Conclusion: Since AO had taken recourse to the provisions of section 142(2A) only with a view to extend the period of limitation by virtue of clause (iv) of Explanation 1 to section 153(9) for completion of assessment, without the conditions being satisfied in section 142(2A), therefore, the assessment framed by AO under section 143(3) was barred by limitation and invalid.
Held: The issue raised in assesse’s appeal was against the order of CIT(A) upholding the exercise of jurisdiction under section 142(2A) by AO by directing Special Audit without demonstrating the complexity in the books of accounts and holding that the assessment was not barred by limitation. It was held that to exercise power by AO under section 142(2A), prior approval had to be taken from CIT which was a statutory safeguard provided in the Act against any unreasonable or arbitrary exercise of power by AO which had to be granted by CIT after following due process and after due application of mind. Thus, approval by CIT should be granted after examining due process and after due application of mind to the proposal submitted by AO but, in the instant case, it appeared not to be so. Assessee filed objection to the show cause notice and AO after considering reply of assessee framed proposal containing 16 issues in the draft order proposed under section 142(2A) and thereafter same was sent to CIT through Addl. CIT and approval was accorded on the same day by CIT. But, exercise of jurisdiction under section 142(2A) was exercised in a mechanical, routine and and so was the approval granted by CIT as all the formalities were done on the same day. Therefore, assessment framed could not be sustained as the same suffered from legal infirmities of improper exercise of jurisdiction on part of tax authorities under section 142(2A). The assessment should have been framed on or before 31-12-2010, whereas, as a matter of fact, assessment was framed on 12-8-2011 by taking recourse to the provision of clause (iv) of Explanation 1 to section 153(9). Therefore, in view of all this, assessment framed by AO was quashed as being barred by limitation.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These cross appeals are arising out of the order of the Commissioner of Income Tax (Appeals)]-50, Mumbai, [in short CIT(A)], in Appeal No. CIT(A)-50/IT-222/2011-12 dated 12.09.2011. The assessment was framed by the Dy. Commissioner of Income Tax, Mumbai (in short DCIT/ITO/ AO) for the A.Y. 2008-09 vide order dated 12.08.2011 under section 143(3) of the Income-tax Act, 1961 (hereinafter „the Act’).
2. We are taking up the assessee’s appeal for adjudication first. The ground raised challenging the jurisdiction of the AO and also assessment being barred by limitation is as under: –
1.“The learned Commissioner of Income-tax (Appeals) erred in upholding the validity of order passed under section 143(3) of the Act for the Assessment Year 2008-09 on 12th August 2011. The order passed under section 143(3) of the Act is barred by limitation and is bad in law and ought to be cancelled.
2. The learned assessing officer vide directions dated 30.12.2010 invoked the provisions of section 142(2A) to order Special Audit without bringing any material on record to demonstrate complexity of books of Account etc. The learned assessing officer has acted in the utmost prejudicial manner and against the spirit of the law. The order passed under section 143(3) of the Act is barred by limitation and is bad in law and ought to be cancelled.”
3. The issue raised in assessee‟s appeal is against the order of CIT(A) upholding the exercise of jurisdiction under section 142(2A) of the Act by the Assessing Officer by directing Special Audit without demonstrating the complexity in the books of accounts and holding that the assessment is not barred by limitation.
4. The facts in brief are that the assessee filed the return of income on 30.09.2008 declaring the total income of ₹44,21,06,679/-. Subsequently, the case of the assessee was selected under scrutiny and statutory notices were duly served to the assessee. The assessee is engaged in the business of Import, Export, Manufacturing, Processing of diamonds and trading in commodity derivatives. In Para 3 of the assessment order, the Assessing Officer observed that assessee has failed to furnish the details/ information as called for from time to time. It was also stated that since the assessee could not produce the substantive evidences in support of various queries and finally a show cause notice dated 24.12.2010 was issued to show cause as to why the special audit under section 142(2A) should not be conducted. The assessee replied the said notice vide letter dated 29.12.2010 submitting its detailed objections and prayed the AO to drop the proposed action under section 142(2A) of the Act. The Assessing Officer rejected the reply of the assessee stating the same as not tenable and convincing. According to the Assessing Officer the full information/ details with regard to transactions of purchases, valuation of stocks, funds transactions with various banks, utilization of borrowed funds, investments in properties have not been furnished along with supporting evidences. The Assessing Officer also noted that there is no satisfactory explanation for the steep fall in GP and NP rate during the year as compared to the earlier two years. According to Assessing Officer, the exact nature of services rendered to justify the expenses on account of labor charges, legal and professional expenses, salary etc., method of valuation of opening/ closing stocks could be known only on special audit. The Assessing Officer therefore came to the conclusion that keeping in view the nature and complexity of the accounts of the assessee and keeping in view the interest of the Revenue, the Assessing Officer thought it fit to direct the special audit under section 142(2A) of the Act by referring the special audit to M/s Ray & Ray Chartered Accountants under section 142(2A) of the Act after obtaining the prior approval of CIT Central-IV, Mumbai vide letter dated 30.12.2010. The Special Auditors M/s Ray & Ray submitted the report on 24.06.2011. The Assessing Officer noted that the Special Auditors have pointed out several irregularities in the books of account and therefore, a show cause notice dated 11.07.2011 was issued to the assessee before framing the assessment. Finally, the assessment was completed by the Assessing Officer at ₹135,21,32,850/- as against the return of income of ₹44,21,06,679/-.
