Reassessment Initiated Solely Based on Audit Party Objections

Reassessment Initiated Solely Based on Audit Party Objections Without New Facts Is Invalid Change of Opinion

Issue

Whether reopening of assessment under Section 147 after four years based solely on an audit party objection, without any new tangible material or failure by the assessee to disclose material facts, constitutes an impermissible change of opinion.

Facts

The assessee-company filed its return for AY 2005-06, which was initially processed under Section 143(1) and subsequently completed under Section 143(3).
An order under Section 143(3) read with Section 154 was also passed later by the Assessing Officer (AO).
Thereafter, the AO reopened the assessment under Section 147 and made additions regarding trade discount differences, cash discount differences, and unpaid bonus.
The reasons recorded for reopening explicitly stated that the action was taken after further verification of existing assessment records based on an audit party objection.
There was no allegation or finding that the assessee failed to fully and truly disclose all material facts necessary for the assessment.

Decision

In favour of Assessee: Reopening of assessment was held to be invalid. Reassessment initiated solely on an audit objection using already existing records—without any new facts—amounts to a mere change of opinion, which is impermissible in law.

Key Takeaways

Audit Objections Cannot Drive Reopening: An audit party objection cannot form the sole basis for reopening an assessment under Section 147 unless accompanied by new factual material.
Prohibition on Change of Opinion: The AO cannot review or re-examine issues already vetted during original scrutiny proceedings merely by revisiting the same record.
Full and True Disclosure Protection: Where an assessment is sought to be reopened after the expiry of four years, the Revenue must explicitly demonstrate a failure on the part of the assessee to disclose fully and truly all material facts.

IN THE ITAT DELHI BENCH ‘H’

Rajni Dua

Income-tax Officer

SUDHIR PAREEK, Judicial Member
and AMITABH SHUKLA, Accountant Member

IT Appeal No. 857 (Delhi) of 2026
[Assessment year 2005-06]

AUGUST 20, 2026

Piyush Kaushik, Adv. and Sourabh Tondon, FCA for the Appellant. Sudip Majumdar, Sr. DR for the Respondent.

ORDER

Sudhir Pareek, Judicial Member.- The instant appeal has been preferred by the appellant against the order of the learned Commissioner of Income Tax (Appeals) Delhi [“Learned CIT(A)”, for short] dated 21.11.2025 passed u/s 250 of the Income Tax Act, 1961 (for short ‘the Act’) by which the appeal of the appellant was dismissed.

2. Facts of the case may be summarized as that the appellant company filed its return of income for AY 2005-06, on 31.10.2005 showing total income at Rs. 10,25,309/-. Subsequently, the Learned AO noticed that in the Profit & loss a/c for the year under consideration the appellant has debited trade discount of Rs. 1,69,94,870/- and cash discount of Rs. 17,00,110/- whereas in the ledger account of these two expenses, the amount of expenditure shown is of Rs.24,50,901/- and Rs. 12,98,786/- respectively. Accordingly, the appellant booked inflated expenditure amounting to Rs.1,45,43,969/- and Rs.4,01,324/- respectively. The Learned AO further noticed that an amount of Rs.1,66,397/- debited in the Profit & Loss account as bonus paid, has not been actually paid till the date of filing of return. On the basis of information as above, the Learned AO had reasons to believe that income to the extent of 1,51,11,690/- has escaped assessment and accordingly the assessment was reopened u/s 147 of the Act by issuing notice u/s.148 dated 22.3.2012, which was completed on 25.3.2013 assessing total income at Rs. 1,62,27,150/-, by adding of Rs.1,51,11,690/- on account of difference in trade discount, cash discount and of bonus not paid before the filing of return of income.

3. Heard rival submissions and carefully scanned the materials available on record.

4. Reiterating the grounds of appeal, the Learned AR submitted that the assessment order dated 25.03.2013 was passed u/s 147/143(3) of the Act assessing therein the income at Rs.1,62,27,150/- for the assessment year 2005-06 deserved to be quashed only on this logic that the reassessment was initiated solely on the basis of audit party objection being inherently based on review/re-appraisal of same assessment records without their being any fresh tangible material unearthed subsequent to conclusion of original assessment being framed vide order dated 16^th Aug., 2011 u/s 143(3)/154 of the Act assessing the income at Rs. 11,15,455/-.

