2014 (4) TMI 78 - HC - Income Tax

Court upholds special audit under Section 142(2A) of Income Tax Act due to complexity & discrepancies.

DLF Ltd. And Another Versus Additional Commissioner of Income Tax & Another

The court upheld the Assessing Officer's direction for a special audit under Section 142(2A) of the Income Tax Act, citing the complexity of accounts, ... Direction of special audit challenged – Pre-conditions u/s 142(2A) not satisfied - Whether or not keeping in view the nature and complexity of accounts and the interest of Revenue direction for special audit is justified – Held that:- No merit in the contention raised by the petitioner that related party transactions or reasonableness of interest paid to the petitioner on loans and advances by its subsidiary was an issue which was never raised in the show cause notice and therefore, there was violation of principles of natural justice. This question was specifically raised in the show cause notice and answer or reply was called for. The claim of the petitioner was that he has complied with all the queries. Thus it is accepted and admitted position that detailed queries in writing and orally were raised. This shows due application of mind and focus on the issues and aspects that arose for consideration. The AO had applied his mind to various aspects like nature of accounts, method of maintaining accounts, entries recorded etc. and reached the conclusion that the accounts were complex and it was in the interest of the Revenue that special audit u/s 142 (2A) of the Act, should be directed - in the past also special audit was directed but the AO has not directed special audit in the assessment year without examining the accounts for the year, the entries made, peculiarity involved etc. Special audit has not been directed for getting over the limitation or in routine. The business transactions have become more complicated and accounting entries more complex than ever before - This may be one of the causes why possibly the frauds could not be detected in some cases - Indeed such cases have made the audit work more comprehensive, intrusive and investigative - Ethical managements may at times regard such enquiries as an unwarranted intrusion or a hounding approach - Section 142(2A) does not permit fishing or roving inquiry approach or a witch hunt but is a regulated provision which accepts the need and necessity of the Assessing Officer to take help of an expert accountant i.e. a Chartered Accountant, a person who is academically qualified and has practical experience to understand accounts and unearth tax evasion or furnishing of inaccurate particulars etc. The provision balances the right of the Revenue with the inconvenience which the assessee may face – AO are not Chartered Accountants and when required and permissible, can take help and assistance from the qualified specialists to complete the assessment and determine the taxable income of an assessee – thus, there is no merit in the appeal – Decided against Assessee. Issues Involved:1. Validity of the special audit direction under Section 142(2A) of the Income Tax Act, 1961.2. Complexity of accounts and the necessity for special audit.3. Consistency in the application of the Percentage of Completion Method (POCM).4. Deduction under Section 80-IAB for SEZ income.5. Reasonableness of interest charged on loans and advances to subsidiaries.6. Related party transactions and their impact on the accounts.7. Alleged violation of principles of natural justice.Issue-Wise Detailed Analysis:1. Validity of the Special Audit Direction under Section 142(2A):The petitioner challenged the direction for a special audit, arguing it was contrary to the statutory pre-conditions stipulated in Section 142(2A). The court reviewed several precedents, including Sahara India (Firm) vs. Commissioner of Income Tax, which elucidated that special audit could be invoked if the accounts were complex and it was in the interest of Revenue. The court concluded that the Assessing Officer (AO) had applied his mind to the accounts' nature and complexity and justified the special audit direction.2. Complexity of Accounts and Necessity for Special Audit:The court noted that the AO had observed significant discrepancies in the POCM calculations, such as variations in budgeted and actual costs, which indicated complexity. The AO's detailed show cause notice and observations during hearings demonstrated that the accounts were intricate and voluminous, justifying the need for a special audit. The court emphasized that the special audit was not a routine delegation of the AO's duties but a necessary measure due to the accounts' complexity.3. Consistency in the Application of POCM:The petitioner argued that POCM was a well-recognized method and had been accepted in previous years. However, the court noted that substantial additions had been made on POCM issues in earlier years, and the petitioner had themselves admitted to reworking project costs due to changes in saleable area. The court found that the POCM calculations had been subject to scrutiny in previous special audits, and discrepancies had been noted, justifying further examination.4. Deduction under Section 80-IAB for SEZ Income:The petitioner claimed that the deduction under Section 80-IAB was duly certified by a qualified Chartered Accountant and should not be subject to special audit. The court observed that the AO had raised specific queries about the SEZ income and noted discrepancies in profit margins between SEZ and non-SEZ projects. The court found that the AO's direction for special audit was justified to ensure transparency and accuracy in the accounts.5. Reasonableness of Interest Charged on Loans and Advances to Subsidiaries:The petitioner argued that the interest rate of 6.5% charged on loans to subsidiaries was reasonable and should not be subject to special audit. The court noted that the AO needed to verify whether the interest rate was indeed revenue-neutral and whether the transactions were commercially expedient. The court held that these aspects required thorough examination by the special auditor.6. Related Party Transactions and Their Impact on the Accounts:The petitioner contended that related party transactions were not part of the show cause notice and that their inclusion in the special audit violated principles of natural justice. The court found that the AO had raised specific queries about related party transactions during the assessment proceedings, indicating due application of mind. The court rejected the petitioner's contention, stating that the AO was justified in including these transactions in the special audit.7. Alleged Violation of Principles of Natural Justice:The petitioner argued that the special audit direction violated principles of natural justice as it was based on issues not raised in the show cause notice. The court found that the AO had provided ample opportunity for the petitioner to respond to queries and had applied his mind to the accounts' complexity and discrepancies. The court concluded that there was no violation of natural justice.Conclusion:The court upheld the AO's direction for a special audit under Section 142(2A), finding it justified due to the complexity of the accounts, discrepancies in POCM calculations, and the need for transparency in SEZ income and related party transactions. The court dismissed the writ petition, vacated the stay order, and allowed the assessment proceedings to continue as per law.