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TMI Blog2012 (9) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... haracter of Nazul I and Nazul II land, payments received and the treatment of the said payments, receipts or expenditure in the books for the purposes of taxation - Held that:- The special auditor cannot go into and examine the said legal issue or question regarding taxability. This has to be determined and decided by the AO himself - AO should indicate his prima facie or tentative view on why the legal issue requires examination of accounts by the specialist. A Chartered Accountant, a specialist in accounts does not have a role to play and cannot be delegated and asked to decipher, decide or express his opinion on nature and character of Nazul I or Nazul II land receipts and payments. The case and the stand of the assessee is that as per the statute, including the Rules, Nazul I and Nazul II land, payments received, expenditure incurred etc., belong to the Central Government and nothing whatsoever can be attributed to them. There is no examination, consideration of the legal aspect and formation of a tentative view. The decision on this legal issue cannot be transposed and passed to the Chartered Accountant as a special auditor as he is not a specialist and mandated by the Act to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) who have given directions or approval for initiation of special audit under Section 142 ( 2A) of the Income Tax Act, 1961 (Act, for short). 2. These writ petitions relate to assessment years 2003-04 to 2009-10, as in respect of each of these assessment years, direction for special audit has been issued. The grounds for initiation of special audit in most of the years are similar. It is also the contention of the petitioner assessee that the order of special audit in respect of 2003-04 forms the basis of the subsequent orders. We have heard and are disposing of the said writ petitions by this common judgment. For the sake of convenience, we have treated Writ Petition (Civil) No. 19746-47/2005, as the lead case as the said writ petition pertains to assessment year 2003-04 and is against the first order directing special audit. Wherever required, facts peculiar to each assessment year have been noticed and dealt with. 3. We may note that earlier Writ Petition (Civil) No. 19746-47/2005 was disposed of vide order dated 29th November, 2006 on the ground that clearance/approval of Committee of Disputes had not been obtained, but on Appeal by Special Leave filed by the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing. The Supreme Court also considered the issue of recording of reasons or the contention of duty to ascribe reasons. Duty to assign reason, it was stated, was a judge-made law and there was a dispute whether it could be described as the third pillar of natural justice. Referring to the section in question, it was observed that the notice may contain briefly the issues that the Assessing Officer thinks to be necessary and need not be detailed ones. An order of approval by the Commissioner/Director should not be granted or passed mechanically. The same should be done having regard to materials on record. Explanation of the assessee could be a relevant factor. Commissioner/Director can form a different opinion than to one expressed by the Assessing Officer who initiates the process. The scope and ambit of Section 142 ( 2A) was examined. Interpretation of the said section as discussed and made in the said judgment has been referred to below. 6. The ratio expressed in Rajesh Kumar's case ( supra ) was referred to a larger Bench of three Judges and their judgment in the case of M/s Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-I Anr. [2008] 14 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Rajesh Kumar [(2007) 2 SCC 181 : (2006) 287 ITR 91] that an order under Section 142(2-A) does entail civil consequences. At this juncture, it would be relevant to take note of the insertion of proviso to Section 142(2-D) with effect from 1-6-2007. The proviso provides that the expenses of the auditor appointed in terms of the said provision shall, henceforth, be paid by the Central Government. In view of the said amendment, it can be argued that the main plank of the judgment in Rajesh Kumar [(2007) 2 SCC 181 : (2006) 287 ITR 91] to the effect that direction under Section 142(2-A) entails civil consequences because the assessee has to pay substantial fee to the special auditor is knocked off. 27 . True it is that the payment of auditor's fee is a major civil consequence, but it cannot be said to be the sole civil or evil consequence flowing from directions under Section 142(2-A). We are convinced that special audit has an altogether different connotation and implications from the audit under Section 44-AB. Unlike the compulsory audit under Section 44-AB, it is not limited to mere production of the books and vouchers before an auditor and verification thereof. It would inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered on 11th April, 2008 and, therefore, will not apply to orders passed under Section 142(2A) before the said date. We have examined the said contention but do not find any merit in the same. The actual wording of the order passed by the Supreme Court reads as under:- " Accordingly, we hold that the law on the subject, clarified by us, will apply prospectively and it will not be open to the appellants to urge before the Appellate Authority that the extended period of limitation under Explanation 1 (iii) to Section 153(3) of the Act was not available to the Assessing Officer because of an invalid order under Section 142(2A) of the Act. However, it will be open to the appellants to question before the appellate authority, if so advised, the correctness of the material gathered on the basis of the audit report submitted under Sub-section 2A of Section 142 of the Act." 10. The Supreme Court clarified that law on the subject as expounded by them will apply