2013 (12) TMI 419 - HC - Income Tax

Directions for special audit - Held that - The Assessing Officer after making genuine and honest attempt to understand the accounts before arriving at the conclusion that the accounts are so complex that special audit is required to be conducted - The Assessing Officer gave ample opportunity to the petitioner to satisfy her with regard to doubts and after seeking explanation of the petitioner, the findings were recorded that the accounts are so complex that special audit would be required - Following Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-I and Anr. 2008 (4) TMI 4 - Supreme Court - The requirement of Section 142(2A) must first be satisfied in every case that the objective assessment of the accounts of the assessee as to its nature and complexity and without there being such finding special audit ought not to be directed - If the accounts after a genuine and past attempt giving opportunity to the petitioner to clarify any doubt and after seeking explanation are found to be complex in nature and further that interest of revenue is involved, the Assessing Officer with a safeguard of obtaining approval from the Commissioner, can direct the special audit - Where such a satisfaction has been arrived at, in bonafide manner after making a genuine and past attempt to understand the accounts and after giving opportunity to the assessee to submit explanation, it cannot be said that unless any of the conditions given in the guidelines are satisfied, special audit cannot be directed - Decided against assessee.

Issues Involved:
1. Legality of the special audit direction under Section 142(2A) of the Income Tax Act, 1961.
2. Compliance with the guidelines for selection of cases for audit under Section 142(2A).
3. Adequacy of the opportunity provided to the petitioner to explain the accounts.
4. Validity of the Assessing Officer's satisfaction regarding the complexity of accounts and the interest of revenue.

Issue-wise Detailed Analysis:

1. Legality of the special audit direction under Section 142(2A) of the Income Tax Act, 1961:

The petitioner challenged the direction for a special audit issued by the Assessing Officer under Section 142(2A) of the Income Tax Act, 1961. The petitioner argued that the Assessing Officer and the Commissioner of Income Tax recorded their satisfaction regarding the complexity of the accounts and the interest of revenue without properly examining the accounts. The court, however, found that the Assessing Officer had provided sufficient opportunities to the petitioner to explain the accounts and the expenditure incurred. The court concluded that the order directing the special audit did not suffer from any jurisdictional error.

2. Compliance with the guidelines for selection of cases for audit under Section 142(2A):

The petitioner argued that their case did not fall within any of the categories outlined in the guidelines for selecting cases for audit under Section 142(2A). The court referenced the Supreme Court's decision in Sahara India (Firm), which held that the prerequisites for exercising power under Section 142(2A) are the nature and complexity of the accounts and the interest of the revenue. The court emphasized that the guidelines are meant for guidance and cannot override the specific powers granted under the Act. The court found that the Assessing Officer had made a genuine attempt to understand the accounts and that the complexity and interest of revenue justified the special audit.

3. Adequacy of the opportunity provided to the petitioner to explain the accounts:

The petitioner contended that they were not given adequate time to produce all the required documents and that their detailed reply was not considered before the approval order was passed. The court noted that the Assessing Officer had given multiple opportunities to the petitioner to satisfy her with regard to the accounting procedures and the accounts. The court found that the Assessing Officer had made a genuine and honest attempt to understand the accounts and had sought explanations from the petitioner before concluding that a special audit was necessary.

4. Validity of the Assessing Officer's satisfaction regarding the complexity of accounts and the interest of revenue:

The court examined the detailed reasons provided by the Commissioner of Income Tax in the approval order, which highlighted various issues such as the sale and purchase of investments, the classification of income, and the accounting policies regarding impairment of assets and foreign currency transactions. The court found that the Assessing Officer's opinion was based on objective criteria and that the accounts were indeed complex. The court concluded that the Assessing Officer's satisfaction regarding the complexity of the accounts and the interest of revenue was valid and justified the direction for a special audit.

Conclusion:

The court dismissed the writ petition, finding no error in law in the Assessing Officer's direction for a special audit. The court held that the Assessing Officer had provided sufficient opportunities to the petitioner, made a genuine attempt to understand the accounts, and that the complexity of the accounts and the interest of revenue justified the special audit.

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