2013 (6) TMI 276 - HC - Income Tax

Appointment of special auditors u/s 142(2A) - Complexities - Assessment u/s 153A - period of limitation u/s 153B - extension due to appointment of auditor u/s 142(2A) - Search and seizure - Held that - it is admitted that the limitation after its statutory curtailment to 21 months was going to expire on 31.12.2009. It is also admitted that if the powers under Section 142 (2A) are exercised, in accordance with law, the limitation would get extended under Explanation (ii) of Section 153B (1) (a), upto the period of completion of special audit and with 60 days for completing the assessment. Reason for delay - The petitioner had invoked the powers of the High Court under Art.226 of the Constitution of India in challenging the directions under Section 142 (2A) of the Act for special audit, on the ground that no reasons were given in the order. The petitioner relied on the principles of natural justice to challenge the order. The prescription of limitation by itself should not be permitted to confer an advantage on the petitioner responsible for such delay. Appointment of auditors u/s 142(2A) - Complexities of accounts - held that - The principles on which accounts may be treated to be inaccurate or complex have been sufficiently explained in Sahara India 2008 (4) TMI 4 - Supreme Court and do not require any reiteration. In the present case we are of the view that the petitioner companies are engaged in large scale tax evasion, and for that purpose it was adopting dubious methods in maintaining the accounts, which were examined and were found to be complex by the Assessing Officer. He made a genuine attempt to understand the method of calculation of the value of the flats, which were being changed frequently by the assessee and having failed to understand the manner and method in which accounts were maintained firstly required the petitioners to explain and having faced an uncooperative attitude directed special audit to be carried out by special auditor. We do not find any legal error in the order directing the petitioners to get their accounts audited by special audit or appointed by the Commissioner of Income Tax, for which the cost is now to be paid by the Central Government and thus the exercise would not cause any prejudice to the petitioners. No merit in submission of the petitioners that in such a case it was open to the A.O. to proceed with the best judgment assessment under Section 144 and that the submission of incomplete accounts or the refusal to disclose true and correct accounts cannot be a ground for special audit under Section 142 (2A) of the Act. The interim order was obtained by concealing relevant documents, which were indexed but were not annexed to the writ petition, and were sought to be introduced at the time of final hearing on the pretext of inadvertence. Shri Deepak Kapoor was present before the Assessing Officer on 19.11.2009 and had produced complete list of books of accounts and print outs of the books of accounts as maintained by the assessee on computer along with a letter. He did not mention about these dates either in the list of dates along with writ petition, or in the list of dates provided by him to the senior counsel at the time of hearing. Shri Deepak Kapoor is prima facie guilty of professional misconduct in misleading the Court. He also misled Mr. S.P. Gupta, a Senior Counsel of the Court, who was cautioned time and again to be more precise in his submissions. He seems to think that the time of the Court is at his mercy, and consumed almost eight hours in explaining the facts, which was full of inaccuracies and repetition. In the special facts and circumstances of the case, we impose exemplary costs of Rs.Two lacs on the petitioner in Writ Petition No.418 of 2010, and Rs.One lac in Writ Petition No.339 of 2010 to be deposited by the petitioners with the Registrar General of the Court within one month. - Decided against the assessee.

Issues Involved:

1. Limitation for completing assessment under Section 153B of the Income Tax Act.
2. Validity of the order directing special audit under Section 142(2A) of the Income Tax Act.
3. Complexity of accounts as grounds for special audit.

Issue-wise Detailed Analysis:

1. Limitation for Completing Assessment Under Section 153B:

The petitioners argued that the assessment for the block period from assessment year 2002-03 to 2008-09 was barred by limitation as provided by Section 153B, which required completion within 21 months from the end of the financial year in which the last search authorization was executed. The limitation period ended on 31.12.2009. The petitioners contended that since the period had expired, no assessment order under Section 153A could be passed, and the power under Section 142(2A) could not be exercised.

The court rejected this argument, emphasizing that the earlier order for special audit was set aside not on merits but due to lack of recorded reasons. The court allowed the department to pass a fresh order, which extended the limitation period. The court cited the principle that no one should gain an unfair advantage due to procedural lapses and referred to the Supreme Court's decision in Grindlays Bank Ltd. v. ITO, Calcutta, which supported the view that the limitation period could be extended in such circumstances.

2. Validity of the Order Directing Special Audit Under Section 142(2A):

The petitioners challenged the order directing special audit on the grounds that the essential conditions for such an audit, namely complexity in the account books and potential revenue loss, were not satisfied. They argued that the required exercise to conclude complexity was not done and that no genuine attempt was made to understand the accounts.

The court found that the Assessing Officer (AO) had examined the accounts and found significant discrepancies, such as varying figures of opening and closing balances, incorrect recording of sale considerations, and non-disclosure of on-money received from flat sales. The AO's detailed reasons for finding complexity in the accounts were deemed sufficient. The court held that the AO was justified in directing a special audit to understand the intricate accounting methods used by the petitioners.

3. Complexity of Accounts as Grounds for Special Audit:

The petitioners argued that the accounts were not complex and that the AO could have proceeded with a best judgment assessment under Section 144. They contended that the AO did not examine the account books properly and did not provide an opportunity to explain the method of accounting.

The court rejected these arguments, noting that the AO had made genuine attempts to understand the accounts and had found them complex due to the petitioners' non-cooperative attitude and the intricate methods used in accounting. The court cited the Supreme Court's decision in Sahara India (Firm) v. CIT, which emphasized that complexity must be based on objective criteria and not subjective satisfaction. The court concluded that the AO's decision to direct a special audit was legally sound and necessary to determine the correct income for assessment.

Conclusion:

The court dismissed the writ petitions, upheld the validity of the special audit orders, and imposed exemplary costs on the petitioners for misleading the court and concealing relevant documents. The interim orders were discharged, and the costs were directed to be deposited with the Registrar General of the Court for the benefit of the State Legal Services Authority.

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