5. The assessee challenged the order of Assessing Officer before the CIT(A) on this jurisdictional issue as well as on merit. The learned CIT(A) while dismissing the jurisdictional ground raised by the assessee has observed and held as under: –
6. “Para 5.3 I have considered the submissions of the Appellant. In this case, special audit under section 142(2A) was ordered. The audit under section 142(2A) is a tool available with the Assessing Officers to be used in appropriate cases for determining the Total Income. Further, in the audit was ordered after following the procedure laid down in the Act. Therefore, in my view, there cannot be any valid grievance in this regard. As regards, the appellant’s claim that the assessment was barred by limitation, I find that since in this case audit under section 142(2A) was ordered, explanation 1 to. section 153 is applicable in this case for the computation of period of limitation for passing the order u/S 143(3) of the Act and the assessment order was passed within the time limit considering the extended time limit as per explanation 1 to section 153 of the Act. The allegation that the Audit under section :14(2A) of the-Act was directed only to gain is not substantiated. The appellant has also claimed that the Assessing Officer was prejudiced in support of his claim that the assessment was barred by limitation. Now, whether or not the Assessing Officer was prejudiced has no bearing on the issue being decided which is “whether or not the assessment was barred by limitation”. In view of the above, I dismiss the first ground of appeal.”
7. The learned AR submitted before the Bench that the assessment framed by the Assessing Officer under section 143(3) of the Act dated 12.08.2011 is bar by limitation as the special audit u/s 142(2A) of the Act was ordered by the AO just to extend the time limit for framing the assessment without satisfactions of necessary preconditions of section 142(2A) of the Act. The learned AR submitted that in terms of section 153(1) of the Act, the assessment order ought to have been passed before the expiry of twenty-one months from the end of the assessment year in which the income was first assessable. For the assessment year 2008-09 i.e. the year under consideration, this period would expire on 31.12.2010. However, according to the Revenue the period of limitation stood extended because of clause (iv) of Explanation 1 to section 153(9) of the Act as the Assessing Officer in the present case by his order dated 30.12.2010 had directed the assessee to get its books of account audited under section 142(2A) of the Act. The learned AR submitted that the jurisdictional pre-conditions for directing special audit under section 142(2A) were not fulfilled and hence, the said order was barred by limitation and is invalid. Further the Assessing Officer had taken recourse to the provisions of section 142(2A) of the Act only with a view to extend the period of limitation for completion of assessment which is not permissible under the Act without the conditions envisaged in section 142(2A) being satisfied. Therefore, the learned AR prayed before the Bench that it is of paramount importance to decide by this Bench whether the Assessing Officer was justified in directing the special audit under section 142(2A) of the Act. The ld AR submitted that the Assessee filed its return of income for the assessment year 2008-09 declaring a total income of Rs. 44,21,06,679. The return of income was accompanied by the Annual Accounts and the Audit Report etc. On 14.09.2009,the Assessee’s return of income for assessment year 2008-09 was selected for scrutiny and a notice under section 143(2) of the Act was issued. On 17.09.2020 the AO effectively started the assessment from this date by asking the assessee to furnish information with respect to certain items. The case was then adjourned to 18.10.2010 (see page 101 of Volume I of the Paper Book). The Assessee’s Authorized Representative, Mr. Samir Gaglani has, as a mark of acknowledgement, placed his signature on the order sheet noting immediately after the texts relating to adjournment of the case to 18.10.2010. However, after the endorsement relating to the case being adjourned, the noting states “A’ asked to I produce books of a/c & vouchers.” The Assessee submits that during the course of the hearing no such direction was ever issued. This noting did not form part of the original entry on 17.09.2010 and has been added subsequently by the AO. This is clear from the fact that the said noting has been made after the notings relating to the case being adjourned were made and the Authorized Representative signed the order sheet and as a matter of fact the Assessee never produced its books of account before the AO which has also been confirmed by the subsequent order sheet noting as well as the assessment order as no observation/ objection/ comment has been expressed by the AO in this regard. In fact nowhere in the assessment order or the order passed under section 142(2A) it is alleged that the Assessee was called upon to produce the books of account and that it failed to do so. This fact assumes relevance as for invoking the provisions of section 142(2A) of the Act, it is essential for the AO to form his opinion on the nature and complexity of the accounts. The ld AR submits that this finding cannot be given without verifying the accounts. The Assessee submits that, in its case, the opinion with respect to nature and complexity of the accounts has been formed by the AO without calling for and examining the books of account. In support of its claim that the AO never asked for production of its books of account and certainly not on 17.09.2010, the Assessee’s Managing Director has filed an affidavit dated 14.09.2019 before the bench on 16.09.2019 which is filed before the bench. From 18.10.2010 to 24.12.2010, the assessee‟s Authorized Representative appeared before the AO on eight different occasions complying with various requirements relating to furnishing of all the information sought for from time to time (please see the order sheet noting at pages 101 to 104 of Volume I of the Paper Book). However, there is no observation therein with respect to the compliance/non-compliance with the alleged requirement relating to production of books of account. Naturally, there could not be any mention because the AO never asked for it. In fact, the order sheet noting of 16.12.2010 states that “Case finally fixed for hearing on 23.12.2010” (see page 104 of Volume I of the Paper Book). On 24.12.2010 it has been observed “written submission received were placed on records.” (see page 104 of Volume I of the Paper Book). On that date, the hearing of the assessment was concluded as no further requirement existed and consequently no further date of hearing has been given. On 27.12.2010 