If Nature of account is complex, Special Audit u/s 142(2A) may be ordered in the Interest of revenue

RELEVANT PARAGRAPH

Having heard learned counsel for the parties, we have perused the impugned order and the material available on record. The apex Court, in the case of Rajesh Kumar Vs Dy. Commissioner of Income Tax reported in (2006)287 ITR 91 while considering the scope of Section 142(2A)of the Act has held that before issuing the direction for the special audit it is necessary to give opportunity to the assessee. It appears that having regard to the said decision the proviso to Section 142(2A)of the Act has been added providing an opportunity to the assessee before issuing the direction for the special audit. However, the issue involved in the case of Rajesh Kumar (supra)has been referred to the larger Bench. The larger Bench of the apex Court in the case of Sahara India (Firm (supra)has affirmed the decision in the case of Rajesh Kumar (supra).It has been held that the opportunity to the assessee is necessary before issuing the direction under Section 142(2A)of the Act. The apex Court has held as follows :

“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 express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in section 142(2A)barring the giving of reasonable opportunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar’s case.”

The apex Court has further held as follows :

” 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 dis junction. In other words, the twin conditions of “nature and complexity of the accounts ” and “the interests of the Revenue ” are the pre-requisites 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 the accounts of the assessee to be complex, in order to protect the interests of the Revenue, recourse to the said provision can be had. The word “complexity ” used in section 142(2A)is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. v. CIT, it is a the impugned order and the material available on record. The apex Court, in the case of Rajesh Kumar v. Dy. Commissioner of Income Tax reported in (2006)287 ITR 91 while considering the scope of Section 142(2A)of the Act has held that before issuing the direction for the special audit it is necessary to give opportunity to the assessee. It appears that having regard to the said decision the proviso to Section 142(2A)of the Act has been added providing an opportunity to the assessee before issuing the direction for the special audit. However, the issue involved in the case of Rajesh Kumar (supra)has been referred to the larger Bench. The larger Bench of the apex Court in the case of Sahara India Firm (supra) has affirmed the decision in the case of Rajesh Kumar (supra).It has been held that the opportunity to the assessee is necessary before issuing the direction under Section 142(2A)of the Act.The apex Court has held as follows :

“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 express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in section 142(2A)barring the giving of reasonable opportunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar’s case.”

The apex Court has further held as follows :

” 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 dis junction. In other words, the twin conditions of “nature and complexity of the accounts ” and “the interests of the Revenue ” are the pre-requisites 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 the accounts of the assessee to be complex, in order to protect the interests of the Revenue, recourse to the said provision can be had. The word “complexity ” used in section 142(2A)is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. v. CIT, it is a auditors. The petitioner has prepared the provisional balance-sheet and profit and loss account and on the basis of such provisional balance-sheet and profit and loss account got the accounts audited through the private Chartered Accountant company and submitted the income-tax return on the basis of the provisional balance-sheet and the profit and loss account annexing the auditor’s report under Section 44AB of the Act. Such auditor has pointed out several discrepancies.

This shows that the books of account have never been properly audited on the basis of final balance-sheet and profit and loss account and the final authenticated balance-sheet and profit and loss account have never been prepared and got audited. The assessing authority, in its order, has pointed out that the books of account have never been produced despite several opportunity being given. For the sake of example, one of the paragraphs in the reply, annexed as Annexure ‘5’ to the writ petition, is referred herein below to show that the petitioner has admitted the discrepancies in the figures shown in the provisional balance-sheet :

“a)That the assessee’s company has shown the closing cash-in-hand as on 31.03.2007 Rs.(-)698960070. 16 including the cash-in-hand account group no.24.110 cash with SDO 75612.11,Cash with PI Rs.34159.20 and cash with TI Rs. 7697753.47. It is hereby submitted that the assessee company audit as on 31.03.2006 was not finalised till the submission of return for the F.Y.2006-07 i.e.A.Y.2007- 08 and the assessee company has taken opening balance as on 31.03.2007 Rs. 175909955. 00 in place of opening cash Rs.694044052. 00 and the net effect of closing cash has comes to Rs.523050115. 16 and after taken the actual opening cash balance from audited final account Rs 694044052. 00 the net cash effect will be comes as on 31.03.2007 Rs.4917905.54. A copy of ledger account from the books of the assessee’s company, permanent imprest account group 24.210,temporary imprest group 24.220,cash with SDO group a/c 24.260 is enclosed for your kind perusal along with copy of Audited balance sheet audited by the statutory auditor as on 31.03.2006 is enclosed for your kind perusal. The detailed annexure-A is enclosed separately.”

In the circumstances, we are of the view that the present is the case where the opportunity has been given to the assessee and there are proper reasons for forming the opinion that the nature of the account is complex and in the interest of revenue, special audit is necessary. Therefore, the direction for the special audit for the reasons stated in the order cannot be said to be without any material. We are also of the view that on the facts and circumstances the approval granted by the Commissioner of Income Tax, Varanasi, cannot be said to be mechanical and without application of mind. The proceeding under Section 142(2A)of the Act is not strictly a judicial proceeding and, therefore, the elaborate reasoning is not required to be given. In the case of Rajesh Kumar (supra)the apex Court has held that the hearing given need not be elaborate. The notice issued may only contain briefly the issues which the Assessing Officer thinks to be necessary. The reasons assigned, therefore, need not be detailed one . We are further of the view that under Article 226 of the Constitution of India, in a writ jurisdiction, this Court can consider whether there was material for the issue of direction and not the sufficiency of the material.

It may be mentioned here that after insertion of the proviso to Section 2D to Section 142(2A)of the Act by the Finance Act,2007 with effect from 1.6.2007 the remuneration of the Accountant is now payable by the Chief Commissioner or the Commissioner and, therefore, there is no financial burden on the petitioner. It may be mentioned here that in paragraph (e)of the reply, referred herein above, the petitioner admitted that the Auditor will take six months ‘time to complete the audit, which itself shows the complexity of the account.

Unless the final balance-sheet and profit and loss are being prepared by the auditor after examining the books of account verifying the various entries, etc. the correct income cannot be deduced for the purposes of assessment. This exercise cannot be done by the assessing authority during the course of assessment proceeding. This exercise is only possible by the Chartered Accountants who are expert for the job. Therefore, direction to get the account audited and to prepare final balance-sheet and profit and loss account cannot be said to be without jurisdiction or exceeding to jurisdiction or outside the ambit of the provision.