A) The rationale behind the introduction of the provision of Special Audit
√ Assessee is liable to get its account audited u/s 44AB only when the situation stated in Section 44AB triggered which are mostly based on the Turnover/Gross receipt Criteria.
√ The main objective of the introduction of Section 44AB is to determine whether the tax liability calculated by Assessee is following Provisions & rules of the Income Tax Act or not.
√ Filing of the Tax Audit Report u/s 44AB by the chartered Accountant selected by the assessee is not the full proof solution in all the circumstances.
√ It means even after filing of report u/s 44AB certain core investigation still required by the revenue which depends upon case to case.
√ It might also be possible that if assessee who is not liable to get its accounts audited u/s 44AB because his turnover is below 1Cr. runs such kind of business which is specialized in nature.
√ The nature of transactions, volume of the transaction, the complexity of Accounts requires special concern.
√ Report of the Tax Audit may not cover these issues if the assessee is liable to get its account.
√ Here is the requirement of special Audit U/s 142(2A) arise.
√ During Assessment proceedings, the order is to be passed within time limits prescribed u/s 153 of the Act. For example, for AY 2019-20 order must be passed on or before 31/03/2021. It means roughly 1 year is available for AO to complete the Assessment.
√ In that case, to complete the Assessment promptly AO can order for special audit u/s 142(2A) of the Act after obtaining the prior approval of CIT.
√ Chartered Accountants nominated by Commissioner for this purpose also require some time to complete the audit. Hence, in such a case AO requires some extra time to complete the assessment.
√ Therefore, for completion of Assessment in such a case Explanation to Section 153 is introduced in the Act.
B) Decoding of Section 142(2A) to 142(2D) of the Income Tax Act, 1961
I) Analysis of word “Proceeding’’ pending before him i.e. Assessing Officer
√ Direction for Special Audit can only be given by Assessing Officer. Commissioner of Income Tax can’t direct the assessee to get his accounts audited u/s 142(2A) of the Act.
√ Joint Commissioner of Income Tax can give direction for Special Audit since he can also be an Assessing Officer.
√ However, before giving the direction of the Special Audit prior Permission of PCCIT/CCIT/PCIT/CIT is required. It means they are indirectly involved in giving the direction of Special Audit to the Assessee.
√ Direction for Special Audit can be given only when the Proceedings in pending before him i.e. before AO. Proceedings may be Assessment Proceedings or penalty Proceedings before AO like Penalty Proceedings u/s 270A.
√ The penalty Proceedings U/s 270A can also be initiated by the Commissioner of Income Tax (Appeals) or CIT. Still, they can’t give direction for Special Audit. Because only proceedings initiated by AO is covered.
√ All types of Assessment Proceedings are covered here means 143(3)/144/147/153A.
√ The Proceedings before CIT(A)/CIT whether u/s 263 or 264 /ITAT/High Court/Supreme Court is out of the scope of Section 142(2A) of the Act. It means they can’t give the direction to Assessee for Special Audit
√ In the event of remanding back the case to the AO i.e. set aside or canceled the Assessment with the direction to make a fresh assessment as referred to in Section 153(3), it is deemed that such proceedings are pending before the Assessing Officer.
√ In that case, AO can give direction for special Audit u/s 142(2A). The time limit of completion of the assessment is enhanced by Explanation to Section 153 in such a case.
√ In case of direction is given by higher authority the Assessment Jurisdiction of AO is limited to the direction & not beyond that.
√ For Example, ITAT gives directions to the Assessing Officer to reassess Income A & B only & keep the rest of the order is intact. This type of case is dealt with following Section 153(6) of the Act. In that situation, if AO wants to give the direction for Special Audit to the Assessee then logically scope of Special Audit should be limited to Income A & B only.
√ Proceedings must be pending before the Assessing Officer. The direction for special Audit can’t give to the Assessee before the Assessment or after the conclusion of the Assessment.
√ It means such direction can’t be given by AO to decide whether to open the case of the Assessment of Assessee or not.
√ Similarly, this direction can’t be given by AO after passing of the Assessment Order.
√ For Example, CIT(A) allows the Assessee Mr. X expenses D of Rs 20 Lacs on the ground of the Latest Supreme Court Judgment which was initially disallowed by the AO u/s 143(3). Before the filing of further Appeals to ITAT revenue wants to ensure the possible outcome of the Appeals. Therefore, he permitted AO to give direction for Special Audit to Assessee. Comment
Ans – Since the Assessment Proceedings are already concluded therefore Direction for Special Audit given by AO is not tenable as per the law. Assessee can file Writ Petition against such directions.
