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TMI Blog2012 (10) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of business advance received by the assessee from DLF Ltd. and in turn advanced to certain land owning companies was being examined in the assessment proceedings. AO further stated in the final report that whatever details are required in respect of the issues raised in the show cause notice dated 21.11.2011 were being examined in the assessment proceedings and the assessee has been asked to furnish further details (which is an apparent reference to the hearing posted on 28.11.2011) and further that a draft order has been prepared which is enclosed with the final report for the perusal of the CIT. It is very difficult to treat this report of the Assessing Officer as a proposal submitted by him to the CIT for special audit of the accounts of the petitioner. Also it contains a clear statement that since the complexities in the accounts have been answered by the petitioner and since the details and material submitted by the petitioner would be examined in the course of the assessment proceedings which were pending on that date, no special audit was required. It difficult to accede to the proposition that the CCIT could have applied his mind in such a short period of time to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor in terms of Section 142(2A) of the Act. In particular, it was stated that the following complexities in the accounts were noted:- (a) The petitioner had received business advances of Rs. 3717.42 crores from one of its partners, that is, M/s DLF Limited on which no interest was paid. This amount was invested in more than hundred companies which were part of the DLF Group of Companies. The petitioner has been used as a conduit to make huge advances to companies of the same group with a view to avoiding the applicability of the provisions of Section 2(22)(e) relating to deemed dividend and Section 40A(2)(b) of the Act. (b) The petitioner was showing various payments made to companies on account of development rights under the head "stock". No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex. (c) No details were available in the accounts with regard to the deduction of Rs. 25.40 crores claimed in the profit and loss account under the head "reimbursement of expenses". (d) The petitioner in the relevant accounting year was dealing only in the purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerns in order to avoid the provisions relating to Section 2(22)(e) and Section 40A(2)(b), the petitioner sought to explain the facts and in particular pointed out that DLF Ltd. is a company in which the public was substantially interested and when advances were made by it to the petitioner-firm, the provisions of Section 2(22)(e) of the Act were not attracted and that in any case, the advances were in the nature of business advances. As regards the applicability of Section 40A(2)(b), the petitioner drew the attention of the Assessing Officer to the tax audit report in which the transactions covered by the Section have been specifically mentioned, without any adverse inferences being drawn. 4. The petitioner also objected to the proposal of the first respondent to consider the question of showing the payments made on account of development rights as its stock as resulting in complexity of the accounts, in the absence of any details with regard to the quantum of the development rights. It was pointed out that the parawise details with regard to the cost of development rights along with the relevant agreements had been furnished under cover of letters dated 4th and 11th November ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 142(2A). It also brought to the notice of the Assessing Officer the instruction No.1076 issued by the CBDT on 12th July, 1977 laying down guidelines for the selection of cases for special audit. The attention of the Assessing Officer was also drawn to several authorities. 8. It appears that after the receipt of the reply of the assessee dated 24th November, 2011, the assessment proceedings went ahead pursuant to the notices issued earlier under Section 143(2) and Section 142(1) of the Act. This is evident from the order sheet notings dated 5th December, 2011, 16th December, 2011 and 19th December, 2011. These order sheet notings were been obtained by the assessee under the Right to Information Act, 2005 by an application made on 20th February, 2012 and is annexed to the writ petition as annexure B. It may be relevant to reproduce the order sheet notings, so far as is necessary for our purpose, as follows:- "05.12.2011: Present Shri Anil Aggarwal, CA and made submissions. To furnish details regarding reimbursement of expenses to DLF Ltd. U/s 40(a)(ia). Case adjourned to 16th Dec. 16.12.2011: Attended Shri Anil Aggarwal, CA and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues stated in the Show Cause Notice, CBDT Guidelines, provisions of law and judicial decisions relied upon. Further as regards to the issue to business advance received form one of its partner i.e. M/s DLF limited which has further been advanced to Land owning Companies, the same is being examined during the course of assessment proceedings. Similarly regarding the claim of "Reimbursement of expenses" the assessee has submitted that a detailed note along with full details and Invoices on account of Service Charges amounting to Rs. 1.21 Crore and reimbursement of expenses amounting to Rs. 24.19 Crores, aggregation total expenses at Rs 25.40 Crores has been furnished by the assessee which are being examined. The assessee has been asked to file the necessary details which are being verified and examined in the course of the assessment proceedings." 