitioner urged that the audit objection could not have been taken as "material," based on which reassessment proceedings could have been initiated. The deduction claimed under Section 54F would not constitute an "asset" under Section 149. Since the assessment year in issue is AY 2015–2016, reassessment proceedings could not have been commenced unless the petitioner failed to disclose, truly and fully, all material facts.

The issue raised was whether deductions claimed under Section 54F would constitute an "asset" under Section 149 of the Act so as to enable the department to reopen assessments beyond the stipulated period of three years.

Under the new regime, reopening of assessments beyond the period of three years can only be initiated if the alleged escapement chargeable to tax is represented in the form of an asset.

Yet another issue raised was whether the department can reopen the assessment on the basis of an internal audit objection if reopening is done in 2021 when the term "any audit objection" is not specifically mentioned in the statutory provision.

The court was of the view that the matter required examination and listed the matter on August 29, 2023.

Case Title: Kum Kum Kohli Versus ACIT

Citation: W.P.(C) 930/2023

Date: 25.01.2023

Counsel For Petitioner: Advocates Sumit Lalchandani with Salil Kapoor, Tarun Chanana, and Ananya Kapoor

Counsel For Respondent: Sr. Standing Counsel Sunil Agarwal

Click Here To Read The Order