The amended reassessment regime under the Income-Tax Act, 1961 (‘IT Act’) has changed the landscape dramatically. Under this regime, to initiate reassessment proceedings, the Assessing Officer must have ‘information’ in his possession, which suggests that income chargeable to tax has escaped assessment. Under the amended provisions (and prior to the 2022 amendment), Section 148, Explanation 1 Clause(ii) of the IT Act dealt with a situation wherein any final objection raised by the Comptroller and Auditor General of India (‘CAG’) would constitute ‘information’ to suggest that income chargeable to tax has escaped assessment. This was qualified by the use of the expression that “the assessment has not been made in accordance with the provisions of the Act”.

By way of the Finance Act, 2022, while retaining the above expression, an amendment to the term ‘information’ in the context of Clause(ii) of Explanation 1, was brought in, wherein the words “final objection raised by the Comptroller and Auditor General of India” was replaced by the term “any audit objection”. The law forming part of the statute (under the amended reassessment regime) is contrary to the settled position of law on this point that ‘audit’ is not competent to opine on a point of law. Consequently, any objection that an assessment is not in accordance with the provisions of the IT Act would be beyond the competence of the audit.

In this regard, the issue of whether a view expressed by an internal audit party of the Income-Tax Department on a point of law could be regarded as ‘information’ for the purposes of initiating proceedings under Section 147 of the IT Act (under the erstwhile law), was put up for consideration before the Supreme Court of India^[1]. The Apex Court, while appreciating the difference between fact and law, had in unequivocal words held that the opinion of internal audit party of the Income-Tax Department or an audit party of the CAG on a point of law cannot be regarded as ‘information’ for the purposes of Section 147 of the IT Act.

The Court reasoned that these bodies perform essentially administrative/ executive functions and cannot be attributed the power of judicial supervision over the quasi-judicial acts of the Income-Tax authorities. The Court further held that the true evaluation of the law in the context of an assessment must be made directly and solely by the Income-Tax Officers.  The Court also recognised that the internal audit department was set up primarily for imposing a check over the arithmetical accuracy of the computation of income and the determination of tax. While holding the above, the Court also placed reliance on the CAG’s (Duties, Powers and Conditions of Services) Act, 1971 and the Board’s Circular^[2] dated July 28, 1960. While specifically referring to Paragraph 3 of this Circular, the Court held that the audit department should not in any way substitute itself for the Revenue authorities in the performance of their statutory duties.

Taking cue from the above, it can be safely concluded that the subject amendment does not reinvent the law already settled on the point that an audit objection cannot opine/ question/ interpret the law declared by the competent authorities under the IT Act. Therefore, any ‘objection’ raised by the audit party questioning the assessment as not being in accordance with the provisions of the IT Act cannot form ‘information’ suggesting the escapement of income chargeable to tax.

[1] Indian & Eastern Newspaper Society v. Commissioner of Income-Tax, [1979] 2 Taxman 197 (SC), (Supreme Court of India).

[2] Circular No. 14/19/56-11.