2023 (5) TMI 947 - AT - Income Tax

Special audit report u/s 142(2A) - whether report of the nominated auditors is purely based on surmises and assumptions? - HELD THAT - Undisputedly u/s 142(2A) of the Act special audit can be referred by the AO during assessment proceedings only when the accounts of the assessee are complex in nature or it is necessary for the interest of the Revenue. An admitted fact on record that the AO had no occasion to examine the books of accounts furnished by the assessee, which were actually furnished for A.Y. 2007-08 to 2011-12 on 04.10.2013 whereas order for special audit was passed on 22.03.2013 and pursuant thereto special auditor furnished report on 16.09.2013. When we examine the contentions raised by assessee in the light of the aforesaid undisputed facts it goes to prove that the order for special audit has been passed in these cases merely on the basis of surmises by the AO as well as the Ld. CIT even without having a look into the books of accounts furnished by the assessee. Rather on the other hand the assessee has been objecting to the special audit since beginning. Order for special audit in this case was passed on 22.03.2013 and audit report was furnished on 16.09.2013, the AO had no occasion whatsoever to peruse the books of accounts furnished by the assessee for A.Y. 2007-08 to 2011-12 on 04.10.2013. Action of the AO referring the matter for special audit was purely a subjective decision based upon surmises which is patently against the spirit of section 142(2A). Re-course to the special audit by the AO is without any basis and even without perusing the books of accounts of the assessee, which were actually not there before the AO at that time. In that eventualities the AO was having the only option to frame the assessment on the basis of best judgment assessment u/s 144 of the Act. So when the very initiation of proceedings for calling special audit report by the AO and approved by the Ld. CIT is bad in law, merely based upon surmises, the subsequent proceedings are also not sustainable in the eyes of law. Appeal of assessee allowed.

Summary

Issues Involved:
1. Validity of assessment order under section 153C read with section 143(3) of the Income Tax Act.
2. Timeliness of the assessment order.
3. Legality of the special audit under section 142(2A) of the Income Tax Act.
4. Addition of Rs. 32.38 crore in NRE account.
5. Addition of Rs. 20 crore as unexplained credit.
6. Validity of additions made without incriminating material.
7. Alleged violation of principles of natural justice.

Summary:

1. Validity of Assessment Order:
The assessee challenged the assessment orders under section 153C read with section 143(3) of the Income Tax Act, claiming they were "bad in law, illegal, null and void." The Tribunal found that the Assessing Officer (AO) initiated proceedings based on a satisfaction note recorded for assessment years 2005-06 to 2010-11. However, the special audit was approved without examining the books of accounts, rendering the initiation of special audit baseless and subjective.

2. Timeliness of the Assessment Order:
The Tribunal noted that the assessment order was passed beyond the period of limitation specified under section 153B of the Act. The seized documents were handed over to the AO on 17/11/2011, and the assessment should have been completed by 31/03/2013. However, the order was passed on 14/11/2013, making it time-barred.

3. Legality of the Special Audit:
The Tribunal found that the AO had no occasion to examine the books of accounts before ordering the special audit. The special audit was based on surmises, violating the spirit of section 142(2A) of the Act. The Tribunal cited the Supreme Court's decision in Sahara India, emphasizing that the opinion for special audit must be based on objective criteria.

4. Addition of Rs. 32.38 Crore in NRE Account:
The Tribunal did not specifically address this issue on merits, as the assessment order itself was quashed on legal grounds.

5. Addition of Rs. 20 Crore as Unexplained Credit:
Similarly, the Tribunal did not delve into the merits of this addition due to the quashing of the assessment order.

6. Validity of Additions Made Without Incriminating Material:
The Tribunal found that the additions made by the AO were unsustainable as they were not based on any incriminating material found during the search.

7. Alleged Violation of Principles of Natural Justice:
The Tribunal did not specifically address this issue, as the primary focus was on the legality of the special audit and the timeliness of the assessment order.

Conclusion:
The Tribunal quashed the assessment orders for being "bad in law" and "illegal," primarily due to the baseless initiation of the special audit and the orders being time-barred. Consequently, the appeals filed by the assessee were allowed.