the Assessee was shocked and surprised to receive a show cause notice dated 24.12.2010 issued under section 142(2A) of the Act (see pages 89 to 191 of Volume I of the Paper Book). The ld AR submits that this action has been taken in the present case only because the AO realised that he won’t be able to pass the assessment order within the period of limitation which was to expire on 31.12.2010. This was done only with a view to extend the period of limitation. The said notice also does not make any reference to the Assessee’s books of account let alone a failure to produce them. The show cause notice makes a reference to eight different issues. The Assessee submits that as stated in greater detail hereafter and as analysed , none of those aspects even remotely affect the nature and complexity of the accounts or how carrying out of an audit would serve the interests of the revenue. The issues referred to in the show cause notice already stood examined by the AO in the course of assessment proceedings. If the AO was not satisfied with its explanation, the recourse available with him was adding/ disallowing the amount but the same would not justify directing an audit under section 142(2A) of the Act. It also assumes relevance that, in respect of four items out of these aspects, the AO has himself not made any adjustment in the assessment order and in respect of the balance four items the adjustment as made the AO stood deleted in appeal by the CIT(A), though the Revenue is in appeal before the Tribunal. On 30.12.2010, the Assessee filed its response to the show cause notice issued under section 142(2A) of the Act dealing with each item referred to in the notice in detail (please see pages 92 to 99 of Volume I of the I Paper Book). In the order sheet noting recorded on the said date it is stated that the case was finally adjourned to 31.12.2010 (see page 105 of Volume I of the Paper Book). On 30.12.2010, the AO prepared his proposal for special audit under section 142(2A) of the Act after allegedly considering the Assessee’s submissions filed on the same date. The said proposal goes beyond the show cause notice as it makes a reference to more than sixteen issues while the show cause notice only referred to eight of them. Therefore, the Assessee has not been given any opportunity of hearing in respect of the said further items. Thereafter, the said proposal was sent to the CIT through the Additional CIT for his approval. It appears that the CIT has granted his approval on the same date and the final order under section 142(2A) of the Act was passed directing the Assessee to get its accounts audited by M/s. Ray and Ray, Chartered Accountants (see pages 107 and 108 of Volume I of the Paper Book). It is a jurisdictional precondition and a statutory safeguard that the said order could be passed only alter obtaining approval of the Commissioner of Income-tax. It goes without saying that such approval should be granted by the said authority after application of mind and not in a casual, routine or perfunctory manner. Further, before nominating a Chartered Accountant the least that would be expected of the CIT will be identifying the person/ firm who would be able to perform the audit and ascertain its availability. This will be important because there would be certain peculiar features of a particular trade, size of operation of the assessee etc. The nomination of a particular Chartered Accountant would be meaningless if he is going to be preoccupied with other engagements and would not be able to take up this assignment. The Assessee submits that it was humanly impossible for the CIT to apply his mind to all the aspects referred to in the proposed order and also carry out the necessary steps before nominating the Chartered Accountant. The Assessee therefore submits that this condition has also not been fulfilled in the present case. On 12.08.2011, the AO passed his assessment order under section 143(3) of the Act determining its total income at Rs.135,21,32,850. A bare perusal of the additions/ disallowances made in the said order shows that out of eight issues referred to in the show cause notice dated 24.12.20 10 issued under section 142(2A) of the Act and more than sixteen issues in the order dated 30.12.2010 passed under the said section, only seven aspects (four aspects out of those referred to in show cause notice) have been taken into account, which also stood substantially deleted in the appellate Order passed by the CIT(A), except for certain minor items. Further, the issues in respect of which additions have been made are routine issues considered in any assessment proceeding not justifying any audit as per section 142(2A) of the Act. The ld AR submits that the assessment order was challenged before the ld CIT(A) on the ground the assessment being invalid and barred by limitation. The ld CIT(A) called for remand report of the AO and submitted his report on 16.12.2013 before the CIT(A) inter alia accepting that the Assessee’s assessment record had been destroyed in the fire which took place in his office on 09.05.2013. Referring to the hearings held before him on 22.09.2009, 09.10.2009, 10.11.2009, 17.09.2010, 24.11.2010, 02.12.2010, 13. 12.20 10, 16.12.2010 and 24.12.2010, it has been alleged that the Assessing Officer thoroughly examined the books of account and other details submitted by the assessee company. Consequent thereto, it has been observed that the Assessee’s submission that the conclusion of the AO was based on presumptions and conjectures in as much as the AO never called for and examined the books of account before issuing such direction was incorrect. It requires consideration that, this is simplicitor referring to the dates of hearing and nowhere suggests that the AO has verified the books of account. In fact, in this record also, there was no reference to order sheet noting calling for the books of account on 17.09.2010. Therefore, the entry in the order sheet noting on the said date directing the Assessee to produce its books of account did not even exist at the time of making reference for audit under section 142(2A). These are simply general remarks without pointing out on which date the books of account were examined by the AO (please see Annexure to letter dated 13.09.20 19 from the AO to the Ld. DR).The CIT(A) dismissed the Assessee’s ground of appeal with respect to the assessment order being barred by limitation. He has held that, in the present case, audit was directed under section 142(2A) of the Act after adherence to the procedure specified in the said section. He has however allowed substantial relief on the merits of the case. After giving effect to the appellate order passed by the CIT(A) the total income as determined for assessment year stood at Rs.46,13,90,736 as against the returned income of Rs.44,21,06,679.
