2014 (5) TMI 855 - HC - Income Tax

Validity of direction of special audit Failure to produce books of accounts - Held that - At various stages of the assessment for AY 2011-12, sufficient opportunities were granted to the assessee to produce the tax audit report u/s 44AB of the Act and besides it, the books of account, bills and vouchers as well as the annual audit report for justifying the claim u/s 80-IB(10) of the Act - Once after the grant of a reasonable opportunity to the assessee as required by law, the AO has indicated the material on the basis on which he has come to the conclusion that a special audit was necessary, it would not be open to the Court to test the sufficiency of the grounds - the Court would be justified in interfering in a case where there has been a breach of the procedural requirement of complying with the principles of natural justice or where there is absolutely no material whatsoever to sustain the conclusion that the grounds which have been relied upon do exist. The CIT (Central), Kanpur, as well as the AO have furnished cogent reasons for holding that the grounds which are stipulated in Section 142(2A) of the Act have been duly established - the assessee had failed to produce the books of account, that does not leave the AO with a recourse to Section 145A of the Act as the only available means to determine the income of the assessee for the purposes of an assessment - the requirement contained in Section 142(2A) of the Act about the specialized nature of the business activity of the assessee is broad enough to comprehend the facts - The assessee consistently obstructed the assessment proceedings by refusing to produce relevant information which was in its possession ostensibly because there was a dispute in the Management before the Company Law Board - The AO was justified in holding that the interest of the revenue had to be protected by ordering a special audit thus, there was no reason to interfere in the order 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 procedural requirements and principles of natural justice.
3. Justification of invoking Section 142(2A) based on the complexity of accounts and other grounds.

Detailed Analysis:

1. Legality of the Special Audit Direction under Section 142(2A):
The dispute arises from a direction given on 21 March 2014 by the Assistant Commissioner of Income Tax, Central Circle-II, Kanpur, under Section 142(2A) of the Income Tax Act, 1961, directing a special audit for the assessment year 2011-12. The order was based on a sanction granted by the Commissioner of Income Tax (Central), Kanpur, on 13 March 2014. The assessee, a builder and developer, filed a return of income showing a total income of Rs.67.77 lacs and claimed a deduction under Section 80-IB(10) for AY 2010-11. Notices under Sections 143(2) and 142(1) were issued, but the assessee failed to comply, leading to a penalty and prosecution proceedings. Summons under Section 131 and subsequent notices under Section 142(2A) were issued, citing the complexity of accounts, volume of accounts, specialized nature of business activities, and interest of the revenue as grounds for the special audit.

2. Compliance with Procedural Requirements and Principles of Natural Justice:
The assessee contended that a special audit under Section 142(2A) could only be ordered where there is complexity in the accounts and the interest of the revenue requires it. The assessee argued that the failure to furnish a tax audit report could result in a penalty but could not justify a special audit. The Assistant Commissioner, in his letter seeking approval, noted the amendment in Section 142(2A) by the Finance Act, 2013, effective from 1 June 2013, which introduced additional grounds for ordering a special audit. The Commissioner granted approval, and the special audit was ordered.

3. Justification of Invoking Section 142(2A):
The Revenue argued that the assessee obstructed the assessment process by not responding to notices for the production of the tax audit report, books of account, bills, and vouchers. The amended Section 142(2A) allows for a special audit based on the nature and complexity of the accounts, volume of accounts, doubts about the correctness of the accounts, multiplicity of transactions, specialized nature of business activity, and interest of the revenue. The court noted that the assessee was granted sufficient opportunities to produce the required documents but failed to comply, leading to the imposition of a penalty. The Assessing Officer's proposal for a special audit was based on the amended provisions of Section 142(2A), which include additional grounds beyond the complexity of accounts.

The CIT (Central), Kanpur, in granting approval, noted the total failure of the assessee to comply with requisitions and the necessity to determine the true and correct income. The special audit was justified as the assessee's business involved complex accounting procedures, and the interest of the revenue needed protection. The court held that the special audit order was in accordance with the law and based on statutorily recognized grounds. The court emphasized that it would not interfere unless there was a breach of procedural requirements or no material to sustain the grounds relied upon. The assessee's failure to produce books of account did not limit the Assessing Officer to Section 145A, and the specialized nature of the business activity justified the special audit.

Conclusion:
The court found that the impugned orders were in accordance with the law and dismissed the writ petition, upholding the special audit direction under Section 142(2A) of the Income Tax Act, 1961.

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