TIME LIMIT FOR COMPLETION OF ASSESSMENT FROM THE DATE OF SPECIAL AUDITOR’S REPORT UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Section 142(2A) of the Income Tax Act, 1961 (‘Act’ for short) provides for the conduct of special audit that may directed by the Assessing Officer.  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 Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below 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.  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.

In ‘Commissioner of Income Tax and another V. BJN Hotels Limited’ – 2016 (3) TMI 283 - KARNATAKA HIGH COURT the assessee is engaged in the hotel business.   A search was conducted by the Department under Section 132 of the Act on 17.12.2004.  The Department issued notice under Section 153A with directions to file a return of income for the relevant assessment years.  The assessee filed return declaring loss.  A special audit was order on 31.03.2006 but however the same has been dropped as no opportunity was provided to the assessee.

On 30.11.2006 another notice was issued under Section 142(2A) of the Act proposing to send the books of the account of the assessee for special audit.  The assessee objected the same that there was no complexity in the accounts.  The Assessing Officer obtained the prior permission of the Commissioner on 18.12.2006 and directed the assessee to get the accounts audited.   He fixed the due date for submission of special audit on 28.02.2007.  Assessments were conducted under Section 153A read with Section 143(3).  The assessment order was sent to the assessee on 30.04.2007.

The assessee filed appeal to the Commissioner (Appeals) against the order.  The Commissioner (Appeals) allowed the appeal in part.  Against this order the assessee as well as the Revenue filed appeal before the Tribunal.  The Tribunal held that the assessment orders passed are time barred and decided the case in favor of the assessee.

The Revenue approached the High Court against the order of the Tribunal and framed four questions of law as detailed below:

• Whether the Tribunal was correct in law in holding that the time for furnishing the special audit report could not have been extended beyond 27.01.2007 being 180 days from 31.07.2006 being the date of the first direction and the order of assessment ought to have been made by 26.03.2007 and consequently the assessment order passed on 27.04.2007 is barred by limitation on the facts and circumstances of the case?
• Whether the Tribunal is correct in law holding that the Assessing Officer does not have the powers to unilaterally withdraw the direction for special audit under Section 142(2A) of the Act, as the original direction was made with the approval of the Commissioner of Income Tax on the facts and circumstances of the case?
• Whether the Tribunal was correct in law holding that the assessment order passed on 27.04.2007 is barred by limitation as successive direction under Section 142(2A) is not permissible and the second direction given to obtain the audit report before 28.04.2007 is to elongate the assessment proceedings and also contrary to section 142(2C) of the Act on the facts and circumstances of the case?
• Whether the assessment order is barred by limitation as it was made beyond the period of limitation on the facts and circumstances of the case?

The High Court heard both parties.  First it considered the question of law of 4^th, relating  to the limitation since it goes into the root of the matter.  The High Court found that the undisputed facts are that the assessment orders were required to be issued on or before 26.03.2007, the period prescribed under law considering sixty days from January 27, 2007, the due date for special audit report as specified under Section 142(2C) of the Act.  The assessment order was passed on 27.04.2007.  Taking the second reference of the Commissioner, dated 18.12.2006 for special audit report, due date for submission of special audit report is 28.02.2007, therefore the assessment orders would have been issued on or before 29.04.2007.  The copies of the assessment orders were served on the assessee on 30.04.2007.

The Revenue contended that the assessment order was passed on 27.04.2007 and the same was dispatched to the assessee.  The High Court directed to produce the original records for the date of passing order and the dispatch of the order.  The High Court noticed certain over writing in the order sheet as regards date of passing of the order by the Assessing Officer.  The High Court also noticed that a particular page of the order sheet is maintained on a rough sheet different from other pages of the order sheet.  The Revenue is neither able to point out from the records that the assessment orders were dispatched on 27.04.2007 nor produced the dispatch register to establish that the orders are complete and effective i.e., it is issued, so as to be beyond the control of the authority concerned within the period of limitation i.e., 29.04.2007.  It is an admitted fact that the orders were served on the assessee only 30.04.2007.  The High Court was of the opinion that the assessment orders passed are barred by limitation.

The High Court relied on the judgment in ‘Government Wood Works V. State of Kerala’ – 1987 (1) TMI 451 - KERALA HIGH COURT, the Kerala High Court held that in the absence of dispatch date made available to the Court from the records, to prove that the order is issued within the prescribed period, order passed by the Assessing Officer is barred by limitation.

The High Court dismissed the appeal filed by the Revenue.