2012 (5) TMI 166 - HC - Income Tax

Special audit u/s 142(2A) - opportunity of being heard before issuance of order of special audit - held that - A comparison of the show cause notice given to the petitioner with the reasons given by the Assessing Officer would show that the grounds on which the previous approval has been granted, finds mention in the show cause notice dated 11th of September, 2011 and the petitioner has not been prejudiced in any manner. - Decided in favor of revenue. Examination of books of accounts and form 3C before order u/s 142(2A) - held that - The Assessing Officer first tried to clear the doubts by calling replies and he resorted to Section 142 (2A) thereafter, he found that it is difficult to work out the real income of the assessee due to complex nature of the entries in the account books. It is one thing to say that the account books may be rejected and the best judgement assessment may be resorted to under section 144 of the Act. But even then, best judgement cannot be arbitrary or whimsical. There has to be some basis for it. - Cogent and valid reasons have been assigned by the Assessing Officer - order is not in error - decided against the assessee.

Issues Involved:
1. Whether a proper opportunity of being heard was provided to the petitioner.
2. Whether the special audit under Section 142(2A) of the Income Tax Act was justified due to the complexity of the accounts.

Issue-wise Detailed Analysis:

1. Proper Opportunity of Being Heard:

The petitioner argued that the approval for a special audit was granted without a "reasonable opportunity of being heard," which is essential under Section 142(2A) of the Income Tax Act. The petitioner contended that the Commissioner of Income Tax (respondent no.1) should have provided a personal hearing, not just the Assessing Officer.

The court referenced the decision in Rajesh Kumar and others Vs. Deputy Commissioner of Income Tax (2006) 287 ITR 91, which emphasized that approval should not be granted mechanically and should consider the materials on record. However, the court noted that this decision was prior to the insertion of the proviso to Section 142(2A) by the Finance Act, 2007, which mandates that the Assessing Officer must provide a reasonable opportunity of being heard.

In this case, the court found that the Assessing Officer had indeed provided such an opportunity. The petitioner was issued a notice and allowed to file a reply, which was considered by the Assessing Officer. The Commissioner also reviewed the reply before granting approval. The court concluded that the requirement for a reasonable opportunity of hearing was met as per the statutory provisions, and there was no violation of natural justice principles.

2. Complexity of the Accounts:

The petitioner claimed that their accounts were not complex and that the special audit was unnecessary. They argued that if the accounts were unreliable, the Revenue could reject them under Section 144 of the Act.

The court examined the notice and the discrepancies pointed out by the Assessing Officer, such as inconsistencies in the quantum of power generated, consumed, and sold, as well as discrepancies in the financial figures provided by the petitioner and those received from external sources like UPPCL.

The court noted that the Assessing Officer had made an objective evaluation of the information, pointing out the complexity in determining the actual income due to these discrepancies. The Commissioner of Income Tax also objectively examined the petitioner's stand and concluded that the accounts were indeed complex, warranting a special audit.

The court referenced the Supreme Court decisions in Rajesh Kumar and Sahara India (Firm) Vs. CIT, which emphasized that the complexity of accounts must be genuinely assessed and that the decision to order a special audit should not be arbitrary. The court found that the Assessing Officer had made a genuine attempt to understand the accounts and only resorted to Section 142(2A) after finding unexplained discrepancies.

The court concluded that the Assessing Officer and the Commissioner had provided cogent and valid reasons for the special audit, and there was no jurisdictional error in their decision. The petitioner's contention that the accounts were not complex was rejected.

Conclusion:

The court held that the petitioner was given a reasonable opportunity of hearing as required under the proviso to Section 142(2A) of the Income Tax Act. The court also found that the accounts were complex, justifying the special audit. Consequently, the writ petition was dismissed.

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