Dishman Infrastructure Limited Vs ACIT (Gujarat High Court)
Request made by the learned Sr. Advocate Mr.M. R. Bhatt for the respondent to exclude the period during which the present petition remained pending in the High Court after issuance of the notice i.e. from 14.6.20201 till this date, deserves to be considered for the purpose of Section 142(2C) of the Act. The Supreme Court in case of VLS Finance Ltd. & Anr. Vs. CIT & Anr. (supra), dealing with similar issue observed as under:-
“23. We, therefore, agree with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the Court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, may not be a valid argument to the issue that is being dealt with. The assessing officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the assessing officer would not proceed with the assessment till the time the special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The assessing officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the assessing officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the assessing officer at that time. It is stated at the cost of repetition that in the estimation of the assessing officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the assessing officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.”
Applying the ratio of the afore-stated judgement to the facts of the present petitions, it is directed that the period during which both the petitions remained pending i.e. from the date of issuance of notice on 14.6.2021 till the date of pronouncement of judgement, shall be excluded while counting the period prescribed in the proviso to Sub-section (2C) of Section 142 of the said Act. Subject to the said direction, the petitions are dismissed.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. Both the petitions, being inter-connected with each other, involving similar questions of law and facts, were heard together finally at the admission stage with the consent of the learned Advocates for the parties, and hence are being decided by this common judgement.
2. Initially, the petitioners in both the petitions had challenged the order dated 8.4.2021 passed by the respondent, disposing of the objections raised by the respective petitioners against the proposed referral for special audit within the meaning of Section 142(2A) of the Income Tax Act, 1961 (hereinafter referred to as the “said Act”), and had also challenged the impugned directions given by the respondent to the petitioners vide the communication dated 22.4.2021 under the said provisions. To be precise, following prayers were sought in both the petitions:-
7. … that this Hon’ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, direction or order and be pleased to:
(a) quash and set aside the impugned order dated 8.4.2021 at Annexure-A to this petition;
(b) quash and set aside the impugned directions of 22.4.2021 at Annexure-A to this petition;
(c) pending the admission, hearing and final disposal of this petition, to stay implementation and operation of the notices at Annexure-A to this petition;”
3. However, at the time of hearing, the learned Sr. Advocate Mr. S. N. Soparkar did not press for the challenge to the impugned order dated 8.4.2021 and confined himself to the challenge to the impugned directions dated 22.4.2021. The Court, therefore, while issuing “notice” to the respondent in both the petitions, had passed the following order on 14.6.2021:-
“1. The Petitioner by way of present petition has sought to challenge the impugned order dated 8.4.2021 at Annexure-A as well as the impugned directions dated 22.4.2021, which are also part of Annexure-A.
2. After arguing for some time, learned Senior Advocate Mr. S.N.Soparkar for the petitioner confines himself to the challenge to the impugned directions dated 22.4.2021 (Annexure-A) and does not press for the challenge to the impugned order dated 8.4.2021 (Annexure-A).
3. Issue Notice as regards the challenge to the impugned directions dated 22.4.2021 (Annexure-A), returnable on 28.6.2021.
4. In the meantime, it is needless to say that the Special Auditor shall confine himself to the scope of Section 142 (2A) of the Income Tax Act read with Rule 14A and Form 6B of the Income Tax Rules.“
4. In view of the above order, the prayer contained in Paragraph 7(a) with regard to the challenge to the impugned order dated 8.4.2021 has stood rejected, as not pressed for in both the petitions. As regards the remaining challenge to the impugned directions dated 22.4.2021, the factual matrix as stated in the Special Civil Application No.7618 of 2021 is taken into consideration for the sake of convenience.
4.1 The petitioner is a limited Company of which most of its shareholders are citizens of India. The petitioner is in the business of development of Special Economic Zone (SEZ) at Village Bhamsara, Kalyanghadh, and Ghangad, Near Bagodara. On 19.12.2019 and on subsequent dates, a search/seizure and survey actions were conducted in “Dishman Group” and voluminous data/materials/documents were seized from the various premises, including the residential premises of the petitioner. Consequent to the search action, the proceedings under Section 153A of the Act have been initiated in case of the petitioner – assessee.
