2017 (3) TMI 113 - HC - Income Tax

Court upholds Special Auditor appointment under Section 142(2A)

The court upheld the Assessing Officer's decision to appoint a Special Auditor under Section 142(2A), finding that the petitioner was given a reasonable ... Special audit under Section 142(2A) - nature and complexity of accounts - multiplicity of transactions - interest of revenue - reasonable opportunity of being heard (proviso to Section 142(2A)) - scope and object of Section 142(2A) as enabling provisionReasonable opportunity of being heard (proviso to Section 142(2A)) - Whether the assessee was denied sufficient opportunity before direction for special audit was issued - HELD THAT: - The Court noted that the proviso to Section 142(2A) mandates that the Assessing Officer shall not direct a special audit unless the assessee has been given a reasonable opportunity of being heard. The record shows that the assessee received the show cause notice, sought time to file a reply and was granted an extension; the reply was filed and the Assessing Officer considered the reply before seeking and obtaining higher authority's approval and passing the impugned order. The Court held that the impugned order was passed after giving the opportunity contemplated by the proviso and that no breach of principles of natural justice was made out. [Paras 6, 8]Assessee was given reasonable opportunity; challenge on grounds of insufficient opportunity rejected.Special audit under Section 142(2A) - nature and complexity of accounts - multiplicity of transactions - interest of revenue - scope and object of Section 142(2A) as enabling provision - Whether the Assessing Officer was justified in directing a special audit having regard to the nature and complexity of accounts and the interests of revenue - HELD THAT: - Relying on the statutory text of the amended Section 142(2A) (w.e.f. 1.6.2013) and the principles explained in precedent, the Court treated Section 142(2A) as an enabling provision to assist the AO when accounts are complex or transactions are multiplicious. The Court examined the facts that voluminous requisitioned material (large number of papers/gunny bags) linked other persons to the assessee and that many documents required consideration and verification. On that basis the AO's conclusion that accounts involved complexity and multiplicity of transactions was sustainable. The Court observed that the object of special audit is to facilitate the AO to arrive at correct taxable income and that subsection (3) ensures the assessee an opportunity to comment on the special auditor's report, mitigating prejudice to the assessee. [Paras 6, 8, 9]AO was justified in directing special audit; conditions in Section 142(2A) satisfied and impugned order valid.Proper purpose of special audit - prohibition of fishing or roving inquiry - Whether the direction for special audit was merely to extend limitation or constituted an impermissible fishing exercise - HELD THAT: - The Court considered submissions that the special audit was intended only to extend limitation or to enable a roving inquiry. It reiterated that Section 142(2A) does not permit fishing or roving inquiries but is a regulated provision to assist the AO. Given the AO's recorded satisfaction about the complexity and multiplicity of transactions and the linkage of voluminous requisitioned materials to the assessee, the Court found no basis to infer mala fide motive or that the direction was issued solely to extend limitation. The statutory safeguards, including requirement of approval and the assessee's right to comment on the auditor's report, were noted as protective of the assessee's rights. [Paras 7, 9]No indication that special audit was directed solely to extend limitation or for a fishing expedition; contention rejected.Final Conclusion: The petition challenging the order appointing a Special Auditor for AY 2009-10 to 2015-16 is dismissed; the Assessing Officer acted within the scope of Section 142(2A), having given the requisite opportunity and being justified by the nature and complexity of records and multiplicity of transactions. Issues Involved:1. Insufficient opportunity.2. Conditions for the appointment of Special Auditor under Section 142(2A) not satisfied.3. Appointment of Special Auditor to extend the period of limitation for block assessment.Issue-wise Detailed Analysis:1. Insufficient Opportunity:The petitioner argued that they were not given sufficient time to respond to the notice for the appointment of a Special Auditor. The notice dated 11.11.2016 was served on 17.11.2016, and the petitioner requested 15 days to respond, but the Assessing Officer (AO) only granted 10 days. The petitioner contended that this did not allow them enough time to file a detailed reply, thus breaching the principles of natural justice. The court, however, found that the AO had given the petitioner a reasonable opportunity to be heard, and the impugned order was passed only after considering the reply submitted by the petitioner.2. Conditions for Appointment of Special Auditor under Section 142(2A) Not Satisfied:The petitioner contended that the conditions for the appointment of a Special Auditor under Section 142(2A) were not met. They argued that their accounts were already audited and there was no need for another audit. The court referred to Section 142(2A) and noted that the AO is authorized to direct an audit if the accounts are complex and there are multiple transactions. The court emphasized that the purpose of a special audit is to assist the AO in determining the correct taxable income. The court found that the AO had justified the need for a special audit due to the complexity and multiplicity of transactions, and the impugned order was passed after obtaining the necessary approval from higher authorities.3. Appointment of Special Auditor to Extend the Period of Limitation for Block Assessment:The petitioner argued that the appointment of the Special Auditor was a tactic to extend the period of limitation for completing the block assessment. The court, however, found that the AO had ample material connecting the petitioner with the requisitioned documents and the persons involved. The court noted that the AO's decision to appoint a Special Auditor was based on the complexity and multiplicity of transactions, which justified the need for a special audit. The court also highlighted that the purpose of the special audit is to facilitate the AO in arriving at the correct taxable income and that the petitioner would have the opportunity to respond to the special auditor's report.Conclusion:The court concluded that the AO had followed the legal provisions under Section 142(2A) and had given the petitioner a reasonable opportunity to be heard. The court found that the conditions for the appointment of a Special Auditor were satisfied, and the AO's decision was justified due to the complexity and multiplicity of transactions. The court dismissed the petition, upholding the AO's order for a special audit.