Case Law Details

Case Name : Takshashila Realties (P.) Ltd. Vs Dy. CIT (Gujarat High Court)
Appeal Number : Special Civil Application Nos. 4613, 4614, 4619 & 4620 of 2017
Date of Judgement/Order : 21/03/2017
Related Assessment Year :
Courts : All High Courts (3699) Gujarat High Court (312)

In the present case, before passing the impugned Orders under section 142(2A) of the Act, opportunity of being heard has been duly given to the assessee and show cause notices were issued and served upon the petitioner calling upon the petitioner to show cause why, for the reasons stated in the said notice, the books of account may not be subject to audit by a special auditor. It is required to be noted that in the show cause notice, reasons were specifically mentioned pointing out the necessity to get accounts audited by the Special Auditor. That thereafter, the petitioner-assessee raised objections in detail, which have been disposed of by the assessing officer by speaking order and only thereafter, after seeking approval from the Principal Commissioner of Income Tax; as required under the Act, the assessing officer passed the impugned orders under section 142(2A) of the Act. Therefore, as such, the procedure which is required to be followed, while passing the order under section 142(2A) of the Act, has been duly followed by the assessing officer.

Now so far as submission made on behalf of the petitioner that the assessing officer cannot direct special audit under section 142(2A) of the Act before calling for the accounts from the petitioner in the assessment proceedings and without doubting the accounts and/or considering the complexity in the accounts is concerned, it is required to be noted that as per amended section 142(2A) of the Act, apart from the nature and complexity of the accounts, etc., even in case of multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and the interests of the Revenue, the assessing officer can pass an order for special audit in exercise of powers conferred under section 142(2A) of the Act. Therefore, while forming an opinion to get the accounts audited by special auditor; considering the specialized nature of business activities of the assessee, there need not be any books of account before the assessing officer. In the present case, having found that there are complex issues relating to introduction of land by the partners into the firms; revaluation of land; credit of partners in capital account equal to revalued amount of land; conversion of capital account to loan account of shareholders and issues relating to issuance of equity shares against the balances of revaluation credits at an unreasonable premium, and after having been satisfied that considering the specialized nature of business activities of the assessee, the assessing officer has passed an order of special audit in exercise of powers under section 142(2A) of the Act.

Full Text of the High Court Judgment / Order is as follows:-

Rule in each case, returnable forthwith. Learned counsel Shri Nitin K Mehta waives service of notice on behalf of the respondent-Revenue.

2. With the consent of the learned advocates appearing for and on behalf of the respective parties, these matters were heard together.

3. As common question of law and facts arise in this group of petitions and as such in respect of the same assessee, but with respect to different assessment years, all these petitions are disposed of by this common judgment and order.

4. In all these writ petitions preferred under Article 226 of the Constitution of India, the common assessee has challenged impugned orders passed by the respondent No. 1-assessing officer by which, in exercise of power under section 142(2A) of the Income Tax Act, 1961 [hereinafter referred to as, “the Act”], the assessing officer has directed the petitioner to get its accounts audited for assessment year 2009-10, as a successor of erstwhile firm-Chanakya Infracon Private Limited [Special Civil Application No. 4619 of 2017]; for assessment year 2009-10, as successor of erstwhile firm-Youngstar Infracon Private Limited [Special Civil Application No. 4613 of 2017]; for assessment year 2009-10, as a successor of erstwhile firm- Chanakya Buildcon Private Limited [Special Civil Application No. 4614 of 2017]; and for assessment year 2009-10, as a successor of erstwhile firm-Takshashila Properties Private Limited [Special Civil Application No. 4620 of 2017].

