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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 ..... opment rights. On 21st November, 2011 the first respondent issued a show cause notice under Section 142(2A) of the Act, proposing to refer the accounts of the petitioner for special audit. In this show cause notice, a copy of which has been annexed as Annexure H to the writ petition, the first respondent observed that he noticed certain complexities in the accounts of the petitioner on going through the books of accounts and the audited financial statements which necessitated the reference of the accounts of the petitioner to a special 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 peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner had produced the books of accounts before the first respondent who had test-checked them but had not raised any queries or explanation thereafter which implied that there was no complexity in the accounts. It was submitted that the petitioner maintained its books of account as per the accounting standards issued by the Institute of Chartered Accountants of India and that the accounts were also audited in terms of Section 44AB. 3. As regards the observation of the first respondent that there was a diversion of the borrowed funds to sister 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 specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts by showing them as advances. The petitioner thereafter sought to explain in detail the nature of its activities. It was urged that by no stretch of imagination can the relationship between the petitioner and DLF Ltd. lead to an inference that the accounts maintained by the petitioner were complex, necessitating a special audit under Section 142(2A). 7. In addition to the aforesaid submission the petitioner drew the attention of the first respondent to Circular No. 204 dated 24th July, 1996 issued by the CBDT in connection with the scope of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification of the books, a show cause notice dated 21st November, 2011 was issued containing the proposal for special audit and that the assessee-firm was required to furnish its reply by 24th November, 2011. The reply submitted by the assessee is thereafter discussed in considerable detail along with the extracts, wherever necessary, from the reply. The penultimate paragraph of the report is relevant and extracted below:- "The submission of the assessee is being examined with regards to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be decided on merits on the basis of material available on records." 12. On 26th December, 2011 the assessee replied to the above letter of the Assessing Officer and furnished a detailed reply in respect of the points raised in the letter of the Assessing Officer. A copy of this letter is annexed to the writ petition as Annexure K. 13. It is thus seen that upto 26th December, 2011 the assessing proceedings continued without interruption, have been commenced on 23rd August, 2010 when the case 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 point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. M/s DLF limited which has further been advanced to Land Owning Companies on which additions were made in the previous years and the issue being held in favour of the assessee by the ITAT; the same issue does not exist in the A.Y. 2009-10. Regarding the claim of "Reimbursement of expenses" the assessee 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the petitioner and the reply given by the departmental officers under the RTI Act are crucial as we shall presently show. 17. On 27th December, 2011, i.e. one day after he sent a report to the CIT stating that the apparent complexities noticed in the accounts were answered by the assessee and, therefore, the assessment is being proceeded with and further that the assessee had submitted its reply to the various points raised by him which will be examined and the interest 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 26.12.2011 be taken as an expression of opinion that there was no need for a special audit? 2. If the answer to the first question is in the affirmative, what is it that happened between 26th December, & 27th December, 2011 which compelled the Assessing Officer to change his mind and come to the conclusion that "certain complexities have been noted in the accounts of the assessee" and, therefore, special audit was required to be carried out? 3. Assuming that it is open to the Assessing Officer 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. It is the aforesaid order that is impugned in the writ petition as also the order dated 29.12.2011 passed by the first respondent containing the terms of reference to the special auditor. 20. The relevant statutory provisions governing the special audit are incorporated in Section 142 of the Income Tax Act which is titled "inquiry before assessment". Sub-sections (2A), (2B), (2C), (2D), (3) & (4) are relevant in this behalf. They are as under:- "(2A) If, at any stage of the proceedings before him, the 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 : [P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year." The relevant principles governing the applicability of the provisions have been set out in the judgment of the Supreme Court in Sahara India v. CIT & Anr. [2008] 300 ITR 403:- "... 6. A bare perusal of the provisions of Sub-section (2A) of the Act would show that the opinion of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dealing with the question whether the requirement of affording an opportunity of hearing is to be read into Section 142(2A), in Rajesh Kumar (supra) it has been held that prejudice to the assessee is apparent on the face of the said statutory provision. It has been observed that on account of the special audit, the assessee has to undergo the process of further accounting despite the fact that his accounts have been audited by a qualified auditor in terms of Section 44AB of the Act. An auditor is a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even after the obligation to pay auditor's fees and incidental expenses has been taken over by the Central Government, civil consequences would still ensue on the passing of an order for special audit...." 21. We must refer to the short affidavit filed by the first respondent as per the directions of this Court issued on 30.3.2012. The Court had directed the filing of an affidavit on oath whether the Assessing Officer had mooted the proposal for the special audit. The affidavit was directed to be 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the judgment, the approval must reflect the application of mind to the facts of the case. 24. There is a good deal of force in the contention of the petitioner that there was no proposal initially by the Assessing Officer for special audit and that he did not form any opinion that the accounts of the assessee were complex and a special audit was required to protect the interests of the revenue. This is clear from the report dated 26.12.2011 submitted by the Assessing Officer to the CIT, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnish 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. On the contrary 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 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 Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question whether such communication was statutorily or even administratively required. The relevant enquiry to be made is only whether the Assessing Officer did form an opinion one way or the other regarding the need for special audit. Once that opinion has been formed and it is part of the record, it binds the Assessing Officer. It is not open to him to deny the fact. Thus the first question posed by us is answered in the affirmative. 27. If our conclusion that the Assessing Officer on 26.12.2011 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. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mind are very vague and unconvincing. He has merely stated that on going through the books of accounts, the audited financial results and the balance sheet and profit and loss account "certain complexities have been noted in the accounts of the assessee". He has thereafter referred to the four issues on which special audit was required. In the second paragraph of the letter he has referred to the reply submitted by the petitioner on 26.12.2011. Thereafter, it has been stated that "the submissions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Assessing Officer gave reasons as to why he changed his mind; his communication was forwarded to the JCIT who in turn forwarded it to the concerned CIT on the same day i.e. 27.12.2011. On the very same day, the CIT forwarded the proposal to the CCIT. Per se, this may not be a suspicious situation and having regard to the urgency of the matter, it was perhaps expected of the revenue authorities to expedite. However, the CCIT took no time to give his approval to the special audit. He overlooked 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 prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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