2018 (12) TMI 831 - HC - Income Tax

Initiation of special audit of the petitioner/assessee u/s 142(2A) - benefit of Section 80IC - Held that - The order passed under Section 142 (2A) on 28.03.2013 contains a detailed discussion as to the complexity of the accounts. The profit and loss account, balance sheet and the computation of the income were before the A.O. It cannot be disputed that the profit and loss account and the balance sheet fit the description of accounts . The complexity arising out of such accounts is the difficulty in allocating the expenses incurred by the petitioner given the manner in which it chose to supply information to the AO, during the inquiry, in a piecemeal fashion. Nor is the court persuaded to agree with the learned counsel that AS-3 did not apply and that the accounting practise adopted was correct or that it foreclosed inquiry. The linchpin of the assessee s argument is that the AO s indolence or inability to exert himself to inquire diligently cannot result in a special audit. Undoubtedly, the AO has a duty to apply his (or her) mind and not fall back upon the provision of special audit in all routine cases. However, when the AO does feel that information is not forthcoming in a timely manner (as appears to have occurred in this case) her choices are limited to let go of the stage of inquiry, and complete the assessment, or, disallow what is considered appropriate. The AO quite correctly felt that the latter course would not be appropriate; he therefore, ordered special audit, which was quite reasonable, especially in regard to the imprest account for which details of expenses incurred had not been furnished. That amount was sizeable. Also, with respect to the benefit of Section 80IC and the revision of returns, was an aspect which could not have been given a light treatment, but needed inquiry, if the AO felt it to be so. This court is of the opinion that far from the case showing non-application of mind, the AO has carefully outlined what were the salient aspects in the accounts and returns of the assessee that needed to be looked into and made the impugned order directing special audit. The assessee has not alleged any mala fides - writ petition has no merit. Consequently, the interim orders which operated for these last 5 years are vacated. The assessee is directed to co-operate with the Special Auditor. The period during which the interim order operated shall be excluded for the purpose of calculation the period for completion of such special audit.

Issues Involved:
1. Legitimacy of the special audit order under Section 142(2A) for AY 2010-2011.
2. Complexity in the accounts of the assessee.
3. Compliance with Accounting Standards.
4. Justification of imprest accounts.
5. Reliability of financial statements and tax audit report.
6. Claim of deduction under Section 80IC.
7. Revision of returns and discrepancies in income declaration.

Issue-wise Detailed Analysis:

1. Legitimacy of the Special Audit Order:
The petitioner challenged the income tax department's decision to initiate a special audit for AY 2010-2011. The impugned order dated 28.03.2013 was contested on the grounds that there were no complexities in the accounts that warranted such an audit. The court examined whether the Assessing Officer (AO) had valid grounds to direct a special audit under Section 142(2A).

2. Complexity in the Accounts:
The AO cited several reasons for the special audit, including the valuation methods for inventory, the complexity of work-in-progress calculations, and discrepancies in debtor and creditor balances. The AO argued that these factors indicated complexity in the accounts, making it difficult to ascertain the correct taxable income. The court noted that the AO had detailed the complexities and found the reasons justified.

3. Compliance with Accounting Standards:
The AO observed that the assessee did not follow Accounting Standard-2 (AS-2) for work-in-progress and finished goods (manufactured), which led to discrepancies in income reporting. Additionally, the cash flow statement was not in commensuration with Accounting Standard-3 (AS-3) and was later revised by the assessee. The court found that the AO's concerns about compliance with accounting standards were valid and warranted further examination through a special audit.

4. Justification of Imprest Accounts:
The assessee maintained multiple imprest accounts for day-to-day petty cash expenses across its units, which were located at a distance. The AO questioned the justification and impact of these accounts on the overall accounting system. The court agreed that the AO's inquiry into the imprest accounts was reasonable, given the complexity and volume of transactions involved.

5. Reliability of Financial Statements and Tax Audit Report:
The AO raised concerns about the reliability of the financial statements and tax audit report, citing discrepancies in the cash flow statement and the need for further verification of transactions. The court upheld the AO's decision, emphasizing that the special audit was necessary to ensure the accuracy and reliability of the financial records.

6. Claim of Deduction under Section 80IC:
The assessee claimed a deduction under Section 80IC for the first time in AY 2010-2011, with discrepancies between the original and revised returns. The AO argued that this indicated incomplete and incorrect maintenance of books of accounts. The court found that the AO's need to verify the genuineness and correctness of the deduction claim justified the special audit.

7. Revision of Returns and Discrepancies in Income Declaration:
The AO noted significant differences in the income declared in the original and revised returns, which were not fully explained during the assessment proceedings. The court agreed that these discrepancies warranted a detailed examination through a special audit.

Conclusion:
The court concluded that the AO had carefully outlined the complexities and discrepancies in the assessee's accounts, justifying the special audit order. The writ petition was dismissed, and the assessee was directed to cooperate with the special auditor. The interim orders were vacated, and the period during which the interim order operated was excluded for the completion of the special audit. The court emphasized that the AO's decision was not arbitrary and was based on a genuine need to ensure accurate assessment of taxable income.

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