2018 (6) TMI 963 - AT - Income Tax

Validity of assessment u/s 153C - scope of the special audit u/s 142(2A) - delegation of job of the AO to special auditor - non speaking order - extended period invoked - Held that - Referring to ratio laid down in the case of Unitech Ltd. Vs. Addl. CIT (2016 (7) TMI 320 - ITAT DELHI) it is apparent that the order is non speaking order and gives no reasons for arriving at the conclusion that having regard to the nature and complexity of assessee s accounts and interest of the revenue, the AO was of the opinion that accounts are to be audited u/s 142(2A) - The order is silent as to on what basis and on what grounds, the accounts proposed to audit under section 142(2A) were considered complex and on what considerations it was arrived that it is in the interest of revenue to direct audit of accounts. Mere reference to a prior approval of CIT does not satisfy the precondition of a Speaking order containing reasons for invoking the provision of section 142(2A) of the Act. There is no reference to detailed replied furnished by the assessee during the proceedings. Order is bereft of any reason. It is stated here that reasons are heart and soul of an order, as they facilitate the process of judicial review and therefore in absence of any reason much less cogent, clear and succinct reasons order u/s 142(2A) of the Act is held to be bad in law and without proper jurisdiction. Since the extended period was taken under the guise of Special audit, which is held without proper jurisdiction, the time so taken cannot be counted and the period does not get extended. - Decided in favour of assessee

Issues Involved:
1. Validity of initiation of proceedings under Section 153C.
2. Alleged disregard of principles of natural justice in framing the assessment.
3. Legality of directions to get accounts audited by a special auditor under Section 142(2A).
4. Various specific disallowances and additions made by the Assessing Officer.

Detailed Analysis:

1. Validity of Initiation of Proceedings under Section 153C:
The Assessee contested the initiation of proceedings under Section 153C as being "bad in law." The Tribunal examined the sequence of events leading to the initiation of these proceedings, including the search and seizure operation under Section 132(1) and the subsequent issuance of notices and show cause for a special audit. The Tribunal concluded that the initiation of proceedings under Section 153C was not justified due to the lack of proper grounds and the absence of a clear connection between the seized documents and the assessee.

2. Alleged Disregard of Principles of Natural Justice:
The Assessee argued that the assessment was framed in total disregard of the principles of natural justice. The Tribunal noted that the Assessee had cooperated with the department and attended all proceedings, submitting required documents. However, the Assessing Officer's reliance on non-cooperation and the intricate nature of the seized material as reasons for ordering a special audit was found to be unjustified. The Tribunal emphasized that the Assessing Officer did not provide a reasonable opportunity for the Assessee to be heard, thus violating the principles of natural justice.

3. Legality of Directions to Get Accounts Audited by a Special Auditor under Section 142(2A):
The Tribunal scrutinized the Assessing Officer's decision to direct a special audit under Section 142(2A). The Tribunal highlighted that the Assessing Officer failed to demonstrate the "nature and complexity of the accounts" or any other statutory conditions required for ordering a special audit. The Tribunal referenced several judicial precedents, including decisions by the Delhi High Court and the Supreme Court, which emphasize the necessity of a detailed and reasoned satisfaction by the Assessing Officer regarding the complexity of accounts before directing a special audit. The Tribunal found that the Assessing Officer's reasons were inadequate, as they primarily focused on non-cooperation and the need to reconcile loose papers and redraw financial statements, which are not valid grounds for a special audit.

4. Various Specific Disallowances and Additions:
The Tribunal addressed multiple specific disallowances and additions made by the Assessing Officer across different assessment years. These included:
- Disallowance of ?35,539/- for non-payment of TDS.
- Additions of ?69,770/-, ?18,02,160/-, ?3,00,946/-, and ?10,70,000/- for alleged discrepancies in books of accounts, payments to M/s Om Industries, negative cash balance, and entries in katcha books, respectively.
- Disallowance of ?8,732/- under Section 40A(3), and other smaller disallowances for alleged interest received and car insurance payments.
- Disallowances and additions for subsequent years, including ?19,123/- under Section 40A(3), ?9,77,000/- for discrepancies in cash/loans, and ?15,000/- for non-deduction of TDS.

The Tribunal found that many of these disallowances and additions were based on the special auditor's report, which was itself rendered invalid due to the improper initiation of the special audit. Consequently, these disallowances and additions were also deemed unjustified.

Conclusion:
The Tribunal concluded that the initiation of proceedings under Section 153C and the direction for a special audit under Section 142(2A) were both invalid. The assessment orders were found to be framed in violation of the principles of natural justice. As a result, the Tribunal held that the assessments were time-barred and legally unsustainable. All appeals filed by the Assessee were allowed, and the orders passed by the Assessing Officer were quashed.

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