2021 (8) TMI 1014 - HC - Income Tax

Special audit u/s 142(2A) - AO Jurisdiction to give directions for a special audit - necessary approval of the Principal Commissioner of the Income Tax or not? - HELD THAT - Assessing officer after going through the said material seized during the search operations and after following the due procedure of giving reasonable opportunity of hearing to the petitioners and after obtaining necessary approval of the Principal Commissioner of the Income Tax as contemplated in Sub-section (2A) of Section 142 has directed the respective petitioners vide the impugned directions to get their accounts audited by the nominated accountant, and to furnish the report in the prescribed form, also setting forth the requisite particulars as prescribed in the questionnaire. Such directions could neither be said to be arbitrary, illegal nor beyond the scope of the said provision. It is neither permissible to the Court exercising the jurisdiction under Article 226 of the Constitution to enter into the disputed questions of facts, nor is it possible for the Court to analyse each and every direction and come to the conclusion whether it is bad in law or not. The submission of Mr.Soparkar that if some of the questions, which seem to be bad in law cannot be segregated, the entire impugned order containing the directions be quashed and set aside, also cannot be accepted. It is axiomatic that when an authority has a jurisdiction to pass an order, the exercise of jurisdiction in wrongful manner in certain cases even though held to be illegal, would not necessarily render the order a nullity. All irregular or erroneous or illegal orders cannot be held to be null and void. In the instant case, as set out herein above the Assessing Officer does have the jurisdiction to give directions for a special audit under Section 142(2A). Even the impugned directions also do not suffer from any illegality or infirmity. In any case, even if two-three queries out of forty five queries are found to be unwarranted, as sought to be submitted by Mr.Soparkar, the entire order giving directions can not be set aside treating it to be a nullity. In that view of the matter, both the petitions being devoid of merits deserve to be dismissed. At this stage, the request made by the learned Sr. Advocate Mr.M. R. Bhatt for the respondent to exclude the period during which the present petition remained pending in the High Court after issuance of the notice i.e. from 14.6.20201 till this date, deserves to be considered for the purpose of Section 142(2C) - See VLS FINANCE LTD. ANOTHER VERSUS COMMISSIONER OF INCOME TAX ANOTHER 2016 (4) TMI 1133 - SUPREME COURT Applying the ratio of the afore-stated judgement to the facts of the present petitions, it is directed that the period during which both the petitions remained pending i.e. from the date of issuance of notice on 14.6.2021 till the date of pronouncement of judgement, shall be excluded while counting the period prescribed in the proviso to Sub-section (2C) of Section 142 of the said Act. Subject to the said direction, the petitions are dismissed.

Summary

Issues Involved:
1. Challenge to the impugned directions dated 22.4.2021 issued under Section 142(2A) of the Income Tax Act, 1961.
2. Scope and legality of the directions issued by the Assessing Officer for special audit.
3. Whether the Assessing Officer's directions constitute a delegation of judicial functions to the special auditor.
4. Applicability and interpretation of Section 142(2A) post-amendment.

Issue-wise Detailed Analysis:

1. Challenge to the Impugned Directions Dated 22.4.2021:
The petitioners initially challenged both the order dated 8.4.2021 and the directions dated 22.4.2021. However, during the hearing, the petitioners confined their challenge to the directions dated 22.4.2021. The court noted that the prayer regarding the order dated 8.4.2021 stood rejected as not pressed. The court was thus required to examine only the legality of the directions dated 22.4.2021, which directed the petitioners to get their accounts audited by a nominated accountant and furnish a report in Form No.6B.

2. Scope and Legality of the Directions Issued by the Assessing Officer for Special Audit:
The court elaborated on the scope of Section 142(2A) of the Income Tax Act, which allows the Assessing Officer to direct a special audit considering the nature, complexity, volume, and correctness of the accounts, among other factors. The court emphasized that the special audit involves more than just verifying books and vouchers; it includes submission of explanations and clarifications, making it akin to an investigation. The court referred to the Supreme Court's decision in Sahara India (Firm) Vs. Commissioner of Income-tax & Anr., which stated that special audit entails civil consequences and is more investigative in nature.

3. Whether the Assessing Officer's Directions Constitute a Delegation of Judicial Functions to the Special Auditor:
The petitioners argued that the directions issued by the Assessing Officer improperly delegated judicial functions to the special auditor. The court rejected this argument, noting that the special audit under Section 142(2A) is intended to assist the Assessing Officer in understanding complex accounts and transactions. The court cited the amended Section 142(2A) and the decision in Tehmul Burjor Shethna Vs. ACIT, which clarified that the scope of Section 142(2A) has been widened to include not just the complexity of accounts but also the specialized nature of business activities and the interests of revenue. The court also noted that the special auditor is permitted to call for explanations and clarifications on various issues, including legal ones, as part of the audit process.

4. Applicability and Interpretation of Section 142(2A) Post-Amendment:
The court discussed the amendments to Section 142(2A) effective from 1.6.2013, which expanded the scope of the provision. The court highlighted that the Assessing Officer's power to direct a special audit now includes considerations of the specialized nature of business activities and the interests of revenue. The court emphasized that the Assessing Officer's directions for a special audit are valid as long as they are within the scope of Section 142(2A) and are not arbitrary or illegal. The court also noted that the detailed comments provided by the respondent justified each direction issued by the Assessing Officer.

Conclusion:
The court dismissed both petitions, holding that the directions issued by the Assessing Officer were neither arbitrary nor illegal. The court also directed that the period during which the petitions remained pending should be excluded for calculating the limitation period under Section 142(2C) of the Act. The interim relief granted to the petitioners was extended to allow them to approach a higher forum.