5. The facts leading to the present Special Civil Applications, in nutshell, are as under :

5.1 That, in the case of erstwhile firms viz., Chanakya Infracon Private Limited; Youngstar Infracon Private Limited; Chanakya Buildcon Private Limited and Takshashila Properties Private Limited, the assessment proceedings for assessment year 2009-10 were completed. That, pursuant to an order dated 22-3-2011 passed by the High Court of Gujarat in Company Application No. 263 of 2011, five companies viz., Chanakya Buildcon Private Limited; Chanakya Infracon Private Limited; Takshashila Properties Private Limited; Takshashila Realities Limited and Youngstar Infracon Private Limited came to be amalgamated with Takshashila Gruh Nirman Private Limited. Messrs. Takshashila Gruh Nirman Private Limited is subsequently named as Takshashila Realities Limited. It appears that in case of transferee companies viz., Takshashila Gruh Nirman Private Limited; Chanakya Buildcon Private Limited; Chanakya Infracon Private Limited and Youngstar Infrastructure Private Limited, reassessment proceedings came to be initiated for assessment year 2009-10. Notices under section 148 of the Act came to be issued and served upon the respective assessees. The aforesaid transferee companies-original assessees preferred Special Civil Applications Nos. 13971 of 2016; 14018 of 2016; 14071 of 2016 and 14794 of 2016 before this Court challenging Notices under section 148 of the Act and the reassessment proceedings. That, by a detailed judgment and order dated 5-12-2016, Division Bench of this Court, dismissed the said Special Civil Applications.

5.2 That thereafter, the petitioner herein-Takshashila Realities Private Limited has been served with a Notice under section 142(2A) of the Act and the petitioner, as the successor of firms viz., Chanakya Buildcon Private Limited; Chanakya Infracon Private Limited; Takshashila Properties Private Limited and Youngstar Infracon Private Limited was called upon to show cause why an order for special audit under section 142(2A) of the Act may not be passed. In the show cause notice, it was noted that the conversion of five firms into companies, after revaluation of land, merger of five companies with Takshashila Gruh Nirman Private Limited; later with issue of equity shares against the balance of revaluation credits at a premium; valuation of shares as Discounted Cash Flow method by estimating cash flows and adopting a random discounted rate for valuation, there is a complex web of transactions in the group of firms namely introduction of land by some of the partners; revaluation of lands and crediting of amounts in the current accounts of all partners; conversion of firms into companies which merged with existing Company; valuation of share by discounted cash flow method and allotment of shares against the amounts outstanding as unsecured loans at unreasonable premium, clubbed with multiple revaluation or properties over the years, starting from 2008 to 2013 in various entities involves application of provisions of the Companies Act, application of Accounting Standards and examination of provisions of capital gains in the hands of various partners, firms and directors is involved, and therefore, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts, or specialized nature of transaction in the cases which finally of the assessee, and the interest of the Revenue, the accounts are required to be got audited by a Special Auditor from the point of view of taxation of capital gains and accounting of stock-in-trade at each stage of transfer so that there is no loss to the Revenue out of the complex web of transactions involved.

5.3 That, the petitioner-assessee filed its objections, which came to be disposed of by the assessing officer. That thereafter, the assessing officer sent a proposal to the Principal Commissioner of Income Tax, Ahmedabad IV for its approval. That the said Principal Commissioner of Income Tax granted his approval and appointed respondent no. 3 as a Special Auditor. Thereafter, by two communications, the petitioner has been called upon to get the accounts audited for assessment year 2009-10, as the successor of viz., Chanakya Infracon Private Limited; Youngstar Infracon Private Limited; Chanakya Buildcon Private Limited and Takshashila Properties Private Limited by the Special Auditor.

6. Feeling aggrieved and dissatisfied by the impugned order passed by the respondent no. 1-assessing officer passed under section 142(2A) of the Act, the assessee has preferred by the present Special Civil Applications.

7. Heard Shri JP Shah, learned senior advocate appearing with Mr. Manish J Shah, learned advocate for the petitioner and learned advocate Mr. Nitin Mehta for the respondent-Revenue.

8. It is vehemently submitted by Shri JP Shah, learned counsel for the petitioner that the impugned orders passed in exercise of power under section 142(2A) of the Act appointing Special Auditor is absolutely bad, illegal and contrary to the provisions of section 142(2A) of the Act. It is further submitted by Shri J.P Shah, learned counsel for the petitioner that the Division Bench of this Court by its judgment and order dated 5-12-2010 had dismissed the writ petitions preferred by the transferee companies in which reassessment proceedings for assessment year 2009-10 were challenged and thereafter immediately, the assessing officer, without even return being filed by the petitioner pursuant to the Notice under section 148 of the Act and without there being any accounts available before him and/or even verification of the accounts, has passed the impugned orders under section 142(2A) of the Act of Special Audit, which is absolutely contrary to the provisions of section 142(2A) of the Act. It is vehemently submitted by Shri J.P. Shah, learned counsel for the petitioner that the language used in section 142(2A) of the Act is that, “the assessing officer, having regard to the nature and complexity of the accounts,…….” may pass an order for special audit. It is submitted that in view of the aforesaid language of the Section, the assessing officer cannot direct special audit under section 142(2A) before calling for the accounts from the petitioner in the assessment proceedings.

