2017 (4) TMI 921 - HC - Income Tax

Special audit under Section 142 2A - proper material on record and reasons recorded - Held that - As per amended Section 142 2A of the Act, apart from the nature and complexity of the accounts, etc., even in case of multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and the interests of the Revenue, the Assessing Officer can pass an order for special audit in exercise of powers conferred under Section 142 2A of the Act. Therefore, while forming an opinion to get the accounts audited by special auditor; considering the specialized nature of business activities of the assessee, there need not be any books of account before the Assessing Officer. In the present case, having found that there are complex issues relating to introduction of land by the partners into the firms; revaluation of land; credit of partners in capital account equal to revalued amount of land; conversion of capital account to loan account of shareholders and issues relating to issuance of equity shares against the balances of revaluation credits at an unreasonable premium, and after having been satisfied that considering the specialized nature of business activities of the assessee, the Assessing Officer has passed an order of special audit in exercise of powers under Section 142 2A of the Act. We see that the decision for audit of the assessees account is backed by proper material on record and reasons recorded by the Assessing Officer. His formation of belief that looking to the multiplicity of the transactions in the accounts and specialized nature of business activities of the assessee, a special audit is called for, and therefore, it cannot be faulted. No error and/or any illegality committed while passing the order under Section 142 2A of the Act. Under the circumstances, the present writ petitions deserve to be dismissed

Summary

Issues Involved:
1. Legality of the orders passed under Section 142(2A) of the Income-tax Act, 1961 for special audit.
2. Compliance with the procedural requirements under Section 142(2A) before directing a special audit.
3. Validity of the opinion formed by the Assessing Officer regarding the complexity and correctness of accounts.
4. Application of mind by the Principal Commissioner of Income-tax while granting approval for special audit.
5. Whether the special audit was justified in the context of the business activities and transactions of the assessee.

Issue-wise Detailed Analysis:

1. Legality of the Orders under Section 142(2A):
The petitioner challenged the orders directing a special audit under Section 142(2A) of the Income-tax Act, 1961, claiming they were illegal and contrary to the provisions of the Act. The court noted that the Assessing Officer (AO) had issued show cause notices, considered objections, and obtained approval from the Principal Commissioner of Income-tax before passing the orders. The court found that the AO followed the required procedure and the orders were legally valid.

2. Compliance with Procedural Requirements:
The court examined whether the AO had complied with the procedural requirements under Section 142(2A), which necessitates giving the assessee a reasonable opportunity of being heard before directing a special audit. The court observed that the AO had issued show cause notices detailing the reasons for the special audit, considered the objections raised by the petitioner, and disposed of them by a speaking order. Therefore, the procedural requirements were duly followed.

3. Validity of the AO's Opinion:
The petitioner argued that the AO could not form an opinion about the complexity and correctness of the accounts without first calling for and examining the accounts. The court referred to the amended Section 142(2A), which allows the AO to direct a special audit considering factors like the nature and complexity of the accounts, volume of transactions, and specialized nature of business activities. The court found that the AO had sufficient material and reasons to form an opinion about the complexity and correctness of the accounts, justifying the special audit.

4. Application of Mind by Principal Commissioner:
The petitioner contended that the Principal Commissioner had granted approval for the special audit mechanically without proper application of mind. The court noted that the Principal Commissioner had considered the objections raised by the petitioner and the reasons recorded by the AO before granting approval. The court found no evidence of mechanical approval and held that the Principal Commissioner had applied his mind appropriately.

5. Justification for Special Audit:
The court considered the complex web of transactions involving the introduction of land by partners, revaluation of land, conversion of firms into companies, and subsequent amalgamation. The AO had identified issues such as the revaluation of land, issuance of equity shares at a premium, and the multiplicity of transactions, which warranted a special audit to ensure proper taxation and prevent revenue loss. The court held that the special audit was justified given the specialized nature of the business activities and the interests of the revenue.

Conclusion:
The court dismissed the writ petitions, upholding the orders for special audit under Section 142(2A) of the Income-tax Act, 1961. The court found that the AO had followed the required procedure, formed a valid opinion based on sufficient material, and the Principal Commissioner had applied his mind while granting approval. The special audit was deemed necessary and justified considering the complexity and specialized nature of the transactions involved.