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TMI Blog2021 (11) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... aside the explanation as not being tenable without assigning any reason for stating so. On the query regarding method valuation of closing stock for year ending 31/03/2013 and 31/03/2014 the assessee replied that upto 31/03/13 since it was following cash system of accounting no stock was accounted for while thereafter it followed the Percentage Completion Method (PCOM) for accounting for inventory, valuing it at cost or net realizable value which ever was less. To this the AO notes that no calculation of working of inventory has been provided by the assessee. To the query raised regarding how PCOM method was applicable to the assessee, the assessee replied that its activities fell under the scope of transactions covered By the guidance note issued by ICAI on Accounting for real estate transactions which recommended PCOM method. It was also explained as to how its activities fell under the said guidance note. To this the AO noted that why this method was not adopted in earlier years also. On being asked to explain basis of ascertaining revenue from operations, due reply explaining the same was filed. To this the AO notes simply that it is not verifiable since assessee pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence which can possibly be drawn in the facts of the present case as narrated above, is that the reference to special audit was made only to buy further time for completing the assessment, having been made at the fag end of the period for completion of assessment that too merely for obtaining further details and information and not because any complexity was noted in the accounts of the assessee. The reference to special audit, therefore we hold, is an invalid reference, contrary to law. Assessment order passed therefore in the extended period, as a consequence of the invalid reference, we hold, is barred by limitation and hence void. Appeal of assessee allowed. - ITA No. 1369/Chd/2019 - - - Dated:- 26-10-2021 - Shri Satbeer Singh Godara, Judicial Member And Smt.Annapurna Gupta, Accountant Member For the Assessee : Shri A.K. Jindal, CA And Smt. Rattan Kaur, CA For the Revenue : Smt.C.Chandrakanta, CIT ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER: The present appeal has been preferred by the assessee against the order of the Learned Commissioner of Income Tax(Appeals)- I, Chandigarh [ (in short the Ld. CIT(A)] dated 27.08.2019 relating to assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by placing before us various decisions of the Tribunal and High Courts holding to the contrary. The submissions in writing to this effect were also filed alongwith the copies of the case laws relied upon by the Ld. Counsel for the assessee. 8. We have heard both the parties. We have also gone through the various case laws relied upon by them. We find that the decision of the Hon ble Apex Court in the case of Rajesh Kumar(supra), relied upon by the Ld. DR to support her contention that the reference to special audit is not appealable, has been considered in various decisions of the Tribunal and High Courts where the Revenue had identically opposed the adjudication of this issue. We find that taking note of the said decision this argument of the Revenue has been dismissed by the ITAT, holding that though order directing special audit is otherwise not appealable but while challenging the assessment order as being barred by limitation, the validity of the order directing special audit u/s 142 (2 A) can be challenged, albeit for this limited purpose alone. It has been held that for coming to a conclusion that the assessment order is barred by limitation, all aspects integral to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us is challenged for assessment being barred by limitation, we are well within our rights to consider all material aspects which were considered while framing the assessment order u/s 143(3) of the Act. 9. Further, the Hon ble Delhi High Court in the case of Consulting Engineering Services Private Limited Vs. ITAT Another in W P(C) 7734/2017 dated 01.09.2017, has categorically held that it is well within the jurisdiction of the ITAT to entertain the grounds relating to validity of reference to special audit, after noting that the observation to the contrary by the Apex Court in the case of Sahara India (supra) was specific to those cases. The relevant findings are as under : 4. The Petitioner challenges an interim order dated 8th August, 2017 passed by the Income Tax Appellate Tribunal ( ITAT ) in Petitioner s appeal being ITA No.1443/Del/2014 for the Assessment Year ( AY ) 2008 2009. By the said impugned order, the ITAT has declined to permit the Petitioner to raise additional ground 22 which reads as under: 22. That the assessment order passed on 25.06.2012 is illegal, bad in law, without jurisdiction barred by time limitation as the reference ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or reasons recorded by the A.0 prior to re-opening of assessment cannot be challenged separately. But an assessment order can be challenged in an Appeal before the Ld. CIT(A) or the ITAT on the ground that the re-opening itself is bad in law, as the notice is illegal or not served or that there is no material based on which reasons were recorded etc. Every facet of an assessment can be challenged in appeal to deny once liability to be charged to tax or to challenge the quantum of tax demanded. In the case of hand, the legality of the orders passed u/s 142(2A) or u/s 142(2C) can be challenged to demonstrate that the order of assessment has been passed beyond the period of limitation. Thus, we reject this contention of the Ld. CIT. DR. 7. A similar view was taken by the ITAT in Unitech Ltd. v. Additional Commissioner of Income-tax, Range- [2016] 74 taxmann.com 121 (Delhi-Trib.). The order of the ITAT on the same lines was upheld by this Court in Principal Commissioner of Income-tax v. Nilkanth Concast (P.) Ltd. [2016] 70 taxmann.com 157 (Del). 