SPECIAL AUDIT UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Under the provisions of the Income Tax Act, 1961 (‘Act’ for short) and the rules made there under, an assessee is to file return on his/her income as specified. The said returns ought to be verified as provided for in Section 140 of the Act. The assessee may also make self-assessment under the provisions of Section 140A of the Act. Thereafter, the income tax Department is to undertake assessment of the tax payable.

Under Section 142 of the Income Tax Act, the Income Tax Department may, undertake an enquiry for the purpose of making the assessment. For the said purpose, the Income Tax Department may call for the return of income in respect of which the assessee is assessable, the production of any documents, accounts or information and a statement in respect of the assets and liabilities of the Assessee. For the purpose of obtaining full information with respect to the income or loss of any person, the Assessing Officer can, Under Section 142(2), make such enquiry as considered necessary.

In the process of making such enquiry in order to carry out the assessment proceedings, Section 142(2A) of the Income Tax Act, contemplates the nomination of an accountant by the Commissioner or by other high-ranking officials of the Income Tax Department, in a situation where the Assessing Officer is of the opinion that owing to the volume, nature and complexity of accounts, doubt regarding the correctness of the accounts, specialized nature of the business Activity etc. of the assessee and in the interest of Revenue, an audit of the accounts of the assessee is required.

Section 142(2A) of the Act provides that if, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business Activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of the following, namely-

• to get the accounts audited by an accountant, as defined in the Explanation below (2) of section 288 (2), nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require;
• to get the inventory valued by a cost accountant, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such inventory valuation in the prescribed form duly signed and verified by such cost accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require.

The Assessing Officer shall not direct the assessee to get the accounts so audited or inventory so valued unless the assessee has been given a reasonable opportunity of being heard.

The Assessing Officer may, suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed 180 from the date on which the direction under sub-section (2A) is received by the assessee.

The expenses of, and incidental to, any audit or inventory valuation under sub-section (2A) (including the remuneration of the accountant or the cost accountant, as the case may be) shall be determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVII-D for the recovery of arrears of tax.

In terms of Section 142(2D) of the Income Tax Act, such accountant, who may be engaged for the purpose of audit, is to be paid remuneration which is to be determined by the Commissioner or the Principal Commissioner, Chief Commissioner or the Principal Chief Commissioner. Upon being determined, the said remuneration shall be final. This remuneration shall be paid by the Central Government.

The assessee shall, except where the assessment is made under section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry or any audit or inventory valuation under sub-section (2A) and proposed to be utilized for the purposes of the assessment.

Rule 14B provides that every Chief Commissioner shall maintain a panel of accountants. Where the Assessing Officer directs for special audit the expenses of, and incidental to, audit (including the remuneration of the Accountant, qualified Assistants, semi-qualified and other Assistants who may be engaged by such Accountant) shall not be less than Rs. 3750/- and not more than Rs. 3700/- for every hour of the period as specified by the Assessing Officer. The Special Auditor shall maintain a time-sheet and shall submit it to the Chief Commissioner or Commissioner, along with the bill. The Chief Commissioner or the Commissioner shall ensure that the number of hours claimed for billing purposes is commensurate with the size and quality of the report submitted by the Accountant.

The Income Tax Department usually calls for Expressions of Interest from the accountants. Upon the submission of the EOI, the nomination is effected. The accountant is under no obligation to accept the nomination. The empanelled auditors are fully aware of the nature of the assignment when the nomination is made. Such auditors are also aware of the finality which is attached to the determination of the remuneration.

Thus, the scheme of the Act and the Rules entails the following steps-

• Submission of Expression of Interest;
• Nomination by the Department;
• Conduct of Special Audit;
• Submission of report;
• Determination of remuneration payable
• The payment of remuneration.

Therefore Special audit is to facilitate the Assessing Officer in the completion of the assessment proceedings and to arrive at the correct taxable income. The assignment, being ‘statutory’ in nature, the only remedy is under the Income Tax Act, 1961 or by way of a writ petition. Such an audit can never be described as a ‘commercial contract’ or an ‘agreement’ where the word ‘consideration’ is used. The Special Audit is made for and on behalf of the Assessing Officer to the complexity of the transactions and such other factors as are set out Under Section 142(2A) of the Act.

After completion of the Special Audit, the Chief Commissioner or the Commissioner plays a very crucial role in the determination of remuneration. Rule 14B (5) stipulates that the number of hours claimed by the accountant for billing purposes has to be commensurate with the size and quality of the report submitted by the accountant. This provision clearly shows that the invoice, which may be raised by the accountant, is not to be straightaway accepted.

The Chief Commissioner or the Commissioner is required to assess various factors, including-

• The nature of the work assigned to the accountant;
• The quantum of work;
• The duration of the work;
• The quality of the report;

Whether the hours claimed is exaggerated or commensurate or suitable, bearing in mind the above factors.