1980 (6) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Compliance with Section 142(2A) of the Income-tax Act.
2. Validity of the best judgment assessment under Section 144(b) of the Income-tax Act.
3. Interpretation of the term "fails" in Section 144 of the Income-tax Act.
4. Role and obligations of the chartered accountant nominated for audit.
5. Impact of ongoing litigation on the audit process.
6. Legal implications of the refusal by the chartered accountant to conduct the audit.

Issue-wise Detailed Analysis:

1. Compliance with Section 142(2A) of the Income-tax Act:
The petitioner, Swadeshi Polytex Ltd., was directed by the Income-tax Officer (ITO) to get its accounts audited under Section 142(2A) of the Income-tax Act due to the complexity of its accounts and in the interest of revenue. The petitioner complied by providing the required documents to the nominated chartered accountant, Sri K. Annadhanam. However, the chartered accountant later declined to conduct the audit, citing ongoing litigation involving the petitioner.

2. Validity of the best judgment assessment under Section 144(b) of the Income-tax Act:
The ITO, after the refusal of the chartered accountant to conduct the audit, issued a best judgment assessment under Section 144(b) of the Act, estimating the petitioner's income at Rs. 1 lakh, discarding the petitioner's claim of a loss. The petitioner argued that it had complied with the requirements and that the refusal by the chartered accountant was beyond its control, thus Section 144(b) should not apply.

3. Interpretation of the term "fails" in Section 144 of the Income-tax Act:
The court deliberated on whether the term "fails" in Section 144 implies wilfulness or default on the part of the assessee. It concluded that the term "fails" does not necessarily imply wilfulness or neglect but includes any inability to comply, irrespective of justification. This interpretation was supported by the clear and unambiguous language of the statute, and the court refused to read additional words like "without sufficient cause" into the section.

4. Role and obligations of the chartered accountant nominated for audit:
The court noted that the chartered accountant's refusal to conduct the audit was based on frivolous grounds. The chartered accountant had cited the ongoing litigation as a reason for his inability to audit the accounts, which the court found to be an unjustifiable excuse. The court emphasized that the chartered accountant's duty was to comply with the statutory order, irrespective of the pending litigation.

5. Impact of ongoing litigation on the audit process:
The court held that the ongoing litigation involving allegations against the petitioner's managing director did not provide a valid reason for the chartered accountant to refuse the audit. The court clarified that conducting the audit would not interfere with the pending court proceedings and that the chartered accountant's refusal was not justified.

6. Legal implications of the refusal by the chartered accountant to conduct the audit:
The court concluded that the petitioner's inability to comply with the audit direction due to the chartered accountant's refusal still constituted a "failure" under Section 144(b). The court emphasized that the reasons for the failure are immaterial under the statute, thus upholding the ITO's best judgment assessment.

Conclusion:
The court dismissed the petition, holding that the petitioner failed to comply with the direction under Section 142(2A) due to the chartered accountant's refusal, which still attracted the provisions of Section 144(b). The court found no merit in the petitioner's arguments and upheld the ITO's best judgment assessment. The respondent was entitled to costs, and the interim order was vacated.