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2021 (5) TMI 468 - AT - Income TaxSpecial audit u/s 142(2A) - CIT(A) upholding the exercise of jurisdiction u/s 142(2A) by the Assessing Officer by directing Special Audit without demonstrating the complexity in the books of accounts and holding that the assessment is not barred by limitation - assessee was selected under scrutiny and statutory notices were duly served to the assessee - HELD THAT - The special audit under section 142(2A) of the Act has to be directed by the Assessing Officer only in the genuine cases where the Assessing Officer finds that he is not in a position to assessee the income of the assessee having regard to the complexities in the books of accounts. For the exercise of this power u/s 142(2A), it has been provided that the prior approval has been taken from the CIT which is a statutory safeguard provided in the Act against any unreasonable or arbitrary exercise of power by the Assessing Officer which has to be granted by the CIT after following the due process and after dule application of mind. The approval by the CIT should be granted after examining and after due application of mind to the proposal submitted by the Assessing Officer but in the present case it appears not to be so. The assessee filed objection to the show cause notice on 30.12.2020 and Assessing Officer after considering the reply of the assessee framed the proposal containing 16 issues in the draft order proposed under section 142(2A) of the Act and thereafter the same was sent to CIT through Addl. CIT and approval was accorded on the same day by the CIT. But as is apparent from the facts before us, the exercise of jurisdiction under section 142(2A) of the Act has been exercised in a mechanical, routine and perfunctory manner and so is the approval granted by the CIT as all the formalities were done on the same day. Therefore the assessment framed by the AO cannot be sustained as the same suffer from legal infirmities of improper exercise of jurisdiction on the part of the tax authorities u/s 142(2A) of the Act. We are not in agreement with the conclusion of ld. CIT(A) on the issue of upholding the assessment as the same is barred by limitation in view of the fact that order under section 142(2A) was directed only to extend the period of limitation under the Act. Accordingly, we set aside the order of the CIT(A) on the issue and quash the assessment framed by the Assessing Officer as being barred by limitation. Several adhoc additions/disallowances out of expenses and one main addition on account of valuation of closing stocks - HELD THAT - The valuation as done by the assessee was disputed by the special auditor for the reasons that the same is not supported with evidences which was calculated on estimated realisable value by the assessee on some technical assessment of stocks. According to the assessee the estimated realisable value is based upon the realisation in the subsequent year. But the sales realisation was higher in the subsequent year due to depreciation in the value of rupees vis a vis foreign exchange. The assessee is in this trade for the last more than 50 years and has been following accounting policy consistently qua valuation of stocks which has duly been disclosed in audited accounts under significant accounting policies. We note that the cut and polished diamonds are valued on the basis of technical assessment only right from the beginning as per trade practices and the said method of valuation is in accordance with mandatory accounting standard AS-2 issued by ICAI. The method of valuation of stocks is accepted by the department right from the beginning in all the years. We have also examined the financial statements of various listed companies which are into the diamond manufacturing business besides experts opinions on valuation. Moreover any addition in closing stock is tax neutral as the closing stock of the current year will become the opening stock of the following year. Even the Hon ble Apex Court in the case of Chainswarup Sampatram 1953 (10) TMI 2 - SUPREME COURT has held that it is wrong to think that any profit rises out of valuation of stocks. Therefore even stock addition appears to wrong and fallacious and rightly been deleted by the ld CIT(A). - Decided against revenue.
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) under section 142(2A) of the Income-tax Act, 1961. 2. Assessment being barred by limitation. 3. Validity of the Special Audit ordered under section 142(2A). 4. Merits of the additions/disallowances made by the AO. Issue-wise Detailed Analysis: 1. Jurisdiction of the Assessing Officer (AO) under section 142(2A): The primary issue raised by the assessee was the exercise of jurisdiction by the AO under section 142(2A) of the Act, directing a Special Audit without demonstrating the complexity in the books of accounts. The assessee contended that the AO did not call for or examine the books of account before forming his opinion on the complexity of the accounts. The Tribunal noted that the AO must form an opinion based on the nature and complexity of the accounts and the interest of the revenue, which necessitates examining the books of account. The Tribunal found that the AO did not examine the books of account and directed the audit at the fag end of the period to extend the time limit for framing the assessment. 2. Assessment being barred by limitation: The assessee argued that the assessment framed under section 143(3) dated 12.08.2011 was barred by limitation as the period for passing the assessment order expired on 31.12.2010. The Tribunal observed that the AO issued the notice for Special Audit under section 142(2A) on 24.12.2010, just before the expiry of the limitation period, and completed the assessment on 12.08.2011. The Tribunal concluded that the audit was directed primarily to extend the time limit, rendering the assessment order barred by limitation. 3. Validity of the Special Audit ordered under section 142(2A): The Tribunal examined whether the conditions for directing a Special Audit under section 142(2A) were fulfilled. The Tribunal noted that the AO did not point out any specific complexity in the accounts and did not examine the books of account. The Tribunal also found that the approval for the Special Audit by the Commissioner was granted in a casual and routine manner without application of mind. Consequently, the Tribunal held that the direction for Special Audit was invalid and quashed the assessment framed by the AO. 4. Merits of the additions/disallowances made by the AO: Although the Tribunal quashed the assessment on jurisdictional and limitation grounds, it also addressed the merits of the additions/disallowances. The AO made several adhoc additions/disallowances, including a significant addition on account of valuation of closing stocks. The Tribunal noted that the assessee consistently followed a method of valuation accepted by the department in previous years, and any addition in closing stock is tax-neutral as it becomes the opening stock of the following year. The Tribunal found the stock addition to be fallacious and upheld the deletion by the CIT(A). Conclusion: The Tribunal quashed the assessment framed by the AO as being barred by limitation and invalid due to improper exercise of jurisdiction under section 142(2A). Consequently, the appeal of the assessee was partly allowed, and the appeal filed by the Revenue was dismissed.
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