2017 (4) TMI 360 - HC - Income Tax

Special audit under Section 142 2A - Held that - What is required to be considered while passing an order under Section 142 2A of the Act, at the time order under Section 142 2A of the Act, any proceedings are pending before the A.O or not ? Notice under Section 148 of the Act ie., reassessment proceedings can be said to be the proceedings pending before the A.O, and therefore, if at that stage of proceedings in the present case, reassessment proceedings before him , the Assessing Officer, having regard to the multiplicity of transactions in the account or specialized nature of the business activities of the assessee and the interest of the Revenue, is of the opinion that it is necessary to so to do, he may pass an order under Section 142 2A of the Act; subject to compliance with the procedure, as required under Section 142 2A of the Act. Therefore, in the facts and circumstances of the case, it cannot be said that the impugned order is contrary to Section 142 2A of the Act. In the present case, having found that there are complex issues relating to introduction of land by the partners into the firms; revaluation of land; credit of partners in capital account equal to revalued amount of land; conversion of capital account to loan account of shareholders and issues relating to issuance of equity shares against the balances of revaluation credits at an unreasonable premium, and after having been satisfied that considering the specialized nature of business activities of the assessee, the Assessing Officer has passed an order of special audit in exercise of powers under Section 142 2A of the Act. Considering the scope and ambit of Section 142 2A of the Act, it cannot be said that in the facts and circumstances of the case, the respondent has committed any error and/or any illegality while passing the order under Section 142 2A of the Act. Under the circumstances, the present writ petitions deserve to be dismissed and are accordingly dismissed.

Issues Involved:
1. Legality of the order passed under Section 142(2A) of the Income-tax Act, 1961.
2. Adequacy of the opportunity provided to the petitioner to challenge the notice under Section 148 of the Act.
3. Whether the Assessing Officer can order a special audit without examining the books of accounts.
4. Validity of the Principal Commissioner’s approval for the special audit.
5. Applicability of precedents and legal principles to the facts of the case.

Detailed Analysis:

1. Legality of the Order Passed Under Section 142(2A) of the Income-tax Act, 1961:
The court examined the provisions of Section 142(2A) of the Income-tax Act, which allows the Assessing Officer (AO) to direct a special audit if the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions, or specialized nature of business activity necessitate it. The court found that the AO had followed the required procedure, including giving the petitioner a reasonable opportunity to be heard and obtaining prior approval from the Principal Commissioner of Income-tax. The court concluded that the AO's decision was supported by proper material and reasons, thus upholding the legality of the order.

2. Adequacy of the Opportunity Provided to the Petitioner to Challenge the Notice Under Section 148 of the Act:
The petitioner argued that the AO issued the notice under Section 142(2A) without giving sufficient opportunity to challenge the notice under Section 148, as required by the Supreme Court in GKN Driveshafts (India) Limited v. Income Tax Officer. The court noted that the objections to the reassessment proceedings under Section 148 are separate from the proceedings under Section 142(2A). The court found that the AO had given a reasonable opportunity to the petitioner to be heard regarding the special audit and had followed the necessary procedures, thus rejecting the petitioner's argument.

3. Whether the Assessing Officer Can Order a Special Audit Without Examining the Books of Accounts:
The petitioner contended that the AO could not order a special audit under Section 142(2A) without first examining the books of accounts. The court referred to the amended Section 142(2A), which allows the AO to order a special audit based on the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions, or specialized nature of business activity. The court held that the AO could form an opinion for a special audit without examining the books of accounts if the specialized nature of business activities warranted it.

4. Validity of the Principal Commissioner’s Approval for the Special Audit:
The petitioner argued that the Principal Commissioner’s approval for the special audit was given mechanically without proper application of mind. The court found that the Principal Commissioner had considered the objections raised by the petitioner and the material provided by the AO before granting approval. The court concluded that the approval was not mechanical and was based on proper application of mind.

5. Applicability of Precedents and Legal Principles to the Facts of the Case:
The petitioner relied on various judicial decisions to support their arguments, including Delhi Development Authority v. Union of India, Peerless General Finance & Investment Co. Ltd. v. Deputy Commissioner of Income-tax, and Muthoottu Mini Kuries v. Deputy Commissioner of Income-tax. The court distinguished these cases based on their facts and the amendments to Section 142(2A). The court also referred to the decision in DLF Limited & Anr. v. Additional Commissioner of Income-tax & Anr., which emphasized that Section 142(2A) is an enabling provision to assist the AO in completing the scrutiny assessment with the help of a special auditor.

Conclusion:
The court dismissed the petitions, upholding the legality of the AO's order for a special audit under Section 142(2A) of the Income-tax Act. The court found that the AO had followed the required procedures, provided a reasonable opportunity to the petitioner, and obtained proper approval from the Principal Commissioner. The court also held that the AO could order a special audit without examining the books of accounts if the specialized nature of business activities warranted it. The court concluded that the decision for a special audit was backed by proper material and reasons, and the AO's formation of belief could not be faulted.

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