10. It appears that a hearing took place on 16th December, 2011 pursuant to the hearing notices issued by the Assessing Officer. We have already extracted the order sheet entry dated 16th December, 2011 which shows what actually transpired in the course of the hearing. 11. On 19th December, 2011 a letter was written by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was selected under CASS and notice was issued on that day under Section 143(2). The Assessing Officer, however, had issued a show cause notice on 21st November, 2011 under Section 142(2A) for special audit to which, as we have already seen, the assessee replied by letter dated 24th November, 2011 objecting to the proposal to refer the accounts of the assessee to special auditor. We have also seen that on 16th December, 2011 the Assessing Officer had submitted a report to the CIT in which he had narrated the assessee's reply and the various points taken by the assessee and had also intimated the CIT of his intention to proceed with the assessment proceedings and himself examine the points on which special audit was originally proposed by him. 14. Things appear to have taken a new turn after this report was sent by the Assessing Officer to the CIT. We have examined the original files produced before us by the Standing Counsel for the Revenue who has also submitted copies of the relevant communications between the departmental authorities inter se, as also copies of the correspondence between the assessee and the departmental authorities. The chronology of the events which took pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , aggregating total expenses at Rs. 25.40 Cores has duly been furnished during the assessment proceedings. The assessee has been show caused as to why an amount of Rs. 24,19,70,094/- being reimbursement of expenses to M/s DLF Land Ltd. be not disallowed for non-deduction of TDS under Section 40(a)(ia) of the Income Tax Act, 1961. Further the assessee has been show caused as to why the service charges of Rs. 1,20,98,508/- paid to DLF Land Ltd. be not disallowed. The assessee has submitted its reply to the show cause. The same are being examined during the course of assessment proceedings. Similarly with regard to the confirmations of the sundry creditors the assessee has been show caused as to why an amount of Rs. 2,14,26,677/- not be added to the total income. Also the assessee has been required to show cause as to why a sum of Rs. 1,11,50,000/- being the unsecured loans outstanding as on 31.03.2009 be not brought to tax for want of confirmations. The assessee has submitted its reply to the show cause. The same are being examined during the course of assessment proceedings. The assessee has been asked to file the necessary details which are being verified and examined and the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue would be protected, and to which report a copy of the draft assessment order was stated to be enclosed for the perusal of the CIT, the first respondent sent a letter to the CIT-II, New Delhi (on 27th December, 2011) in F.No.ACIT/CIR.31(1)/2011-12/429, in which he appears to have taken a volte face as the following contents of the letter would show:- "To, Dated : 27/12/2011 CIT-XI New Delhi (Through Proper Channel) Sir, Subject: Proposal for special Audit u/s 142(2A) in the case of DLF Commercial Projects Corporation (PAN:AAAFD2181R) for A.Y. 2009-10- Regarding In connection with the assessment for A.Y. 2009-10 books of Accounts were called for vide order sheet entry dated 11 November 2011. On going through the books of accounts as well as the audited financial results including the balance sheet and the profit and loss account certain complexities have been noted in the accounts of the assessee. The assessee is a partnership firm consisting of two partners namely M/s DLF Limited with 76% profit sharing ratio and M/s DLF Housing and Construction Ltd. with 24% profit sharing ratio. Both the partners are engaged in the activity in the real estate alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to change his mind, was it not incumbent upon him to issue another show cause notice to the petitioner under Section 142(2A) and invite the objections of the petitioner? 4. Was there any application of mind on the part of the CCIT before approving the proposal for special audit sent by the first respondent on 28.12.2011? 5. What would be the impact of the answers to the aforesaid four questions upon the validity of the order passed by the CCIT granting approval for special audit? 