8. As stated hereinabove, as per section 153(1) of the Act, the limitation for passing of the assessment order, in the present case i.e., for assessment year 2008-09, stood expired on 31.12.2010 while, the assessment order has been passed on 12.08.2011, rendering the same barred by limitation. The Revenue is placing reliance on clause (iv) of Explanation 1 below section 153(9) of the Act to contend that the limitation stood extended as the Assessee had been directed to get its accounts audited under section 142(2A) of the Act. It is in this context i.e., to ascertain the validity of the assessment order that the Tribunal has to adjudicate on the following issues a) Whether it is a prerequisite that the AO should examine the books of account before forming his opinion with respect to the nature and complexity thereof, as referred to in section 142(2A) of the Act. In the present case, in the absence of the AO examining the Assessee’s books of account, he could never have formed his opinion with respect to the nature and complexity thereof and interests of the revenue justifying such direction. b) Whether, based on the facts and in the circumstances of the present case, the formation of opinion by the AO as required by section 142(2A) of the Act viz., about the nature and complexity of the accounts and the interests of the revenue has no basis and is unsustainable in law c) Whether, the previous approval which is also a jurisdictional precondition has been granted by the Commissioner of Income-tax in the present case in a most casual and routine manner and without application of mind rendering the order dated 30.12.2010 passed by the AO under section 142(2A) of the Act directing it to get its accounts audited to be illegal and bad in law.
9. The assessee‟s submissions in respect of the issue referred to in paragraph 3(a) above, are as under; a) A bare perusal of section 142(2A) of the Act, as it existed prior to its amendment by the Finance Act, 2013 with effect from 01.06.2013, shows that the AO before directing any assessee to get its accounts audited under the said section has to form his opinion that it is necessary so to do i) having regard to the nature and complexity of the accounts; and ii) the interests of the revenue. Further, the AO has to obtain previous approval from inter-alia the Commissioner of Income-tax. The Assessee submits that the aforesaid conditions are cumulative in nature i.e., all the conditions have to be fulfilled before audit of accounts is directed under the said section. These are jurisdictional pre-conditions and unless the same are fulfilled, the order passed by the AO under section 142(2A) of the Act shall be invalid. In the present case, none of the aforesaid conditions have been fulfilled rendering the order dated 30.12.20 10 passed by the AO under the said section to be illegal and bad in law and, consequently, the assessment order to be barred by limitation. That, it is essential for the AO before he forms his opinion in respect of nature and complexity of the accounts that he should call for and examine the assessee’s books of accounts by placing reliance in West Bengal State Cooperative Bank Ltd. v. JCIT 267 ITR 345 the Calcutta High Court inter alia following its earlier judgment in the case of Peerless General Finance & Investment Co. Ltd. v. DCIT 236 ITR 671, has observed that unless the Assessing Officer examines the books of account, he cannot have any understanding as to the nature and complexity of the same, consequently is not possible for him to come the conclusion for necessity of special audit. Therefore, the Assessing Officer without examining the books of account has formed their opinion regarding the nature and complexity and the Commissioner overlooking this serious legal lapse has mechanically approved. It is true they have material, but with these materials no one can reasonably and rationally form an opinion. I have examined the proposal dated 28th March, 2003, of the Assessing Officer, namely, the Assistant Commissioner of Income-tax. It appears that he sought for various information to complete assessment correctly and such information could not be supplied by the petitioner, as the accounts are not maintained in such fashion. Moreover, the business transactions of the petitioner are huge and conducted through 48 branches in West Bengal. Because of this failure he has presumed the accounts of the assessee (petitioner) are very complex and the desired information cannot be collected easily.” (emphasis in bold supplied). This view is also taken in Alidhara Texpro Engineering Pvt. Ltd. v. DCIT 332 ITR 115 (Guj). In the present case, the Assessee submits that the AO never called for and, hence, it has not produced before him its books of account. Consequently, without examining the same he could never have formed his opinion about the nature and complexity thereof. In this regard, the Assessee also relies upon the affidavit dated 14.09.2019 sworn by its Managing Director Mr. Russell A. Mehta, copy of which has been filed before the Tribunal in the course of hearing held on 16.09.2019 copy whereof is filed before the bench.
10. The order sheet noting dated 16.12.2010 discloses that the case was finally fixed for hearing on 23.12.20 10 (see page 104 of Volume 1 of the Paper Book). Similarly, the order sheet noting dated 24.12.2010 shows that the AO received the Assessee’s written submissions and the proceedings stood concluded in the absence of any further requirement or any further date of hearing (see page 104 of Volume 1 of the Paper Book). Therefore, the proceedings relating to directing audit under section 142(2A) of the Act was an afterthought only because the AO realized that he won’t be able to pass the assessment order on or before 31.12.2010 and he wanted the period of limitation to be extended, which cannot be permitted in law. The Tribunal in Rajendra C. Singh v. JCIT 118 ITD 99 (Mum) and Late Pravin N. Shah through L/H. Virang P. Shah v. DCIT (2011) 56 DTR 427 (Mum) has held the assessment order to be barred by limitation as the reference for conduct of audit under section 142(2A) of the Act was not justified.
