2019 (7) TMI 1324 - HC - Income Tax

Special audit u/s 142(2A) - satisfaction recorded by the Assessing Office - Power of AO to pass audit orders - HELD THAT - The question of complexity in accounts we have to apply the test of reasonable man by replacing the word and qualities of a reasonable man with the word and qualities of a reasonably competent AO. The question of complexity of accounts has to be judged applying the yardstick or test; whether the accounts would be complex and difficult to understand to a normal AO who has basic understanding of accounts etc. without the aid assistance and help of a Special Auditor. Thus due regard has to be given to nature and character of transactions method of accounting whether actuarial were adopted for making entries basis and effect thereof etc. though mere volume of entries might not be a justification by themselves as volume and complexity are somewhat different. The satisfaction recorded by the AO as reflected would indicate that the same is not just an eyewash. We are convinced that in the case on hand the Assessing Officer had applied his mind to various aspects like the nature of accounts method of maintaining accounts entries recorded etc. and reached to the conclusion that the accounts were complex and it was in the interest of the Revenue that the special audit u/s 142(2A) should be directed. It will be too much for this Court to try and understand the complexity for and on behalf of the AO. We are of the view that we should not disturb the order passed by the AO in exercise of his powers u/s 142(2A). Writ-application fails and is hereby rejected. The interim order earlier granted stands vacated forthwith. Applicability of law and scope of amendment in Section 142(2A) - HELD THAT - There has been substantial expansion of scope and ambit of Special Audit u/s 142(2A) of the Act with effect from 1st June 2013. The amended section has been widened to include volume of accounts doubts about correctness of accounts multiplicity of transactions in the accounts or specialised nature of business activity of an assessee. These amendments by Finance Act 2013 with effect from 1st June 2013 substitute the words nature and complexity of accounts of the assessee . We are not concerned with the said amendment in the present case as the impugned order in question directing special audit was passed on 11th May 2007 i.e. before the amendments became effective.

Issues Involved:
1. Maintainability of the writ-application under Article 226 by a company.
2. Legality and validity of the order for special audit under Section 142(2A) of the Income Tax Act.
3. Compliance with principles of natural justice in issuing the order for special audit.
4. Justification for the special audit based on the complexity of accounts.

Issue-wise Analysis:

1. Maintainability of the writ-application under Article 226 by a company:
The court noted that a juristic person such as a company is not entitled to the fundamental rights guaranteed by the Constitution of India. The petitioner, being a company, is not entitled to complain of breach or violation of any fundamental rights. However, the court decided to examine the matter on merits without delving into this technicality.

2. Legality and validity of the order for special audit under Section 142(2A) of the Income Tax Act:
The petitioner challenged the order dated 11th May 2007 directing a special audit under Section 142(2A) of the Income Tax Act. The court examined whether the conditions precedent for invoking Section 142(2A) were fulfilled, which include the nature and complexity of the accounts and the interest of the revenue. The court referenced several judgments, including the Supreme Court's rulings, to elucidate the scope and requirements of Section 142(2A). It was emphasized that the satisfaction of the Assessing Officer must be based on objective criteria and not purely on subjective satisfaction.

3. Compliance with principles of natural justice in issuing the order for special audit:
The petitioner argued that the respondent failed to provide a reasonable opportunity to be heard before passing the order for special audit. The court reviewed the procedural history, including the issuance of a show-cause notice and the petitioner's response. It was noted that the principles of natural justice require that the assessee be given a reasonable opportunity to explain before an order for special audit is made. The court found that the Assessing Officer had complied with these principles by issuing a show-cause notice and considering the petitioner's reply before passing the order.

4. Justification for the special audit based on the complexity of accounts:
The petitioner contended that the grounds for special audit were not justified and were based on surmises and conjectures. The court examined the reasons provided by the Assessing Officer, which included the inability to furnish head-wise income, mixed purchases under a single head, and improper maintenance of accounts. The court noted that the Assessing Officer had applied his mind to various aspects such as the nature of accounts, method of maintaining accounts, and entries recorded. The court concluded that the satisfaction recorded by the Assessing Officer was not just an eyewash and that the accounts were indeed complex, justifying the special audit.

Conclusion:
The court held that the order for special audit under Section 142(2A) was justified and complied with the principles of natural justice. The writ-application was rejected, and the interim order earlier granted was vacated. The court emphasized that it should not disturb the order passed by the Assessing Officer, as the complexity of the accounts warranted the special audit in the interest of the revenue.

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