1998 (12) TMI 82 - HC - Income Tax

Natural Justice, Compulsory Audit, Complexity, Interest Of Revenue, Approval, Application Of Mind

Summary

Issues Involved:
1. Interpretation of the provisions of Section 142(2A) of the Income-tax Act, 1961.
2. Validity of the special audit order under Section 142(2A) issued by the Assessing Officer.

Summary:

1. Interpretation of Section 142(2A):
The court examined the provisions of Section 142(2A) of the Income-tax Act, 1961, which allows the Assessing Officer to direct a special audit of accounts if, having regard to the nature and complexity of the accounts and the interests of the Revenue, it is deemed necessary. This requires the previous approval of the Chief Commissioner or Commissioner. The court emphasized that the formation of opinion must be based on objective considerations, not subjective satisfaction. The words "having regard to" indicate that all relevant factors must be considered. The court cited several precedents to underline that administrative decisions must be made in good faith and based on relevant considerations.

2. Validity of the Special Audit Order:
The court scrutinized the process followed by the Assessing Officer and the Chief Commissioner in issuing the special audit order. It was found that the Chief Commissioner merely nominated an auditor without granting prior approval based on substantive materials. The court noted that the Assessing Officer had not examined the books of account before forming an opinion on the complexity of the accounts. The court held that the order was passed without proper application of mind, making it invalid. The court also highlighted that the power under Section 142(2A) should not be exercised lightly and must be based on objective criteria. The court quashed the impugned orders and allowed the Assessing Officer to proceed afresh in accordance with the law. The writ petition was disposed of without any order as to costs.