2004 (2) TMI 712 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the appointment of a special auditor under Section 142(2A) of the Income Tax Act, 1961.
2. Compliance with principles of natural justice.
3. Examination of books of account by the Assessing Officer.
4. Role and approval process of the Commissioner of Income Tax.
5. Comparison between audit under Section 44AB and Section 142(2A) of the Income Tax Act.

Detailed Analysis:

1. Validity of the Appointment of a Special Auditor under Section 142(2A):
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 contended that the Commissioner lacked material to approve the proposal and that the order was passed without compliance with the principles of natural justice. The court noted that the Assessing Officer must form an opinion regarding the nature and complexity of the accounts and the interest of the Revenue before appointing a special auditor. The opinion must be based on objective considerations and not subjective satisfaction. The court found that neither the Assessing Officer nor the Commissioner examined the books of account, which is a prerequisite for forming an opinion under Section 142(2A).

2. Compliance with Principles of Natural Justice:
The petitioner argued that the impugned order was passed without giving them an opportunity to be heard, violating the principles of natural justice. The court agreed, emphasizing that the Assessing Officer must make a genuine attempt to understand the accounts and seek explanations from the assessee. The court held that the Assessing Officer's failure to examine the books of account and the Commissioner's mechanical approval without proper scrutiny violated the principles of natural justice.

3. Examination of Books of Account by the Assessing Officer:
The court stressed that the Assessing Officer must examine the books of account to understand their nature and complexity before forming an opinion for a special audit. The court found that the Assessing Officer did not direct the production of books of account, nor did he examine them, which is a mandatory requirement under Section 142(2A). The court rejected the argument that examining other materials like returns, balance sheets, and profit and loss accounts was sufficient for forming an opinion.

4. Role and Approval Process of the Commissioner of Income Tax:
The court held that the Commissioner should not give approval mechanically. The Commissioner must examine whether the Assessing Officer has correctly formed an opinion based on the examination of books of account. In this case, the Commissioner recorded his approval without verifying if the Assessing Officer had examined the accounts, which was deemed improper. The court emphasized that the Commissioner's role is to support and accept the Assessing Officer's act, provided it is done correctly.

5. Comparison between Audit under Section 44AB and Section 142(2A):
The court noted that Section 44AB provides for compulsory audit for certain assessees based on their turnover, while Section 142(2A) can be applied irrespective of turnover if the accounts are complex and in the interest of the Revenue. The court observed that the purpose of both sections is to ensure the correctness of accounts and prevent tax evasion. The court highlighted that the petitioner's accounts were already audited under Section 44AB and by the Director of Co-operative, reducing the likelihood of manipulated accounts. The court concluded that special audit under Section 142(2A) should be resorted to sparingly and only when absolutely necessary.

Conclusion:
The court set aside the impugned order appointing a special auditor, citing non-compliance with the mandatory requirements of examining the books of account and the principles of natural justice. The court allowed the respondents to proceed afresh, provided they comply with the observations made in the judgment. The petition succeeded, and there was no order as to costs.