8.1 It is further submitted that even otherwise, the assessing officer cannot form an opinion without calling for the record and before examining the accounts that the accounts are complex and correctness thereof is doubtful, and thus, interest of the Revenue is compromised, if special audit is not called for. It is submitted that therefore, before calling for the accounts from the petitioner in the assessment proceedings, the assessing officer without even doubting correctness of the accounts could not have passed an order for special audit under section 142(2A) of the Act. In support of his above submissions, Shri JP Shah, learned counsel for the petitioner has relied upon the following decisions viz.,

(i) Delhi Development Authority v. Union of India (2013) 350 ITR 432 (Delhi);

(ii) Peerless General Finance & Investment Co. Ltd. v. Dy. CIT (1999) 236 ITR 671 (Cal.);

(iii) Muthoottu Mini Kuries v. Dy. CIT (2001) 250 ITR 455 (Ker.);

(iv) West Bengal State Co-operative Bank Ltd. v. Jt. CIT (2004) 267 ITR 345 (Cal.).

8.2 It is further submitted by learned counsel Shri JP Shah appearing for the petitioner that as such the original assessment subjected to scrutiny assessment under section 143(3) of the Act, and therefore also, there was no need for special audit of the accounts. It is further submitted by learned counsel Shri JP Shah that the reasons, or most of the events on which the assessing officer has placed reliance upon for forming an opinion for directing special audit under section 142(2A) of the Act have not at all occurred in assessment year 2009-10, and thus, the foundation of forming an opinion itself is not sustainable, making the direction and approval bad in law. It is further submitted by learned counsel Shri JP Shah that even the respondent no. 2-Principal Commissioner of Income Tax has accorded approval in mechanical manner and it does not reflect any proper application of mind by the said Commissioner in according the approval. It is submitted that the Principal Commissioner, while granting the approval, is required to apply his mind and he is not required to act mechanically. In support of his above submissions, Shri J.P Shah, learned counsel for the petitioner has relied upon decision of Hon’ble Supreme Court in the case of Sahara India (Firm) v. CIT (2008) 300 ITR 403 (SC) as well as a decision of Delhi High Court in case of DLF Commercial Projects Corporation v. Asstt. CIT (2013) 357 ITR 211 (Del). It is further submitted by Shri JP Shah, learned counsel for the petitioner that even otherwise, the directions for which special audit is ordered are mainly questions of law, which are required to be considered by the assessing officer, and therefore, for such accounts are not required to be got audited through Special Auditor. It is submitted that therefore also, the impugned orders under section 142(2A) of the Act deserve to be quashed and set-aside.

Online GST Certification Course by TaxGuru & MSME- Click here to Join

8.3 Making the above submissions and relying upon the above decisions, it is requested to allow the present petitions.

9. All these petitions are vehemently opposed by Shri Nitin Mehta, learned counsel appearing on behalf of the Revenue.

10. An affidavit-in-reply is filed on behalf of the assessing officer in each of the petition.

11. Shri Nitin Mehta, learned counsel for the Revenue has vehemently submitted that in the facts and circumstances of the case, more particularly for the reasons stated in the show cause notice and being satisfied that a case is made out for special audit under section 142(2A) of the Act and only thereafter, the assessing officer has passed the impugned orders of special audit under section 142(2A) of the Act and that too after getting the approval from the respondent no. 2 herein i.e., Principal Commissioner of Income Tax, Ahmedabad IV.

11.1 It is further submitted by Shri Nitin Mehta, learned counsel for the Revenue that the orders for special audit under section 142(2A) of the Act in the present case have been made after giving opportunity to the petitioner, and therefore, before passing of the impugned orders, the principle of natural justice has been followed. It is further submitted by Shri Mehta, learned counsel for the Revenue that as per section 142(2A) of the Act, apart from the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and in the interest of the Revenue, if the assessing officer is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Commissioner, direct the assessee to get the accounts audited by an Accountant [Special Auditor]. It is submitted that in the present case, having found that looking to the multiplicity of transactions in the accounts and specialized nature of business activities of the assessee and in the interest of Revenue, it is necessary to get the accounts of the assessee audited by Special Auditor, the assessing officer has rightly passed an order under section 142(2A) of the Act.

