2017 (6) TMI 784 - HC - Income Tax

Validity of Special audit u/s 142(2A) - multiplicity of transactions in the account or specialized nature of the business activities of the assessee - introduction of land and revaluation of the same - successions/ conversion of firms to a company, treatment of capital account of partners as loan - Held that - After giving fullest opportunity to the petitioner and after dealing with the objections raised by the petitioner and thereafter having obtained the approval from the Principal Commissioner who has granted the approval after considering the material on record and thereafter when the Assessing Officer has passed the order of Special Audit considering the specialised nature of the business activities of the assessee and the multiplicity of transactions, it cannot be said that the Assessing Officer has committed any error. Merely because the assessee along with the return of income submitted a Statutory Audit Report and Tax Audit Report, considering section 142(2B) of the IT Act, the order of Special Audit under Section 142(2A) of the IT Act cannot be said to be invalid. Thus considering the scope and ambit of Section 142(2A) of the IT 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 IT Act. - Decided against assessee.

Issues Involved:
1. Legality of the order under Section 142(2A) of the Income Tax Act, 1961.
2. Compliance with procedural requirements for ordering a special audit.
3. Application of mind by the Assessing Officer and Principal Commissioner.
4. Validity of the reasons for ordering a special audit.
5. Relevance of previous assessments and audits.

Detailed Analysis:

1. Legality of the order under Section 142(2A) of the Income Tax Act, 1961:
The petitioner challenged the legality of the order passed under Section 142(2A) of the IT Act, directing a special audit for AY 2014-15. The court examined the provisions of Section 142(2A), which allows the Assessing Officer 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 of the assessee necessitate it. The court held that the Assessing Officer had validly exercised this power considering the complex web of transactions and specialized nature of the business activities of the assessee.

2. Compliance with procedural requirements for ordering a special audit:
The petitioner argued that the Assessing Officer did not follow the procedural requirements, including giving a reasonable opportunity of being heard. The court noted that the Assessing Officer had issued a show-cause notice, specifying the reasons for the special audit, and had disposed of the petitioner’s objections through a speaking order. The approval from the Principal Commissioner was also obtained as required. Therefore, the court found that the procedural requirements were duly followed.

3. Application of mind by the Assessing Officer and Principal Commissioner:
The petitioner contended that the Assessing Officer and Principal Commissioner did not apply their minds while ordering the special audit. The court observed that the Assessing Officer had detailed the complex transactions and specialized nature of the business in the show-cause notice and the order. The Principal Commissioner’s approval was also based on a thorough consideration of the material on record. Thus, the court concluded that there was proper application of mind by both authorities.

4. Validity of the reasons for ordering a special audit:
The petitioner argued that the reasons cited for the special audit were not relevant to AY 2014-15. The court noted that the Assessing Officer had highlighted the complex issues related to the introduction and revaluation of land, conversion of firms into companies, and the issuance of equity shares at a premium. These transactions had a bearing on the accounts for AY 2014-15, justifying the special audit. The court found the reasons valid and relevant.

5. Relevance of previous assessments and audits:
The petitioner pointed out that the accounts had already been audited for previous years, and there were only a few transactions in AY 2014-15. The court referred to the earlier judgment dismissing the petitions related to special audits for previous years. The court held that the complexity and multiplicity of transactions in earlier years had a consequential effect on AY 2014-15, warranting a special audit.

Conclusion:
The court dismissed the petition, upholding the order for a special audit under Section 142(2A) of the IT Act. The court found that the Assessing Officer had validly exercised the power, followed the procedural requirements, and provided valid reasons for the special audit. The application of mind by the Assessing Officer and Principal Commissioner was also affirmed.

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