2004 (2) TMI 48 - HC - Income Tax

Special audit approval - By the instant writ application the petitioner has challenged an order passed by the CIT appointing a special auditor u/s 142(2A) and also incidentally the vires of section 142(2A) in so far as it covers the same field as section 44AB as regards its constitutionality - it would be Commissioner s duty to examine on receipt of his proposal, whether the Assessing Officer has correctly done it or not, if he finds that this requirement has not been fulfilled then he must not approve of the same - He has not made any attempt in doing so, rather he has come to his own findings different from the Assessing Officer. Accordingly, the approval is not in consonance with the requirement of law - impugned order is set aside

Issues Involved:
1. Legality of the Commissioner's order appointing a special auditor under section 142(2A) of the Income-tax Act, 1961.
2. Compliance with the principles of natural justice.
3. Examination of the complexity and nature of accounts.
4. Necessity of prior examination of books of account by the Assessing Officer.
5. Validity of the approval process by the Commissioner of Income-tax.

Issue-wise Detailed Analysis:

1. Legality of the Commissioner's Order:
The petitioner challenged the order dated June 13, 2003, appointing a special auditor under section 142(2A) of the Income-tax Act, 1961. The petitioner argued that the Commissioner had no material to approve the Assessing Officer's proposal and that the order was passed without complying with the principles of natural justice.

2. Compliance with the Principles of Natural Justice:
The petitioner contended that the power under section 142(2A) could not be exercised without satisfying two conditions: forming an opinion regarding the nature and complexity of the accounts and the interest of the Revenue, and obtaining previous approval from the Chief Commissioner/Commissioner of Income-tax. The court noted that the Assessing Officer must make a genuine attempt to understand the accounts and seek explanations from the assessee before forming an opinion. The petitioner's objections were not properly considered, and no opportunity was given to the petitioner to present its case against the proposal for a special audit.

3. Examination of the Complexity and Nature of Accounts:
The court observed that the Assessing Officer must examine the books of account to understand their nature and complexity. A cursory look at the accounts is insufficient. The opinion must be based on objective considerations. The court cited several precedents, including Peerless General Finance and Investment Co. Ltd. v. Deputy CIT, Bata India Ltd. v. CIT, and Swadeshi Cotton Mills Co. Ltd. v. CIT, which emphasized the necessity of examining the accounts before forming an opinion.

4. Necessity of Prior Examination of Books of Account by the Assessing Officer:
The court found that neither the Assessing Officer nor the Commissioner examined the books of account. The Assessing Officer relied on the order of assessment, returns, profit and loss account, and balance-sheet without making an attempt to understand the accounts. The court rejected the argument that examining all the books of account was unnecessary and held that forming an opinion without examining the accounts was not permissible.

5. Validity of the Approval Process by the Commissioner of Income-tax:
The court concluded that the Commissioner mechanically approved the proposal without considering whether the Assessing Officer had examined the books of account. The approval process was not in accordance with the law, as it lacked objective consideration and independent application of mind. The court emphasized that the Commissioner should not approve the proposal without ensuring that the Assessing Officer had fulfilled the necessary requirements.

Conclusion:
The court set aside the impugned order of approval for the special audit under section 142(2A) of the Income-tax Act, 1961. The court held that the Assessing Officer and the Commissioner had not exercised their jurisdiction as per the mandate of the section. The court directed that any action taken based on the impugned order should be nullified and restored to the original position. The judgment allows the respondents to proceed afresh, complying with the court's observations. The petition succeeded, and there was no order as to costs.

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