11.2 It is further submitted by Shri Nitin Mehta, learned counsel for the Revenue that in the present case, the complex issues involved in the erstwhile firms and the companies before conversion and amalgamation. It is further submitted that even there are complex issues and multiplicity of transactions in the accounts of the assessee in relation to introduction of land and revaluation of the same over a period of time; successions/conversion of firms to a company, treatment of capital account of partners as loan, valuation of land at unreasonable premium and other issues, and therefore, accounts of the assessee are required to be audited by special auditor in the interest of the Revenue.

11.3 It is further submitted that there was conversion of four firms viz., (i) Chanakya Infrastructure; (ii) Chanakya Buildcon; (iii) Takshshila Gruh Nirman; (iv) Yongstar Infrastructure into the four companies i.e., Chanakya Infracon Private Limited; Chanakya Buildcon Private Limited; Youngstar Infracon Private Limited and Takshishila Properties Private Limited and later merger of one more company Takshshila Realities Private Limited with four above mentioned companies into the Transferee company i.e., Takshshila Gruh Nirman Private Limited. The order of five companies merging into Takshshila Realities Private Limited was passed on 10-5-2012 by the High Court of Gujarat in Financial Year 2012-13, relevant to assessment year 2013-14. There is a complex web of transactions in the group of firms and the conversion of firms into companies and their amalgamation/merger thereafter. The issues relate to introduction of land by partners into the firms, revaluation of land, credit of partners capital account equal to the revalued amount of land, conversion of capital account to loan account of shareholders and issue relating to issue of equity shares against the balances of revaluation credits at a premium. The above issues are clubbed with multiple revaluation of properties over the years, starting from 2008 to 2013 and also includes the fact of valuation of shares by discounted cash flow method and allotment of shares against the amounts outstanding as unsecured loans at unreasonable premium. It is submitted that therefore, in the facts and circumstances of the case, the assessing officer is justified in passing the impugned order under section 142(2A) of the Act.

11.4 It is further submitted by Shri Nitin Mehta, learned counsel for the Revenue that in the facts and circumstances of the case, it cannot be said that the respondent no. 2-Principal Commissioner of Income Tax has not applied his mind and/or that there is non application of mind on the part of the Principal Commissioner of Income Tax in granting approval. It is submitted that against the show cause notice, objections were raised by the petitioners and the order disposing of the objections were placed before the Principal Commissioner of Income Tax with other materials and only thereafter, after considering the above material, the Principal Commissioner has accorded the approval.

12. Now, so far as reliance placed upon a decision of Kerala High Court in the case of Muthoottu Mini Kuries (supra) by the learned counsel for the petitioner, in support of his submissions that unless and until the books of account are before the assessing officer and after verification of the books of account, the assessing officer is of the opinion that there is a complexity in the account and/or he doubts the correctness of the accounts and then and then only the assessing officer can pass an order under section 142(2A) is concerned, it is submitted by Shri Nitin Mehta, learned counsel for the Revenue that the said decision has been rendered prior to amendment in section 142(2A) of the Act. It is submitted that after the amendment in section 142(2A) of the Act, apart from the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the account, if the assessing officer is of the opinion that having regard to the specialized nature of business activities of the assessee and in the interest of Revenue, the assessing officer may pass an order under section 142(2A) of the Act. It is submitted that with respect to specialized nature of business activities of the assessee, there need not be any books of account before the assessing officer at the stage of passing of the order under section 142(2A) of the Act.

12.1 Making the above submissions and relying upon recent decision of Division Bench of this Court in the case of Ulhas Securities (P.) Ltd. v. Dy. CIT (2017) 393 ITR 514 (Guj.) in which the Division Bench of this Court has considered the amended Section 142(2A) of the Act, it is requested to dismiss the present petitions.

13. In reply to the above, Shri JP Shah, learned counsel for the petitioner has submitted that the decision of Division Bench of this Court in case of Ulhas Securities (P.) Ltd. (supra) shall not be applicable to the facts of the case on hand. It is submitted that in the case before the Division Bench, it was a case wherein requisitioned material comprising 40,000 papers in 42 gunny bags were collected during the search and seizure operation which were required to be verified and scrutinized, and therefore, there might be a justification for special audit under section 142(2A) of the Act. It is submitted that therefore, the decision in the case of Ulhas Securities (P.) Ltd. (supra) shall not be applicable to the facts of the case on hand.