√ Therefore, arbitrary use of Special Audit is not allowed under the Income Tax Act, 1961.
II) Analysis of the nature of transactions that are covered in Section 142(2A) of the Act.
√ The Direction for Special Audit can be given only if any of the following situations trigger & it is the interest of the revenue:
- Nature & Complexity involve in Accounts.
- The volume of the Accounts. For example, Transaction with a particular person has been entered numerous times. During the Year 90% of the goods sold on Credit by Mr. X to Mr. Y who is his relative. More than 20% amount is claimed as Bad debt u/s 36(1)(vii) of the Act.
- Doubt about the correctness of the Accounts
- The multiplicity of the transactions in the Accounts: It can be understood that a particular transaction occurs with a greater frequency during the year. For Example: During the year X Limit withdraw Rs 49,900/- from their current Account 170 times & at the same time deposit the same amount into their current account 150 times.
- Specialized nature of business Activities: For Example, Assessee is engaged in the business of oil Rigs in India.
√ Both the requirement must be satisfied before giving the direction of Special Audit. Since they are prerequisites before giving Direction of Special Audit.
√ Even if the complexity involved in the accounts is proved but due to which interest of the revenue doesn’t get adversely hampered then AO can’t give direction for Special Audit.
√ Before giving the direction of Special Audit appropriate opportunity of being heard is given to the concerned assessee.
III) Why Opportunities of being heard must be served to the Assessee before Direction U/s 142(2A)
> The factors which will become the base of the direction of Special Audit are subjective. It may vary from person to person.
> In some case, the Court held that the Assessing Officer must possess a working knowledge of accounts which are being subject to Assessment before him.
> The existence of a large number of monotonous entries doesn’t mean that complexity must be present in the Books of Accounts of the Assessee.
> Arbitrary misuse of Section 142(2A) may be possible also if proper opportunities are not given.
> For Example, Assessment Proceedings u/s 143(3) for AY 2017-18 is pending before the Assessing Officer. The order of assessment u/s 143(3) must be passed on or before 25th December 2019. Suppose today is 5th December 2019. AO realizes that it is impossible to complete the Assessment & assessment will get time-barred.
> In such a situation AO may give direction for Special Audit on the ground that accounts are complex on 26th December & direct the assessee to furnish the Audit report on or before 2 months i.e. up to 26th February 2020.
> Explanation to 153 will attract & AO will get 60 days more to complete the assessment in such a case.
> It is utmost that the matters which warrant that Assessing Officer should give direction u/s 142(2A) to assessee should come into the limelight of Assessee before such direction.
> This is why the proper reasonable opportunity of being heard should be given.
> If Directions u/s 142(2A) are issued without Proper opportunity of being heard Assessee can file a Writ to High Court & Court will quash such direction.
> If Assessee got opportunities & he proves that no complexities etc. are involved in the satisfaction of the AO then there is no need for such direction.
> Even after being satisfied with the AO issue directions u/s 142(2A) then Assessee can file a writ against such direction.
IV) Procedural Aspects of Special Audit u/s 142(2A) of the Income Tax Act, 1961
> Before giving the direction for Special Audit appropriate opportunity of being heard is given to the assessee.
> Special Audit shall be conducted by the Chartered Accountant so nominated by PCCIT/PCCIT/CCIT/CIT.
> Any Incidental Expenses including remuneration etc. is determined by the Commissioner of Income Tax & shall be paid by the Central Government.
> Even if the Audit of the Accounts of the assessee had been conducted under any law for the time being in force still he is liable to get his accounts audited u/s 142(2A) provided the Direction had been issued to him.
> For example, Assessee was subject to Statutory Audit under the Companies Act, 2013, Tax Audit us 44 AB of the Income Tax Act, 1961 & GST Audit under the CGST Act, 2017. In the given case also, AO can issue the direction u/s 142(2A) of the Income Tax Act, 1961.
> X’s case was opened u/s 147 of the Income Tax Act, 1961 for AY 2019-20. He hadn’t filed any ROI during his lifetime. During the year 2019-20, he earned Rs 2.2 Lacs which was subject to Section 68 of the Income Tax Act, 1961. After scrutinizing the accounts of the assessee there are certain complexities involved. In such a situation also, AO can issue direction U/s 142(2A) of the Act.
V) Audit Report U/s 142(2C) of the Income Tax Act, 1961
√ The Audit Report shall be submitted in Form 6B for which offline excel utility is available at www.Incometaxindiaefiling.gov.in & shall be submitted along with DSC of the Chartered Accountant so nominated by the Commissioner of the Income Tax.
