Section 142(2A) was amended by Finance Act, 2013 apparently to amplify the scope of special audit i.e. the Assessing Officer now has the power to direct a special audit, having regard to volume of transactions, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee. Till the aforesaid amendment, the “nature and complexity of the accounts” was the necessary and sufficient criterion for directing special audit.

The amended section 142(2A) appears to have the effect of enlarging the scope of special audit considerably. The scope of reasons for invoking the powers under section 142(2A) to direct the assessee to get the accounts audited by an accountant have been substantially increased.

Empowering the Assessing Officer to invoke tax audit under section 142(2A) merely due to the “volume of accounts” or “multiplicity of transactions” may have the effect of bringing each and every case within the ambit of special audit in case of large organisations. Each and every gas station, share broker, retailer, agency business and the like may fall within the purview of this section solely on account of the “volume of accounts” or “multiplicity of transactions”. Also, as these expressions are highly subjective, they are prone to adoption of very low threshold to trigger the application of this provision. This may cause undue hardship to even those assessees who genuinely ensure compliance with the provisions of law. Further, the specialized nature of business activity of the assessee, like say electricity or insurance business, in our opinion, cannot be a standalone reason for directing special audit.

Special audit, as the name suggests, should be invoked only in exceptional circumstances, which is the reason why the erstwhile provision aptly confines that it is the nature and complexity of accounts which has to be considered while directing such audit. There should be a distinction between regular audit and special audit. The scope of special audit cannot be increased to such an extent that majority of the assessees, whose accounts have already been audited, are once again subject to a special audit merely due to, say, volume of accounts being more in case of large enterprises. The special audit is more in the nature of investigation or due diligence, and therefore, needs to be directed only in exceptional cases having regard to the nature and complexity of accounts.

Further, this may increase the possibility of some Assessing Officers resorting to special audit since it gives them an extended time for completing their assessment.


It is suggested that :

a) the amendment made by Finance Act, 2013 be reconsidered and withdrawn.

b) The provision prior to amendment included within its ambit all cases of complexities and there is absolutely no need to give further powers to the AO to order a Special Audit on the reason such as doubts about the correctness of accounts and multiplicity of transactions etc. The amendment in section 142(2A) vide the Finance Act, 2013 needs to be withdrawn to ensure that the wide powers entrusted upon the AO are not misused by way of directing special audit in a routine manner thereby defeating the very purpose.


Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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June 2021