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TMI Blog2017 (8) TMI 1074X X X X Extracts X X X X X X X X Extracts X X X X ..... Advocate along with Mr. Satyen Sethi, Mr. Arta Trana Panda, Mr. Mayank Nagi and Mr. Tarun Singh, Advocates for petitioners in Item Nos. 15 to 19. Ms. Rashmi Chopra along with Mr. Ruchesh Sinha and Ms. Ariya, Advocates for Petitioners in Item Nos. 23 to 41. Mr. Dileep Shivpuri along with Mr. Sanjay Kumar, Advocates for respondent/Income Tax in Item Nos. 1 to 13 & 14 to 22. Mr. Rajesh Gogna, CGSC for respondent no. 1 in Item No. 18. Mr. Kirtiman Singh, CGSC along with Mr. Pranav Agarwal, Mr. Waize Ali Noor and Mr. Prateek Dhanda, Advocates for R-1 (UOI) in Item No. 21. Ms. Kailash Golani, Advocate for respondent no. 1 in Item No. 19. Ms. Shraddha Bhargava, Advocate for respondents in Item nos. 31 to 33, 36 & 38. Mr. Arun Bhardwaj, Advocate along with Mr. Sriram, Advocate for the respondent in Item nos. 1, 16 to 19. Mr. Harish Kumar Garg, Advocate for respondent no. 1 in Item No.22. Mr. Ashok K. Manchanda, Advocate along with Ms. Lakshmi Gurung, Advocate for Revenue in Item Nos. 23 to 41. Mr. Vivek Goyal, CGSC for respondent/UOI in Item No. 17. Ms. Mrinalini Sen, Advocate along with Ms. Kritika Gupta, Advocate for respondent no.1 in Item Nos. 31 to 33, 36 & 38. Ms. Saroj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO proceeded to pass the order under Section 142(2A) of the Act after seeking the approval of the Principal Commissioner of Income Tax, for AYs 2010-11 to 2012-13, leaving out AYs 2007-08 and 2013-14, which were originally also sought for special audit. The AO directed the petitioner to furnish report of special audit within period of 90 days from the receipt of the impugned order. Contentions 5. OSC contends that Section 142(2A), as amended by the Finance Act, 2013, violates Article 14 of the Constitution of India. The petitioner contends that by the said amendment, the scope of Section 142(2A) was substantially widened with effect from 01.06.2013. It is contended that from a bare reading of the amended Section 142(2A) it is clear that the Legislature intends to remove the restrictions inherent in the said provision and expand its scope far beyond what it was earlier. The only ground that was earlier present in Section 142(2A), on which special audit could be directed, was "nature and complexity of the accounts of the assessee". It is urged by the petitioner that after the amendment the grounds that have been added to Section 142(2A), have no relation to the erstwhile complexit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the reach of the mechanism of special audit. It was contended that the present provision clubs equal and unequal in the same class and hence is patently violative of Article 14. The petitioner also submits that under various legislations, including the Companies Act, the Income Tax Act, as well as Service Tax and State VAT regulations, it is required to go through the audit process. It is contended that these audits serve as proper checks and balances on the conduct of the assessee's business and as such there is no requirement of resorting to Special Audit under Section 142(2A). 9. Mr. Ajay Vohra, learned senior counsel relied on the Statement of Object and Reasons of the original provision, when introduced by amendment, [Clause 39 (1)] in 1973, by a Bill, which was ultimately enacted, that to protect the interests of the revenue, the accounts of the assessee, in certain cases, which indicated complexity, power should be conferred to conduct special audit; yet the Committee which recommended the original amendment was conscious of possible harassment of the assessee, by such process and, therefore, proposed that such exercise should be conducted after the highest authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's business, or the widest phrase "doubts as to the correctness" of the accounts is incapable of definition. Necessarily, therefore, every AO is left to his or her own devices to decide - in an entirely subjective manner. Since the assessee would have to reply to show cause notice, before a final decision is taken, the nature of these notices would be wide and sweeping; the AOs would be launching roving and fishing enquiries. It is submitted that arming a quasi-judicial authority with wide discretion would impair the rights of the assessees, who can be subject to whims and vagaries. The decisions in Harakchand Ratanchand Banthia v Union of India 1969 (2) SCC 166; Krishna Mohan v Municipal Corporation of Delhi 2003 (7) SCC 151 and State of Punjab v Khan Chand 1974 (1) SCC 549 were relied upon. 13. It was also argued by learned senior counsel that the lack of any specificity and guidance in the statute, with respect to the new terms introduced, means that Parliament never heeded to decisions by various courts, which had frowned upon the revenue's resort to such vague expressions or excuses for special audits. In case