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TMI Blog2014 (1) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... aw laid down Swadeshi Cotton Mills Company Limited Versus Commissioner Of Income-Tax And Another [1987 (3) TMI 20 - ALLAHABAD High Court] - A.O. should reconsider the issue as to whether a direction should be issued under Section 142(2A) of the Act after considering the objections of the assessee and affording a reasonable opportunity of being heard, in terms of Section 142 (2A) of the Act - It is only after the A.O. reaches to a fair conclusion after considering the reply given by the petitioner, and affording an opportunity of hearing, the CIT as approving authority will consider whether the special audit is required to be carried out for the purposes of understanding the accounts maintained by the assessee – Decided in favour of Assessee. - Writ Tax No. - 137 of 2012 - - - Dated:- 17-1-2014 - Hon'ble Sunil Ambwani And Hon'ble Surya Prakash Kesarwani,JJ. For the Petitioner : Nikhil Agrawal For the Respondent : C. S. C., Income Tax, Dhananjay Awasthi ORDER (Delivered by Hon'ble Surya Prakash Kesarwani,J.) 1. In this writ petition the petitioner has prayed for the following relief : "(i). that a suitable writ, order or direction be issued declaring the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence, sale bills and stock register. The petitioner submitted the details on 2.11.2011. The A.O. further required the petitioner to submit details with regard to valuation of of C/S, reason for non inclusion of insurance claim and interest, bills and supporting documents of expenses of commercial tax, foreign bank charges , ECGC premium, telephone and mobile expenses, electricity expenses, bank interest and bank charges. The petitioner produced the relevant information and documents on the date fixed i.e. 9.11.2011 and 16.12.2011. 3. On 16.12.2011 the A.O. issued a show cause notice under Section 142 (2A) of the Act fixing 21.12.2011 for reply, forming an opinion that the accounts maintained by the petitioner is complex and special audit is required in the interest of revenue. This notice was received by the petitioner on 20.12.2011. On the date fixed i.e. 21.12.2011 the petitioner appeared before the A.O. along with his Chartered Accountant. The A.O. asked the petitioner to submit its reply in writing by the next day. On 22.12.2011, the petitioner submitted a detailed reply through its Chartered Accountant with its explanation on each of the grounds mentioned in the show cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e audit report under Section 142 (2A) within four months from the date of receipt of this order. This letter was served on the petitioner on 9.1.2012 after the limitation for completing assessment for AY 2009-10 expired on 31.12.2012 and thus the assessment proceeding became time barred. Aggrieved with the letter dated 29.12.2011 sent by the Special Auditor intimating their appointment for audit under Section 142 (2A) by the CIT Varanasi for AY 2009-10, and the proceedings for special audit, the petitioner has filed the present writ petition. 5. We have heard Sri Nikhil Agarwal, learned counsel for the petitioner and Sri Dhananjay Awasthi for the respondents and carefully considered their submissions. . Submissions on behalf of petitioner 6. Sri Nikhil Agarwal submits that:- (i) The limitation for AY 2009-10 was to expire on 31.12.201, and as such the power under Section 142 (2A) of the Act was invoked by the respondents only for extending the period of limitation as it is evident from the noting on the top of the notice dated 16.12.2011 (Annexure 7) that "time barring. Limitation expires on 31.12.2011." (ii) The petitioner was not heard, nor any order was passed and was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The A.O. has not considered the reply submitted by the petitioner. 8. Sri Nikhil Agarwal further submits that all these factors of Section 142 (2A) are conjunctively required to be read for the formation of the opinion which must be based on objective consideration. The complexity would mean the state or quality of being intricate or complex, or that it is difficult to understand. The difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature and no order can be passed on the whims or caprice of A.O. The power under Section 142 (2A) cannot be lightly exercised. An order of approval cannot be mechanically granted. An approval can be granted having regard to the material on record and the explanation given by the assessee. The approving authority should go through the explanation before giving approval. He referred to the judgment of Hon'ble Supreme Court in the case of Chairman-cum-M.D. Coal India Limited and others v. Ananta saha and others (2011) 5 SCC 142 (paragraphs 32 and 33), and submits that since the initial action of the respondents was not in consonance with law as such the subsequent proceeding would not sanctify th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16(Gujarat). (iii)Division Bench judgment of this Court dated 31.1.2011 passed in Writ Tax No. 77 of 2011, M/s. Treadstone International Ltd. v. Union of India and others. (iv)Division Bench judgment of this Court dated 3.2.2012 passed in Writ Tax No. 141 of 2012, U.P. Hotels Limited v. Commissioner of Income Tax and another. (v)U.P.State Industrial Development Corporation Ltd. v. Chief Commissioner of Income Tax, (2011) 203 Taxman 337 (All.). Our Findings 11. On the facts of this case, we find that the following issues arise for our consideration :- (i)Whether the order/direction for audit under Section 142 (2A) of the Act as approved by the CIT Varanasi vide letter dated 23.12.2011 has been passed without consideration of the reply submitted by the petitioner ? (ii) Whether the petitioner was afforded opportunity of being heard as required under the proviso of Section 142 (2A) of the Act ? (iii)Whether any order under Section 142(2A) was passed by the A.O. and the same was served on the assessee in accordance with the provisions of Section 282(1) of the Act ? (iv)Whether the ingredients of section 142(2A) exist in the present set of facts so as to enable the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner for the assessment year 2003-04. A true photocopy of the said judgment and order dated 23.11.2007 passed by the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad in the case of the petitioner for the assessment year 2003-04 is being enclosed herewith and marked as Annexure-9 to this writ petition. 34. That once the mode and manner of withdrawal of payment to the weaver have been recognized as past practice by the Tribunal itself, a copy of which was submitted before respondent no.2 along with the reply dated 22.12.2011, it could not have formed the basis of reasoning for ordering a special audit in the case of the petitioner as it amounts to over-reaching of order of higher appellate authority and is contrary to law as held by Hon'ble Supreme Court of India in the case of Union of India and others vs. Kamalakshi Finance Corporation Limited, reported in 1992 (1 suppl.) SCC page 648. 