14. Heard respective counsels appearing for the petitioner as well as Revenue at length.

15. At the outset, it is required to be noted that the impugned orders have been passed by the assessing officer of Special Audit in exercise of powers under section 142(2A) of the Act. Therefore, while considering the legality and validity of the impugned orders passed under section 142(2A) of the Act, section 142(2A) of the Act is required to be referred to and considered, which read as under :–

142(2A). If, at any stage of the proceedings before him, the assessing officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the assessing officer may require:

Provided that the assessing officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.”

15.1 Thus, considering the amended section 142(2A) of the Act, if at any stage of the proceedings before him, the assessing officer, having regard to (a) the nature and complexity of the accounts; (b) volume of the accounts; (c) doubts about the correctness of the accounts; (iv) multiplicity of transactions in the accounts; or (v) specialized nature of business activity of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Commissioner of Income Tax, direct the assessee to get the accounts audited by an accountant [Special Auditor]. As per the proviso to section 142(2A) of the Act, before passing an order of Special Audit and prior to directing the assessee to get the accounts so audited, the assessing officer is required to give a reasonable opportunity of being heard to the assessee.

16. In the present case, before passing the impugned Orders under section 142(2A) of the Act, opportunity of being heard has been duly given to the assessee and show cause notices were issued and served upon the petitioner calling upon the petitioner to show cause why, for the reasons stated in the said notice, the books of account may not be subject to audit by a special auditor. It is required to be noted that in the show cause notice, reasons were specifically mentioned pointing out the necessity to get accounts audited by the Special Auditor. That thereafter, the petitioner-assessee raised objections in detail, which have been disposed of by the assessing officer by speaking order and only thereafter, after seeking approval from the Principal Commissioner of Income Tax; as required under the Act, the assessing officer passed the impugned orders under section 142(2A) of the Act. Therefore, as such, the procedure which is required to be followed, while passing the order under section 142(2A) of the Act, has been duly followed by the assessing officer.

17. Now so far as submission made on behalf of the petitioner that the assessing officer cannot direct special audit under section 142(2A) of the Act before calling for the accounts from the petitioner in the assessment proceedings and without doubting the accounts and/or considering the complexity in the accounts is concerned, it is required to be noted that as per amended section 142(2A) of the Act, apart from the nature and complexity of the accounts, etc., even in case of multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and the interests of the Revenue, the assessing officer can pass an order for special audit in exercise of powers conferred under section 142(2A) of the Act. Therefore, while forming an opinion to get the accounts audited by special auditor; considering the specialized nature of business activities of the assessee, there need not be any books of account before the assessing officer. In the present case, having found that there are complex issues relating to introduction of land by the partners into the firms; revaluation of land; credit of partners in capital account equal to revalued amount of land; conversion of capital account to loan account of shareholders and issues relating to issuance of equity shares against the balances of revaluation credits at an unreasonable premium, and after having been satisfied that considering the specialized nature of business activities of the assessee, the assessing officer has passed an order of special audit in exercise of powers under section 142(2A) of the Act.

18. We see that the decision for audit of the assessees’ account is backed by proper material on record and reasons recorded by the assessing officer. His formation of belief that looking to the multiplicity of the transactions in the accounts and specialized nature of business activities of the assessee, a special audit is called for, and therefore, it cannot be faulted.

19. At this stage, it is required to be noted that the following material weighed with the assessing officer, while forming an opinion that there is necessity for accounts of the assessee audited by special auditor.

“That, the 5 Companies, which have amalgamated with Takshashila Gruh Nirman Pvt. Ltd., have their beginning as partnership firms, which were already doing the real estate and construction business and were executing various projects like Takshashila Residency at Naroda Dehgam Road, Takshshila Colonials at Maninagar and Takshshila Habitat at Vastral, apart from hotel and commercial projects. Hotel projects with shops were earlier executed by Chanakya Buildcon, later by Chanakya Buildcon Pvt. Ltd. and now after amalgamation the present Takshshila Gruh Nirman Pvt. Ltd. has completed project and entered into sale agreement. Chanakya Infrastructure commenced construction of Takshshila Habitat and in the middle of the construction, the firm was converted into Company viz., Chanakya Infracon Pvt. Ltd. under chapter IX of Company Act. Now, the Chanakya Infracon Pvt. Ltd. has been amalgamated with Takshshila Gruh Nirman Pvt. Ltd. Similar is the case with Takshshila Gruh Nirman, a firm converted into company Takshshila Properties Pvt. Ltd. and amalgamated with Takshshila Gruh Nirman Pvt. Ltd. The 80-IB project Takshshila Colonials, for which approval was granted by Local Authority to erstwhile firm and stock-in-trade/CWIP has changed hands and the 80-IB deduction is being claimed in the present Takshshila Gruh Nirman Pvt. Ltd. (Takshshila Realities Ltd.)

