2012 (9) TMI 410 - HC - Income Tax

Direction for special audit - complexity of accounts - Held that - AO felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in number. Detailed scrutiny of large number of entries by itself, on standalone basis, will not amount to complexity of accounts. The accounts do not become complex because merely there are large number of entries, an AO is required to scrutinize the entries and verify them, but this does not require services of a special auditor or a Chartered Accountant to undertake the said exercise. Section 142(2A) is not a provision by which the AO delegates his powers and functions, which he can perform to the special auditor. The said provision has been enacted to enable the AO to take help of a specialist, who understands accounts and accounting practices to examine the accounts when they are complex and the Assessing Officer feels that he cannot understand them and comprehend them fully, till he has help and assistance of a special auditor. Determining and deciding certain legal issues - nature and character of Nazul I and Nazul II land, payments received and the treatment of the said payments, receipts or expenditure in the books for the purposes of taxation - Held that - The special auditor cannot go into and examine the said legal issue or question regarding taxability. This has to be determined and decided by the AO himself - AO should indicate his prima facie or tentative view on why the legal issue requires examination of accounts by the specialist. A Chartered Accountant, a specialist in accounts does not have a role to play and cannot be delegated and asked to decipher, decide or express his opinion on nature and character of Nazul I or Nazul II land receipts and payments. The case and the stand of the assessee is that as per the statute, including the Rules, Nazul I and Nazul II land, payments received, expenditure incurred etc., belong to the Central Government and nothing whatsoever can be attributed to them. There is no examination, consideration of the legal aspect and formation of a tentative view. The decision on this legal issue cannot be transposed and passed to the Chartered Accountant as a special auditor as he is not a specialist and mandated by the Act to undertake the said exercise - As AO have repeatedly in all orders, for the purpose of recording reasons, taken the notes of accounts and verbatim incorporated the same. This is apparently correct and, therefore, discloses non-consideration and non-application of mind, which constitutes an error in the decision making process. Examine irregularities committed in connection with the expenditure in relation to Commonwealth games - Held that - that in the show cause notice, there is no reference to Section 13(3) or any related person and misuse of assets or funds by a related person. Irregularities can be examined and verified by the Assessing Officer and for this purpose, special audit is not required. Exemption and verification by themselves cannot and do not constitute complexity in accounts - the Assessing Officer had not obtained comments/ findings on the C&AG report but he had directed the special auditor to obtain/ask for the same, and then give his opinion. The aforesaid reason itself justifies quashing of the said order on the ground of non application of mind and failure to exercise jurisdiction keeping in view the parameters of Section 142(2A). Registration under Section 12AA is not final and facts and accounts of each year have to be examined - Held that - No doubt that facts and accounts of each year have to be examined but this is different from stating or alleging that Section 13(3) is applicable as that misappropriation, if any, by the employees or third persons which causes loss to the petitioner cannot be a ground to invoke Section 13(3) as the petitioner is a distinct taxable entity. The petitioner suffers when there is misappropriation of the funds or misuse of assets/funds because of malafide or criminal intent of a third person - quash the direction/orders for special audit - decided in favour of assessee.

Issues Involved:

1. Validity of the special audit orders under Section 142(2A) of the Income Tax Act, 1961.
2. Compliance with principles of natural justice.
3. Complexity of accounts and interest of the revenue.
4. Examination of books of accounts by the Assessing Officer.
5. Repeated directions for special audit in subsequent years.
6. Legal implications and procedural requirements for directing a special audit.

Detailed Analysis:

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

The Delhi Development Authority (DDA) challenged the directions for special audit issued by the Income Tax Authorities for the assessment years 2003-04 to 2009-10. The court noted that the grounds for initiation of special audit in most years were similar and that the order for 2003-04 formed the basis for subsequent orders. The court emphasized that an order under Section 142(2A) entails civil consequences and thus, principles of natural justice must be complied with. The court referred to the Supreme Court's decisions in Rajesh Kumar v. Deputy CIT and M/s Sahara India (Firm), which affirmed that natural justice principles must be observed before passing an order under Section 142(2A).

2. Compliance with Principles of Natural Justice:

The court highlighted that the principles of natural justice require a reasonable opportunity of being heard before directing a special audit. The Supreme Court in Rajesh Kumar's case had stated that an order under Section 142(2A) is not merely administrative but has civil consequences, necessitating compliance with natural justice. The court noted that the Assessing Officer must record reasons and that the approval by the Commissioner should not be mechanical but based on material on record. The court found that in the present case, the Assessing Officer did not examine the books of accounts or relevant entries before forming an opinion, indicating a failure to comply with natural justice principles.

3. Complexity of Accounts and Interest of the Revenue:

The court examined the terms 'complexity of accounts' and 'interest of the revenue,' emphasizing that both conditions must be satisfied cumulatively. The court referred to the Allahabad High Court's explanation in Swadeshi Cotton Mills Co. Ltd. v. CIT, which stated that complexity must be based on an objective assessment. The court found that the reasons recorded by the Assessing Officer often referred to the notes of accounts without a genuine attempt to understand the accounts, indicating a casual approach.

4. Examination of Books of Accounts by the Assessing Officer:

The court observed that for the assessment years 2003-04 and 2004-05, the Assessing Officer did not call for or examine the books of accounts. This failure indicated a lack of genuine attempt to understand the accounts before directing a special audit. The court emphasized that the Assessing Officer should have examined the books of accounts or relevant entries himself before forming an opinion. The court found that the Assessing Officer's approach was casual and unacceptable, leading to an erroneous exercise of power.

5. Repeated Directions for Special Audit in Subsequent Years:

The court noted that the reasons for directing special audit in the first year, 2003-04, were substantially followed in subsequent years, often verbatim. This indicated a lack of independent application of mind for each assessment year. The court found that the initial direction for special audit in 2003-04 swayed the decisions for subsequent years, leading to repeated directions for special audit without proper justification.

6. Legal Implications and Procedural Requirements for Directing a Special Audit:

The court emphasized that the power under Section 142(2A) should not be exercised lightly and must be based on objective considerations. The court noted that the Assessing Officer's reasons often included legal issues that should be determined by the Assessing Officer, not the special auditor. The court found that the reasons recorded by the Assessing Officer often lacked specificity and failed to demonstrate genuine complexity in accounts.

Conclusion:

The court quashed the directions/orders for special audit for each assessment year, highlighting the failure to comply with principles of natural justice and the lack of genuine examination of accounts by the Assessing Officer. The court allowed the Assessing Officer to record fresh reasons and justify special audit if required during the assessment proceedings. The court directed that the assessment proceedings for the assessment year 2003-04 be taken up first before proceeding with subsequent years, maintaining interim stay orders for later years until the 2003-04 assessment is concluded. The writ petitions were disposed of without costs.

← Previous Next →