SPECIAL AUDIT

[Mr. M. GOVINDARAJAN]

Every company incorporated under the Companies Act, 1956 has to maintain its accounts and are subjected to audit by statutory audit by the Chartered Accountant.   The companies are also required to have its accounts audited in terms of Section 44AB of the Income Tax Act, 1961. Therefore the company is to maintain its books of accounts properly.   If the company is a manufacturing company or a provider of output service then the provisions of Central Excise Act, 1944 and the provisions of Chapter V of the Finance Act, 1994 and the provisions of CENVAT Credit Rules, 2004 are to be complied with and under an obligation to maintain books of accounts, invoices etc., The Companies Act, 1956, the Income Tax Act, 1961, the Central Excise Act, 1944 and Chapter V of the Finance Act, 1994 provides for special audit in certain cases if there is a belief there is an evasion of duty/tax or the company is being managed in a manner likely to cause serious injury or damage to the interest of the trade, industry or business.

For the academic interest of the readers the provisions relating to special audit under the Companies Act, 1956, Income Tax Act, 1961, Central Excise Act, 1944 and Chapter V of Finance Act, 1994 are furnished as hereunder.

UNDER COMPANIES ACT

Under Section 233A of the Companies Act, 1956 where the Central Government is of the opinion that the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices or that any company is being managed in a manner likely to cause serious injury or damage to the interests of the trade, industry or business to which it pertains or that the financial position of any company is such as to endanger its solvency, the Central Government might by the same or different order direct that a special audit of the company’s accounts for such period or periods as may be prescribed in the order, shall be conducted and may by the same or by different order appoint either a Chartered Accountant as defined in clause (b) of sub section (1) of Section 2 of Chartered Accountants Act, 1949 or the company’s auditor himself to conduct such special audit.

The special auditor appointed by the Central Government under Section 233A of the Companies Act, has the same power and duties in relation to special audit as an auditor of a company under Section 227 of the Companies Act.   The only difference is that in spite of making his report to the members of the company the special auditor submits its report to the Central Government.

Section 233B of the Companies Act provides that where in the opinion of the Central Government it is necessary so to do in relation to any company required under Section 209 to include in its books of account the particulars referred to therein, the Central Government might by order direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959. If the Central Government in the opinion those sufficient numbers of Cost Accountants are not available for conducting the audit of cost accounts of companies then a Chartered Accountant may be directed to conduct the audit of the cost accounts of the company.

UNDER INCOME TAX ACT

The Income Tax Act, 1961 contains provisions for special audit under Section 142(2A) of the Income Tax Act, 1961. The said section 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 Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief 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. The Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.

The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer.

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 one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.

The expenses of, and incidental to, any audit under sub-section (2A) (including the remuneration of the accountant) shall be determined by the Chief 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. Where any direction for audit under sub-section (2A) is issued by the Assessing Officer on or after the 1st day of June, 2007, the expenses of, and incidental to, such audit (including the remuneration of the Accountant) shall be determined by the Chief Commissioner or Commissioner in accordance with such guidelines as may be prescribed and the expenses so determined shall be paid by the Central Government.

UNDER CENTRAL EXCISE ACT    

The Central Excise Act, 1944 also contains provisions for special audit under Section 14A of the Central Excise Act.

Section 14A provides special audit in certain cases. The section provides that if at any stage of enquiry, investigation or any other proceedings before him, any Central Excise Officer not below the rank of an Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise, having regard to the nature and complexity of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or determined by a manufacturer or any person, he may, with the previous approval of the Chief Commissioner of Central Excise, direct such manufacturer or such person to get the accounts of his factory, office, depots, distributors or any other place, as may be specified by the said Central Excise Officer, audited by a cost accountant or chartered accountant, nominated by the Chief Commissioner of Central Excise in this behalf.       

The cost accountant or chartered accountant, so nominated shall, within the period specified by the Central Excise Officer, submit a report of such audit duly signed and certified by him to the said Central Excise Officer mentioning therein such other particulars as may be specified. The Central Excise Officer may, on an application made to him in this behalf by the manufacturer or the person and for any material 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 one hundred and eighty days from the date on which the direction under sub-section (1) is received by the manufacturer or the person.

The special audit conducted under this section shall have effect notwithstanding that the accounts of the manufacturer or person aforesaid have been audited under any other law for the time being in force or otherwise. The manufacturer or the person shall be given an opportunity of being heard in respect of any material gathered on the basis of audit under sub-section (1) and proposed to be utilized in any proceedings under this Act or rules made there under.

Section 14AA provides for special audit in cases where credit of duty availed or utilized is not within the normal limits, etc.- 

• If the Commissioner of Central Excise has reason to believe that the credit of duty availed of or utilized under the rules made under this Act by a manufacturer of any excisable goods—
  • is not within the normal limits having regard to the nature of the excisable goods produced or manufactured, the type of inputs used and other relevant factors, as he may deem appropriate;
  • has been availed of or utilized by reason of fraud, collusion or any willful mis-statement or suppression of facts;

he may direct such manufacturer to get the accounts of his factory, office, depot, distributor or any other place, as may be specified by him, audited by a cost accountant or chartered accountant nominated by him;

• The cost accountant or chartered accountant so nominated shall, within the period specified by the Commissioner of Central Excise, submit a report of such audit duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified;
• This audit shall have effect notwithstanding that the accounts of the said manufacturer aforesaid have been audited under any other law for the time being in force or otherwise;
• The manufacturer shall be given an opportunity of being heard in respect of any material gathered on the basis of audit under sub-section (1) and proposed to be utilized in any proceedings under this Act or rules made there under.

UNDER CHAPTER V OF FINANCE ACT, 1994

Chapter V of Finance Act, 1994 has the provisions for special audit. Till 28.05.2012 the provisions of Sec. 14A of Central Excise Act is also applicable to the provisions of service tax.   With effect from 28.05.2012 Section 72A was inserted by Finance Act, 2012.

The said section provides that if the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as ''such person''),––

• has failed to declare or determine the value of a taxable service correctly; or
• has availed and utilized credit of duty or tax paid-
  • which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or
  • by means of fraud, collusion, or any willful misstatement or suppression of facts; or
• has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner, he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner.

The chartered accountant or cost accountant shall, within the period specified by the said Commissioner, submit a report duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified by him.

This special audit shall have effect notwithstanding that the accounts of such person have been audited under any other law for the time being in force. The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit and proposed to be utilized in any proceeding under the provisions of this Chapter or rules made there under.

The special audit was held to be entail civil consequences and the rule of ‘audi alteram partem’ was to be a necessary prerequisite for an order of special audit under Section 142(2A) of Income Tax Act, 1961. The Supreme Court in ‘Sahara India (Firm), Lucknow V. Commissioner of Income Tax, Central I and another’ – 2008 (4) TMI 4 - Supreme Court held that the expression ‘civil consequences’ encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and non pecuniary damages. Anything which affects in its civil life comes under its umbrella. The same principle shall apply to the special audit under Companies Act, Central Excise Act and service tax provisions. Therefore the special audit is required to be made upon compliance with the principles of natural justice.