38. That it may be relevant to state herein that till the time of the receipt of the letter dated 29.12.2011 written by M/s V.K.Jindal Co. on 2.1.2002, the petitioner had neither been informed orally nor in writing by the assessing authority nor any order was served upon the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce no financial implication are involved. The petitioner should have no grievances, in fact it will be beneficial for the petitioner if correct income is assessed, also all the show cause notices have been received by the petitioner and have been replied too. Hence petitioner has no grounds to challenge special audit. Rest of the facts stated in the paragraphs are denied. 23. That the contents of paragraphs no. 52, 53, 54, 55, 56, 57, 58, 59, 60 61 of the writ petition denied in the form stated. The petitioner has cited judgments in these paragraphs which are of no help, because after the amendment whereby the financial cost which was to be born by the Assessee has been deleted and now the department bears the cost, this section of special audit has only become an aided section which is invoked for quantification of correct income when the books are termed as complex. The petitioner has been given opportunity and then the case has been recommended for special audit which has been approved by the CIT also. Hence filing of this writ is with ulterior motive to derail the correct assessment from being made. 15. From the averments made in paragraphs 33 and 34 of the writ petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idavit quoted above. On 24.1.2012 this Court passed the following order : "List in the additional cause list on 2nd February, 2012. Shri Dhananjay Awasthi appearing for the Income Tax Department will seek instructions specially on the issue whether any order dated 31.3.2009 directing special audit under Section 142 (2-A), Income Tax Act, 1961, was made and was served on the petitioner." 19. In view of the afore not pleadings in the writ petition and the counter affidavit and in the absence of any material on record brought on record by the respondents despite the order of the Court dated 24.1.2012 (afore quoted), we find that the order under Section 142 (2A) of the Act, was not made and served on the petitioner before 31.12.2011. Even if the letter of the A.O. dated 28.12.2011 addressed to the Special Auditor, of which a copy was sent to the petitioner is assumed to be an order under Section 142 (2A) of the Act, it was served on the petitioner on 09.01.2012. The averments of the petitioner in paragraph 56 of the writ petition that none of the ingredients for exercising powers under Section 142 (2A) of the Act are conjointly present in the instant case, have not been denied by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cannot, in our opinion, be lightly exercised. The satisfaction of the authorities should not be subjective satisfaction. It should be based on objective assessment regard being had to the nature of the accounts. The nature of the accounts must indeed be of a complex nature. That is the primary requirement for directing a special audit. But the word "complexity" used in Sub-section (2A) 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 are difficult to understand should not be regarded as complex what is complex to one may be simple to another. It depends upon one's level of understanding or comprehension. Sometimes, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully. Therefore, special audit should not be directed on a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee. These guidelines are no doubt binding on the income-tax authorities. But they should not be construed as a mandate to the authorities for directing special audit in every case falling under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. The satisfaction of the authorities should not be subjective satisfaction. It should be based on objective assessment regard being had to the nature of the accounts. The nature of the accounts must indeed be of a complex nature. That is the primary requirement for directing a special audit. But the word " complexity " used in Sub-section (2A) 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 are difficult to understand should not be regarded as complex What is complex to one may be simple to another. It depends upon one's level of understanding or comprehension. Sometimes, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully. Therefore, special audit should not be directed on a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee." 55. The factors enumerated in Section 142(2A) of the Act, thus, are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed by it would be prejudicial to him, principles of natural justic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and/ or the entries made therein. While exercising its power, the assessing officer has to form an opinion. It is final so far he is concerned albeit subject to approval of the Chief Commissioner or the Commissioner, as the case may be. It is only at that stage he is required to consider the matter and not at a subsequent stage, viz., after the approval is given." (Emphasis supplied by us) 24. In the case of Sahara India Ltd. (supra), Hon'ble Supreme Court held as under : " 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgments as noted in para 9 above, do not support the case of the respondents particularly in the light of the discussions made in foregoing paragraphs of this judgment. 26. In view of the above discussion, the pleadings of the parties, the provisions of section 142(2A) of the Act and the principles of law laid down by the Division Bench of this Court in the case of Swadeshi Cottons Mills Company Ltd. (supra), and by Hon'ble Supreme Court in the case of Rajesh Kumar (supra) and Sahara India (Firm) (supra) and the conclusions reached by us in paras 15,16, 17, 18, 19 and 21 above, we are of the view that A.O. should reconsider the issue as to whether a direction should be issued under Section 142(2A) of the Act after considering the objections of the assessee and affording a reasonable opportunity of being heard, in terms of Section 142 (2A) of the Act. It is only after the A.O. reaches to a fair conclusion after considering the reply given by the petitioner, and affording an opportunity of hearing, the CIT as approving authority will consider whether the special audit is required to be carried out for the purposes of understanding the accounts maintained by the assessee. The op ..... X X X X Extracts X X X X X X X X Extracts X X X X
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