Parliament wished to override judicial view on this, the method kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy is." 15. Learned senior counsel also submits that the Supreme Court has recognized in Rajesh Kumar and Ors. v. Deputy CIT and Ors. [2007] 2 SCC 181 that a special audit under Section 142 (2A) has adverse consequences, because of the intrusion into the accounts of an assessee; the Court, therefore, required that principles of natural justice should be followed before an order under the provision was to be made. It was also stated that in the said decision, the Supreme Court had ruled that Section 142 (2A) cannot become a delegated power by the AO; the task of the special auditor should be specific, in order for a valid order. Counsel also relied on Sahara India (Firm), Lucknow v. Commissioner of Income Tax, [2008] 300 ITR 403 (SC) where the Supreme Court had the occ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the Section is not turned into an empty ritual. Needless to emphasise that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case." 16. On the question of whether Section 142(2A) involves giving a predecisional hearing to the assessee, the Court held: "The upshot of the entire discussion is that the exercise of power under Section 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in arriving at the computation of taxable income of those assessees whose accounts are of such nature that there is likelihood of income escaping the normal assessment procedure. It is also contended by the Revenue that in some cases, special audit may result in benefit to the assessee as well. Moreover, it is urged that Section 142(2A) already contains adequate safeguards and checks to govern the discretion vested in the AO and as such, cannot be said to suffer from the vice of arbitrariness. 19. It was argued that Parliament, after deliberation, felt that the judgments that had circumscribed the exercise of power to order special audit, in cases, which involved voluminous materials, or where there were multiple transactions, involving a complicated web of corporate or related entities, or where the assessment involves specialized nature of the assessee's business activities, for which detailed and careful scrutiny was necessary, needed reconsideration. In such cases, the special auditor merely assisted the AO in the statutory task, but did not actually perform it. It was emphasized that the AO had to perforce, furnish a copy of the special auditor's report, and adjudicate upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility: - This amendment takes effect from 1st June, 2013." 21. From the aforesaid, it is clear that the amended provisions of section 142(2A) provide that an AO may refer a case for special audit having regard to the nature and complexity of accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of the business activity of the assessee, and the interests of the Revenue. The order for special audit can be made by the AO only with approval of the Chief Commissioner or the Commissioner of Income-tax. Since, an order for special audit in the modified provisions of Section 142(2A) of the Act can be made by the AO only with the approval of the Chief Commissioner or the Commissioner of Income tax, hence, such order cannot be called arbitrary as it provides an in-built protection to the assessee against any unjust exercise of power by the AO; reliance is placed on Ramesh Chand Industries Ltd. v Union of India, (1998) 100 Taxman 570, 572 (Delhi). 22. Learned counsel submits that provisions of section 142(2A) as amended by Finance Act, 2013 is neither arbitrary nor unreasonable. It does not violate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h group, the law will not be condemned as discriminative, even if due to some fortuitous circumstance arising out of a peculiar situation, some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine as recognized in Purshottam Govindji Halai v. Shree B.M Desai AIR 1956 SC 20 and Kunnathat Thathuni Moopil Nair v. State of Kerala AIR 1961 SC 552. But in the application of these principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification; so long as it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways. 24. It is also stressed that the AO can order for special audit only with the previous approval of the Chief Commissioner or the Commissioner. Therefore, it can also not be termed as unreasonable. The amendment to Section 142(2A) by the Finance Act, 2013 is aimed at achieving the object of the secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion below sub-section (2) of section288, 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." After the amendment If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity 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 Principal Chief Commissioner or Chief Commissioner or Principal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amended provision was challenged in some writ petitions and the validity of the orders, made under Section 142 (2A) was challenged in others. The following tabular statement describes the particulars of the petitions, where the constitutional validity of the provision is challenged: S.No. Party Names W.P. (C) Date of Impugned Order Page No. Grounds for making of reference 1. Patanjali Ayurved Ltd. vs. Union of India & Anr. 2879/2014 25.03.2014 55-93 Annexure A 1. From the replies and submissions, the assessee has made the status of UNIT-III very complicated and has used it interchangeably with PFHPL in many instances. 