8. The Court notices that the observation in Sahara India (Firm) v CIT (supra) was in the peculiar facts of that case and was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal including the above additional ground, in accordance with law, while passing the final order. 9.1 It is, therefore, evident from the above that the validity of reference u/s 142 (2 A) of the Act is appealable when it has been so challenged for the purpose that the assessment order so passed, in consequence to the extended time available on account of the said reference, was time barred. In the present case the additional ground raised before us is to this effect only that the assessment order was barred by limitation, on account of the reference to special audit being illegal. The objection of the Ld.DR therefore to the admission of the additional grounds raised by the assessee, are dismissed. 10. Further considering that the additional ground raised before us challenges the validity of the assessment order passed on account of it being barred by limitation, the said additional ground is a legal ground and considering the decision of the Hon ble Apex Court in the case of National Thermal Power Corporation (supra) the same is being admitted for adjudication. 11. We shall now proceed to adjudicate the additional ground raised, more specifically whether reference made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the AO s opinion has to be based on fulfillment of the twin conditions of the(i) nature and complexity of accounts, and (ii) the interest of Revenue, and has interpreted the term complexity to mean state of being intricate or complex. It went on to hold that what is complex depends on each persons understanding and what is complex for one may be simple for another. It was held therefore, that the opinion of the AO must be based on objective criteria and not just a subjective satisfaction. That the reference cannot be made merely for shifting his responsibility of scrutinizing the accounts to a special auditor. In the case of Sahara India(Firm) vs CIT 300 ITR 403 (SC) the Apex Court analyzed and interpreted the provisions of section 142(2 A) to the above effect as under: A bare perusal of the provisions of sub-s. (2A) of the Act would show that the opinion of the AO 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval must reflect the application of mind to the facts of the case. 16. In the case of Rajesh Kumar Ors vs DCIT ors 287 ITR 91 (SC), the section was interpreted likewise as under: Interpretation and application of s. 142(2A) of the Act, thus, falls for our consideration. 10. We may at the outset notice that the following are the relevant factors for invoking s. 142(2A) of the Act : (i) The nature of accounts (ii) Complexity of accounts and (iii) Interest of the Revenue. The formation of opinion of the AO must be on the premise that while exercising his power regard must be had to the factors enumerated therein. The use of the word 'and shows that it is conjunctive and not disjunctive. All the aforementioned factors are conjunctively required to be read. The formation of opinion indisputably must be based on objective consideration. 11. The expression complexity would mean the state or quality of being intricate or complex or that it is difficult to understand. Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature. No order can be passed on whims or caprice. 17. In the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (4) Detailed of unclaimed refunds and why same be not disallowed. (5) Why profit on sale of shares may not be treated as business income. (6) Details of how inventory determined as on 31/3/14 vis- a- vis previous year. (7) How POCM method appealable to assessee on meets criteria under POCM. (8) Bais of ascertaining revenue from operations. (9) Show cause why not an amount of ₹ 1050. 40 cr be added back to the returned income as same has been reduced in revised return. Adjourned to 20/12/16 at A. M. Sd/- 19. On the said date the assessee filed reply and the order sheet entry notes case adjourned to 23/12/16 . But another entry on the same date subsequently records issuance of show cause notice to the assessee u/s 142 (2A) of the Act. On 26/12/2016 the assessee files reply to the show cause notice which, the order sheet entry notes as discussed with the counsel and thereafter on 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and the cumulative effect of all the heads of revenue, expenditure, inventories, fixed assets etc., have been accounted for in the said assessment year. It is stated as under: The books of the accounts of the Corporation were being maintained under Cash System of Accounting and all the cost of the Project other expenditure incurred thereon were accounted for in one control account i.e. infrastructure and Industrial Area Development Expenses Recoverable and recoveries from the allottees were netted in said control account. Said control account reflects excess of developmental expenditure over recoveries and is disclosed in the financial statements under Other Current Assets . A sum of ₹ 5671.59 Crore (net of recoveries] was parked in the control account as at 31st March, 2013. After review of the control account i.e. Infrastructure and Industrial Area Development Exp. Recoverable , it has been bifurcated into various functional heads of accounting e.g. - Inventories in the form of unsold land/plots -Cost of the land acquired for existing projects as well as future projects. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 10.09.1990 which provide for accounting of interest income on loans financed to industrial projects and interest on instalments due on the cost ofindustrial plots/sheds etc., on cash basis. In Assessment Year 2014-15, the Corporation has computed the income from Industrial Area Activity earned till 31.03.2014 in A.Y. 2014-15. Due to change in the system of accounting from cash basis to accrual basis, the income from IA Activity should not be computed in a manner adopted in earlier Assessment Year(s). 