2017 (6) TMI 921 - HC - Income Tax

Special audit made under Section 142(2A) - Held that - While forming an opinion to get the accounts audited by Special Auditor; considering the specialized nature of business activities of the assessee, and/or while considering the multiplicity of transactions, there need not be any books of account before the Assessing Officer. In the present case, AO has thought it fit to get the account audited by the Special Auditor as requisitioned material are to the extent of 40,000 papers in 45 gunny bags, which were found during the search conducted of the premises of Asharam Bapu and others and the Trust. Under the circumstances, when large number of papers are required to be considered / verified vis-a-vis the assessee and other persons whose names figured in the requisitioned papers, and when considering section 142(2A) when the the AO has thought it fit to exercise powers under Section 142(2A) of the IT Act, it cannot be said that the Assessing Officer has committed any error and/or illegality. Specific reasons are given so mentioned in the showcause notice as to why and for what purpose the special audit is required. Therefore, it cannot be said that the Assessing Officer has committed any error and/or illegality in passing the impugned order of special audit, in exercise of powers under Section 142(2A) of the IT Act. We see no reason to interfere with the impugned order passed by the Assessing Officer ordering special audit under Section 142(2A) of the IT Act in exercise of powers under Article 226 of the Constitution of India.

Issues Involved:
1. Legality of the order for special audit under Section 142(2A) of the Income Tax Act.
2. Compliance with principles of natural justice.
3. Recording of satisfaction and reasons by the Assessing Officer.
4. Adequacy of opportunity given to the petitioner.
5. Validity of approval by the Principal Commissioner of Income Tax.

Detailed Analysis:

1. Legality of the Order for Special Audit under Section 142(2A) of the Income Tax Act:
The court examined the provisions of Section 142(2A) of the Income Tax Act, which allows the Assessing Officer (AO) to direct an assessee to get their accounts audited by a Special Auditor if the accounts are complex, voluminous, or if there are doubts about their correctness. The court noted that the AO had found 40,000 papers in 45 gunny bags during a search, indicating significant complexity and multiplicity of transactions. The AO's decision to order a special audit was based on this complexity, the large volume of transactions, and the interest of revenue. The court upheld the AO's decision, stating that it was within the legal framework and aimed at facilitating the correct determination of taxable income.

2. Compliance with Principles of Natural Justice:
The petitioner argued that the impugned order was in breach of the principles of natural justice as it did not provide adequate reasons and satisfaction for the special audit. The court found that a detailed show-cause notice had been issued to the petitioner, outlining the reasons for the special audit. The petitioner was given multiple opportunities to respond but failed to do so, instead repeatedly seeking adjournments. The court held that the principles of natural justice were complied with, as the petitioner was given a reasonable opportunity to present its case.

3. Recording of Satisfaction and Reasons by the Assessing Officer:
The petitioner contended that the AO did not record any satisfaction or reasons for the special audit. The court observed that the show-cause notice contained detailed reasons for the special audit, and a comprehensive proposal was sent to the Principal Commissioner of Income Tax, who approved it after due consideration. The court emphasized that the satisfaction note and the detailed proposal demonstrated the application of mind by the AO and the Principal Commissioner. Thus, the requirement of recording satisfaction and reasons was duly met.

4. Adequacy of Opportunity Given to the Petitioner:
The petitioner claimed that it was not given sufficient opportunity to respond to the show-cause notice. The court noted that the petitioner was informed that no further adjournments would be granted after a specific date, yet the petitioner continued to seek adjournments without making any substantive submissions. The court held that the petitioner had ample opportunity to present its case but failed to do so, and therefore, the claim of inadequate opportunity was unfounded.

5. Validity of Approval by the Principal Commissioner of Income Tax:
The petitioner argued that the Principal Commissioner granted approval mechanically, without proper application of mind. The court reviewed the file and found that a detailed satisfaction note was prepared, demonstrating the Principal Commissioner's thorough consideration of the proposal. The approval was not granted mechanically but was based on a detailed evaluation of the facts and circumstances. The court concluded that the approval process was valid and in accordance with the law.

Conclusion:
The court dismissed the petition, upholding the legality of the special audit order under Section 142(2A) of the Income Tax Act. It found that the principles of natural justice were complied with, the AO had recorded the necessary satisfaction and reasons, the petitioner was given adequate opportunity to respond, and the approval by the Principal Commissioner was valid and well-considered. The court emphasized that the special audit was necessary given the complexity and volume of transactions and was in the interest of revenue.

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