2024 (12) TMI 1482 - AT - Income Tax

Special Audit passed u/s 142(2A) - mandation to record satisfaction required for ordering a special audit - Extension of time for furnishing the special audit report - HELD THAT - As in the present case, the satisfaction/opinion was initially recorded by the AO and then subsequently by the CIT as well. Subsequently on 28-03-2013 CIT himself is according approval to such satisfaction. Such action is not mandated in terms of Sec. 142(2A). Further in terms of Section 142(2C) the initial period for furnishing the Special Audit Report has to be specified by the AO and not by the CIT, as has happened in the instant case. Thus the findings of ld. CIT(A) are quite in accordance with law. Since due procedure as mandated under the provisions of Sec. 142(2A) Sec. 142(2C) has not been followed in this case, the order is rightly held to be void ab-initio on this account. Extension of further time period of furnishing the Special Audit Report u/s 142(2A) - The extension of time period for furnishing the Special Audit Report u/s 142(2A) has been provided by the Assessing Officer on an application made by the Special Auditor in this regard. The extension has not been granted in terms of provisions of Sec. 142(2C) and therefore the extension so granted is beyond jurisdiction and is time barred. We are of considered view that there is no error in the findings of ld. CIT(A) that the statute demands that the extension can be granted either by the AO suo-moto or on an application made in this behalf by the assessee. Admittedly, in the present case, the AO has granted extension for conducting Special Audit vide his letter dated 27-03-2019 addressed to the Special Auditor, M/s Sanjay Satpal Associates. Such an action by the AO is certainly in disregard of the provisions of proviso to Section 142(2C) of the Act, and CIT(A) has committed no error in holding that this extension is vitiated and impugned assessment liable to be quashed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

Whether the order for a special audit under Section 142(2A) of the Income Tax Act was validly issued, considering the timing and the process followed.
Whether the satisfaction required for ordering a special audit was appropriately recorded by the Assessing Officer (AO) and approved by the Commissioner of Income Tax (CIT).
Whether the extension of time for furnishing the special audit report was validly granted under the provisions of Section 142(2C) of the Act.
Whether the assessment order was time-barred due to procedural lapses in the extension of the audit period and the timing of the special audit order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the Special Audit Order

Relevant Legal Framework and Precedents: Section 142(2A) of the Income Tax Act allows for a special audit if the complexity of the accounts necessitates it. Precedents such as the ITAT decision in Unitech Limited and the Supreme Court judgment in Anirudh Sinhji Karan Sinhjl Jadeja were considered.
Court's Interpretation and Reasoning: The court noted that the special audit order was issued just before the expiry of the limitation period, suggesting it was used as a tool to extend the assessment period.
Key Evidence and Findings: The special audit was ordered one day before the limitation period expired, raising suspicions about its timing.
Application of Law to Facts: The court applied Section 142(2A) and found that the procedure followed was not in line with statutory requirements.
Treatment of Competing Arguments: The Revenue argued that the audit was necessary due to the complexity of accounts, but the court found procedural faults.
Conclusions: The order for the special audit was deemed invalid due to procedural lapses.

Issue 2: Satisfaction for Special Audit

Relevant Legal Framework and Precedents: Section 142(2A) requires the AO's satisfaction, approved by the CIT. The judgment in SPL'S Siddhartha Ltd. was referenced.
Court's Interpretation and Reasoning: The court held that satisfaction must be independently recorded by the AO, not influenced by the CIT.
Key Evidence and Findings: The satisfaction was recorded by both the AO and CIT, which was not as per the statute.
Application of Law to Facts: The court found that the statutory requirement for independent satisfaction by the AO was not met.
Treatment of Competing Arguments: The Revenue's argument that the CIT's involvement was necessary was rejected.
Conclusions: The satisfaction process was flawed, rendering the audit order invalid.

Issue 3: Extension of Time for Audit Report

Relevant Legal Framework and Precedents: Section 142(2C) outlines the procedure for extending the audit report submission period.
Court's Interpretation and Reasoning: The extension was granted based on an application by the special auditor, not the assessee, which was beyond jurisdiction.
Key Evidence and Findings: The extension was granted after the original period expired, which was procedurally incorrect.
Application of Law to Facts: The court found the extension process did not comply with statutory requirements.
Treatment of Competing Arguments: The Revenue's justification for the extension was not accepted due to procedural errors.
Conclusions: The extension was invalid, leading to the assessment being time-barred.

Issue 4: Time-barred Assessment

Relevant Legal Framework and Precedents: Section 153(1) sets the limitation period for completing assessments.
Court's Interpretation and Reasoning: The court found that the assessment was completed after the limitation period due to invalid extensions.
Key Evidence and Findings: The assessment order was passed after the statutory period, considering invalid extensions.
Application of Law to Facts: The court applied the limitation provisions and found the assessment time-barred.
Treatment of Competing Arguments: The Revenue's argument about valid extensions was rejected.
Conclusions: The assessment order was quashed as it was time-barred.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The order of the AO and the procedure adopted for getting the special audit done u/s 142(2A) suffers from multiple infirmities and is therefore, the assessment order is held to be void ab-initio and is therefore, quashed."
Core Principles Established: The statutory procedure for ordering and extending special audits must be strictly followed, and any deviation renders the orders invalid.
Final Determinations on Each Issue: The special audit order and subsequent assessment were invalid due to procedural lapses, and the assessment was time-barred.

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