11. In respect of the assertion made by the AO that he had called for the books of account vide order sheet noting dated 17.09.2010 (see page 101 of Volume 1 of the Paper Book), the Assessee submits that the order sheet noting as originally recorded on the said date did not make a reference to the direction to produce the books of account and vouchers by the assessee. This has been subsequently done to cover up the deficiency. This is shown by the following facts i) The order sheet noting on 17.09.20 10 after making reference to the information required to be furnished ends with the sentence “case adj to 18.10.1(7′. How could there be any further entry after the case stood adjourned. The Assessee therefore submits that, the entry which the AO is relying upon has been subsequently inserted and did not form part of the original record; ii) The endorsement as made by the Assessee’s Authorized Representative acknowledging the next date of hearing has also been made immediately below the text representing adjournment of the case. Otherwise, the said endorsement would have been made after the entry relating to direction to produce the accounts; iii) The Assessee has never produced its books of account before the AO. No reference thereto has been made either in the order sheet noting of any other date, or in the show cause notice dated 24.12.2010 issued under section 142(2A) of the Act, or the order dated 30.12.20 10 passed under the said section or the assessment order dated 12.08.2011 passed under section 143(3) of the Act alleging that the Assessee has failed to produce the accounts after being called upon to do so. In the absence of any observation/objection/comment about the examination of the books of account by the AO in the proceedings, it cannot be presumed that any books of account were examined by him before directing audit to be conducted under section 142(2A) of the Act; iv) In paragraph 5 at page 2 of the remand report dated 16.12.2013 filed by the AO before the CIT(A), reference has been made to several dates on which the matter was heard by him and basis thereof a general remark has been made that the AO thoroughly examined the books of account and other details submitted by the Assessee. The Assessee submits that the said remark in no way discloses that it had produced the books of account and that the AO had examined the same.
12. In view thereof, it is clear that, in the present case, the AO has directed audit of Assessee’s accounts under section 142(2A) of the Act without satisfying the jurisdictional pre-condition relating to formation of opinion with respect to nature and complexity of the accounts rendering the said action to be illegal and bad in law. The other connected issue alongwith the above is that, it has not been shown how directing audit in the present case would be in the interests of the revenue. Without examining the books of account even this precondition has remained unsatisfied.
13. In the present case, the Assessee filed its response to the show cause notice issued by the AO before him on 30.12.2010. After considering its response, the AO has highlighted around more than sixteen issues in the draft order proposed to be passed by him under section 142(2A) of the Act. Thereafter, the said proposal has been sent to the CIT through the Additional CIT and the approval has been granted on the same date. Further, he also has to nominate a Chartered Accountant for performing the audit. In the least he has to identify the person/ firm who would be able to perform the audit and ascertain its availability. The nomination of a particular Chartered Accountant would be meaningless if he is going to be pre-occupied with other engagements and would not be able to take up this assignment. Based thereon, the AO has passed the order dated 30.12.2010 directing audit do be conducted in the assessee’s case. It is humanly impossible that the AO after receiving its response on eight different issues formed his opinion making a reference to sixteen issues, the CIT applying his mind to all these issues and approving of the AO’s action on the same date identified and nominated the Chartered Accountants for this purpose. In view thereof, the Assessee submits that the approval as granted by the CIT is in a casual and routine manner, without application of mind, rendering the order under section 142(2A) of the Act to be illegal and bad in law. The counsel of the assessee finally submits that Ground No.1 in the assessee‟s appeal may be allowed which would render the other grounds to be academic. However, if for any reason, the ground is not to be allowed, then, the appeal may be refixed for adjudication of the other grounds.