prospectively and it will not be open to the appellant i.e. the assessee, to urge before appellate authority that the extended period of limitation under Explanation 1(iii) to Section 153(3) of the Act which is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind to the relevant facts and it was not a case where irrelevant factors had weighed with the authorities in ordering special audit. The court was not to substitute its own understanding and comprehension of the accounts of the assessee. The contention that the assessee was already subject to audit under Section 44AB of the Act was rejected holding that the audit by statutory auditor does not denude the Assessing Officer of his power to pass an order of special audit. In the said case, the assessee had produced books of accounts before the Assessing Officer and thereafter the Assessing Officer recorded relevant findings which were germane, cogent and not extraneous. It was not based merely on ipse dixit of the Assessing Officer. It was held:- "A bare perusal of the provision would show that the opinion of the Assessing Officer has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessed and (ii) the interests of the Revenue. The word "and" signifies conjunction and not disjunction. In other words, the twin conditions of "nature and complexity of the accounts" and "the interests of Revenue" are the pre-requisites for exercise of power un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find resonance and acceptance in another Division Bench decision of this court in Yum! Restaurant's case ( supra ), in which it has been held :- "Therefore, next we would proceed to discuss the nature of the proceedings before the authorities under section 142(2A) of the Act. Every person is required to file return of income under section 139 of the Act. Once such a return is filed, the Assessing Officer may conduct an inquiry before the assessment, in consonance with the provisions of section 142 of the Act. Thereupon under section 143 of the Act, the Assessing Officer would pass an order of assessment requiring the assessee to pay the tax in terms thereof. All these powers are vested in the Assessing Officer under Chapter XIV relating to "procedure for assessment". Section 142(2A) of the Act forms part of this procedure and mandates that if at any stage of the proceedings before the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and interest of the Revenue, he is of the opinion that it is necessary so to do, he may with the previous approval of the Chief Commissioner direct the assessee to get the accounts audited by an accountan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer to the assessee and requiring him to explain. In the event of Assessing Officer is not satisfied, he would be at liberty to form an opinion and pass a direction under section 142(2A) subject to the approval of the Commissioner for a special audit of the accounts of the assessee. The Assessing Officer should form the required opinion upon examining of books of accounts, after making sincere effort to understand the books of accounts and after putting the assessee at notice. Inability on the part of the assessed to provide the requisite clarifications to the satisfaction of the Assessing Officer would normally be a sufficient ground for the Assessing Officer to exercise his jurisdiction under this provision and to record the opinion on a subjective satisfaction recorded objectively. The Assessing Officer is not required to loose sight of the provisions of the Act and the objects sought to be achieved thereunder. The orders should be founded on application of mind relatable to the nature and complexity of the accounts and in the interest of the Revenue. Once these ingredients are satisfied, the scope of judicial review of such a direction would normally be not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee for 9th November, 2004. There is dispute as to what had happened on 9th November, 2004. The order sheet records no one had appeared but the petitioner (assessee) had written a letter dated 17th January, 2005, in which it had stated: "In this connection, we would like to submit that on 9th November, 2004, the undersigned alongwith Ms. Mala Rajan, C.A. had reached the Office at 10.30 A.M. and waited till 11.30 A.M., but you were not in office. We had left a message with your Office and your goodself had even spoken to the undersigned on his mobile after you had reached your office and it was agreed that we can come some other day to attend the case. On 20th December, 2004, we had attended the hearing and given all the explanations and clarifications that your goodself had sought. The clarifications were on the same points as were raised in the Questionnaire dated 1st November, 2003. After the hearing, your goodself had informed us that another Questionnaire would be framed and we would be informed of the same as soon as the same was ready. The next date of hearing was fixed on 3rd January, 2005. On 3rd January, 2005 since the undersigned was out of station, the case cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sh. K.N. Goel CA, AR of the assesse appeared along with Ms. Mala Rajan CA and furnished the detaisl as per the questionnaire issued on 03/11/04. The next hearing is fixed on 17/01/05. ___________________________________________________ 11/03/05 A letter has been up to the Add CIT, Range 32 proposing special audit u/s 142 (2A) of the IT Act, 1962, keeping in view the nature and complexity of the accounting system followed by the DDA." ___________________________________________________ 16. In response to the notice dated 1st November, 2004 of the Assistant Commissioner, the petitioner had vide reply dated 20th December 2004, stated that (i) the petitioner was maintaining Receipts and Payments based government accounts and the system of accounting and manner of preparing accounts was drawn up and based on the recommendations of the Accountant General, India. DDA (Budget and Accounts) Rules, 