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TMI Blog2019 (9) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... eries raised therein was issued on 30.05.2019. Another notice dated 03.06.2019 in the form of corrigendum to show cause notice was issued, calling upon the Petitioner to produce the books of accounts. The questionnaire raised by the Assessing Officer was not specifically answered, and if the same had been satisfactorily answered, he would have found the same to be useful for verification of various claims made by the assessing companies in its return of income for the assessment year under consideration [AY 2016-17]. Petitioner was given sufficient opportunity of being heard. Thus, the contention of violation of principles of natural justice is also without merit. . Sections 142 (2A) (2D), 142 (3) and 142 (4) are the relevant provisions dealing with the considerations that are to be weighed while directing special audit. The Supreme Court has also laid down the guiding principles relating to conduct of special audit. In essence, the Supreme Court has underlined that the opinion required to be formed must be based on objective criteria, and not subjective satisfaction. On a reading of the impugned order, it is demonstrated that the Assessing Officer has examined the objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning its books of account and filing its tax return. For assessment year 2016-17, the year under consideration, the Petitioner originally e-filed its return of income declaring total income of ₹ 44,64,06,770/-. The return of income was revised declaring same total income. The case of the Petitioner was selected for scrutiny through CASS and notice was issued under section 143(2) of the Act. During assessment proceedings, Respondent No.1 called for various information, details and data, which were duly furnished by the Petitioner from time to time. The Petitioner filed, before the Revenue, a copy of the order dated 14.03.2019 passed by Securities Exchange Board of India ( SEBI ). In the said letter, the Petitioner explained that SEBI, vide order dated 14.03.2019, directed the Petitioner and M/s. Religare Finvest Ltd. ( RFL ), subsidiary of the Petitioner, to initiate steps to recall all the loans diverted to the companies associated with the former promoters. 6. Petitioner further represented that the new professional management of the Petitioner is taking all steps to recall the loan and that the transactions referred in the SEBI order, in any case, had no effect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s several subsidiaries, and explained that all the transactions entered into by the Petitioner with its sole subsidiary viz Religare Housing Development Finance Corporation are duly disclosed in the related party transaction schedule of audited financial statement. Regarding SEBI order dated 14.03.2019, it was argued that vide an earlier letter dated 06.05.2019 filed before principal CIT, Petitioner had elaborately explained the background of the aforesaid order, and that there was no revenue loss to the Income Tax Department. Thus, essentially the contention of the Petitioner was that there was no complexity in the books of account which would warrant the Respondent No. 1 to direct special audit. 10. Respondent No. 1 considered the reply furnished by the Petitioner and after seeking approval of the Principal Commissioner of Income Tax, passed the order dated 06.08.2019 and directed M/s Das Gupta and Associates, Chartered Accountants to audit the accounts of the Petitioner as per the terms of reference within a period of ninety days. WP (C) NO. 9358/2019 11. In the present case, the Petitioner, Religare Finvest Limited (RFL) is a subsidiary of the Pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is not in a position to comprehend. The provision of Section 142 (2A) cannot be construed to mean that in every case where there is a large volume of accounts and multiplicity of transactions, the Assessing Officer can direct the conduct of a special audit under the aforesaid provision. Such an interpretation would be highly irrational and illogical in as much as, in case of every assessee having substantial turnover and reported taxable income, it would become possible to order conduct of a special audit in routine merely on the ground that the volume of accounts and multiplicity of transactions is large. The nature of business of the Petitioner which involves dealing with lakhs of people, would necessarily result into a high turnover, which is more than ₹ 2000 crores. This does not mean that in case of an assessee having turnover in excess of ₹ 2000 crores, special audit has to be directed as a matter of rule or mechanically. He relied upon the decision of the Supreme Court in the case of Sahara India (Firm) (supra) to contend that the impugned order is wholly without jurisdiction, illegal and bad in law. Mr. Vohra rebutted all the comments/findings of Respondent No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion the nature and complexity of the accounts , w.e.f. 1.6.2013. Prior to the amendment, special audit under Section 142(2A) of the Act could have been directed only in case the accounts of the Assessee were complex in nature and having regard to the interests of the revenue. The reason behind the amendment can be inferred from the Memorandum Explaining provisions in the Finance Bill, 2013, which reads as follows: Direction for special audit under sub-section (2A) of section 142 The existing provisions contained in sub-section (2A) of section 142 of the Income-tax Act, inter alia, provide that if at any stage of the proceeding, 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 approval of the Chief Commissioner or Commissioner, direct the assessee to get his accounts audited by an accountant and to furnish a report of such audit. The expression nature and complexity of the accounts has been interpreted in a very restrictive manner by various courts. It is, therefore, proposed to amend the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore dealing with the constitutionality of the aforesaid amendment, it would be fitting to recollect the basic principles that must be kept in mind by the Courts while dealing with the challenge to the constitutionality of a legislative enactment. These principles were succinctly stated by the Supreme Court in Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar, AIR 1958 SC 538: 14. The principle enunciated above has been consistently adopted and applied in subsequent cases. The decisions of this Court further establish- (a) that a law may be constitutional even though it relates to a single individual if, on account of some special circumstances or reasons applicable to him and not applicable to others, that single individual may be treated as a class by himself; (b) that there is always a presumption in favour of the constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles; (c) that it must be presumed that the legislature understands and correctly appreciates the need of its own people, that its laws are directed to problems made man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislation and rendering legislation invalid are now well recognised and these are: (i) discrimination, based on an impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders-if such conferment is without any 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. xxxxxxxxx 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 ..... ubt, seek explanation from the assessee. But opinion required to be formed by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by another person. Therefore, it would be his duty to examine on receipt of his proposal, whether the Assessing Officer has correctly done it or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercise his discretion in a reasonable manner by taking into account all relevant and germane aspects. The exercise of the power would be subject to the guiding principles laid down by the Supreme Court in Sahara India (Firm) (supra), as notice by this Court in Sahara India Finance Corporation Ltd.