2019 (9) TMI 734 - HC - Income Tax

Special audit u/s 142(2A) - as per the AO the questionnaire was remain conclusively unanswered - contention of the Petitioner was that there was no complexity in the books of account which would warrant the Respondent No. 1 to direct special audit - denial of natural justice - HELD THAT - on the basis of the reasons recorded in the impugned order, it cannot be said that there was no genuine attempt on the part of the Assessing Officer to understand the nature of his business, its method of accounting, or to understand the nuances of the books of accounts or documents. The impugned order clearly reflects the reasons for ordering a special audit. AO initially issued a notice under Section 142(1) on 03.08.2018 along with detailed questionnaire including the reason for selection of case for scrutiny under Section 143 (3). Thereafter, a fresh notice under Section 142 (1) was issued on 30.10.2018 along with pending and fresh queries. Since there was continued non compliance, a show cause notice in respect of specific queries raised therein was issued on 30.05.2019. Another notice dated 03.06.2019 in the form of corrigendum to show cause notice was issued, calling upon the Petitioner to produce the books of accounts. The questionnaire raised by the Assessing Officer was not specifically answered, and if the same had been satisfactorily answered, he would have found the same to be useful for verification of various claims made by the assessing companies in its return of income for the assessment year under consideration AY 2016-17 . Petitioner was given sufficient opportunity of being heard. Thus, the contention of violation of principles of natural justice is also without merit. . Sections 142 (2A) (2D), 142 (3) and 142 (4) are the relevant provisions dealing with the considerations that are to be weighed while directing special audit. The Supreme Court has also laid down the guiding principles relating to conduct of special audit. In essence, the Supreme Court has underlined that the opinion required to be formed must be based on objective criteria, and not subjective satisfaction. On a reading of the impugned order, it is demonstrated that the Assessing Officer has examined the objections raised by the Petitioner and has exercised his jurisdiction objectively on due consideration of the records, documents and other material before him for ordering a special audit. There is no perversity or arbitrariness in the order of the Assessing Officer. On careful perusal of the afore-noted reasons spelt out in the impugned order, we are of the considered opinion that the Assessing Officer has carefully scrutinized the objections raised by the Petitioner and has fairly and objectively arrived at the conclusion that special audit is required - no infirmity in the order directing the special audit - Decided against assessee.

Issues Involved:
1. Legality of the order directing special audit under Section 142(2A) of the Income Tax Act, 1961.
2. Alleged violation of principles of natural justice.
3. Complexity and volume of accounts.
4. Specialized nature of business activities.
5. Interests of revenue and allegations of fund diversion/siphoning.
6. Adequacy of reasons for directing special audit.
7. Scope of judicial review under Article 226 of the Constitution of India.

Detailed Analysis:

Legality of the Order Directing Special Audit
The petitions under Article 226 of the Constitution challenge the orders dated 06.08.2019 by the Deputy Commissioner of Income Tax directing the Petitioners to have their books of account audited by a Special Auditor under Section 142(2A) of the Income Tax Act, 1961. The court noted that the Assessing Officer (AO) must form an opinion based on objective criteria, not subjective satisfaction, to direct a special audit. The AO's discretion must be exercised reasonably, taking into account all relevant aspects.

Alleged Violation of Principles of Natural Justice
The Petitioner argued that the order was passed without affording a reasonable opportunity of being heard, thus violating the principles of natural justice. However, the court found that the Petitioner was given sufficient opportunity to respond to the show-cause notices and queries raised by the AO. The AO issued multiple notices and show-cause letters, and the Petitioner had the opportunity to furnish explanations and documents.

Complexity and Volume of Accounts
The AO noted various anomalies and complexities in the Petitioner’s accounts, such as significant loans and advances, investments in subsidiaries, and shared expenses with associated concerns. The AO highlighted the large volume of transactions and the specialized nature of the business, which warranted a special audit. The court emphasized that the AO's determination of complexity is primarily within his domain and should not be interfered with unless it is arbitrary or perverse.

Specialized Nature of Business Activities
The Petitioner’s business involved financing, lending, and investment activities, which are specialized in nature. The AO observed that the Petitioner’s transactions with associated concerns and the rotation of money through various companies indicated a need for in-depth verification. The court upheld that the specialized nature of the business justified the need for a special audit.

Interests of Revenue and Allegations of Fund Diversion/Siphoning
The AO referred to a forensic audit report by SEBI, which indicated diversion and siphoning of funds by the Petitioner. The AO considered this to protect the interests of revenue. The court noted that the forensic audit report and the ongoing inquiries by various government agencies supported the AO’s decision to order a special audit.

Adequacy of Reasons for Directing Special Audit
The AO provided detailed reasons for directing the special audit, including the complexity and volume of accounts, specialized nature of the business, and interests of revenue. The court found that the AO’s reasons were cogent and based on objective assessment. The AO’s order was not arbitrary or mechanical but reflected a genuine attempt to understand the accounts.

Scope of Judicial Review under Article 226
The court reiterated that under Article 226, it does not sit in appeal over the AO’s decision but examines whether the AO exercised his discretion objectively. The court found no perversity or arbitrariness in the AO’s order. The AO’s decision was based on valid material and objective criteria, and the court would not interfere with it.

Conclusion
The court dismissed the writ petitions, holding that the AO’s order directing the special audit was justified and based on objective criteria. The Petitioner was given sufficient opportunity to be heard, and the AO’s decision was not arbitrary. The court directed the Petitioners to cooperate with the special auditor.

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