√ Such report shall be submitted within such period as may be specified by the Assessing Officer.
√ Such a period may be extended by the Assessing Officer on suo moto or an application made by the Assessee on behalf of this.
√ However, in no case, maximum time limits will go beyond 180 days from the date when the Direction for Special Audit is received by the Assessee.
√ For Example, Assessment U/s 143(3) for Assessment Year 2017-18 is pending before the Assessing Officer for X Limited. After giving the proper opportunity to the assessee Direction for Special Audit is an issue by the Assessing Officer on 28th September 2019 by registered Post & Received by Assessee on 30th September 2019. AO direct that report must be submitted up to 31st December 2019. However, on 31st December 2019 AO suo moto increased the time by further 1 month i.e. up to 31st January 2020. On 28th January 2020 Assessee applied to extend the Time Limits. Up to how much time AO further allowed to submit the Audit Report
U/s 142(2C) of the Act?
Ans-
- As per Proviso to Section 142(2C), Audit Report U/s 142(2C) in no case extend beyond 180 days from the date when Direction is received by the assessee.
- In the given case Direction is received on 30th September 2019. The cumulative effect of Section 142(c) read with its proviso state that the audit report must be submitted maximum up to 31st March 2020 irrespective of the fact how many times it got extended.
- It is possible that for the same audit report AO can suo moto extent, as well as assessee, can further request for extension of submission of the Audit Report like in the above case.
- First Assessing officer Suo moto extends it & again it extended on the application of Assessee.
- One should have noted that the Time Limit of passing the order is normally, in this case, is 31st December 2019. But the Audit Report is not received up to 31st December 2019. Now the question arises that is assessment getting time-barred?
- The Answer is No. Such a situation is dealt with following the Explanation to Section 153 of the Act.
VI) Time Limits of passing the order as per Explanation to section 153 read with Section 142(2A) of the Income Tax Act, 1961
i) The time limits of passing the Assessment Order are dealt with following Section 153(1)/ 153(2)/ 153(3)/ 153(8).
ii) Appeal Effect referred to in Section 153(5) & Direction of higher authorities’ u/s 153(6) can’t be said to be assessment. These sections are drafted to give the special effect of the Judicial Pronouncement of Higher Authorities.
iii) Therefore, Explanation to Section 153 shouldn’t be applicable in such a case. Since explanation to Section 153 is applicable only in the case of Assessment Order.
iv) However, the case referred to in Section 153(3) is tantamount to fresh assessment proceedings pending before the concerned Assessing Officer. Hence, Explanation to Section 153 shall apply to the case referred to in Section 153(3) of the Income Tax Act.
v) The normal time limit u/s 153 shall be extended by:
the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and—
(a) ending with the last date on which the assessee is required to furnish a report of such audit under that sub-section; or
(b) where such direction is challenged before a court, ending with the date on which the order setting aside such direction is received by the Principal Commissioner or Commissioner;
Provided that where immediately after the exclusion of the aforesaid period, the period of limitation referred to in Section 153 available to the Assessing Officer for making an order of assessment or reassessment is less than sixty days, such remaining period shall be extended to sixty days.
VI) Comprehensive Example: The case of X Limited is pending for Assessment Year 2017-18 U/s 143(3) of the Act. However, due to the complexity involved in the Accounts of the Assessee Direction U/s 142(2) is issued on 28th August 2019. Such direction was received by Assessee on 1st September 2019. The assessing officer directs the Assessee to submit the Audit Report maximum up to 31st October 2019. Calculate up to when the Assessment Order should be made in different scenarios stated below:
Scenario 1: Case of No Extension at all either suo moto or on application & Audit report is submitted on:
Case (a): 10th October 2019
Case (b): 31st October 2019
Case (c): 10th November 2019
Case (d): Not Submitted at all.
Scenario 2: Assessee didn’t submit the Report up to 31/10/2019 & Assessing officer suo moto extend the date on 31st October 2019 & direct Assessee to submit the report up to 30th November 2019. Audit Report is submitted on:
Case (a): 30th November 2019
Case (b): 10st November 2019
Case (c): 10th December 2019
Case (d): Not Submitted at all.
Scenario 3: Assessee didn’t submit the Report up to 30/11/2019 & Assessing officer extend the date on 30th November 2019 & direct to submit the Report as per maximum time limits prescribed in Section 142(2C) i.e. on or before 28/02/2020.
