2023 (12) TMI 740 - HC - Income Tax

Special audit of accounts u/s 142A for the purpose of assessment u/s 153A - Power (Jurisdiction) to grant Extension lies with AO or CIT - Extension given for submission of the audit report to Chartered Accountant appointed u/s 142(2A) - HELD THAT - It was the respondent/assessee's stand that both cooperation and information was furnished as sought by the concerned auditor. Regarding the interconnection of transactions, two separate auditors appointed in the matter had enough time to coordinate. That said, according to the respondent/assessee, without prejudice to the contention made on its behalf, one way or the other, the AO had to decide as to whether the extension of time for conducting the audit was mandated. The letter dated 08.04.2010, the extract of which was embedded in the letter dated 11.02.2020, needed to demonstrate that there was good and sufficient cause for extending the timeframe. Having noted the diametrically opposite assertions made on the aspect of delay, in our opinion, the legal tenability of the decision taken in the matter depends on which specified authority was invested with the power to extend the timeframe. As discussed above, since the legislature vested the discretion to extend the timeframe solely in the AO, he could not have abdicated that function and confined his role to only making a recommendation to the CIT. CIT had no role in extending the timeframe as the AO was in seisin of the assessment proceedings. As has been correctly submitted on behalf of the respondent/assessee, the decision taken to get an audit conducted u/s 142(2A) of the Act is a step in the process of assessment proceedings and, therefore, is clearly not an administrative power; as the appointment of a special auditor entails civil consequences. We may note that the decision relied upon on behalf of the appellant/revenue in the matter of Yum Restaurant 2005 (5) TMI 55 - DELHI HIGH COURT has been disapproved in Rajesh Kumar s case 2006 (11) TMI 135 - SUPREME COURT . Furthermore, the judgment in Rajesh Kumar s case has been reaffirmed by the Supreme Court in the Sahara India Firm case 2008 (4) TMI 4 - SUPREME COURT with some moderation with regard to the Court s exposition concerning the scope and impact of Section 136 of the Act. Given that the initial exercise of the power has been explicated as one that is not administrative, the CIT(A) could not have extended the time based on the recommendation of the AO. However, the enunciation of this legal principle does not derogate from our observation above that since the discretionary power was vested in the AO (which was non-delegable), it could not have been exercised by the CIT, irrespective of the nature of the power. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the extension given to the Chartered Accountant for submission of the audit report was in consonance with the proviso appended to Section 142(2C) of the Income Tax Act, 1961.

Summary:

Issue 1: Extension of Time for Audit Report Submission

The appellant/revenue challenged the common order dated 03.06.2020 passed by the Income Tax Appellate Tribunal concerning Assessment Years (AYs) 2007-08 and 2008-09. The core issue was whether the extension given to the Chartered Accountant for submitting the audit report was in line with the proviso to Section 142(2C) of the Income Tax Act, 1961.

The Tribunal's impugned order disposed of the appeals filed by the revenue and the cross-objections filed by the respondent/assessee for the mentioned AYs. The Tribunal also addressed a separate order concerning a group company, B.L. Kashyap and Sons Ltd (BLK).

Background:

The respondent/assessee, engaged in construction and allied services, was subjected to a search action on 19.02.2008 under Section 132 of the Income Tax Act. Subsequently, a notice under Section 153A was issued on 24.12.2008. The Assessing Officer (AO) issued a show cause notice on 27.11.2009 for a special audit under Section 142(2A), which was objected to by the assessee but was rejected by the AO on 08.12.2009. The Commissioner of Income Tax (CIT) approved the special audit on 15.12.2009, appointing Dinesh Mehta & Co. with a 120-day timeframe, later extended by 60 days upon the auditor's request.

Submissions of Counsel:

Appellant/Revenue's Arguments:

1. Extension of time under Section 142(2C) is an administrative act, not a judicial power.
2. The AO satisfied himself for the need for an extension and recommended it to the CIT, fulfilling the conditions of the proviso to Section 142(2C).
3. The form of the letter issued by the AO should not determine the validity of the exercise of power.
4. Procedural errors should not invalidate the assessment if substantive justice is served, and no prejudice is caused to the assessee.

Respondent/Assessee's Arguments:

1. Only the AO has the power to extend the timeframe for the audit, not the CIT.
2. The extension granted by the CIT was illegal and invalid, making the assessment order beyond the prescribed period of limitation.
3. The power to extend time is discretionary and must be exercised by the AO based on good and sufficient reasons.
4. The extension of time impacts the limitation period and has substantive civil consequences.

Analysis and Reasons:

The court examined the relevant provisions of Section 142 of the Income Tax Act. It concluded that both the discretion to direct an audit and the extension of the timeframe for submitting the audit report are vested solely in the AO. The role of the CIT is limited to granting approval for the audit and nominating the auditor. The CIT's involvement in extending the timeframe was beyond the statutory authority, as the power to extend time was non-delegable and vested only in the AO.

Conclusion:

The court held that the extension of time granted by the CIT was not in consonance with the proviso to Section 142(2C) of the Act. Consequently, the assessment order dated 10.08.2010 was barred by limitation. The question of law was answered against the revenue and in favor of the assessee, and the appeals were disposed of accordingly.