2016 (9) TMI 558 - HC - Income Tax

Special audit - SCN for why for the financial year 2012-13, relevant to assessment year 2013-14 accounts of the petitioner not be audited by an accountant as defined under section 288(2) of the Act - Held that - Insofar as the direction for auditing the company s account for the assessment year 2012-13, we see the same is backed by proper materials on record and reasons recorded by the Assessing Officer. Even during the course of the assessment, multiple queries had exchanged between the Assessing Officer and the assessee concerning the accounts of the assessee. It was eventually that the Assessing Officer was prompted to issue notice dated 08.03.2016. His formation of the belief that looking to the complexity and volume of the accounts, a special audit was called for, therefore, cannot be faulted. The matter however does not rest here. In the impugned order, he expanded the scope of special audit and directed the special audit not only for the financial year 2009-10 in case of the assessee, but also called for special audit of various other entities for number of years. This, in our opinion, was simply impermissible. We are doubtful whether while processing the return of an assessee for a particular year, in exercise of powers under section 142(2A) of the Act, the Assessing Officer can call for special audit of a financial year other than one which is relevant to the assessment year in question. In any case, no such direction could have been issued without any proposal in the show cause notice. We may recall the only proposal in the show cause notice was that the Assessing Officer upon failure of the assessee to satisfy him otherwise, would call for special audit for the financial year 2012-13. There was no further proposal that he may expand the scope of special audit for any other years as well. His recording of background facts of multiple transactions in earlier years, must be seen as demonstrating the nature of complexity in accounts and without there being any specific proposal in this respect, cannot be read as giving a reasonable opportunity to the petitioner to oppose why special audit for other years should not be called for. Same logic would apply in respect of the direction for special audit in case of other entities. Here also, admittedly there was no proposal in the show cause notice. If the case of the Revenue is that, such entities having merged, it is the petitioner alone who would respond to any proposal for the special audit in respect to such entities, there is no such indication in the show cause notice and at any rate, no proposal for special audit in respect of such entities. The direction contained in the impugned order concerning the special audit in case of the petitioner for the finnacial year 2012-13 being severable, can be saved. - Direction for audit for other assessment years quashed - Decided partly in favor of assessee.

Summary

Issues Involved:
1. Requirement of special audit under section 142(2A) of the Income Tax Act.
2. Scope of special audit for financial years beyond 2012-13.
3. Special audit of other entities amalgamated into the petitioner company.

Detailed Analysis of the Judgment:

I. Requirement of Special Audit:
The petitioner, a private limited company, challenged an order dated 31.03.2016 by the Deputy Commissioner of Income-tax, which mandated a special audit under section 142(2A) of the Income Tax Act for the assessment year 2013-14. The Assessing Officer (AO) identified a complex web of transactions involving the conversion of partnerships into companies, revaluation of lands, and amalgamation into a single company. The AO noted that these transactions involved multiple revaluations, application of accounting standards, and provisions of the Companies Act, necessitating a special audit to ensure no loss to revenue.

The petitioner contended that the accounts were neither complex nor voluminous to warrant a special audit and that the scheme of amalgamation had been approved by the High Court, with the Income Tax department as a party. The petitioner argued that the AO did not make a sincere effort to appreciate the accounts before calling for a special audit, thus unfairly burdening the petitioner.

II. Scope of Special Audit for Financial Years Beyond 2012-13:
The AO's order extended the special audit to financial years 2009-10 and other entities amalgamated into the petitioner company. The petitioner argued that the AO could not call for a special audit for years beyond 2012-13 and for other entities without a proposal in the show cause notice. The court noted that the show cause notice only proposed a special audit for the financial year 2012-13 and did not include any proposal for other years or entities. Thus, the AO's direction for special audits beyond 2012-13 and for other entities was found to be impermissible and without a reasonable opportunity for the petitioner to oppose it.

III. Special Audit of Other Entities Amalgamated into the Petitioner Company:
The AO's order also called for a special audit of various other firms and companies that amalgamated into the petitioner company. The court highlighted that there was no proposal in the show cause notice for a special audit of these entities. The court emphasized that any direction for a special audit must be preceded by a show cause notice and a reasonable opportunity for the affected party to be heard. Since the show cause notice did not include a proposal for a special audit of other entities, the AO's direction in this regard was deemed invalid.

Conclusion:
The court upheld the AO's direction for a special audit of the petitioner company for the assessment year 2012-13, finding it backed by proper materials and reasons. However, the court quashed the AO's direction for special audits for financial years beyond 2012-13 and for other entities, as these directions were not included in the show cause notice and did not provide a reasonable opportunity for the petitioner to oppose them. The petition was thus allowed in part, with the direction for a special audit of the petitioner company for the assessment year 2013-14 being severable and saved.