1982 were applicable and the accounts were drawn up based on the cash receipts, but at the year end the accounts were converted into Income and Expenditure based accounts and this accounting system had been followed in the earlier years. There was no change. The petitioner had initiate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erations received to make up for the rebates allowed in the Janta or lower income group housing. The authority worked on a non-profit motive and on a special compensatory pricing mechanism. The value of stocks was calculated at a disposal price or cost whichever was lower. In special rebate schemes, the value was calculated at lower than cost, but other stocks are valued at cost. (ix) All adjustments for period prior to 31st March, 2002 were routed through a separate adjustment account and so they did not affect the income of the years in question. (x) The accounts involved in inter se transfer of funds and Personal Ledger Accounts were personal accounts and had no bearing on the income and expenditure accounts of the petitioner. The personal accounts were subject to re-conciliation. 17. Thereafter, ACIT sent a questionnaire on 18th January, 2005 to the petitioner. In response, vide letter of the same date to the Assistant Commissioner of Income Tax, it was stated that the Ground Rent and Service Charges up to 31st March, 2002 were accounted for on accrual basis, but the same had been accounted for on cash basis from the financial year 2002-03 as a scheme for payment of one-tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that all entries made in the adjustment account need scrutiny. The exact words used, read as under:- "All the entries made in the adjustment account needs scrutiny w.r.t. the treatment given to such entries. The assessee has stated that there was no revenue loss involved by such an entry but what has to be examined is that though such an entry may not be having any revenue loss temporarily but the same may be having profound revenue impact in future entries in "Adjustment A/c" which involves very complex accounting issued needs examination rather that looking at the revenue loss/gain temporarily." (emphasis supplied) 20. The Assessing Officer recorded that conversion from receipt and payment system of accounting into accrual system needed a closed monitoring and it was observed as under:- "But the conversion from Receipt payment system of accounting to accrual system itself involves lot of accounting complexities for such a large organization like DDA. Hence this conversion needs to be closely monitored w.r.t. the accounting treatment given to various issues. The assesse himself stated that in respect of ground rent service charge, the accounting system has been cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity is maintaining two accounts, one personal and the other Revenue account, both the accounts needs deep scrutiny whether the same was in accordance with the provisions of the IT Act, 1961. The nature of reconciliation carried out by the authority involves complexity in accounts w.r.t. the treatment given various entries and just because the reconciliation pertained to the past years, it doesn't necessary mean that the process has no bearing on the revenue of the current year." (emphasis supplied) 24. We have referred to the aforesaid note in detail for two reasons. Firstly, the note reveals that the Assessing Officer felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in number. Detailed scrutiny of large number of entries by itself, on standalone basis, will not amount to complexity of accounts. The accounts do not become complex because merely there are large number of entries, e.g., a petrol pump may have substantial sales, to thousands of customers daily at prices fixed under law/Rules, but this by itself will not be the accounts complex. Similarly, an Assessing Officer is required to scrutinize the entries and veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, consideration of the legal aspect and formation of a tentative view. The decision on this legal issue cannot be transposed and passed to the Chartered Accountant as a special auditor as he is not a specialist and mandated by the Act to undertake the said exercise. The case of the assessee is that it is maintaining separate accounts for Nazul I and Nazul II lands and the General Development Account. The said accounts are audited by the Comptroller and Auditor General and have been accepted by the Central Government. 25. We also find merit in the contention raised by the petitioner that the Assessing Officers have repeatedly in all orders, for the purpose of recording reasons, taken the "notes of accounts" and verbatim incorporated the same. This is apparently correct and, therefore, discloses non-consideration and non-application of mind, which constitutes an error in the decision making process. It is an easy and convenient manner to transfer the obligation of scrutiny and examination to the special auditor. It may be true and correct that certain aspects mentioned in the Notes of Accounts may, if required and necessary and after in depth examination, justify appointment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ✓ x x X x x X 2 Change in accounting policy for Ground Rent Service charges from accrual to cash basis The change is in consonance with the introduction of one-time payment scheme. Already disclosed in Notes to Accounts Cash accounting more appropriate and poses no complexity -do- and Accounting Policy No. 7 (d) ✓ ✓ ✓ ✓ ✓ ✓ ✓ 3 Taxability of interest on GPF, Pension Fund to be verified Both Funds exempt. GPF u/s 10(25) Pension Fund already recognized by Commissioner of Income Tax. Hence, no revenue impact Accounting Policy No. 14 (a) and (b) ✓ ✓ ✓ ✓ ✓ ✓ ✓ 4 Nazul I II being Authority's revolving fund, income thereon needs to be examined Nazul I II record transactions on Central Government Account and accounts forms part of L B Deptt. Of the Government. Accounting Policy No. 1 and Nazul Notification ✓ ✓ ✓ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ull details available, but not perused by AO. The amounts not even claimed in utilization of funds. Schedule to the Balance Sheet x X ✓ ✓ ✓ ✓ ✓ 12 Accounting procedure described elaborately to show complexity The AO has not pointed out what he wanted to verify from the accounts that he could not. In fact, the description shows simple accounting and availability of information in all forms viz., periodical, zone- Our submissions x X ✓ ✓ ✓ ✓ ✓ 13 Application of section 269SS on earnest money from contractors Section is inapplicable to Corporation established by Central, Provincial, or State Act. Also, there is no specific Tax Audit Report of Tax Auditor in Form No. 3 CD for the asst. year 2003-04 x x ✓ ✓ x x X 14 Reproduction of accounting policies w.r.t.