2. Assessee holds 77% shares of PFHPL instead of the 49% provided for in the shareholders‟ agreement, making the entire transaction quite complex. 3. Assessee entered into Joint Venture Agreement with PFHPL for setting up Bio Gas Power Plant. This investment needs a detailed scrutiny as utilization of invested fund has tax implications. 4. There are numerous debit and credit transactions between the assessee and PFHPL. These transactions are very voluminous and need to be thoroughly audited. 5. Transactions with related party have not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure P-1 2. Despite being given repeated opportunities to do so, the assessee failed to produce books of accounts for perusal of the AO. 7-11. Shri Dhir Chand Sharma vs. Union of India & Ors. 9138/2015 9139/2015 9140/2015 9146/2015 9147/2015 30.03.2015 60-66J Annexure P-1 3. The assessee hasn't revealed complete details of all the bank accounts held by him. The assessee has also not given the bank statements of the accounts he submitted for consideration. 12-16. Smt. Gita Sharma vs. Union of India 9141/2015 9142/2015 9149/2015 (pg. 58) 9151/2015 9152/2015 30.03.2015 60-67K Annexure P-1 4. There have been a great number of cheque and cash credits in the bank accounts of the assessee during the assessment year in question, which need to be examined properly. 17-21. Shri Guru Prasad Sharma vs. Union of India & Ors. 9143/2015 9144/2015 9145/2015 9148/2015 9150/2015 30.03.2015 60-67L Annexure P-1 28. The rationale for the amendment, therefore, is that the erstwhile expression "nature and complexity of the accounts" had been interpreted in a restrictive manner by courts. The petitioner submits that such an amendment runs afoul of the guarantee under Article 14 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discriminatory and violative of the equal protection of the laws." 29. The above principles have been consistently followed by the courts in India and the law in relation to challenge on the constitutionality of an enactment on the touchstone of Article 14 was reiterated by the Supreme Court in Subramaniam Swamy v. CBI, (2014) 8 SCC 682 in the following terms: "Where there is challenge to the constitutional validity of a law enacted by the legislature, the Court must keep in view that there is always a presumption of constitutionality of an enactment, and a clear transgression of constitutional principles must be shown. The fundamental nature and importance of the legislative process needs to be recognised by the Court and due regard and deference must be accorded to the legislative process. Where the legislation is sought to be challenged as being unconstitutional and violative of Article 14 of the Constitution, the Court must remind itself to the principles relating to the applicability of Article 14 in relation to invalidation of legislation. The two dimensions of Article 14 in its application to legislation and rendering legislation invalid are now well recognised and these a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere possibility that the executive authority may abuse its discretion would not be a ground for declaring the legislation unconstitutional. In this context, the Supreme Court in Special Courts Bill, In Re, (1979) 1 SCC 380 held: "Whether a law conferring discretionary powers on an administrative authority is constitutionally valid or not should not be determined on the assumption that such authority will act in an arbitrary manner in exercising the discretion committed to it. Abuse of power given by law does occur; but the validity of the law cannot be contested because of such an apprehension. Discretionary power is not necessarily a discriminatory power." 33. Similarly in Naraindas Indurkhya v. State of MP, (1974) 4 SCC 788, the Supreme Court noted: "Mere possibility that power may be misused or abused cannot per se induce the Court to hold the statute unconstitutional." 