4.2 On 23.2.2021 the respondent issued a notice under Section 142(1) of the said Act, calling upon the petitioner to furnish the details as mentioned therein. According to the petitioner, since the respondent had called for the numerous details spanning across 10 years and since Covid-19 Pandemic situation was prevailing, the petitioner took time to compile all the details and submit the same.
4.3 On 19.3.2021, the respondent issued a notice under Section 142(2A) of the said Act and also supplied the Satisfaction Note drawn for referring the case for an independent audit. The petitioner objected to the said notice and sought the copies of the statements of Bharatbhai Padia and Chiragbhai Thakkar and also sought personal hearing vide the letters dated 27.3.2021 and 30.3.2021.
4.4 The petitioner was communicated vide letter dated 31.3.2021 to collect the requisite statements on 1.4.2021. The petitioner was also granted an opportunity of hearing by fixing the hearing on 5.4.2021, however, petitioner neither collected the statements, nor remained present for personal hearing.
4.5 The petitioner instead challenged the said notice dated 19.3.2021 before this Court by filing a petition being SCA No.6033 of 2021, which subsequently came to be withdrawn as per the order dated 5.4.2021.
4.6 On 5.4.2021, the petitioner intimated the respondent that the copies of the statements were not provided. On 6.4.2021 the petitioner was provided with the copies of the statements of Mr.Bharat Padiya and Mr.Chirag Thakkar. On 7.4.2021, the petitioner wrote a letter, seeking copies of the seized material from Mr.Rajiv Shah and the findings of the Investigation Wing.
4.7 The respondent after considering the objections of the petitioner contained in the letter dated 27.3.2021 passed the impugned order on 8.4.2021 disposing of the said objections. Thereafter, the respondent issued the impugned directions on 22.3.2021 under Section 142(2A) of the said Act.
5. Both the petitions containing almost identical facts have been resisted by the respondent by filing the affidavits-in-reply, to which the respective petitioners have filed their affidavit-in-rejoinder.
6. During course of the arguments, the learned Sr. Advocate Mr.Soparkar for the petitioners in both the petitions made the following submissions:-
6.1 The Assessing Officer before making the reference under Section 142(2A), is required to peruse the accounts, make a genuine and honest attempt to understand the accounts, appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee.If the Assessing Officer is still not able to understand, then he may make reference to the special auditor, after providing an opportunity of hearing to the assessee, as observed by the Supreme Court in case Sahara India (Firm) Vs. Commissioner of Income-tax & Anr., reported in 300 ITR 403. However, in the present case, the respondent had not undertaken any of such exercises and sought voluminous account and data from the petitioners on 23.2.2021.
6.2 The show-cause notices under Section 142(2A) were issued on 19.3.2021 to the petitioners in utter disregard of the provisions contained in Section 142(2A), delegating his adjudicatory function to the auditor.
6.3 As held by the Supreme Court in case of Rajesh Kumar & Ors., Vs. Deputy Commissioner of Income-tax & Ors., reported in 287 ITR 91 (SC), the assessment proceedings are part of a judicial process and are not administrative in nature. The opinion of the Assessing Officer is required to be based on an objective criteria and not on subjective satisfaction, as held by the Supreme Court in case of Sahara India (Firm) Vs. Commissioner of Income-tax & Anr., (supra).
6.4 The special auditor cannot go into and examine the legal issues or question regarding the taxability, which otherwise is required to be done by the Assessing Officer himself. However, in the instant case, the respondent has delegated upon the auditor, the
investigation into the affairs of the petitioners, including the social functions, analysis of the seized documents and forming an adjudicatory opinion of the impact and the consequences of the same, not only on the income of the petitioners for the current year, but for the other years and other laws and other assessees. In this regard, reliance is placed on the decisions of the Delhi High Court and Calcutta High Court.
6.5 An appraisal report was made by the investigating team after a search, to the concerned Assessing Officer and such report encompassed complete and thorough analysis done on the seized documents by the investigating team, and therefore, the Assessing Officer had sufficient assistance to understand the seized documents. Therefore, the delegation of the work of both – the investigating officer as well as of the Assessing Officer upon the Special Auditor is bad and illegal.