14. The ld DR per contra submitted at the outset, that the provisions of section 142(2A) are applied in a case having regard to nature and complexity of the account , volume of accounts, doubts regarding correctness of account, multiplicity in transactions in accounts, or specialized nature of business activity and in the interest of revenue. The ld Dr referred to reasons recorded by the AO as noted in the para 3.2 of the assessment order. The ld DR argued that the submissions made and the objections raised by the assessee in its reply are not convincing. Full information and details with regard to transactions of purchase, valuation of stock, fund transactions with various bank accounts, utilization of borrowed funds, investment in acquisition of property, have not been furnished along with supporting evidences. There is also no satisfactory explanation for the steep fall in GP and NP rate during the year as compared to the earlier two years. Further, the exact nature of services rendered to justify huge claim of expenses on account of labour charges, legal & professional expenses, salary etc., method of valuation of opening/closing stock etc., could be known only on special audit. Therefore, having regard to the nature and complexity of the accounts of the assessee and in the interest of the revenue, it was considered to be a fit case for special audit u/s 142(2A) of the 1.1 Act, 1961. Accordingly, the case was referred to the Special Auditor M/s Ray & Ray for special audit u/s 142(2A) of the I. T. Act,1961 after obtaining the prior approval of the CIT. Central-/V, Mumbai vide letter dated 30.12.2010.Thus, the Assessing Officer after examining of books of accounts and other transactions recorded detailed satisfaction in this regard and referred the matter for Special Audit u/s 142(2A) after obtaining prior approval of the CIT. This is also to submit that the decision to invoke the provisions of section 142(2A) was made after giving opportunity of being heard to the assessee before doing so, as is noted in para 3 of the assessment order. After obtaining the report of the Special Auditor, the assessee was given an opportunity in respect of material gathered u/s 142(2A) in accordance with the provision of 142(3). This is worthwhile to mention that the assessee, for the reasons best known to it, did not co-operate with the Special Auditor and had consistently sought extension from time to time which ultimately led to completion of Special Audit in the back drop of poor co-operation by it. The issue of not examining books of account by the AO was also taken before the Ld CIT(A) by the assessee. At that stage, the Ld CIT(A) thought fit to call for specific comments of the Assessing officer through the remand report. The Assessing officer vide his letter dated 16.12.2013 informed that the case record of the assessee for this AY was destroyed in a fire in the office on 09.05.2013. At the behest of the Ld.CIT(A) the assessee after lot of persuasion, came into assistance in reconstructing the case records and based on that, the AO submitted his remand report wherein vide para 5 he submitted that upon perusal of documents submitted by the assessee company during the course of assessment proceedings before the AO reveals that the AO had held multiple hearings with the authorised representative of the assessee company viz; on 22.09.2009, 09.10.2009, 10.11.2009, 17.09.2010, 24.11.2010, 02.12.2010,13.12.2010, 16.12.2010 and 24.12.2010. During the course of these hearings, the AO thoroughly examined the books of accounts and other details submitted by the assessee company. Hence, the allegation that ‘the conclusion of the AO that the nature and complexity of books of account require Special Audit is based on presumptions and conjectures in as much as the AO never called for an examined the books of account before issuing such directions’ is incorrect. Based on this remand report the Ld CIT(A) dismissed the ground of appeal taken by the assessee in this respect as noted by him in para 5.3 of the appellate order. This goes to show that the Ld CIT(A) was fully satisfied with the correctness of reference for Special Audit in accordance to section 142(2A). During the hearing held on 16.09.2019 before the bench, the assessee produced copy of order sheet of the assessment record which shows that books of accounts were requisitioned by the AO for verification vide his order sheet dated 17.09.2010, much before the case was referred for Special Audit. This particular fact also goes in line with the contention of the AO in his remand report noted above, that reference for Special Audit u/s 142(2A) was made after examination of books of accounts and other documents. Hence the assessee’s contention made during the hearing on that date that books of accounts were not seen before referring this matter for Special Audit does not have any leg to stand on. The Department during the course of last hearing failed to produce the assessment record for the simple reason that the same is no more available as it was destroyed in a fire. At this stage, it needs to be reiterated that books of accounts were seen before making reference for Special Audit as evidenced by an order sheet entry for production of books of accounts and comments of the AO in the remand report made on 16.12.2013. The presumption should not be drawn against the department that books of accounts were not seen before referring the matter for Special Audit merely because of non production of assessment record. The other connected evidence in relation to examination of books of accounts before Special Audit in the form of order sheet noting have already been furnished to your Honours which are enough to conclude that AO did apply his mind after examination of of accounts before sending the case for Special Audit. Hence, the affidavit filed by the assessee in this respect, also needs to be rejected based on above submission. The ld. DR submitted that the justification of Special Audit in this case is also proved when we see a series of discrepancies in the accounts of the assessee as noted by the Special Auditor, mentioned by the AO in para 20 and para 22 of the assessment order. Apart from this, the method of valuation of closing stock was found grossly incorrect which has been elaborately discussed in the assessment order and addition made. All these facts also go to prove the justification of the Special Audit and inadequacy of the books of accounts maintained by the assessee. The ld DR therefore prayed that the grounds of appeal taken by the assessee required to be rejected and the order of Ld CIT(A) on this ground is prayed to be upheld. The assessee also contented in its grounds of appeal that since reference for Special Audit was not correct therefore, the assessment made was barred by limitation. In this respect, the Ld Counsel of the assessee made reference to certain decisions. The perusal of all the above judgements shows that various Hon’ble courts had held assessment as time barred because either books of accounts were not seen by the AO before making reference for the Special Audit, or the assessee was not given an opportunity before the audit or other due procedure of law was not followed, which is not the case here. Here in the case of the assessee, the reference was made after examination of books of accounts and other documents, after affording opportunity to the assessee and after taking due approval from the jurisdictional CIT. Therefore, all the judgements (supra) do not apply in the facts of the case of the assessee. In view of this, the ground of appeal raised by the assessee as assessment being time barred needs to be rejected.