34. The task that this Court is, therefore, faced with is to determine whether the grounds added by amendment to Section 142(2A) of the Act, are of such nature that they violate Article 14 of the Constitution. In this regard, the mere possibility that the AO may abuse the discretion that the provision vests i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the Section is not turned into an empty ritual. Needless to emphasise that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case." 35. On the question of whether Section 142(2A) involves giving a predecisional hearing to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, if he finds that this requirement has not been fulfilled then he must not approve of the same." (iv) In accordance with the principles of natural justice, the assessee must be given the opportunity of a pre-decisional hearing before action is taken under Section 142(2A). 37. While this decision of the Supreme Court was prior to the amendments inserted by the Finance Act, 2013, this Court sees no reason as to why these holdings of the Supreme Court in Sahara (supra) would not be applicable to the amended Section 142(2A). The fact that the AO's determination under this provision must be based on objective material and not subjective satisfaction, that he must make an honest attempt at understanding the accounts of the assessee, that the grant of approval by the higher authority must not be mechanical, that principles of natural justice must be followed by giving the assessee a pre-decisional hearing, would all be equally applicable even under the amended Section 142(2A). It would still be impermissible for the AO to shift the responsibility of auditing the accounts mechanically to the special auditor. In these circumstances, we fail to understand the petitioner's contention as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters and safeguards. Section 142(2A) already contains a safeguard in the form of requiring the prior approval of the Commissioner or the Chief Commissioner before the AO can order special audit under this provision. Moreover, the Supreme Court's ruling in Sahara (supra) insists that approval by the Commissioner or the Chief Commissioner must not be mechanical and must show application of mind. Additionally, after the Sahara (supra) decision, a pre-decisional hearing must also be mandatorily given to the assessee and the AO himself must arrive at the decision to order a special audit based on objective material and not just subjective satisfaction. Thus, it becomes clear that through the procedural safeguards already envisaged in the plain text of the statute, as well as those read into the statute by the Supreme Court in Sahara (supra), the impugned provision, even with the amendments, cannot be classified as arbitrary or conferring un-canalized discretion on the AO. 41. In relation to the amendments, the primary contention of the petitioners is that the amendments radically alter the scheme of the provision and confer excessive and wide discretion on the AO. It is contended by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable. 43. The petitioner contends that the legislature has sought to widen the ambit of Section 142(2A) so as to negate judicial pronouncements on this particular provision and travel beyond the limits set forth by judicial interpretation. That the purpose of introducing the said criteria in Section 142(2A) by way of amendment, was to widen the ambit of the impugned provision from that which had been set by judicial pronouncements, is evident from the Memorandum accompanying the Finance Bill, 2013 itself which states that the term "nature and complexity of accounts" had been interpreted in a very restrictive manner by courts and, therefore, the provision was being amended to insert new criteria. Aside from the fact that it would be well within the Legislature's prerogative to do so, in taxation matters especially, the law has been settled by the Supreme Court's decision in Indian Aluminium Ltd. v. State of Kerala, (1996) 7 SCC 537 in the following terms: "In exercising legislative power, the Legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity. The importance and relevancy of the legislation cannot be underestimated and it is a power available with the Assessing Officer to aid and assist him. Accounts should be accurate and provide real time record of the financial transactions of the assessee. Preparation of accounts is the work of the accountant on the payrolls or employed by the assessee. In order to ensure reliability and accuracy, enterprises resort to internal audit and an external audit which can be a statutory audit. Internal audits are normally conducted in house generally by acquainted or qualified accountants. Statutory audit is compulsory under the Companies Act, 1956 or when stipulated by the Act and accounts have to be audited by a qualified Chartered Accountant. Chartered Accountants are not ordinary accountants but specialists who have successfully undergone academic study and have extensive practical experience and trained for the said work. Curriculum requires article ship under a mentor who is himself a Chartered Accountant with some years of experience. As opposed to an ordinary accountant, a Chartered Accountant with his experience and academic background is in a better position to investigate, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxable income of an assessee." 