2018 (6) TMI 1500 - AT - Income Tax

Special audit under section 142(2A) - validity of appointment - assessment by limitation - Held that - In the light of the ITAT s finding in the assessment year 2009-10, we have analysed the objection of the assessee in the present assessment year and find that these objections were also similar to that of the assessment year 2009-10. AO ought to have visualized the complexity of accounts and compelling circumstances for exercising such power. Though while making a proposal for approval, an opportunity was provided to the assessee, but after submitting explanation no opportunity was granted to the assessee, nor any reasons were assigned. The proposal was sent without communicating to the assessee and the ld.Commissioner has approved the proposal. Thereafter, an order under section 142(2A ) was passed running into few lines. The question was also raised before the Tribunal that it has no jurisdiction to entertain objection of the assessee against appointment of special auditor. The Tribunal after taking into consideration time limit provided in section 153(1) of the Act for passing assessment order observed that the assessment order in assessment year 2009-10 was to be passed before 31.12.2011 whereas, it was passed on 1.82012. The special auditor was appointed on 8.12.2011 just 23 days prior to expiry of limitation for passing the assessment order. Thus, in this given factual matrix, the Tribunal has considered that had the case was not referred for special auditor, the assessment would have become time barred and in order to gain time, a reference for appointment of special auditor was made. We allow the preliminary grounds of appeal raised by the assessee and hold that directions dated 26.03.2014 by the learned Addl. CIT, Range-18, New Delhi for special audit under section 142(2A) of the Act were illegal, invalid and not in accordance with the law; therefore, the assessment order impugned in the present appeal is barred by limitation and thus quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdictional validity of the special audit direction under Section 142(2A) of the Income Tax Act, 1961.
2. Validity of the assessment order based on the special audit.
3. Deletion of additions made by the AO on account of deemed dividend.
4. Deletion of additions made by the AO on account of interest paid to Tata Reality Infrastructure Ltd.

Detailed Analysis:

1. Jurisdictional Validity of the Special Audit Direction under Section 142(2A):

Assessee's Argument:
The assessee contended that the direction for a special audit under Section 142(2A) was unwarranted and issued merely to extend the time limit for a time-barred assessment. It argued that there was no complexity in the books of accounts, and the direction for a special audit was issued without jurisdiction. The assessee relied on the precedent set by the ITAT in the preceding assessment year (2009-10), where a similar direction was quashed, and the assessment was declared time-barred.

Revenue's Argument:
The Revenue argued that the appointment of a special auditor cannot be challenged before the Tribunal and that the remedy lies elsewhere. It contended that the special audit was necessary due to the complexity and volume of transactions, and the interest of the revenue.

Tribunal's Analysis:
The Tribunal noted that the facts in the current assessment year (2010-11) were similar to those in the preceding year (2009-10). The Tribunal observed that the direction for a special audit was given at the fag end of the limitation period, indicating that it was done to extend the time for passing the assessment order. The Tribunal found that the order appointing the special auditor did not spell out any reasons exhibiting the complexity of the accounts and was a non-speaking order. The Tribunal held that the direction for a special audit was illegal, invalid, and not in accordance with the law, and therefore, the assessment order was barred by limitation.

Conclusion:
The Tribunal quashed the assessment order on the preliminary ground that the direction for a special audit under Section 142(2A) was invalid, and the assessment was time-barred.

2. Validity of the Assessment Order Based on the Special Audit:

Assessee's Argument:
The assessee argued that the assessment order based on the special audit was invalid as the direction for the special audit itself was without jurisdiction.

Tribunal's Analysis:
The Tribunal concurred with the assessee's argument and held that since the direction for the special audit was invalid, the assessment order based on it was also invalid and barred by limitation.

Conclusion:
The Tribunal quashed the assessment order as it was based on an invalid direction for a special audit.

3. Deletion of Additions Made by the AO on Account of Deemed Dividend:

Revenue's Argument:
The Revenue contended that the DRP erred in deleting the addition of ?54,64,23,410/- on account of deemed dividend without appreciating the provisions of Section 2(18) of the Income Tax Act, 1961, and Section 3(1)(iii) of the Companies Act, 1956.

Tribunal's Analysis:
The Tribunal did not specifically address this issue in detail as it quashed the entire assessment order on the preliminary ground of invalidity of the special audit direction.

Conclusion:
The Tribunal's decision to quash the assessment order rendered this issue redundant.

4. Deletion of Additions Made by the AO on Account of Interest Paid to Tata Reality Infrastructure Ltd:

Revenue's Argument:
The Revenue contended that the DRP erred in deleting the addition of ?16,75,28,379/- on account of interest paid to Tata Reality Infrastructure Ltd.

Tribunal's Analysis:
Similar to the issue of deemed dividend, the Tribunal did not specifically address this issue in detail as it quashed the entire assessment order on the preliminary ground of invalidity of the special audit direction.

Conclusion:
The Tribunal's decision to quash the assessment order rendered this issue redundant.

Final Conclusion:
The Tribunal allowed the assessee's appeal on the preliminary ground that the direction for a special audit under Section 142(2A) was invalid and quashed the assessment order as time-barred. Consequently, the Revenue's appeal and cross-objection were dismissed as redundant.