2010 (2) TMI 625 - HC - Income Tax

Special audit order for special audit - nature of the accounts is complex and in the interest of the Revenue, special audit is necessary - special audit for the reasons stated in the order cannot be said to be without any material appeal dismissed

Issues Involved:
1. Validity of the Special Audit Order under Section 142(2A) of the Income-tax Act.
2. Compliance with Principles of Natural Justice.
3. Complexity of Accounts and Interest of Revenue.
4. Adequacy of Reasons and Opportunity Provided.
5. Mechanical Approval by Commissioner of Income-tax.
6. Financial Burden on the Petitioner due to Special Audit.

Detailed Analysis:

1. Validity of the Special Audit Order under Section 142(2A) of the Income-tax Act:
The petitioner sought relief to quash the order dated December 31, 2009, passed by the Additional Commissioner of Income-tax, Varanasi, and the Commissioner of Income-tax, Varanasi, for a special audit of the petitioner's accounts for the assessment year 2007-08. The court examined whether the order directing a special audit was valid under Section 142(2A) of the Income-tax Act.

2. Compliance with Principles of Natural Justice:
The court noted that the Supreme Court in *Rajesh Kumar v. Deputy CIT* and *Sahara India (Firm) v. CIT* mandated the necessity of giving an opportunity to the assessee before issuing a direction for a special audit. The court observed that the petitioner was given an opportunity to respond to the show-cause notice, and the reasons for the special audit were communicated.

3. Complexity of Accounts and Interest of Revenue:
The court emphasized that the twin conditions of "nature and complexity of the accounts" and "the interests of the Revenue" are prerequisites for exercising power under Section 142(2A). The court found that the petitioner's accounts were not audited under Section 619 of the Companies Act, and the provisional balance-sheet and profit and loss account contained several discrepancies. The court concluded that the nature of the accounts was complex, and a special audit was necessary to protect the interests of the Revenue.

4. Adequacy of Reasons and Opportunity Provided:
The court examined the reasons provided in the show-cause notice and the petitioner's reply. The court found that the petitioner admitted discrepancies in the provisional balance-sheet, such as a negative cash balance and incorrect opening balances. The court held that the reasons for the special audit were adequately communicated, and the petitioner was given a reasonable opportunity to respond.

5. Mechanical Approval by Commissioner of Income-tax:
The petitioner argued that the Commissioner of Income-tax granted mechanical approval for the special audit without applying his mind. The court reviewed the Commissioner's approval and found that it was based on the proposal sent by the Additional Commissioner and the material on record. The court held that the approval was not mechanical and reflected the application of mind.

6. Financial Burden on the Petitioner due to Special Audit:
The petitioner contended that the special audit would impose a financial burden. The court noted that after the insertion of the proviso to sub-section (2D) to Section 142 by the Finance Act, 2007, the remuneration of the accountant is now payable by the Chief Commissioner or the Commissioner. Therefore, there is no financial burden on the petitioner.

Conclusion:
The court concluded that the special audit was justified due to the complexity of the accounts and the need to protect the interests of the Revenue. The court found that the petitioner was given a reasonable opportunity to respond, and the Commissioner's approval was not mechanical. The court dismissed the writ petition, declining to exercise its extraordinary jurisdiction under Article 226 of the Constitution of India.

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