2009 (3) TMI 79 - HC - Income Tax

SCN issued proposing to hold special audit u/s 142(2A) petitioner- trust has approached this Court under Article 226 of the Constitution with a prayer for quashing SCN - petitioner-Trust has also challenged the order referring the matter to Special Auditor, being totally arbitrary and contrary to Article 14 of the Constitution records reveals that there are discrepancies in book of account of petitioner neither petitioner appeared before AO nor any information was sent despite the fact that it was duly informed that time barring assessment is involved - argument of petitioner that special audit has been ordered to gain more time, is not impressive - writ petition is wholly misconceived and the same is dismissed

Summary

Issues:
1. Quashing of show cause notices proposing special audit under Section 142(2A) of the Income Tax Act, 1961.
2. Allegation of arbitrariness and contravention of Article 14 of the Constitution.
3. Complexity of accounts and necessity of special audit.
4. Compliance with procedural requirements and principles of natural justice.

Issue 1: Quashing of show cause notices proposing special audit under Section 142(2A) of the Income Tax Act, 1961:
The petitioner-Trust challenged the show cause notices dated 5.12.2008 and 19.12.2008 proposing special audit under Section 142(2A) of the Act. The petitioner alleged that the notices were an attempt to extend the limitation period provided by Section 143(3) of the Act, set to expire on 31.12.2008. The petitioner contended that special audit could only be ordered if the Assessing Officer deemed the accounts to be complex. The petitioner claimed that the books of account were not inspected before the notices were issued. The High Court examined the show cause notices and found that the department had raised queries and requested details, but the petitioner failed to respond adequately, leading to the need for a special audit. The Court concluded that the decision for special audit was not arbitrary and dismissed the petition.

Issue 2: Allegation of arbitrariness and contravention of Article 14 of the Constitution:
The petitioner-Trust contended that the order dated 30.12.2008 referring the matter to a Special Auditor was arbitrary and contrary to Article 14 of the Constitution. The Court analyzed the procedural history and found that the department had followed due process, including issuing notices, granting opportunities for hearing, and obtaining approval before ordering the special audit. The Court held that there was no lack of bona fide or unwarranted action by the department. The Court dismissed the petition, stating that the petitioner's delay in producing books of account cannot be used to complain about the special audit process.

Issue 3: Complexity of accounts and necessity of special audit:
The petitioner argued that the accounts were not complex enough to warrant a special audit under Section 142(2A) of the Act. The Court reviewed the discrepancies found in the books of account, including mismatches between ledger entries and cash book entries, and adjustments made over several years. The Deputy Commissioner of Income Tax concluded that the mixed system of accounting used by the petitioner made it difficult to ascertain accurate profits. The Court noted that the department's decision for special audit was based on past discrepancies and complexities in maintaining accounts. The Court upheld the necessity of the special audit given the circumstances and complexities involved.

Issue 4: Compliance with procedural requirements and principles of natural justice:
The Court examined whether the procedural requirements and principles of natural justice were followed in ordering the special audit. It was found that the department had issued notices, provided opportunities for hearing, and obtained necessary approvals before ordering the audit. The Court emphasized that the principles of natural justice, as laid down by the Supreme Court, were adhered to in this case. The Court concluded that there was no procedural lapse and dismissed the petition, stating that the special audit was not ordered to gain more time but was necessitated by the complexities in the petitioner's accounts.

This detailed analysis of the judgment covers the issues raised in the case comprehensively, addressing the legal arguments and findings of the High Court in relation to each issue involved.