18. On the very same day on which the JCIT forwarded the report of the Assessing Officer to the CIT, the CIT wrote a letter to the Chief Commissioner of Income Tax, Delhi-II under the subject "proposal for special audit under Section 142(2A) of the IT Act, 1961-Reg.". In this letter, a copy of which is placed at page 174 of the writ petition, the CIT stated as follows:- "In this Connection, please find enclosed herewith proposals for special Audit u/s 142(2A) of the I.T. Act 1961 as received from the ACIT, Circle-31(1), New Delhi vide letter F No ACIT/Circle-31(1)/2011-12/429 dt. 27/12/2011 duly forwarded by Joint CIT, R-31. New Delhi vide F.No. JCIT/E-31/11-12/442 dt. 27.12.2011 in the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require : [Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.] (2B) The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. (2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer that it is necessary to get the accounts of assessee audited by an Accountant has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessee; 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 the revenue" are the prerequisites for exercise of power under Section 142(2A) of the Act. Undoubtedly, the object behind enacting the said provision is to assist the Assessing Officer in framing a correct and proper assessment based on the accounts maintained by the assessee and when he finds the accounts of the assessee to be complex, in order to protect the interests of the revenue, recourse to the said provision can be had. The word "complexity" used in Section 142(2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. v. MANU/UP/0236/1987 : C.I.T. [1988] 171 ITR 634 (All) it is a nebulous word. Its dictionary meaning is: "The state or quality of being intricate or complex or that is difficult to understand. However, all that is difficult to understan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... professional person. He has to function independently. He is not an employee of the assessee. In case of mis-conduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949. Besides, the assessee has to pay a hefty amount as fee of the special auditor. Moreover, during the audit of the accounts again by the special auditor, he has to answer a large number of questions. Referring to the decision of this Court in Binapani Dei (supra) wherein it was observed that when by reason of an action on the part of a statutory authority, civil or evil consequences ensue, the principles of natural justice are required to be followed and in such an event, although no express provision is laid down in this behalf, compliance with the principles of natural justice would be implicit, the learned Judges held that by virtue of an order under Section 142(2A) of the Act, the assessee suffers civil consequences and the order passed would be prejudicial to him and, therefore, principles of natural justice must be held to be implicit. The Court has further observed that if the assessee was put to notice, he could show that the nature of accounts is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed on or before 10.04.2002. The direction was issued because it was one of the contentions of the petitioner that the Assessing Officer had not mooted any proposal for special audit, but on the contrary had actually dropped the proposal in his report dated 26.12.2011 and that the proposal actually moved from the CIT who had no authority to propose the special audit. The petitioner had sought to support the allegation on the basis of the report of the Assessing Officer dated 26.12.2011 and the subsequent turn of events on 27.12.2011 when the Assessing Officer had taken a 'U' turn and made a proposal for the special audit. 22. In the short affidavit filed by the first respondent it has been stated in para 2 that the proposal for special audit was sent by the Assessing Officer through the JCIT who forwarded the same to the CIT on 27.12.2011. In para 3 of the affidavit it has been stated that the Assessing Officer submitted a proposal to the CIT on 27.12.2011 through the JCIT seeking proposal for referring the case of the petitioner to the special auditor and the CIT forwarded the proposal to the CCIT on the same date i.e. 27.12.2011 along with the copies of the report of the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant portions from which have been extracted earlier. The Assessing Officer did examine the accounts of the assessee on 18.11.2011. He issued a proposal for special audit under Section 142(2A) on 21.11.2011. The petitioner submitted a detailed reply to the same on 24.11.2011. After considering the reply, the Assessing Officer prepared a report on 16.12.2011. The penultimate paragraph to this report, which has also been extracted by us earlier, gives the impression that it was some kind of an interim report, informing the CIT that the submissions of the petitioner are being examined with regard to the issues raised in the show cause notice, the CBDT guidelines, the provisions of law and the judicial decisions relied upon. It also states that the issue of business advance received by the assessee from DLF Ltd. and in turn advanced to certain land owning companies was being examined in the assessment proceedings. The issue relating to reimbursement of expenses in respect of which the assessee had submitted a detailed