Special audit based on complex accounts can extend limitation where the audit direction is valid on record material.

A special audit direction under the Income-tax Act is valid where the Assessing Officer forms bona fide satisfaction on material showing complexity of accounts; the term "complex" is to be read broadly, and numerous transactions, discrepancies, erasures or overwritings may justify the audit. Once the special audit direction is valid, the period spent in audit is excluded while computing limitation for assessment under the relevant limitation provision. On that basis, the assessment is treated as within time.

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Issues: (i) Whether the direction for special audit under section 142(2A) of the Income-tax Act, 1961 was arbitrary or illegal and the time taken in special audit could be excluded for limitation purposes; (ii) whether the assessment was barred by limitation.

Issue (i): Whether the direction for special audit under section 142(2A) of the Income-tax Act, 1961 was arbitrary or illegal and the time taken in special audit could be excluded for limitation purposes.

Analysis: The validity of a special audit direction depends on the Assessing Officer's subjective satisfaction based on material on record as to whether the accounts are complex. The word "complex" is to be given a wide and liberal meaning. Where the record shows numerous transactions, discrepancies, erasures and overwritings, the accounts may be treated as unreliable and a direction for special audit can be sustained. Once the direction under section 142(2A) is held valid, the period spent in special audit is excluded under the limitation provision.

Conclusion: The direction for special audit was valid and the time spent in special audit was liable to be excluded, in favour of Revenue.

Issue (ii): Whether the assessment was barred by limitation.

Analysis: Since the special audit direction was valid, Explanation 1(iii) to section 153 of the Income-tax Act, 1961 applied and the period consumed in special audit had to be excluded while computing limitation. On that basis, the assessment fell within time.

Conclusion: The assessment was within limitation, in favour of Revenue.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue on both questions, upholding the special audit direction and the assessment order as timely.

Ratio Decidendi: The validity of a direction for special audit turns on the Assessing Officer's bona fide satisfaction from material on record regarding complexity of accounts, and once such direction is valid, the period spent in special audit is excluded for computing limitation.

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