6.6 As regards the voluminous 50 TB of data and 22000 plus loose papers found during the search operation, it is submitted that during the post-search investigation proceedings, personal hearings were granted and exhaustive submissions were filed by the petitioners. On the basis of the same, the DDIT(Inv), Unit 1(3), Ahmedabad had quantified the undisclosed income to the tune of Rs.3,959 crore, as reflected in the satisfaction note of the respondent. However, disregarding the said report, the respondent again intends to repeat the same exercise.
6.7 The respondent cannot make a reference under Section 142(2A) solely “in the interest of revenue”. The condition of interest of
revenue is a joint condition with any one of the previous conditions.
6.8 Many queries raised in reference have no bearing on the seized documents but are related to the assessment of the income as such. As observed in case of Principal Commissioner of Income-tax Vs.Saumya Construction (P) Limited, reported in (2016) 387 ITR 529 (Gujarat), the assessments pursuant to search and seizure have to be limited to only incriminating materials found during the search, and no normal additions can be made in the assessment, by making a rowing inquiry.
6.9 In case of Vodafone Mobile Services Limited Vs. Dy. Commissioner of Income Tax (W.P. (c) No.4081/2016), it has been held that the special auditor must confine himself to the accounts. The special auditor has limited scope and is not an adjudicator.
6.10 As regards the issue of international transactions, the respondent has already referred the issues of international transactions to the Transfer Pricing department on 13.4.2021 and now in the impugned directions again has referred the issues of cross border transactions to the special auditor.
6.11 The information which refers to the violation of section 269SS/T or dis-allowability of expenses under Section 37(1) is already certified by the Tax Auditor and verified by the Assessing Officer during the assessment proceedings which are completed till A.Y. 2015-16.
6.12 As regards the applicability of other laws, the auditor is not expected to do roving and fishing inquiries and he cannot be expected to do the work of the Assessing Officer. The said work has to be done by the respondent Assessing Officer himself by examining the legal position and decided in accordance with law.
7. Per contra, the learned Sr. Standing Counsel Mr.M.R. Bhatt for the respondent made the following submissions:-
7.1 The petitioners having the orders dated 8.4.2021 disposing of the objections of the respective petitioners against the proposed referral for special audit under Section 142(2A) of the Act, the Court is required to examine the challenge to directions dated 22.4.2021 only.
7.2 Section 142(1)(ii) and (iii) entitles the Assessing Officer to call upon the assessee to produce such account or document as the Assessing Officer may require or to give information as the Assessing Officer may require.
7.3 Section 142(2),(2A) also requires the assessee to furnish a report of such audit in the prescribed form (Form 6B) setting forth such particulars as may be prescribed and such other particulars as may be required by the Assessing Officer.
7.4 Form 6B is in three parts. The first part requires the special auditor to examine balance sheet, profit and loss account etc., the second part requires the to obtain all the information the purpose of audit, and the third part requires the opinion of the special auditor. It is submitted that the report by the special auditor in the form 6B is not restricted to the Annexure stated in the said form but would also contain such other particulars as were required by the Assessing Officer. This can also be culled out from the guidance notes of tax audit, issued by the institute of Chartered Accountant.
7.5 Insofar as the terms of reference are concerned, for each and every direction, respondent has offered comments in tabular form, in an excel sheet, separately filed. The directions issued by the Assessing Officer are strictly in consonance with Section 142(2A) read with Form 6B.
7.6 The arguments made by the petitioner during the course of hearing essentially pertained to the order dated 8.4.2021 directing the special audit, which as such has not been pressed into service as per the order passed by the Court on 14.6.2021.
7.7 The respondent has issued the impugned directions under Section 142(2A) after issuing summons to the assessee under Section 142(1), after pursuing the record available, after recording the satisfaction, after considering and disposing of the objections raised by the petitioner.