15. We have heard rival submissions and perused the materials on record including the written submissions filed by both the parties. The jurisdictional issue raised before us by the assessee as has been discussed above is qua wrong exercise of jurisdiction while giving direction under section 142(2A) of the Act without complying with the necessary pre-conditions as envisaged in the said section and primarily the audit was directed under section 142(2A) of the Act just to extend the time limitation under section 153(1) of the Act. In terms of section 153(1) of the Act, the assessment for the instant year should have been framed by 31.12.2010. However, the assessment was actually formed on 18.08.2011 as the Assessing Officer issued notice under section 142(2A) of the Act dated 24.12.2010 directing the assessee to file objection if any on or before 29.12.2010 to the proposed special audit. The assessee has challenged the assessment framed by the Assessing Officer on the ground that the same is barred by limitation as the assessment should have been framed on or before 31.12.2010 whereas, as a matter of fact the assessment was framed on 12.08.2011 by taking recourse to the provision of section 153(9) explanation 1 clause (iv) of the Act. The learned AR primarily contended that the books of account were never asked for or required to be produced during the assessment proceedings by the Assessing Officer and were never produced by the assessee. We have also examined and perused the order sheet entries during the assessment proceedings, the copies thereof are placed in the paper book from page 100-105 and observe that nowhere the AO required the assessee to produce the books of account or the fact of having examined the books of accounts during the assessment proceedings except on 17.09.2010, when the assessee was asked to produce the books of account and vouchers which according the assessee was added in the order sheet after the AR of the assessee put his signature on the order sheet. In other words, the assessee has alleged that the last two lines were added to the order sheet entry after AR of the assessee signed the order sheet that too after mentioning that case is adjourned to 18.10.2010. But at this stage, we are not going into these allegations but it is apparent from the order sheet that the direction to produce the books of accounts was added after the case was adjourned and on the left side of the signature put by the assessee. Thus, it is clear that the Assessing Officer has not examined the books of account during the assessment proceedings as is clear from the perusal of the order sheet entries, assessment orders and various replies and submissions of the assessee. On all these occasions when the AR attended the proceedings before the Assessing Officer, the Assessing Officer called for various details, explanation/ information from the assessee from time to time. We also find merits in the submissions and contentions of the assessee that the necessary pre-conditions for directing the special audit under section 142(2A) of the Act have not been fulfilled as Assessing Officer has not pointed out any specific complexity in the books of account of the assessee due to which the Assessing Officer was not in a position to assess the income of the assessee correctly. The assessee filed its objections to its show cause notice on 30.12.2010 copy of the same is filed at page No. 9299 of the assessee‟s paper book and the case was finally adjourned to 31.12.2010. Thus, the Assessing Officer prepared the proposal for Special audit under section 142(2A) of the Act and submitted the same to the learned Commissioner of Income Tax through Addl. CIT for approval thereof. We also note that in the show cause notice dated 24.12.2010 there were 8 items on which the Assessing Officer sought to invoke the provisions 142(2A) of the act, whereas in the proposal the Assessing Officer proposed 16 items as is clear from the draft order dated 30.12.2010 proposed under section 142(2A) of the Act appointing M/s Ray and Ray as a special auditor to conduct the special audit. Thus, we note that the assessee has not been confronted with all the issues on which the audit was sought to be proposed. We also note that the CIT accorded the proposal of the Assessing Officer for special audit on the same date which shows that approval has been granted without application of mind and in a casual manner. We also note that in the assessment framed, the Assessing Officer assessed the total income at ₹ 135,21,32,850/- which was challenged before the learned CIT(A). The learned CIT(A) has called for a remand report from the Assessing Officer and in the said remand report the Assessing Officer has informed that the case record of the assessee was destroyed in a fire in the office on 09.05.2013. However, it has been stated in the report during the course of hearing before him on 22.09.2009 to 24.12.2010 that the Assessing Officer thoroughly examined the books of account and other documents filed by the assessee. In our considered view the Assessing Officer has to form an opinion that having record to the nature and complexity of accounts and in view of the interest of the Revenue it is necessary to get the accounts audited under section 142(2A) of the Act as it stood prior to amendment by Finance Act 2013 dated 01.06.2013. But after taking into account the facts on records including the assessment order ,submissions of the assessee and the order sheet entries before us, we believe that no such opinion was formed by the Assessing Officer as the Assessing Officer has never examined the books of accounts as is clear from the facts in record before us. Therefore, it quite apparent that audit at the fag end of the period when the time for framing the assessment is due to time barred in terms of section 153(1) of the Act, the audit was directed under section 142(2A) of the Act obviously to obtain extension of time for framing the assessment. The case of the assessee finds from the decision of Calcutta High court in the cast of West Bengal State co-operative Bank Ltd. V. JCIT (2004) 267 ITR 345 (Calcutta). The Hon’ble High Court in the said decision following the earlier year decision in the case of Peerless General Finance And Investment Ltd. vs. DCIT(1999) 236 ITR 671 has observed as under:-
“20. If an assessee files a return the same is not presumed to be incorrect. When the Assessing Officer, however, intends to pass an order of assessment, he may take recourse to such steps including the one of asking the assessee to disclose documents which are in his power or possession. He may also ask third parties to produce documents. Section 136 of the Act by reason of a legal fiction makes an assessment proceeding, a judicial proceeding. The assessment proceeding, therefore, is a part of judicial process. When a statutory power is exercised by the assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature. It stricto sensu is also not quasi-judicial. By way of example, although it may not be very apposite, we may state that orders passed under Order XII of the Code of Civil Procedure by a Court cannot be held to be administrative in nature. They are judicial orders and subject to the order which may be passed by higher Courts in regard thereto. Indisputably, the prejudice of the assessee, if an order is passed under section 142(2A) of the Act, is apparent on the face of the statutory provision. He has to undergo the process of further accounting despite the fact that his accounts have been audited by a qualified auditor in terms of section 44AB of the Act. An auditor is a professional person. He has to function independently. He is not an employee of the assessee. In case of a misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949.
