2014 (1) TMI 1190 - HC - Income Tax

Validity of proceedings u/s 142(2A) of the Act Special audit -Opportunity of being heard Held that - The exercise of power to direct special audit depends upon the satisfaction of the Income-tax Officer with the added approval of the Commissioner - But he must be satisfied that the accounts of the assessee are of a complex nature and in the interests of the Revenue, the accounts should be audited by a special auditor - The special auditor is also an auditor like the company s auditor, but he has to be nominated by the Commissioner and not by the company - The accounts are again to be audited at the cost of the company - This is the substance of the statutory provisions - The power cannot be lightly exercised - The satisfaction of the authorities should not be subjective satisfaction - It should be based on objective assessment regard being had to the nature of the accounts - The nature of the accounts must indeed be of a complex nature. Relying upon the pleadings of the parties, the provisions of section 142(2A) of the Act and the principles of law laid down Swadeshi Cotton Mills Company Limited Versus Commissioner Of Income-Tax And Another 1987 (3) TMI 20 - ALLAHABAD High Court - A.O. should reconsider the issue as to whether a direction should be issued under Section 142(2A) of the Act after considering the objections of the assessee and affording a reasonable opportunity of being heard, in terms of Section 142 (2A) of the Act - It is only after the A.O. reaches to a fair conclusion after considering the reply given by the petitioner, and affording an opportunity of hearing, the CIT as approving authority will consider whether the special audit is required to be carried out for the purposes of understanding the accounts maintained by the assessee Decided in favour of Assessee.

Issues Involved:
1. Validity of proceedings under Section 142(2A) of the Income Tax Act, 1961.
2. Whether the assessment for AY 2009-10 became time-barred.
3. Legality of the letter dated 29.12.2011 requiring the petitioner to furnish an audit report.
4. Prohibition against further proceedings under Section 142(2A).
5. Costs awarded.

Detailed Analysis:

1. Validity of Proceedings under Section 142(2A):
The petitioner argued that the proceedings under Section 142(2A) were initiated merely to extend the limitation period, which was set to expire on 31.12.2011. The petitioner contended that no order was passed or served under Section 142(2A) and that the complexity of accounts, a prerequisite for invoking Section 142(2A), did not exist. The court noted that the Assessing Officer (A.O.) issued a show cause notice on 16.12.2011, but there was no evidence of an order being served on the petitioner before the limitation period expired. The court emphasized that the formation of opinion under Section 142(2A) must be based on objective criteria and not subjective satisfaction. The approval by the Commissioner of Income Tax (CIT) on 23.12.2011 lacked consideration of the petitioner's replies, indicating a mechanical approval process.

2. Whether the Assessment for AY 2009-10 Became Time-barred:
The petitioner claimed that the assessment for AY 2009-10 became time-barred as no order under Section 142(2A) was served before 31.12.2011. The court found that even if the letter dated 28.12.2011 from the A.O. to the Special Auditor was considered an order, it was served on the petitioner only on 09.01.2012, after the limitation period had expired. Thus, the proceedings were indeed time-barred.

3. Legality of the Letter Dated 29.12.2011:
The letter from the Special Auditor dated 29.12.2011, informing the petitioner of their appointment, was received on 09.01.2012. The court observed that the CIT's approval and the subsequent letter did not reflect an application of mind or consideration of the petitioner's objections. The court reiterated that any order under Section 142(2A) must be communicated and served on the assessee, which was not done in this case.

4. Prohibition Against Further Proceedings under Section 142(2A):
The court directed that the A.O. should reconsider the issue of directing a special audit under Section 142(2A) after giving the petitioner a reasonable opportunity to be heard. The CIT, as the approving authority, must ensure that the approval reflects an objective assessment of the facts and the petitioner's objections.

5. Costs Awarded:
The court did not award any costs and directed the A.O. and CIT to reconsider the matter in accordance with the law.

Conclusion:
The court allowed the writ petition, setting aside the approval dated 23.12.2011 and the letter dated 29.12.2011. The A.O. and CIT were directed to reconsider the matter for special audit under Section 142(2A) after considering the petitioner's objections and providing a reasonable opportunity to be heard, ensuring that the decision is based on objective criteria.

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