2004 (2) TMI 56 - HC - Income Tax

Court Validates Income Tax Special Audit, No Show Cause Notice Needed

The court upheld the validity of the directions and notice issued under section 142(2A) of the Income-tax Act, 1961, requiring the petitioner to undergo a ... This writ petition has been filed for quashing the impugned directions and notice u/s 142(2A) - The petitioner has also prayed for a mandamus restraining respondent No.1, the Assistant Commissioner of Income-tax, from proceeding in pursuance of the aforesaid directions and notice – Held that High Court in writ jurisdiction cannot judge the satisfaction of the authority when it has ordered for appointment of an auditor after taking note of the nature-of the controversy and accounts – Petition dismissed Issues Involved:1. Legality of the directions and notice issued under section 142(2A) of the Income-tax Act, 1961.2. Requirement of a show cause notice or opportunity of hearing before issuing directions under section 142(2A).3. Complexity of the petitioner's accounts and the necessity for a special audit.4. Validity of proceedings under section 148 for the assessment year 1990-91.Detailed Analysis:1. Legality of the Directions and Notice Issued under Section 142(2A):The petitioner challenged the directions and notice dated March 23, 1994, under section 142(2A) of the Income-tax Act, 1961, which required the petitioner to get its accounts audited by a chartered accountant. The court found that the Assessing Officer (AO) had valid reasons to believe that the petitioner's accounts were complex, necessitating a special audit. The AO's opinion was based on various factors, including discrepancies in the petitioner's account books, understated investments, and the absence of proper records for fixed assets.2. Requirement of a Show Cause Notice or Opportunity of Hearing:The petitioner argued that the directions under section 142(2A) were issued without a show cause notice or an opportunity of hearing, which violated their rights. The court held that it is not necessary for the AO to give a show cause notice or hearing before issuing directions under section 142(2A). The direction for a special audit is administrative in nature and does not have civil consequences or affect the assessee's rights or liabilities. The purpose of the direction is to ensure a correct assessment so that the Revenue is not deprived of its dues.3. Complexity of the Petitioner's Accounts and Necessity for a Special Audit:The court examined the complexity of the petitioner's accounts as detailed in the counter affidavit. The AO noted several issues, including:- Discrepancies in the petitioner's stock register and production records.- The petitioner's failure to provide satisfactory evidence for the acquisition and installation of plant and machinery.- The existence of numerous complex book entries and transactions among units belonging to the same group.- Inconsistencies in the petitioner's claimed investment in plant and machinery, which was significantly understated.Based on these factors, the court concluded that the petitioner's accounts were indeed complex and warranted a special audit under section 142(2A).4. Validity of Proceedings under Section 148 for the Assessment Year 1990-91:The petitioner also alleged that the proceedings under section 148 for the assessment year 1990-91 were in violation. The court found no merit in this argument, as the AO had valid reasons to believe that income had escaped assessment due to understated investments and discrepancies in the petitioner's account books. The AO issued notice under section 148 after conducting inquiries and obtaining necessary approvals.Judicial Precedents:The court referred to several judicial precedents to support its decision:- Gurunanak Enterprises v. CIT: The Delhi High Court observed that judicial review should not minutely analyze the materials on which the AO's opinion is based.- Kumar Films Pvt. Ltd. v. CIT: The Patna High Court held that the High Court cannot judge the satisfaction of the authority ordering a special audit.- Living Media Ltd. v. CIT: The Supreme Court affirmed the Delhi High Court's judgment regarding the AO's power to order a special audit.- U.P. State Handloom Corporation Ltd. v. CIT: The Allahabad High Court upheld directions under section 142(2A).- Swadeshi Cotton Mills Co. Ltd. v. CIT: The court held that the AO's satisfaction for issuing directions under section 142(2A) should be based on an objective assessment.Conclusion:The court dismissed the petition, finding no merit in the petitioner's arguments. The directions under section 142(2A) were justified due to the complexity of the petitioner's accounts, and the AO was not required to issue a show cause notice or provide a hearing before issuing such directions. The proceedings under section 148 were also found to be valid.