Case (a): 28th February 2020
Case (b): 11st February 2020
Case (c): 10th March 2020
Case (d): Not Submitted at all.
Scenario 4: Assessee filed a writ petition to High Court against the Direction on 5th September 2019. The High court decided on 20th December 2019 that the direction is valid & direct the assessee to file a report by 25th April 2020. Such an order is received by PCIT on 4th January 2020. Received by AO on 8th January 2020 & by Assessee on 10th January 2020. The Assessee filed the report as on:
Case (a): 25th April 2020
Case (b): 15th April 2020
Case (c): 25th May 2020
Case (d): Not Submitted at all.
Solution:
Provisions Applicable:
> Assessment Order u/s 143(3) will be passed on or before 21 months from the end of the relevant Assessment Year Provided the Relevant Assessment Year is up to 2017-18.
> Therefore, in the given case normal time limits u/s 153(1) shall be 31st December 2019.
> These normal time limits shall be extended following explanation to Section 153.
> Which is from the date when the Assessing Officer issued the direction U/s 142(2A) to the Assessee till the Last date when the assessee was required to submit the Audit Report U/s 142(2A).
> The last date means considering all the extension which is made either suo moto or through an application by the Assessee to AO for it.
> Explanation to Section 153 focuses on the word required to submit rather than actual submission of the report to covet those situations where the assessee deliberately not submit the Audit Report al all.
> Hence, we will always consider the last date required to submit the Audit Report irrespective of the fact that the actual Audit Report is submitted:
- Before the last due date.
- On the Last due date.
- After the Last due date.
- Not submitted at all.
> Therefore, normal time Limits as per section 153 i.e. 31st December 2019 further enhanced by the date of issue of Direction i.e. 28th August 2019 till the last date required to submit which is:
- 31st October 2019 for scenario 1.
- 30th November 2019 for scenario 2.
- 28th February 2020 for scenario 3.
- 25th April 2020 for scenario 4.
√ It can be concluded that irrespective of the fact that when the Audit Report is actually submitted or even not submit, we will consider the only date when he is required to submit the Audit Report.
> Thus, the New Due date for passing the order u/s 153 is as follows:
- Scenario 1: 31/12/2019 + (28/08/2019 to 31/10/2019) = 4th March, 2020.
- Scenario 2: 31/12/2019 + (28/08/2019 to 30/11/2019) = 3th April, 2020.
- Scenario 3: 31/12/2019 + (28/08/2019 to 28/02/2020) = 2nd July, 2020.
- Scenario 4: 31/12/2019 + (28/08/2019 to 25/04/2020) = 28th August, 2020.
Example: Assessment U/s 147 for Assessment Year 2014-15 is pending. Notice u/s 148 is served on 25/06/2018. Direction for special Audit was issued on 1/12/2019 without giving the opportunity of being heard. The assessee filed a writ against such direction & Court quash such direction on 28/12/2019 & such order is received by PCIT, Assessing Officer & Assessee on 5/01/2020, 8/01/2020 & 15/01/2020 respectively. What is the time limit of passing the order for Section 147?
Ans-
> Order u/s 147 shall be made on or before 9 months from the end of the financial year in which notice u/s 148 is served on the assessee. Therefore, Normal time Limits U/s 153(2) shall be 31/12/2019.
> Such time limits shall be extended from the date of direction i.e. 1/12/2019 till `the date of canceling an order is received by > PCIT/CIT i.e. on 05/01/2020. i.e. by 35 days.
> Therefore, the New Due date of passing the order will be 4th February 2020.
> The order received by CIT on 05/01/2020 & the last date of passing the order came to 04th February 2020. Which is very less time to complete the assessment.
> Therefore, the proviso to explanation 153 attracts & in such a case Due date shall be extended to 05th March 2020 i.e. 60 days from the date when the order is received by PCIT.
Additional Notes:
1) Failure to comply with Direction u/s 142(A) may lead to the following consequences:
- Penalty U/s 272A of Rs 10,000/- for each failure.
- Scope of Best Judgment Assessment U/s 144 of the Act.
- Authorization of Section 132 i.e. Income Tax Search & Seizure i.e. Income Tax Raid.
2) AO has to give the proper opportunity of being heard to the Assessee before using any material, information, etc. from the Special Audit Report against the Assessee. However, no Opportunity shall be given if the case falls under Assessment U/s 144 of the Act.
3) If Audit Report is submitted by Assessee after the date he required to submit (say 10th March 2019) & the date up to which assessment has to completed is not expired (say 20th August 2019)
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