1999 (7) TMI 68 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the appointment of a special auditor u/s 142(2A) of the Income-tax Act, 1961.
2. Compliance with natural justice principles in the approval process for the special auditor.
3. Applicability of section 142(2A) in cases with turnovers exceeding Rs. 40 lakhs.
4. Justification for the special auditor's appointment considering the nature and complexity of the accounts.

Summary:

1. Validity of the Appointment of a Special Auditor u/s 142(2A):
The Revenue challenged the stay of the special auditor's appointment, while the assessee contested the issuance of notice u/s 142(1) without due consideration. The court examined whether the accounts of the assessee should be audited by a special auditor or by the Assessing Officer (AO) himself. The AO, with the Commissioner's approval, can direct an audit if the accounts are complex and in the interests of the Revenue. The court emphasized that the AO must form an opinion on the necessity of a special audit, considering the nature and complexity of the accounts.

2. Compliance with Natural Justice Principles:
The assessee argued that the Chief Commissioner approved the special auditor's appointment without granting a hearing. The court found that the Chief Commissioner provided an opportunity for the assessee to submit written objections, which were considered. Thus, the court held that the principles of natural justice were not violated, as the assessee was given a chance to present its case.

3. Applicability of Section 142(2A) in High Turnover Cases:
The assessee contended that section 142(2A) should not apply to businesses with turnovers exceeding Rs. 40 lakhs, as per the Andhra Pradesh High Court's decision. The court disagreed, stating that the legislature did not intend to limit the application of section 142(2A) based on turnover. The provision is meant to address cases where the accounts' complexity necessitates a special audit, regardless of turnover.

4. Justification for Special Auditor's Appointment:
The court reviewed the AO's proposal, which highlighted several discrepancies and complexities in the assessee's accounts, including significant transactions and deductions without proper documentation. The court noted that the AO's inability to verify the accounts justified the special auditor's appointment. The court emphasized that the special auditor's role is to ensure accurate assessment of income and protect the Revenue's interests.

Conclusion:
The court set aside the impugned order dated April 5, 1999, and directed the AO to proceed with the special auditor's appointment if justified. The court also instructed the AO not to insist on the production of all documents unless necessary for the assessment. The assessment based on the special auditor's report should not be communicated to the assessee or given effect until the pending petition is resolved. Consequently, Appeal No. 401 of 1999 was allowed, and Appeal No. 425 of 1999 was disposed of accordingly.