(supra). 19. Now let s examine the reasons assigned by Respondent No. 1 in the impugned order dated 06.018.2019 directing special audit. While testing the reasoning on the touchstone of the principles enunciated by the Supreme Court in Sahara India (Firm) (supra), we would like to underscore that while exercising jurisdiction under Article 226 of the Constitution of India, the Court does not be sit in appeal over the order passed by the Assessing Officer. The subjective satisfaction is a subject matter which falls exclusively within the domain of the Assessing Officer. In Article 226, we would not like to tread or invade into the jurisdiction of the AO. As long as the exercise of the jurisdiction is based on cogent reasons, Court would certainly have the jurisdiction to examine whether the discretion to refer the account for special audit was exercised objectively, or not. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts of the assessee: During the course of assessment proceedings various anomalies and complexities were noted in the books of accounts of the Assessee company. These were communicated to assessee company vide show cause notice dated 30.05.2019 and subsequently vide show cause notice issued under section 142(2A) of the Act. The reply of the assessee company filed on 06.06.2019, 12.06.2019, 17.06.2019 and 28.06.2019, in this regard, have been considered and the same has been disposed of issue wise as under: a. The assessee company is a Non-banking Finance Company (NBFC) engaged in the business of financing. The assessee borrowed loans from Various Banks, Financial Institutions and others on which interest was paid. The said loans were given to various parties and interest received from them was declared as income. Total loans of ₹ 682 Crores borrowed by the assessee company and total amount of ₹ 232 Crores lent by the assessee were outstanding as on 31/03/2016. The assessee declared interest income of ₹ 125.40 Crores during the year and has claimed interest expense of ₹ 110 Crores. The assessee has also claimed professional / litiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minous information in the form of agreement; balance sheets etc. on record which needs in depth verification for allowability of the said claim. The said information runs into 9 bulky volumes of more than 1000 pages. Justification regarding the investment into the subsidiary / associated companies/ partnership firms and resultant gain/loss has also not been provided. c. The assessee has made provision of ₹ 279.25 crores for diminution in value of investment made in subsidiary company during the year. Each year such provisions are made for diminution in the value of shares of subsidiary company which creates a suspicion as to how the value of investment in subsidiaries can diminish at such a level. Despite being confronted on this issue no satisfactory reply with the help of relevant supporting evidences could be furnished by the assessee. In fact the reply needs in depth backward integration and verification of the reasons/business expediency/sources having revenue implication that ultimately lead to such diminution. d. The assessee claimed legal and professional fees of ₹ 3,53,45,032/- in its profit and loss account. The assessee was as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount. However, the assessee stated in para 11.1 of its submissions as under: With reference to the same, it is submitted that the assessee has already submitted ledger accounts, party-wise details and relevant information with respect to the points raised vide the subject mentioned SCN. The relevant extracts of the documents relating to the anomalies as mentioned in the SEBI report have been enclosed as per the reply in the preceding paras. However, of your goodself required any other information in respect of books of accounts, then please let us know specific requirement, the assessee shall submit the same .. (f.ii) This shows that the assessee is reluctant to produce the books of account, as it will reveal the true nature of the transactions undertaken by the assessee. It must be appreciated that ledgers of particular expenses helps to understand the nature of the said expense but the books of account need to be verified in detail to understand the overall scenario of the business of the assessee and transactions undertaken by it. Non-production of the books of account further strengthens the view about the correctness of the same. g. As o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the department and therefore, assessee s interest are not affected in any way except to the extent of correct determination of taxable income. i. In view of the above discussed facts the statutory provisions with regard to ordering of special audit is satisfied in this case in view of the basic two ingredients i) Nature and complexity of accounts, its voluminous, doubts about the correctness of accounts, multiplicity of transactions, specialized nature of business activity of the assessee, and ii) Interest of the revenue for forming an opinion for the purpose of special audit u/s 142(2A) is satisfied in this case. j. Therefore, I am of the considered opinion in view of foregoing discussion and complexity involved in information submitted and in the interest of revenue, that this is a fit case for invoking provisions of section 142(2A) of the Income Tax Act, 1961 so as to determine correct and true income of the Assessee company for the A.Y. 2013-14. (Emphasis supplied) 21. The Assessing Officer deduced that the queries raised by the questionnaire dated 30.05.2019 remain conclusively unanswered. The Assessing Officer has held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of corrigendum to show cause notice was issued, calling upon the Petitioner to produce the books of accounts. The questionnaire raised by the Assessing Officer was not specifically answered, and if the same had been satisfactorily answered, he would have found the same to be useful for verification of various claims made by the assessing companies in its return of income for the assessment year under consideration [AY 2016-17]. The Petitioner also placed reliance on the judgment of the Kerala High Court in Muthoottu Mini Kuries v Deputy Commissioner of Income Tax 250 ITR 455 (Kerala) to contend that the direction to the assessee to get accounts audited without hearing the assessee would be unjustified. However, the ratio of the said judgment is not applicable to the facts of the present case. Each case turns on its own facts and the present case is distinguishable from the said judgment keeping in view the facts and circumstances in both the cases. For the foregoing reasons it is, thus, evident that the Petitioner was given sufficient opportunity of being heard. Thus, the contention of violation of principles of natural justice is also without merit. 23. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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