2019 (4) TMI 714 - HC - Income Tax

Special audit u/s 142(2A) - denial of principles of natural justice - inability of the assessee to provide particulars with respect to various units - HELD THAT - In the present case, the nature of proceedings which culminated in the passing of the order u/s 142(2A), to this Court s mind, do not show any unfairness; they in fact highlight that the AO started the enquiry to understand the claims of the assessee as far back as in September. The notice seeking detailed facts issued in late September 2018 could be replied with the relevant details only after two months, i.e. 21.11.2018 by the NPCC. Thereafter too, on not less than three occasions, the AO called for further details. The process of receiving these details continued even after the issuance of the SCN on 18.12.2018. The last of these documents was in fact given on 21.11.2018. It cannot be said that there was no genuine attempt on part of the AO to understand the nature of the assessee s business; its method of accounting or to understand the nuances of its books or documents. So far as the reasons given by the AO are concerned, this Court is of the opinion that the NPCC s argument that the conclusion amounts to mere pretence is unwarranted. The extract of the order clearly reflect the AO s reasoning. The inability of the assessee to provide particulars with respect to various units (in regard to each of which it had claimed substantial deductions by way of expenses) as well as the adverse remarks made by the NPCC s auditor do amount to voluminous evidence which also present complexity of the accounts that needed a close scrutiny. This Court is of the opinion that there is no merit in the writ petition. Furthermore, a perusal of the original file produced by the Revenue would disclose that even as late as in the third week of January, the special auditor designated by the AO, was repeatedly calling for details; the AO had sought for the order to be kept in abeyance. This Court had stayed the direction to conduct special audit. In these circumstances, the time during which the present writ petition was pending, i.e. 17.01.2019 till today shall be excluded for the purpose of computing the period of limitation to carry on and conclude the special audit. The writ petition is, therefore, dismissed

Summary

Issues Involved:
1. Validity of the order under Section 142(2A) of the Income Tax Act.
2. Allegations of non-application of mind and unfairness by the Assessing Officer (AO).
3. Allegations of procedural unfairness and denial of natural justice.
4. Allegations of the special audit order being a mere pretence to extend the limitation period.
5. Complexity and volume of accounts as a basis for special audit.

Detailed Analysis:

1. Validity of the Order under Section 142(2A) of the Income Tax Act:
The petitioner, NPCC, challenged the validity of the order issued under Section 142(2A) of the Income Tax Act by the AO. The court examined whether the AO had valid grounds for directing a special audit. The AO's reasons included the complexity and volume of accounts, adverse comments by the auditor, and the inability to verify the genuineness of liabilities. The court found that the AO had provided detailed reasons and followed due process, thereby upholding the validity of the order.

2. Allegations of Non-Application of Mind and Unfairness by the AO:
NPCC argued that the AO did not consider its submissions and passed the order based on inaccurate assumptions. The court reviewed the AO's detailed reasoning, which included specific anomalies in the books of accounts, adverse auditor comments, and the complexity of transactions. The court concluded that the AO had made a genuine attempt to understand the accounts and that the order was not based on mere pretence.

3. Allegations of Procedural Unfairness and Denial of Natural Justice:
NPCC contended that the special audit order was issued without considering its replies and was a mere pretence to extend the limitation period. The court examined the procedural history, noting that the AO had issued multiple notices and received voluminous documents from NPCC. The court found no procedural unfairness or denial of natural justice, as the AO had engaged in a detailed inquiry before issuing the order.

4. Allegations of the Special Audit Order Being a Mere Pretence to Extend the Limitation Period:
NPCC argued that the special audit order was issued to extend the limitation period for completing assessment proceedings. The court reviewed the timeline of events and found that the AO had started the inquiry in September and continued to seek details until December. The court concluded that the order was not a mere pretence but was based on genuine reasons related to the complexity of accounts and the need for a special audit.

5. Complexity and Volume of Accounts as a Basis for Special Audit:
The court examined whether the complexity and volume of accounts justified the special audit. The AO had cited several reasons, including adverse auditor comments, unexplained liabilities, and the complexity of transactions. The court agreed that these factors warranted a special audit, as they presented complexities that required close scrutiny.

Conclusion:
The court dismissed the writ petition, upholding the validity of the special audit order under Section 142(2A) of the Income Tax Act. The court found that the AO had provided detailed reasons, followed due process, and made a genuine attempt to understand the accounts. The allegations of procedural unfairness and denial of natural justice were found to be unsubstantiated. The court also excluded the period during which the writ petition was pending from the limitation period for completing the special audit. There was no order as to costs.