- Fixed Assets Rent of Staff Quarters Valuation of Stocks Revenue Recognition Recoveries/payments to Nazul Accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered. As noticed, the reasons recorded do not refer to examination of books of accounts or any entries therein which could be a cause for confusion or complexity relating to accounts. In the counter affidavit, it is stated that the Assessing Officer asked for the details and after considering the details came to the conclusion that the details supplied were too complex. 30. In the assessment year 2005-06, the respondents have stated that the books of accounts for a part period were called for and examined and thereafter the Assessing Officer vide letter dated 17th October, 2007, referred the matter to the Director of Income Tax (Exemption) recommending special audit in view of the accounting complexity. The case of the petitioner, however, is that the notice under Section 143(2) was issued by the Assistant Director of Income Tax (Exemption), Trust Circle-II, vide letter dated 6th August, 2007. Subsequently, the jurisdiction was transferred to Additional Director of Income Tax (Exemption), Range-I, who had fixed the first hearing on 7th September, 2007. The petitioner vide letter dated 24th September, 2007, had submitted documents at the time of hearing. On 15th October, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had stated that the deposits made were not released except by way of account payee cheques. The Assessing Officer records this aspect was not verifiable in view of the nature and complexity involved. In the reply, the petitioner had also stated that Section 269SS was not applicable to a corporation established under the Central, State or Provincial Act. Payments or refunds by the petitioner could be verified from the accounts and bank records. The petitioner could be asked to collate the deposits received with payments made. This would not be a complex accounting exercise, if it is not specifically indicated and stated why and how it involved complexity in accounts. 31. In the assessment year 2006-07, the respondents have stated that books of accounts were produced but the copy of the C AG report was not filed before the Assessing Officer. Again it was stated that the cash books were maintained at different zone levels and monthly accounts were prepared and sent to the Head Officer for consolidation. Similarly, applicability of Section 269 SS involved complexity of accounts. The petitioner has stated that a preliminary questionnaire dated 12th November, 2008, was issued fixing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use notice, in addition to the other grounds it was stated that in the year, expenditure for commonwealth games was incurred on construction. The books of accounts did not reveal whether a transparent tender process was resorted to. In receipt and payment accounts, there was expenditure of Rs.39 crores under the head "Commonwealth Games Reserve Fund break-up". Rs.300 crores had been transferred to Commonwealth Game Reserve" from income and expenditure account. There was need to verify whether the threshold limit below which tendering was not done, was breached. It was to be examined whether contracts were broken down into smaller contract. Monitoring mechanism in cases of small contracts was required to be verified. In the reply dated 6th December, 2010, it was stated that in the last hearing or earlier, no accounting issue was raised that was difficult to understand or comprehend. The C AG report had been submitted. It was submitted that the accounts were maintained in a systematic manner and in just one hearing nobody could come to the conclusion that the accounts were complex. There was no complexity in the accounts. Question of transparency in tendering, we may observe, is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42(2A). 37. One more additional factor for the initial assessment years may be noted that the petitioner DDA was granted registration as a charitable institution under Chapter 12AA of the Act in 2006 with retrospective effect w.e.f. 1st April, 2002. This fact was not in the knowledge of the respondent authorities when the first few orders for special audit were passed. Counsel for the Revenue has relied upon Section 13(3) of the Act and submitted that the registration under Section 12AA is not final and facts and accounts of each year have to be examined. There can be no doubt that facts and accounts of each year have to be examined but this is different from stating or alleging that Section 13(3) is applicable. Various contentions and issues have to be examined before a finding is recorded that Section 13(3) is attracted and applicable. It is the contention of the petitioner that misappropriation, if any, by the employees or third persons which causes loss to the petitioner cannot be a ground to invoke Section 13(3) as the petitioner is a distinct taxable entity. The petitioner suffers when there is misappropriation of the funds or misuse of assets/funds because of malafide or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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