That, at the time of formation or at the later date some of the partners brought land into the firms as their capital contribution. Before conversation to companies, the firms got the lands available in the books revalued and the amounts were credited in the current capital accounts of the partners.

Consequent to amalgamation, the Company has issued and allotted 6,00,000 equity shares at a fair price of Rs. 10 and a premium Rs. 390 per share against the unsecured balances of Rs. 24 Crores, treating the same as share application money and share premium. The fair market value of shares has been arrived by the company on ‘Discounted Cash Flow (DCF) method. The basis for free cash flow to equity is randomly taken by the company.

Conversation of 5 firms into companies, after revaluation of lands, merger of 5 companies with Takshshila Gruh Nirman Pvt. Ltd. Later with issue of equity shares against the balances of revaluation credits at a premium. Valuation of shares as Discounted Cash Flow method by estimating cash flows and adopting a random discounted rate for valuation. There is complex web of transactions in the group of firms namely introduction of land by some of the partners, revaluation of lands and crediting of amounts in the current accounts of all partners, conversion of firms in to companies which merged with the existing company, valuation of share by discounted cash flow method and allotment of shares against the amounts outstanding as unsecured loans at unreasonable premium, clubbed with multiple revaluation or properties over the years starting from 2008 to 2013 in various entities involves application of provisions of the Companies Act, application of Accounting Standards and examination of provisions of capital gains in the hands of various partners, firms and directions is involved. Having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of transaction in the cases which finally of the assessee, and the interests of the revenue, am of the opinion that it is necessary to get the accounts audited by a Special Auditor from the point of view of taxation of capital gains and accounting of stock-in-trade at each stage of transfer so that there is no loss to the revenue out of the complex web of transactions involved.”

20. Considering the aforestated facts and circumstances of the case and having regard to the multiplicity and specialized nature of transactions and in the interests of the Revenue, when the assessing officer has passed the impugned orders of special audit under section 142(2A) of the Act, the same cannot be faulted with.

21. At this stage, decision of Delhi High Court in the case of DLF Ltd. v. Addl. CIT (2014) 366 ITR 390 (Delhi) is required to be referred to and considered. In the said decision, Delhi High Court has considered scope, ambit and powers of the assessing officer, while passing order under section 142 of the Income Tax Act. In the said decision, it is observed that section 142(2A) of the Act is an enabling provision to help and assist the assessing officer to complete the scrutiny assessment with the assistance of an accountant. In paragraphs 10, 11, 26 & 27 of decision, Delhi High Court has observed as under :–

“10. Aforesaid rulings when appraised and reflected, state that while examining the question of complexity in accounts, we have to apply the test of reasonable man by replacing the word and qualities of a reasonable man, with the word and qualities of a reasonably competent assessing officer. The question of complexity of accounts has to be judged applying the yardstick or test; whether the accounts would be complex and difficult to understand to a normal assessing officer who has basic understanding of accounts etc., without the aid, assistance and help of a special auditor. Thus due regard has to be given to nature and character of transactions, method of accounting, whether actuarial were adopted for making entries, basis and effect thereof, etc., though mere volume of entries might not be a justification by themself as volume and complexity are somewhat different. Accounts should be intricate and difficult to understand. Every scrutiny assessment entails investigation and verification of the books of accounts, genuineness of the transactions or entries reflected in the books, computation of income etc. It is an exercise which demands expertise and a degree of skill to understand the accounts and decipher whether true and full income has been disclosed; whether there has been jugglery in the accounts or camouflage has been adopted. No undesirable assumptions should be made and a return filed is presumed to be correct, but a deep and in depth scrutiny depending upon the facts may be warranted. Section 142(2A) is an enabling provision to help and assist the assessing officer to complete scrutiny assessment with the help of assistance of an accountant.