46. Thus, it is clear that Section 142(2A) was enacted to facilitate investigation into the accounts of an assessee for the proper determination of tax liability. It deals with cases where the AO needs to take the assistance of a Chartered Accountant in order to be able to understand the assessee's accounts and determine the correct tax liability. It is, therefore, abundantly clear from the aforesaid dictum, that Section 142(2A) confers an important power on the Revenue to curb tax evasion and balances it with the inconvenience that an assessee may face. The impugned amendments to Section 142(2A) also have to be viewed in that light and hence must be considered to be reasonable. 47. The petitioners had urged that since it is already subjected to statutory audit under other provisions of the Income Tax Act as well as other legislations, the need to have recourse to Section 142(2A) does not arise. A similar argument was considered and rejected earlier, by the Madhya Pradesh High Court, which this court is in agreement with. Dealing with the argument in the context of Section 142(2A), a Division Bench of the Madhya Pradesh High Court in Mohan Tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the Legislature, as per the law laid down in the aforesaid ruling of the Supreme Court. The second batch 50. These batch of cases, also included petitions, where the assessees challenge the orders, made under Section 142 (2A) as untenable. The grounds for such orders are varied. A tabular chart, disclosing particulars relating to each such petition, is shown below: S.No. Party Names W.P. (C) Date of Impugned Order Page No. Grounds for making of reference u/s 142(2A) 1. M/s Sahara India Financial Corporation Ltd. Lucknow vs. Commissioner of Income Tax. Delhi (Central-I) & Ors. 3222/2008 28.12.2007 137-138 Annexure P-10 1. Many expenses pertaining to previous years were included in the year under review and no item wise list of Fixed Assets particulars was submitted. Difficult to thus verify quantum of depreciation claimed in tax returns. 2. Expenses incurred by assessee company seemed to be relating to a sister concern, or in the nature of personal/non-business expenses or prior period expenses. 3. Expenses under different heads were transferred to the company‟s sister concern and vice versa and no basis of these transactions could be traced. 4. Many tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts among various sister concerns. Booking of transactions through journal vouchers especially at the year-end renders the accounting quite complex as it is not easy to establish whether income and expenditure have been recognised/ booked as per accounting norms or as per convenience. 5. Sahara India Financial Corporation Ltd. Lucknow vs. Commissioner of Income Tax, Delhi (Central -I), New Delhi & Anr. 14141/2009 24.11.2009 35-36 Annexure P -1 1. Method of accounting followed in respect of broken period interest on securities. 2. Application of variable rates as interest on deposits. 3. Booking of expenditure of sister concerns through JVs making it difficult to decide its allowability u/s 37 of IT Act. 4. Lack of transparency & consistency in deduction of TDS on payment of interest on depositor's account. 6. M/s Sahara India Financial Corporation Ltd. Lucknow vs. Commissioner of Income Tax, (Central - I) New Delhi & ors. 886/2011 10.12.2010 36-37 Annexure P-1 5. Booking of expenditure not relating to previous year. 6. Intermingling of accounts among various sister concerns making it difficult to separate mere cash transactions. 7. Leisure and personal expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure not relating to the previous year. 5. There is a lot of intermingling of accounts among various sister concerns. Booking of transactions through journal vouchers especially at the year-end renders the accounting quite complex as it is not easy to establish whether income and expenditure have been recognised/ booked as per accounting norms or as per the convenience. 14. Sahara India Financial Corporation Ltd., Lucknow vs. Commissioner of Income Tax, Delhi (Central) - I New Delhi & Ors. 3272/2011 21.03.2010/22.03.2010 46-107 Annexure P-1 1. Accounts are audited under various schemes bearing same name and same address under different schemes leading to the conclusion that large amounts of money has been repaid to the same persons.. No PAN numbers or depositor ledgers for 1508 branches have been produced for examination. 2. There was lack of transparency & consistency in deduction of TDS on payment of interest in depositor's account. 3. Special details with respect to lapsed deposit accounts, both regular and irregular, were not furnished by the assessee despite repeated requests for the same. 4. Needs to be examined whether the assessee company has claimed income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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