2024 (5) TMI 645 - HC - Income Tax

Validity of special audit u/s 142(2A) - entries/transactions in seized/impounded documents/digital documents/bank accounts are not matching with the financials shown by the assessee in its return of income for the different A.Ys. - whether AO wrongly recorded that the petitioner-Company did not submit its reply to the show-cause notice? - HELD THAT - While forming an opinion for the special audit by a nominated Accountant the AO is also required to have regard to the interests of the Revenue. In the milieu of such varied requirements as provided u/ss (2-A) this cannot be a requirement in law that the AO must refer to each of the aforementioned factors separately and narrate the supporting facts thereof while exercising the power under sub-section (2-A). In the notice u/s 142 (1) to the petitioner-Company AO referred to huge discrepancies in sale descriptions in the seized documents that were verified with Tally data. During the searches several documents and digital devices were seized and the information retrieved from the mobile phone of the directors and employees of the petitioner-Company revealed suspected transactions. The unexplained transactions and the details of suspicious transactions are spread over fourteen pages in the notice. The satisfaction indicated under sub-section (2-A) for forming an opinion by the AO shall not be open to judicial scrutiny and wherever it is shown to the Court that there are materials for arriving at satisfaction for the special audit of the accounts of an assessee by an Accountant as defined in explanation to sub-section (2) of section 288 the writ Court shall be denuded of its power of judicial review under Article 226 of the Constitution of India. The submission that by passing an order under sub-section (2-A) the period of limitation which shall be expiring on 31st day of March 2024 would be extended by six months and thereby cause prejudice to the assessee cannot be countenanced in law. Unless it is demonstrated by producing materials to the satisfaction of the Court that the exercise of powers under sub-section (2-A) by the Assessing Officer is with mala fide intention the writ Court shall not exercise its powers under Article 226 of the Constitution. In the opinion of this Court the Assessing Officer for valid and justifiable reasons may exercise the powers under sub-section (2-A) till the last date of the financial year. Having regard to the initial stage of inquiry we shall be careful to see that no prejudice is caused to the assessee and would therefore simply indicate that (i) there are certainly doubts about the correctness of the accounts (ii) multiplicity of transactions is apparent (iii) unexplained/unaccounted transactions are like specialized transactions and (iv) the accounts are complex and certainly voluminous. The order granting approval dated 20th March 2024 for special audit under section 142 (2-A) of the Income Tax Act takes note of every detail of the case. This would evince no doubt that at this stage the statutory Authority is required to form a prima facie opinion and not to render a conclusive finding. The Latin word prima facie which means at first glance shall refer to materials based on which the statutory Authority shall form an opinion. To a limited extent we may agree with the learned counsel for the petitioner-Company that five days to respond to the notice under section 142 (2-A) was not sufficient and the Assessing Officer passed the order without looking at the objections raised by the petitioner-Company. Even so there is no law of universal application that every order passed in breach of natural justice must be interfered by the Court. The requirement in law that every order that ensues civil consequence must be passed following the rules of natural justice shall vary from case to case and no strait-jacket formula can be prescribed. We are not in agreement with the learned counsel for the petitioner-Company that serious prejudice has been caused to the petitioner-Company on account of violation of the rules of natural justice. For the foregoing reasons we are not inclined to interfere with the orders. Only the time indicated in the order for submission of report by the nominated Auditor is extended by a further three months. The nominated Auditor shall confine the inquiry to the matters as indicated.

Summary

Issues Involved:
1. Violation of natural justice in the issuance of special audit orders u/s 142(2-A) of the Income Tax Act, 1961.
2. Challenge to the approval granted by the Principal Commissioner of Income Tax for the special audit.

Summary:

Issue 1: Violation of natural justice in the issuance of special audit orders u/s 142(2-A) of the Income Tax Act, 1961.

Saluja Steel and Power Private Limited challenged the orders passed u/s 142(2-A) of the Income Tax Act, 1961, directing a special audit of its Books of Account for the Assessment Years 2020-21 and 2022-23. The petitioner argued that the orders were passed in violation of the principles of natural justice, as the Assistant Commissioner of Income Tax did not consider the show-cause reply filed by the petitioner. The court noted that the petitioner was given only five days to respond to the notice dated 1st March 2024, which was insufficient and deprived the petitioner of a fair opportunity to object to the proposed special audit.

Issue 2: Challenge to the approval granted by the Principal Commissioner of Income Tax for the special audit.

The petitioner also challenged the approval granted by the Principal Commissioner of Income Tax (Central), Patna, for the special audit. The court examined the provisions of sub-section (2-A) to section 142 of the Income Tax Act, which allows the Assessing Officer to direct a special audit if there are doubts about the correctness of the accounts, multiplicity of transactions, or complexity of the accounts, among other factors. The court found that the Assessing Officer had valid reasons for forming an opinion for the special audit based on the materials collected during the search and seizure operations, which revealed significant discrepancies in the petitioner's accounts.

Court's Findings:

The court held that the exercise of powers u/s 142(2-A) by the Assessing Officer was justified and based on valid reasons. However, the court acknowledged that the petitioner was not given sufficient time to respond to the notice, constituting a breach of natural justice. Despite this, the court found that the petitioner did not suffer any substantial prejudice due to the breach, as the objections raised by the petitioner lacked merit.

Directions Issued by the Court:

1. The time for submission of the special audit report by the nominated Auditor was extended by three months.
2. The nominated Auditor was directed to confine the inquiry to the matters indicated in para no.5 of the order dated 23rd March 2024.
3. The Auditor was instructed not to refer to any internal document/appraisal report prepared by the Income Tax Department concerning the petitioner-Company.

The writ petitions were disposed of accordingly.