2018 (4) TMI 628 - AT - Income Tax

Reference for special audit u/s.142(2A) - Chartered Accountant failed to supply the Audit Reports to the appellant as mandated - Held that AO passing the order under appeal has not see or considered a detailed reply of the appellant by two letters dt.01/07/2014 one in reply to AO s letter dt 25/06/2014 and second requesting amendment of orders u/s.142(2A) as also letter dt. 29/07/2014 and 25/09/2014, explaining how the Accountant appointed u/s.142(2A) of the Act actually performed duties assigned to him, particularly the fact that the Accountant failed to even commence the Special Audit for the first 60 days after the appointment on 26/03/2014 and did not even spend a single day for audit work. Accountant failed to supply the Audit Reports to the appellant as mandated by the provisions of S.142(2A) of the Act before the due date and actually supplied the same after the due date, even after availing the maximum period of 180 days and in spite of the appellant s AR having alerting him of approaching limitation. These letter s reference has also been given in the order of the ld. CIT(A). In our considered opinion AO did not have any good and sufficient reasons for extending the period of audit suo motu to the maximum permissible extent, and was not correct in casually attaching the tag of non-cooperative attitude to the appellant. AO has exercised beyond his power. We can also see from the order of the lower authorities that no incriminating documents were found during the search and whatever document were found in earlier year for completed the assessment u/s.143(3) and 143(1). In our considered opinion, additions made were having no foundation or reference of any seized document al all. So whatever additions have been made by the AO were on the basis of commenced of special auditor - Decided against revenue

Summary

Issues Involved:
1. Legality of additions made by the Assessing Officer (AO) without reference to incriminating seized material.
2. Deletion of interest payment additions by the CIT(A).
3. Deletion of addition on account of washing/handling loss.
4. Deletion of disallowance of employees provident fund.
5. Legality and appropriateness of the special audit ordered under Section 142(2A).

Detailed Analysis:

1. Legality of Additions Without Incriminating Seized Material:
The AO made various additions during the assessment proceedings under Section 153A, which were contested by the assessee. The AO relied on the special auditor's report, which was based on audited books of accounts. The assessee argued that the original assessments for the years in question were completed before the search, and thus, these assessments did not abate. The assessee cited various authorities to argue that no additions could be made without incriminating material seized during the search. The CIT(A) upheld the assessee's contention, noting that the additions were made without any foundation in the seized documents. The Tribunal agreed with the CIT(A) and found that the AO had no basis for the additions, as they were not supported by any incriminating material found during the search.

2. Deletion of Interest Payment Additions:
The AO disallowed interest payments on the grounds that the assessee had made interest-free advances out of interest-bearing funds. For AY 2007-08, the disallowed amount was ?20,65,647, and for AY 2008-09, it was ?31,33,414. The CIT(A) deleted these additions, and the Tribunal upheld this decision, finding no ambiguity in the CIT(A)'s order.

3. Deletion of Addition on Account of Washing/Handling Loss:
The AO made additions for washing/handling loss, amounting to ?1,70,500 for AY 2007-08 and ?7,07,322 for AY 2008-09. The CIT(A) deleted these additions, and the Tribunal agreed, noting that the AO's additions had no foundation in any seized material.

4. Deletion of Disallowance of Employees Provident Fund:
For AY 2008-09, the AO disallowed ?9,394 under Section 36(1)(va) for employees' provident fund. The CIT(A) deleted this disallowance, and the Tribunal upheld the decision, finding no legal basis for the AO's action.

5. Legality and Appropriateness of the Special Audit Ordered Under Section 142(2A):
The AO directed the assessee to undergo a special audit under Section 142(2A) due to complexities and doubts about the correctness of accounts. The assessee objected, arguing that the special audit was ordered merely to extend the time limit for assessment. The CIT(A) and the Tribunal found that the special audit was not justified, as the AO had no "good and sufficient" reasons for extending the audit period. The Tribunal noted that the special auditor failed to commence the audit on time and that the AO's actions were beyond his powers.

Conclusion:
The Tribunal dismissed both appeals filed by the department and upheld the CIT(A)'s order, which deleted the various additions made by the AO. The Tribunal also dismissed the assessee's cross objections as not pressed. The judgment emphasized that additions made without reference to incriminating seized material were not sustainable and that the special audit ordered under Section 142(2A) was not justified.