2007 (12) TMI 303 - AT - Income Tax

Summary

Issues Involved:
1. Validity of directions under section 142(2A) for special audit.
2. Whether the assessment order was barred by limitation.
3. Treatment of certain advances as bogus credits under section 68.
4. Disallowance of expenses claimed as reimbursement.

Detailed Analysis:

1. Validity of Directions Under Section 142(2A) for Special Audit:
The assessee challenged the directions for a special audit under section 142(2A) as illegal and invalid. The CIT(A) dismissed this challenge, noting that the assessee had not approached the High Court for a writ petition. The assessee argued that non-challenge before the High Court does not bar the challenge before appellate authorities, citing section 246(1)(a) and various case laws (e.g., Smt. Bhagwant Kaur v. CIT, Mandal Ginning & Pressing Co. Ltd. v. CIT). The Tribunal considered whether it could examine the legality of such directions, given that no internal remedy against the direction under section 142(2A) is provided. The Tribunal referred to the Supreme Court's decision in Rajesh Kumar v. Dy. CIT, which held that judicial review of directions under section 142(2A) is not within the appellate authority's purview. Consequently, the Tribunal concluded that the legality of directions for special audit cannot be challenged before an appellate authority.

2. Whether the Assessment Order Was Barred by Limitation:
The assessee contended that the assessment order was barred by limitation as the directions under section 142(2A) were illegal, and thus, the extension of limitation under section 153 Explanation 1(iii) was inapplicable. The Tribunal noted that the legality of directions under section 142(2A) impacts the applicability of section 153 Explanation 1(iii). However, it held that even if the directions were illegal, the period during which the special audit was conducted should be excluded from the limitation period, based on the principle of good faith and due diligence in administrative jurisprudence. Therefore, the assessment order was not barred by limitation.

3. Treatment of Certain Advances as Bogus Credits Under Section 68:
The Assessing Officer treated Rs. 5,23,500 as bogus credits, noting that some enquiry letters sent to creditors were returned unserved. The CIT(A) granted relief of Rs. 1,23,000 for credits with received confirmations. The assessee argued that the addresses were provided, and the Assessing Officer did not ask to produce the creditors. The Tribunal found merit in the assessee's claim that the Assessing Officer did not require the physical production of creditors and noted that some replies were received shortly after the hearing. Consequently, the Tribunal restored the issue to the Assessing Officer for fresh adjudication, allowing the assessee to present the creditors.

4. Disallowance of Expenses Claimed as Reimbursement:
The Assessing Officer disallowed Rs. 20,06,980 claimed as reimbursement of expenses, citing lack of supporting vouchers. The CIT(A) reduced the disallowance to Rs. 7,78,818, applying an 8% profit rate as per section 44AD. The assessee presented a certificate from Amway India Enterprises confirming that vouchers were retained by them. The Tribunal noted that the necessary details were with Amway India Enterprises and restored the issue to the Assessing Officer for fresh adjudication, allowing the assessee to provide the necessary vouchers.

Conclusion:
The Tribunal dismissed the challenges to the legality of directions under section 142(2A) and the assessment order's timeliness. It restored issues related to bogus credits and disallowed expenses to the Assessing Officer for fresh adjudication, allowing the assessee to present further evidence. The assessee's appeal was partly allowed, and the department's appeal was allowed for statistical purposes.