21. In this case, the fee of the special auditor has been fixed at Rs. 1.5 lakhs. The assessee during the audit of the account by the special auditor had to answer large number of questions. Whether he defaulted therein or not is a matter of little or no consequence for the purpose of construction of the said provision. We may, however, notice that whereas according to the revenue, the assessee was not cooperating, according to the assessee, as all the books of account having been seized, there was nothing it could do in the matter.
22. Effect of civil consequences arising out of determination of lis under a statute is stated in State of Orissa v. Dr. (Miss) Binapani Dei AIR 1967 SC 1269. It is an authority for the proposition when by reason of an action on the part of a statutory authority, civil or evil consequences ensue, prin-ciples of natural justice are required to be followed. In such an event, although no express provision is laid down in this behalf compliance of principles of natural justice would be implicit. In case of denial of principles of natural justice in a statute, the same may also be held ultra vires article 14 of the Constitution.”
16. The same view was also taken in Alidhara Texpro Engineering (P.) Ltd. Vs. DCIT(2011) 332 ITR 115 (Guj). Thus, we are of the view that the Assessing Officer has not formed opinion about the nature and complexity of the assessee‟s books of accounts and consequently the special audit was directed only in the view to extend the time limit. Besides ,in the case of Rajendra C. Singh V. JCIT 118 ITD 99 (Mum) and Late Pravin N. Shah though L/H. virang P. Shah V. DCIT (2011) 56 DTR 427 (Mum) it has been held that assessment order is to be barred by limitation as the reference for conduct of audit under section 142(2A) of the Act was not justified in the present case and also the special audit has been ordered without specifying the necessary conditions envisaged therein. Therefore, the audit has been directed only to extend the limitation and thus, the order passed by the Assessing Officer is barred by limitation.
17. The special audit under section 142(2A) of the Act has to be directed by the Assessing Officer only in the genuine cases where the Assessing Officer finds that he is not in a position to assessee the income of the assessee having regard to the complexities in the books of accounts. For the exercise of this power u/s 142(2A), it has been provided that the prior approval has been taken from the CIT which is a statutory safeguard provided in the Act against any unreasonable or arbitrary exercise of power by the Assessing Officer which has to be granted by the CIT after following the due process and after dule application of mind. Thus, the approval by the CIT should be granted after examining and after due application of mind to the proposal submitted by the Assessing Officer but in the present case it appears not to be so. The assessee filed objection to the show cause notice on 30.12.2020 and Assessing Officer after considering the reply of the assessee framed the proposal containing 16 issues in the draft order proposed under section 142(2A) of the Act and thereafter the same was sent to CIT through Addl. CIT and approval was accorded on the same day by the CIT. But as is apparent from the facts before us, the exercise of jurisdiction under section 142(2A) of the Act has been exercised in a mechanical, routine and perfunctory manner and so is the approval granted by the CIT as all the formalities were done on the same day. Therefore , in view of the facts and the ratio laid down in the decisions as discussed above , the assessment framed by the AO cannot be sustained as the same suffer from legal infirmities of improper exercise of jurisdiction on the part of the tax authorities u/s 142(2A) of the Act. We are not in agreement with the conclusion of ld. CIT(A) on the issue of upholding the assessment as the same is barred by limitation in view of the fact that order under section 142(2A) was directed only to extend the period of limitation under the Act. Accordingly, we set aside the order of the CIT(A) on the issue and quash the assessment framed by the Assessing Officer as being barred by limitation.
18. Even on merits of the case we note that the AO had made several adhoc additions/disallowances out of expenses and one main addition on account of valuation of closing stocks. The valuation as done by the assessee was disputed by the special auditor for the reasons that the same is not supported with evidences which was calculated on estimated realisable value by the assessee on some technical assessment of stocks. According to the assessee the estimated realisable value is based upon the realisation in the subsequent year. But the sales realisation was higher in the subsequent year due to depreciation in the value of rupees vis a vis foreign exchange. The assessee is in this trade for the last more than 50 years and has been following accounting policy consistently qua valuation of stocks which has duly been disclosed in audited accounts under significant accounting policies. We note that the cut and polished diamonds are valued on the basis of technical assessment only right from the beginning as per trade practices and the said method of valuation is in accordance with mandatory accounting standard AS-2 issued by ICAI. The method of valuation of stocks is accepted by the department right from the beginning in all the years . We have also examined the financial statements of various listed companies which are into the diamond manufacturing business besides experts opinions on valuation. Moreover any addition in closing stock is tax neutral as the closing stock of the current year will become the opening stock of the following year. Even the Hon‟ble Apex Court in the case of Chainswarup Sampatram as reported in 24 ITR 481(SC) has held that it is wrong to think that any profit rises out of valuation of stocks. Therefore even stock addition appears to wrong and fallacious and rightly been deleted by the ld CIT(A).
19. The other grounds raised are not being adjudicated as the jurisdictional and time barring issue have been in favour of the assessee.
20. Since, we have quashed the assessment on the issue of jurisdiction, appeal file by the Revenue becomes infructuous and is dismissed.
21. In the Result, the appeal of assessee is partly allowed and the appeal of Revenue is dismissed.
Order pronounced in the open court on 31.12.2020