note along with invoices for service charges amounting to Rs. 1.21 crores and reimbursement of expenses amounting to Rs. 24.19 crores were also stated to be examined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d since the details and material submitted by the petitioner would be examined in the course of the assessment proceedings which were pending on that date, no special audit was required. It is not necessary for us to pronounce finally on the question whether the draft assessment order was enclosed to the report dated 26.12.2011 or not; the preparation of the report itself would indicate the mind of the Assessing Officer and the decision taken by him on that date. There is of course the unanswered question whether the draft assessment order was enclosed to the report or not. Section 114(e) of the Evidence Act would perhaps be applicable to such a case and if it has been stated by the Assessing Officer that the draft order was enclosed to the final report, the presumption would be that it was enclosed and it would be for the revenue authorities to rebut the presumption with strong evidence to show that it was not. The burden was on them. They have merely stated in the reply to the RTI enquiry raised by the petitioner that the draft order was not enclosed with the final report dated 26.12.2011. This is a perfunctory manner of discharging the burden placed on them. If the draft assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .12.2011 did form an opinion that no special audit was required in the petitioner's case is correct, there is an end of the matter and the approval granted by the CCIT on 27.12.2011 and communicated to the Assessing Officer through the CIT on 28.12.2011 is without any effect. It is a nullity. However, it is necessary to examine the question whether it is open to the Assessing Officer, having already formed an opinion that no special audit was necessary, and not having communicated the same to the petitioner, to change his mind and form an opinion subsequently that a special audit is necessary having regard to the complexities of the accounts and the protection of the interests of the revenue. We will proceed on the assumption that it is permissible to the Assessing Officer to do so as prospector or guardian of the revenue since protection of the interests of the revenue is one of the two criteria for reference to the special auditor. Even if we assume so in favour of the revenue, in the present case it would be difficult to justify the change of opinion. There are impediments to accepting the claim that the change of opinion was justified. Firstly, the earlier opinion that no speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions of the reply needs detailed examination in view of the complexity of the accounts". Apparently, the Assessing Officer was referring to the reply submitted by the petitioner on 26.12.2011 in the course of the assessment proceedings fixed on that date. In this reply the petitioner has submitted its response to the four issues raised by the AO in the course of the assessment proceedings on 19.12.2011. This reply was not in response to the show-cause notice issued under Section 142(2A) on 21.11.2011; in fact it could not have been, because in the said show-cause notice, the AO did not raise the issue of sundry credits and unsecured loans appearing in the balance-sheet. There, he had raised issues which were different, except one issue, which was common to the notice issued on 19.12.2011, which is the issue relating to reimbursement of the expenses amounting to Rs. 25.40 crores. This consists of the two amounts of Rs. 24,19,70,094/- and the service charges of Rs. 1,20,98,508/-. So far as these amounts were concerned, though they were included in the show-cause notice issued under Section 142(2A) and also in the letter dated 19.12.2011, the show-cause notice stood terminated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlooked that no notice had been given by the AO to the petitioner under Section 142(2A) before forwarding the proposal on 27.12.2011. This shows non-application of mind on his part. He approved the proposal on the same day, namely, 27.12.2011. The fact that the CCIT has also approved the proposal on 27.12.2011 itself is borne out by the endorsement made by him on the note put up by the ACIT (Headquarters, CCIT-XI). The signature of the ACIT who put up the note bears the date 27.11.2011 and immediately below the same is the endorsement of the CCIT reading as follows: "ACIT Circle 31(1) note other facts are perused carefully. Note is initialled. This is a fit case for complete audit as per provisions of Section 142(2A) of the IT Act". Sd/- 27.12.2011" We are also aware that the assessment proceedings were getting barred by time on 31.12.2011. The Assessing Officer had fixed the hearing on 28.12.2011. It was on that day i.e. 28.12.2011 that the approval of the CCIT to the special audit proposal was communicated to him. This extended the period of limitation for completing the assessment. This is an aspect which has to be kept in view. 29. Having regard to the above circums ..... X X X X Extracts X X X X X X X X Extracts X X X X
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