11. There has been substantial expansion of scope and ambit of Special Audit under section 142(2A) of the Act with effect from 1-6-2013. The amended section has been widened to include volume of accounts, doubts about correctness of accounts, multiplicity of transactions in the accounts or specialised nature of business activity of an assessee. These amendments by Finance Act, 2013 with effect from 1-6-2013, substitute the words “nature and complexity of accounts of the assessee”. We are not concerned with the said amendment in the present case as the impugned order in question directing special audit was passed on 25-3-2013, before the amendments became effective. We are, therefore, primarily concerned with whether or not keeping in view the nature and complexity of accounts and the interest of Revenue direction for special audit is justified for the reasons set out in the order dated 25-3-2013. (We have not examined the constitutional validity of the amended provisions and we express no opinion on the said aspect).

26. Powers under section 142(2A) have to be exercised in terms of the legislative provisions. The object and purpose behind the legislation is to facilitate investigation and proper determination of the tax liability. The importance and relevancy of the legislation cannot be underestimated and it is a power available with the assessing officer to aid and assist him. Accounts should be accurate and provide real time record of the financial transactions of the assessee. Preparation of accounts is the work of the accountant on the payrolls or employed by the assessee. In order to ensure reliability and accuracy, enterprises resort to internal audit and an external audit which can be a statutory audit. Internal audits are normally conducted in house generally by acquainted or qualified accountants. Statutory audit is compulsory under the Companies Act, 1956 or when stipulated by the Act and accounts have to be audited by a qualified Chartered Accountant. Chartered Accountants are not ordinary accountants but specialists who have successfully undergone academic study and have extensive practical experience and trained for the said work. Curriculum requires article-ship under a mentor who is himself a Chartered Accountant with some years of experience. As opposed to an ordinary accountant, a Chartered Accountant with his experience and academic background is in a better position to investigate, examine and scrutinize entries and records of financial transactions. Calibre and competence of Chartered Accountants is of a high degree and should not and cannot be equated with the capability of an ordinary accountant or a normal person having knowledge or acquainted with accounts. Off late there has been demand for increased public scrutiny of accounts, inspite of statutory audit. Enron and other cases abroad and Satyams case in India have highlighted the need and necessity to have controls and system of checks, perhaps even beyond scope of traditional audit. Financial statements and accounts are being increasingly exiguously examined to rule out possibility of wrong doings, cover up or evasion of taxes. Financial statements and accounts are coming under increasing scrutiny and investigation. A Chartered Accountant is a financial investigator and prober, is required to be curious, tenacious and well conversant to identify and unearth frauds, misreporting and wrong claims in the accounts.

27. The aforesaid observations should not be construed as a general expression or opinion, that every account or statement of income must be viewed with suspicion, distrust and scepticism. The past instances are mere warnings, for closer and more indepth scrutiny. It is also a fact that the business transactions have become more complicated and accounting entries more complex than ever before. This may be one of the causes why possibly the frauds could not be detected in some cases. Indeed such cases have made the audit work more comprehensive, intrusive and investigative. Ethical managements may at times regard such enquiries as an unwarranted intrusion or a hounding approach. Section 142(2A) does not permit fishing or roving inquiry approach or a witch hunt but is a regulated provision which accepts the need and necessity of the assessing officer to take help of an expert accountant i.e. a Chartered Accountant, a person who is academically qualified and has practical experience to understand accounts and unearth tax evasion or furnishing of inaccurate particulars etc. The provision balances the right of the Revenue with the inconvenience which the assessee may face. Assessing officers are not Chartered Accountants and when required and permissible, therefore, can take help and assistance from the qualified specialists to complete the assessment and determine the taxable income of an assessee.”

22. In view of the above and for the reasons stated hereinabove, more particularly considering the scope and ambit of section 142(2A) of the Act, it cannot be said that in the facts and circumstances of the case, the respondent has committed any error and/or any illegality while passing the order under section 142(2A) of the Act. Under the circumstances, the present writ petitions deserve to be dismissed and are accordingly dismissed. Rule nisi issued in each case stands discharged. No costs.

Download Judgment/Order

More Under Income Tax

Posted Under

Category : Income Tax (25148)
Type : Judiciary (9971)
Tags : high court judgments (4004)

Leave a Reply

Your email address will not be published. Required fields are marked *