5. Per Contra, the Learned DR relied on the orders passed by both lower authorities.

6. A bare perusal of the assessment order, it is clearly manifested that the case was reopened only on the basis of audit objection raised by the Revenue audit party, on the reasons mentioned in the assessment order itself and Learned AR submitted that it is established principle of law that audit objections being only an information and reassessment notice based on said audit objection only, is not sustainable in the eyes of law and for this purpose, the Learned AR relied upon the judgment passed by the Hon’ble Delhi High Court in the case of FIS Global Business Solutions India (P.) Ltd. v. Asstt. CIT [2018] 408 ITR 75 (Delhi), of which relevant extract of para 5 & 6 reads as under:

“5. Carlton overseas (P.) Ltd. (supra) emphasizes reliance by the revenue on a subsequent audit report, cannot be considered as tangible material. The relevant extracts of that decision are as follows:

“8 . Ms. Prem Lata Bansal, learned counsel appearing for the Revenue has contended that audit party can on factual basis ask for reassessment and which has, therefore, been done in the present case. It is, however, admitted by her that a mere change of opinion does not permit action under section 147/148 of the Act.

9. We find that the arguments on behalf of the petitioner are well founded and it must succeed. The audit report merely gives an opinion with regard to the non-availability of the deduction both under section 80-IA was not deducted from the profits of the business while computing deduction under section 80HHC.

Clearly, therefore, there was no new or fresh material before the Assessing Officer except the opinion of the Revenue audit party.

10. Since it is settled law that mere change of opinion cannot form the basis for issuing of a notice under section 147/148 of the Act, therefore, we do not propose to burden out judgment with the said judgments. In fact, as stated above, counsel for the Revenue does not dispute this principle of law.”

6. This Court is of the opinion that Carlton overseas (P.) Ltd. (supra) concludes the issue in the present case, the audit objection merely is an information. As reiterated in Kelvinator of India Ltd. (supra) by the Supreme Court, change of information is impermissible. Revenue clearly barred by provisions of Section 147/148 of the Act.”

7. The Hon’ble High Court of Delhi in the case of Carlton Overseas (P.) Ltd. v. ITO 318 ITR 295 (Delhi), held as under:

“9. We find that the arguments on behalf of the petitioner are well founded and it must succeed. The Audit Report merely gives an opinion with regard to the nonavailability of the deduction both under section 80-JA and under section 80HHC and that the deduction under section 80-IA was not deducted from the profits of the business while computing deduction under section 80HHC. Clearly, therefore, there was no new or fresh material before the Assessing Officer except the opinion of the revenue Audit Party.”

8. On the basis of above, there is materials substance in the argument advanced on behalf of the appellant and it is established that the Learned AO simply reopened the assessment on only and solely basis of the audit party objection and there was no any fresh tangible material before the Learned AO to reopen the same. In the reasons for re-opening, it is specifically mentioned that in the year under consideration the return of income was processed u/S 143(1) of the Act and scrutiny assessment u/s 143(3) of the Act was completed on 03-12-2007 and thereafter proceedings u/s 147 of the Act was initiated, on further verification of assessment records only and assessment opened solely on the audit objection and addition without there being any iota of fresh material for re-opening the assessment and it is also argued before us by the Learned AR that there is no any stipulation to the effect that there has been any failure on the part of appellant in disclosing fully and truly all materials facts necessary for the purpose of assessment. It is settled legal position that section 147 of the Act does not postulate conferment of power upon the Learned AO to initiate reassessment proceedings upon mere change of opinion and reassessment validly ordered should necessarily be based on tangible material which an Learned Assessing Officer comes by after the original assessment and necessarily, such material is outside the record. We find material substance in the submission advanced on behalf of appellant that where reassessment was initiated solely based on an audit party objection, without any new facts and on issues already examined in original assessment, such initiation is a mere change of opinion and thus invalid. On the basis of foregoing discussions, settled legal position and by respectfully following binding judicial pronouncement mentioned hereinbefore, there is no any hesitation to infer that the Learned AO manifestly erred in making addition of Rs. 1,51,11,690/- on merits of the case vide the impugned assessment order u/s 147/143(3) of the Act Dated 25^th March, 2013 and the same deserves to be deleted.

9. Consequently, the appeal is hereby allowed as indicated above.