2013 (8) TMI 448 - HC - Income Tax

Special Audit of the Trust under section 142(2A) of the Income Tax Act, 1961 - complexity of the accounts Held that - Assessing Officer in his reply affidavit dated 19 June 2013 has in terms denied the assertion of the Petitioner that the books of accounts were not examined and/or verified by him. - Further in the affidavit it is stated that while verifying books of accounts the Assessing Officer came to the conclusion that the audit report and the books of accounts submitted by assessee were faulty and unreliable as auditor had not reported related party transactions - At no stage prior to the filing of this petition, has the petitioner taken up the plea that the Assessing Officer had not examined the books of accounts of the petitioner. In fact, even at the hearing before the Commissioner of Income Tax for purposes of considering grant to approval to carry out Special Audit, the petitioner s only submission as recorded in the approval letter dated 25 March 2013 was only that the accounts are not complex. There is not even a suggestion about the Assessing Officer concluding about the complexity of the accounts without having verified/examined the same - Condition precedent for exercising powers under Section 142(2A) of the said Act, viz nature and complexity of accounts of the assessee have been satisfied. Reliance is placed upon the decision in the case of Joint Commissioner of Income tax v/s. I.T.C. Ltd., 1999 (7) TMI 68 - CALCUTTA High Court , wherein it was held that it is not possible for an Assessing Officer to look into the accounts and to verify whether each of the entries in the accounts reflects genuine transactions if the transactions are large in number. Therefore, in such a case, looking at large number of the transactions, the Assessing Officer can ask for the approval for the appointment of special auditor - In the present facts also, the transactions are large in number as it cover 10 entities and having turnover of Rs.100 Crores. Thus, the appointment of Special Auditor in terms of Section 142 (2A) of the Act cannot be found fault with Decided against the Assessee. Effect of amendment to section 142(2A) vide Finance Act, 2013 - Petitioner relied upon the above provisions to contend that prior to 1 June 2013, the volume of accounts and/or doubts about correctness of accounts would not warrant a special audit. - Held that - In any event, we need not examine the same as we are of the view that even under the unamended provision of Section 142 (2A) of the said Act, the Assessing Officer has properly exercised its jurisdiction to order a special audit after obtaining the approval of the Chief Commissioner for the same. - Decided against the assessee.

Summary

Issues Involved:
1. Legality of invoking Section 142(2A) of the Income Tax Act for a special audit.
2. Examination of the complexity of accounts as a condition precedent for a special audit.
3. Impact of non-disclosure of related party transactions and accounting policies.
4. Prejudice caused to the petitioner by the special audit order.
5. Applicability of judicial precedents and statutory amendments.

Detailed Analysis:

1. Legality of Invoking Section 142(2A) of the Income Tax Act for a Special Audit:
The petitioner challenged the order dated 30 March 2013, directing a special audit under Section 142(2A) of the Income Tax Act, 1961. The petitioner argued that the Assessing Officer (AO) did not examine the books of accounts and hence could not conclude that the accounts were complex, which is a prerequisite for invoking Section 142(2A). The AO, however, contended that the books were verified and found to be complex, necessitating a special audit. The court found the AO's statement credible and upheld the legality of invoking Section 142(2A), stating that the accounts had been verified and deemed complex.

2. Examination of the Complexity of Accounts as a Condition Precedent for a Special Audit:
The petitioner argued that the AO did not provide any findings regarding the complexity of the accounts, which is essential for a special audit. The court noted that the AO had indeed examined the books and found issues such as non-disclosure of related party transactions and accounting policies. The court concluded that the complexity of the accounts was established, and the special audit was warranted.

3. Impact of Non-Disclosure of Related Party Transactions and Accounting Policies:
The AO found that the auditor did not report related party transactions, raising doubts about the correctness of the audit. The petitioner contended that these transactions were at arm's length and did not require special disclosure. The court held that the non-disclosure warranted a special audit to ensure the income of the trust was not diverted from its charitable objectives. The court emphasized the importance of a proper audit for trusts claiming tax exemptions under Section 11 of the Act.

4. Prejudice Caused to the Petitioner by the Special Audit Order:
The petitioner argued that the special audit caused serious prejudice, especially since it was ordered at the fag end of the assessment proceedings. The court, however, found no prejudice, stating that the special audit would ensure the correct determination of income and the continuation of tax exemptions under Sections 11 and 12 of the Act. The court noted that the absence of a special audit could jeopardize the petitioner's tax exemptions.

5. Applicability of Judicial Precedents and Statutory Amendments:
The petitioner cited several judicial precedents, including Sahara India (Firm) v. CIT and Delhi Development Authority v. UOI, to argue against the special audit. The court distinguished these cases based on their facts and upheld the special audit in the present case. The petitioner also referred to the Finance Act, 2013, which amended Section 142(2A) to include "volume of accounts" and "doubts about the correctness of accounts" as grounds for a special audit. The court held that even under the unamended provision, the AO had appropriately exercised his jurisdiction for a special audit.

Conclusion:
The court dismissed the writ petition, upholding the AO's order for a special audit under Section 142(2A) of the Income Tax Act. The court found that the complexity of the accounts and the non-disclosure of related party transactions justified the special audit. The court also ruled that no prejudice was caused to the petitioner by the special audit, which was necessary to ensure the correct determination of income and the continuation of tax exemptions.