4. Detail of how inventory determined as on 31.03.2014 viz-a-viz 31.03.2013. We submit that the Corporation was following cash system of accounting for maintaining its accounts till F.Y. 2012-13, therefore, no inventory was recognized in the books of accounts till 31.03.2013. However,, the Corporation changed its system of accounting from cash basis to accrual basis w.e.f. 01.04.2013 i.e. F.Y. 2013-14 and accordingly, inventory has been determined and accounted for in the books of accounts on the basis of Percentage of Completion Method (POCM) read with Guidance Note on Accounting for Real Estate Transactions issued by Institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities. Since the activities undertaken by the Corporation fall under the scope of transactions covered under the Guidance Note on Accounting for Real Estate Transactions , therefore, the POCM is applicable to the Corporation. 6. Basis of ascertaining revenue from operations. Revenue from Industrial Infrastructure activities is recognized in accordance with the provisions of Accounting Standard (AS) 9 on Revenue Recognition, read with Guidance Note on Recognition of Revenue by Real Estate Developers (Revised 2012) . Revenue is computed based on the Percentage of Completion Method (POCM) when following conditions are satisfied: - All critical approvals such as environmental clearances, approvals of plan and design, title to land or other development right have been obtained. - The stage of completion of the project has reached reasonable level. A reasonable level of development is achieved if expenditure incurred on construction and development cost (excluding cost of land cost) is not less than 25% of the estimated construction and development cost and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .03.2014 (including the years during which income has been computed at ₹ 1,050.40 Crore) in Assessment Year 2014-15 and the original return was filed showing entire income ofindustrial Area Activity earned till 31.03.2014. The Corporation has revised the return by reducing income of ₹ 1,050.40 Crore out of total income for Assessment Year 2014-15 because tax has already been levied by the Department on the amount of ₹ 1,050.40 Crore. In case, the said income is not reduced out of taxable income of Assessment Year 2014-15 it would amount to double taxation i.e. once paying tax in Assessment Year 2005-06 to Assessment Year 2013-14 on the basis of assessment made by the Department and again paying tax in Assessment Year 2014-15 on the basis of income declared in accounts. In case at a later stage, the appeals of the assessee are allowed by ITAT and income assessed from Industrial Area Activity is deleted, in that case, assessee Corporation agrees to pay the tax in Assessment Year 2014-15 as the same can be done u/s 154/155 while giving appeal effect to the orders of ITAT for years in appeal. The above exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Interest on allottees 5,39,94,85,248.00 4. Rent 10,08,845.00 5. Misc. Income 5,87,50,28,173.00 6. Surrender/Resumption 21,67,66,905.00 7. Lease Rent 49,19,306.00 8. Processing Charges 17,13,22,463.00 9. EDC Charges (DATED P-HR) 680935032 10. Internal Development Charges 19351482 11. Licence fee Karnal 6092.00 12. Contractor Accounts 98,81,231.00 13. Grand Total 1,00,00,000.00 Grand Total(A) 82,88,25,96,963.00 A Total Expenditure Control Account 1,39,59,85,23,797.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already been levied by the department on this amount it would be double taxation. In case at later stage the appeals of the assessee are allowed by ITAT the assessee agrees to pay tax in A.Y.2014-15, The explanation provide by you not seems to be contradictory On one side you are reducing the amount and other side the appeals also being contested. In view of the above facts and circumstances of your case and considering the nature and complexity of accounts, volumes of accounts and multiplicity of transactions, your case is proposed for audit u/s 142(2A) of the IT Act, 1961. You are hereby given an opportunity of being heard in this regard and your case is fixed for 26.12.2016 at 11.00 AM. 23. A perusal of the above show cause notice reveals that on the query raised asking explanation of how figures of industrial activity upto 31.03. 2013 were incorporated in the impugned years balance sheet, the assessee had explained that it had switched over from cash system of accounting done upto 31/03/13 to accrual system and had also explained the manner of doing so as also furnishing year wise bifurcation of expenses and recoveries in the IA account as on 31.03. 2013.To this the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and the nature and complexity of accounts of the assessee, volume of transactions and multiplicity of transactions, special audit u/s 142 (2 A) of the Act is proposed. 30. As is evident from the above the reason for referring the accounts of the assessee to special audit, highlighted above in italics by us, by the AO does not point out a single complexity in the accounts of the assessee. On the contrary he has only pointed out certain information still lacking in the reply submitted by the assessee. With regard to each explanation he has stated that the assessee has either not given certain explanation required by him or certain working or calculations had not been explained. It is not coming out from the notice, therefore, that there was any complexity in the nature of the accounts of the assessee which had come to the notice of the AO. Nor has the Ld.DR been able to enlighten us as to what complexity was pointed out by the AO in the accounts of the assessee for enabling reference to a special audit. 31. What is clearly evident is that the reference for special audit was merely made for obtaining certain explanation and information which were further required by the AO f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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