7.8 During the search proceedings several documents and digital evidence in the form of hard drives, mobile data, laptop data and other storage device were found and seized from the petitioner’s premises, including the residential premises. The total volume of digital data runs into more than 50 plus HD drives of 1 TB each i.e. more than 50 TB size data. There is SAP software data also seized from the petitioners’ premises. The loose material seized by the department during the course of search proceedings runs into more than 22000 pages. Hence, from the said seized material, it was gathered that the petitioner was running an organized activity of providing accommodation entries along with the other unaccounted transactions resulting into tax evasion.
7.9 Placing reliance on the affidavit-in- reply, filed on behalf of the respondent, it has been submitted that the petitioners were involved in providing accommodation entries, money laundering, as there were transactions with almost 290 parties having no business relations with the petitioners for giving loans and advances. There were complex issues relating to the accommodation entries with around 300 people involving an amount of about Rs.1,500 crore. There were bogus claims of expenditure, higher income shown through inflated sales and commission income, sale of unaccounted scraps, transactions with foreign subsidiaries and the sales routed through them without availing any actual services, etc.
7.10 The petitioners being in the business of specialized activity of developing the molecules on behalf of third parties, and the technology transfer getting involved into the transactions required specialized skill and knowledge.
7.11 As regards the correctness of books of accounts, it was found from the impounded material that numerous transactions reflected in the bank statements were recorded in some other names. The said facts were duly accepted by Shri Harshil Dalal, Group CFO of the assessee company during the course of recording his statement.
7.12 Thus, the ingredients of Section 142(2A) with regard to the nature and complexity, volume, doubts about the correctness and multiplicity of transactions being found in existence and since it was in the interest of revenue, the special audit has been directed after complying with the requirement of principles of natural justice. Reliance is placed on the decisions in case of Ulhas Securities (P) Ltd. Vs. DCIT, reported in 393 ITR 514 (Guj), in case Cama Hotels Ltd. Vs. Samir Vakil for His Successor DCIT (OSD) & and in case of Tehmul Burjor Sethna Vs. ACIT, reported in 418 ITR 596.
7.13 As per the proviso to Section 142(2C), the special auditor is required to give his report within 180 days, however, due to absolute non-cooperation by the petitioner – assessee coupled with voluminous record as referred, and taking note of Supreme Court’s decision in case of VLS Finance Ltd. & Anr. Vs. CIT & Anr., reported in (2016) 384 ITR 1 (SC), the period during which the petition remained pending be excluded for the purpose of calculating the limitation.
8. At the outset, it may be noted that though there is voluminous record produced and lengthy arguments advanced by the learned Advocates for the parties, the issue involved in the present petitions runs in a very narrow compass. As stated earlier, the petitioners had initially challenged the legality and validity of the order dated 8.4.2021 disposing of the objections raised against the proposed referral for special audit and also challenged the legality of the directions issued under Section 142(2A) of the said Act vide the order dated 22.4.2021, however, at the initial hearing of the petitions on 14.6.2021, the learned Sr. Advocate Mr.Soparkar for the petitioners in both the petitions had confined himself to the challenge to the impugned directions dated 22.4.2021 and had not pressed for the challenge to the impugned order dated 8.4.2021. Ergo, the Court is required to examine the legality of the impugned directions dated 22.4.2021 only, whereby the respondent has directed the petitioners to get their books of accounts audited by the Accountant nominated by the Principal, CIT (Central-1), Ahmedabad, and directed the nominated Accountant to submit the report as per Rule 14A of the Income-Tax Rules in the prescribed Form No.6B, and further directed the nominated Accountant to go through the XLV issues/points mentioned therein. The petitioners have been directed to submit the report of the Accountant within 90 days from the date of the said directions. It may be pertinent to note that the necessary corollary of not challenging the order dated 8.4.2021 would be that the petitioners in both the petitions do not challenge the powers of the respondent to pass the order for special audit as contemplated under Section 142(2A) of the said Act, nor do they challenge the decision-making process followed by the respondent while passing the said order dated 8.4.2021.
9. In the backdrop of the aforesaid, and for the better appreciation of the rival contentions raised by the learned Advocates for the parties, it would be germane to reproduce the relevant provisions contained in Section 142(2A) of the Act, the Rule 14A of the Income-Tax Rules, as also the Form No.6B annexed to the Rules:-
“Inquiry before assessment.
