2021 (11) TMI 219 - AT - Income Tax

Special audit u/s 142 (2 A) - Period of limitation - reasons for change in accounting system - method of valuation of closing stock - HELD THAT - Query raised asking explanation of how figures of industrial activity upto 31.03. 2013 were incorporated in the impugned years balance sheet, the assessee had explained that it had switched over from cash system of accounting done upto 31/03/13 to accrual system and had also explained the manner of doing so as also furnishing year wise bifurcation of expenses and recoveries in the IA account as on 31.03. 2013. AO notes that no explanation has been furnished as to how cumulative calculations were made no break up of certain details provided and site wise break also not provided. Similarly the assessee explanation regarding why income be not computed as in earlier years the assessee justified the change in system of accounting as being in compliance with accounting standard issued by the ICAI and also in accordance with government notifications, to which the AO merely brushes aside the explanation as not being tenable without assigning any reason for stating so. On the query regarding method valuation of closing stock for year ending 31/03/2013 and 31/03/2014 the assessee replied that upto 31/03/13 since it was following cash system of accounting no stock was accounted for while thereafter it followed the Percentage Completion Method (PCOM) for accounting for inventory, valuing it at cost or net realizable value which ever was less. To this the AO notes that no calculation of working of inventory has been provided by the assessee. To the query raised regarding how PCOM method was applicable to the assessee, the assessee replied that its activities fell under the scope of transactions covered By the guidance note issued by ICAI on Accounting for real estate transactions which recommended PCOM method. It was also explained as to how its activities fell under the said guidance note. To this the AO noted that why this method was not adopted in earlier years also. On being asked to explain basis of ascertaining revenue from operations, due reply explaining the same was filed. To this the AO notes simply that it is not verifiable since assessee passes through various stages and no specific information/no detailed working has been provided by the assessee. To the query as to why ₹ 1050 crores has been reduced from the income of the assessee in the revised return filed. the assessee explained in detail that the department had already collected taxes on the same in earlier years when it had rejected its cash basis of accounting and taxed income on accrual basis. To this the AO notes that the assessee has filed appeal against the said additions made by the department and therefore by reversing the income in the impugned year it was taking a contradictory stand. After so stating the AO notes that considering the facts and circumstances and the nature and complexity of accounts of the assessee, volume of transactions and multiplicity of transactions, special audit u/s 142 (2 A) of the Act is proposed. AO does not point out a single complexity in the accounts of the assessee. On the contrary he has only pointed out certain information still lacking in the reply submitted by the assessee. With regard to each explanation he has stated that the assessee has either not given certain explanation required by him or certain working or calculations had not been explained. It is not coming out from the notice, therefore, that there was any complexity in the nature of the accounts of the assessee which had come to the notice of the AO. Nor has the Ld.DR been able to enlighten us as to what complexity was pointed out by the AO in the accounts of the assessee for enabling reference to a special audit. What is clearly evident is that the reference for special audit was merely made for obtaining certain explanation and information which were further required by the AO for the purposes of assessment of income of the assessee. In effect,the AO, was shifting his responsibility to the special auditor. This is surely not the purpose for which special audit can be referred to under law. Assessee filed a detailed reply to the show cause notice explaining at length all doubts and queries raised by the AO in its previous reply and furnishing all information which he found lacking (P. B 222 - 252), but despite the same, the AO sought approval of the PCIT for special audit on the same day the reply was filed by the assessee and after obtaining the same ordered special audit on the very same day. The only inference which can possibly be drawn in the facts of the present case as narrated above, is that the reference to special audit was made only to buy further time for completing the assessment, having been made at the fag end of the period for completion of assessment that too merely for obtaining further details and information and not because any complexity was noted in the accounts of the assessee. The reference to special audit, therefore we hold, is an invalid reference, contrary to law. Assessment order passed therefore in the extended period, as a consequence of the invalid reference, we hold, is barred by limitation and hence void. Appeal of assessee allowed.

Summary

Issues Involved:
1. Validity of the reference to special audit under Section 142(2A) of the Income Tax Act.
2. Whether the assessment order passed was barred by limitation.

Issue-wise Detailed Analysis:

1. Validity of the Reference to Special Audit Under Section 142(2A):

The assessee challenged the reference made by the Assessing Officer (AO) for a special audit under Section 142(2A) of the Income Tax Act, arguing that the preconditions for invoking this section were not satisfied. The AO must form an opinion that a special audit is necessary, considering the nature and complexity of the accounts and the interest of the Revenue. The AO's opinion must be based on objective criteria and not just subjective satisfaction.

The Tribunal found that the AO did not point out any complexity in the accounts of the assessee. Instead, the AO noted certain deficiencies and shortcomings in the information provided by the assessee. The AO's reasons for the special audit were primarily to obtain further explanations and information, which is not the purpose of a special audit. The Tribunal also noted that the AO initiated the special audit at the fag end of the assessment period, indicating that the reference was made to extend the time for completing the assessment.

2. Whether the Assessment Order Passed Was Barred by Limitation:

The Tribunal held that the reference to the special audit was invalid. Consequently, the assessment order passed in the extended period, due to the invalid reference, was barred by limitation and hence void. The Tribunal emphasized that an invalid reference to a special audit cannot extend the statutory period for completing the assessment.

Conclusion:

The Tribunal allowed the additional ground raised by the assessee, holding that the assessment order was void due to the invalid reference to the special audit. The remaining grounds relating to the merits of the case were rendered academic and not addressed. The appeal of the assessee was allowed in these terms. The order was pronounced on October 26, 2021.