2025 (3) TMI 1048 - AT - Income Tax

Special audit u/sec.142(2A) - extended time limit for completion of the assessment - HELD THAT - AO has made an attempt to extend the time limit for passing the assessment order by a reference to special auditor u/sec.142(2A) whereby the AO gets extended time limit for completion of the assessment. We are therefore of the considered view that reference to special audit u/sec.142(2A) without satisfying the conditions provided therein is arbitrary illegal and void ab initio. Therefore in our considered view once the reference to special audit is illegal and void ab initio then the Assessing Officer will not get extended time limit for completion of assessment as per sec.153A) of the Act and consequently the final assessment orders passed by the AO for the assessment years 2014-2015 and 2015-2016 are barred by limitation and thus we quash the assessment orders passed by the AO for assessment years 2014-2015 and 2015-2016. Addition u/sec.69 towards payment made as unexplained - HELD THAT - On perusal of cash flow statement filed by the assessee AO has recorded a categorical finding that there is time gap of more than 4 years when compared to advance received in the year 2012 and payment made in the year 2016. Even before us the assessee could not explain the source except reiterating the very same arguments made before the AO and the CIT(A). Therefore we are of the considered view that assessee could not establish the source of payment to Shri Shoukat Ali from known source of income. CIT(A) after considering the relevant material on record sustained the addition made by the AO. Thus we uphold the findings of the learned CIT(A) on this issue and reject the ground taken by the assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the reference to a special audit under Section 142(2A) of the Income Tax Act, 1961, by the Assessing Officer (AO) was valid and justified.

2. Whether the assessment orders for the assessment years 2014-2015 and 2015-2016 were barred by limitation due to the alleged invalidity of the special audit reference.

3. Whether the additions made by the AO towards long-term capital gains and unexplained investments were justified.

4. Whether the addition of Rs. 6 lakhs under Section 69 of the Income Tax Act for the assessment year 2017-2018 was valid.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Special Audit Reference under Section 142(2A)

Relevant Legal Framework and Precedents: Section 142(2A) allows the AO to direct a special audit if the accounts are complex or voluminous, with the approval of the Principal Commissioner of Income Tax (PCIT). Judicial precedents emphasize that the AO must objectively assess the complexity of accounts rather than rely on subjective satisfaction.

Court's Interpretation and Reasoning: The Tribunal found that the AO did not make an objective assessment of the complexity of the accounts. The reference to the special audit was made on the last date for completing the assessment, suggesting it was used to extend the time limit for passing the assessment order.

Key Evidence and Findings: The Tribunal noted that the assessee had not maintained books of accounts, and the AO had not demonstrated the complexity of the accounts. The special audit reference appeared arbitrary and was deemed void ab initio.

Application of Law to Facts: The Tribunal concluded that the AO's reference to the special audit was invalid, and thus, the extended time limit for completing the assessment was not available.

Conclusions: The Tribunal quashed the assessment orders for 2014-2015 and 2015-2016, deeming them barred by limitation due to the invalidity of the special audit reference.

2. Additions towards Long-Term Capital Gains and Unexplained Investments

Treatment of Competing Arguments: The Tribunal did not address the merits of these additions because the assessment orders were quashed on the issue of limitation, rendering these grounds academic.

Conclusions: The Tribunal rejected these grounds as infructuous.

3. Addition of Rs. 6 Lakhs under Section 69 for Assessment Year 2017-2018

Relevant Legal Framework: Section 69 deals with unexplained investments, where the assessee must satisfactorily explain the source of any investment.

Court's Interpretation and Reasoning: The Tribunal found that the assessee failed to establish the source of the Rs. 6 lakhs payment to Shri Shoukat Ali, as there was a significant time gap between the alleged receipt of funds and the payment.

Key Evidence and Findings: The cash flow statement provided by the assessee did not adequately explain the source of the funds used for the payment.

Application of Law to Facts: The Tribunal upheld the addition made by the AO, agreeing with the CIT(A) that the source of the payment remained unexplained.

Conclusions: The Tribunal dismissed the appeal for the assessment year 2017-2018, upholding the addition under Section 69.

SIGNIFICANT HOLDINGS

Core Principles Established:

• The reference to a special audit under Section 142(2A) must be based on an objective assessment of the complexity of accounts, not merely to extend the time limit for assessment.
• An invalid reference to a special audit renders the consequent assessment orders void and barred by limitation.
• For additions under Section 69, the burden is on the assessee to satisfactorily explain the source of any unexplained investments.

Final Determinations on Each Issue:

• The assessment orders for 2014-2015 and 2015-2016 were quashed due to the invalidity of the special audit reference.
• The addition of Rs. 6 lakhs for the assessment year 2017-2018 was upheld, as the source of the payment was not satisfactorily explained.