2011 (7) TMI 645 - HC - Income Tax

Special audit under 142(2A) - Assessee, a goverment company made false statements in the return and thereafter did not make any effort to complete the audit for two years - Held That - As no books were produced till the date of appointment of auditors. Reports of misfeasance, gross neglect or breach of duty are on the part of the principal officer or director & where the approving authority has considered the account books along with auditors reports and finds that there was a malafide intention to avoid the verification of the books and accounts and that there are various comments on the auditors justifying gross neglect, and misappropriation of funds, the satisfaction, in this case for Special Audit is justified.

Issues Involved:
1. Legality of the Special Audit order under Section 142(2A) of the Income Tax Act, 1961.
2. Compliance with procedural requirements for Special Audit.
3. Allegations of false statements and non-compliance by the petitioner.
4. Petitioner's conduct and its impact on the legal process.
5. Justification for Special Audit based on complexity and interest of revenue.

Detailed Analysis:

1. Legality of the Special Audit Order under Section 142(2A):
The petitioner, a government company, challenged the order dated 28.4.2011 by the Chief Commissioner of Income Tax (CCIT) granting approval for a Special Audit under Section 142(2A) of the Income Tax Act, 1961. The petitioner argued that the necessary ingredients for ordering a Special Audit, namely the complexity of accounts and the interest of revenue, were not satisfied. However, the court found that the CCIT had exercised his discretionary administrative powers correctly, considering the nature of the petitioner's accounts and the comments in the auditor's report indicating discrepancies, misfeasance, and gross negligence.

2. Compliance with Procedural Requirements for Special Audit:
The petitioner contended that sufficient opportunity was not given before directing the Special Audit. The court noted that the petitioner had previously approached the court on similar grounds and was directed to present its case before the CCIT. Despite this, the petitioner failed to file a certified copy of the court's order with the CCIT. The court found that the petitioner had been given multiple opportunities to comply with the procedural requirements, including notices and hearings, but had failed to produce the necessary documents and accounts.

3. Allegations of False Statements and Non-Compliance by the Petitioner:
The court highlighted that the petitioner made a false statement in its e-return, claiming that its accounts were audited by P.D. Agarwal & Co., which was later found to be untrue. The petitioner delayed the submission of accounts and failed to comply with multiple notices and summonses issued by the assessing officer. The auditor's report also indicated that essential records were not produced, and there were significant discrepancies in the accounts.

4. Petitioner's Conduct and Its Impact on the Legal Process:
The court criticized the petitioner for misleading the court in the earlier writ petition by concealing the fact that the order of approval for the Special Audit was passed on 28.12.2010, not 14.12.2010. The petitioner's conduct of seeking extensions and then approaching the court at the last minute for a stay order was seen as an attempt to delay the audit process. The court found that the petitioner's actions demonstrated a lack of good faith and an intention to obstruct the legal process.

5. Justification for Special Audit Based on Complexity and Interest of Revenue:
The court referred to the Supreme Court's decision in Sahara India (Firm) v. CIT, emphasizing that the order for Special Audit should be based on the complexity of accounts and the interest of revenue. The court found that the CCIT had considered the auditor's reports, which highlighted gross neglect and misappropriation of funds, justifying the need for a Special Audit. The petitioner's large-scale operations and incomplete accounts further supported the decision for a Special Audit.

Conclusion:
The court dismissed the writ petition, finding that the CCIT had acted within his discretionary powers under Section 142(2A) and that the petitioner had not been denied a reasonable opportunity. The petitioner's conduct of making false statements and delaying compliance was condemned, and the court imposed costs of Rs. 1 lakh on the petitioner for misleading the court and obstructing the audit process. The petitioner was directed to deposit the costs within one month in the account of the Allahabad High Court Legal Service Committee.

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