2017 (6) TMI 921 - HC - Income Tax

Validity of Special Audit Order Confirmed Under Income Tax Act Section 142(2A)

The court upheld the legality of the special audit order under Section 142(2A) of the Income Tax Act, citing the complexity and volume of transactions. It ... Special audit under Section 142(2A) - reasonable opportunity of being heard - principles of natural justice - complexity and multiplicity of transactions - prior approval of the Principal Commissioner - assessing officer's opinion requirementSpecial audit under Section 142(2A) - complexity and multiplicity of transactions - assessing officer's opinion requirement - Validity of the Assessing Officer's order directing special audit for AY 2009-10 to 2015-16 - HELD THAT: - The Court upheld the Assessing Officer's decision to direct a special audit. The AO formed an opinion based on voluminous requisitioned material (approximately 40,000 papers) showing apparent discrepancies - large unaccounted cash donations, multiple bank accounts, use of entities for alleged laundering, diversion of funds and multiplicity/complexity in transactions - and recorded a proposal which was sent for approval. Given the nature, volume and prima facie complexity of the material, the AO's exercise of power under Section 142(2A) was held to be within the scope of the provision and intended to assist in arriving at the correct taxable income; the amended subsection contemplates reliance on such factors even where formal books are not fully available to the AO. On these facts the order of special audit was not illegal or beyond power. [Paras 6]The order directing special audit for AY 2009-10 to 2015-16 was validly passed in exercise of powers under Section 142(2A).Reasonable opportunity of being heard - principles of natural justice - Whether the assessee was denied reasonable opportunity and the order breached principles of natural justice - HELD THAT: - The Court found that a detailed showcause notice (running to many pages) was served and the assessee was repeatedly granted hearing dates but repeatedly sought adjournments without filing objections or substantive replies. The proviso to Section 142(2A) requires a reasonable opportunity; the Court applied the principle that compliance with audi alteram partem is contextual and not rigid. Disclosure of the material by way of the showcause notice and the opportunity afforded satisfied fairness. The assessee's failure to avail the chances meant it could not subsequently complain of lack of opportunity. [Paras 6]No breach of natural justice; reasonable opportunity was afforded and the impugned order does not suffer from want of fair hearing.Prior approval of the Principal Commissioner - assessing officer's opinion requirement - Whether the Principal Commissioner granted mechanical approval without application of mind - HELD THAT: - The Court examined the file and notesheet placed before it and observed that the AO's detailed proposal was routed properly and the Principal Commissioner recorded a detailed satisfaction note after scrutiny. That notesheet demonstrated independent application of mind and agreement with the AO's reasons; thus the approval was not a mere mechanical rubber-stamp. The forwarding letter communicating approval to the assessee was a subsequent communique; the decisive satisfaction is recorded in the Principal Commissioner's notes. [Paras 6]The Principal Commissioner's approval was given after due application of mind and therefore was not mechanical.Special audit under Section 142(2A) - assessing officer's opinion requirement - Whether the AO could direct special audit before calling for or verifying the assessee's books or before doubting the accounts - HELD THAT: - The Court construed the amended Section 142(2A) as permitting the AO to direct a special audit having regard to factors beyond formal books - including multiplicity of transactions and specialised nature of activity - and therefore it is not prerequisite that the AO must first have the assessee's books in hand or express recorded doubts after scrutiny of those books. Where extensive third party/requisitioned material indicates a need, the AO may form the requisite opinion and invoke subsection (2A). On the facts, the extensive requisitioned material justified exercising the power even before conventional verification of the assessee's own books. [Paras 6]AO may direct special audit based on nature/volume/multiplicity of available material without first calling or fully verifying the assessee's books; no illegality in doing so on the facts.Special audit under Section 142(2A) - Impact of contemporaneous proceedings (notice under Section 148) on the validity of the Section 142(2A) direction - HELD THAT: - The Court held that objections to a notice under Section 148 pertain to distinct reassessment proceedings and do not negate the AO's power under Section 142(2A) during any stage of proceedings pending before him. The fact that a Section 148 notice for an assessment year was issued shortly before the Section 142(2A) direction does not invalidate the special audit direction where the AO, in the course of pending proceedings, forms the opinion that special audit is necessary and follows the prescribed procedure. [Paras 6]The Section 142(2A) direction is not vitiated by contemporaneous Section 148 proceedings; both are distinct and the special audit direction remains valid.Final Conclusion: Petition dismissed; the High Court found no illegality in the Assessing Officer's order directing special audit for AY 2009-10 to 2015-16, held that reasonable opportunity and necessary approvals were given and recorded, and declined to interfere with the Section 142(2A) direction. Issues Involved:1. Legality of the order for special audit under Section 142(2A) of the Income Tax Act.2. Compliance with principles of natural justice.3. Recording of satisfaction and reasons by the Assessing Officer.4. Adequacy of opportunity given to the petitioner.5. Validity of approval by the Principal Commissioner of Income Tax.Detailed Analysis:1. Legality of the Order for Special Audit under Section 142(2A) of the Income Tax Act:The court examined the provisions of Section 142(2A) of the Income Tax Act, which allows the Assessing Officer (AO) to direct an assessee to get their accounts audited by a Special Auditor if the accounts are complex, voluminous, or if there are doubts about their correctness. The court noted that the AO had found 40,000 papers in 45 gunny bags during a search, indicating significant complexity and multiplicity of transactions. The AO's decision to order a special audit was based on this complexity, the large volume of transactions, and the interest of revenue. The court upheld the AO's decision, stating that it was within the legal framework and aimed at facilitating the correct determination of taxable income.2. Compliance with Principles of Natural Justice:The petitioner argued that the impugned order was in breach of the principles of natural justice as it did not provide adequate reasons and satisfaction for the special audit. The court found that a detailed show-cause notice had been issued to the petitioner, outlining the reasons for the special audit. The petitioner was given multiple opportunities to respond but failed to do so, instead repeatedly seeking adjournments. The court held that the principles of natural justice were complied with, as the petitioner was given a reasonable opportunity to present its case.3. Recording of Satisfaction and Reasons by the Assessing Officer:The petitioner contended that the AO did not record any satisfaction or reasons for the special audit. The court observed that the show-cause notice contained detailed reasons for the special audit, and a comprehensive proposal was sent to the Principal Commissioner of Income Tax, who approved it after due consideration. The court emphasized that the satisfaction note and the detailed proposal demonstrated the application of mind by the AO and the Principal Commissioner. Thus, the requirement of recording satisfaction and reasons was duly met.4. Adequacy of Opportunity Given to the Petitioner:The petitioner claimed that it was not given sufficient opportunity to respond to the show-cause notice. The court noted that the petitioner was informed that no further adjournments would be granted after a specific date, yet the petitioner continued to seek adjournments without making any substantive submissions. The court held that the petitioner had ample opportunity to present its case but failed to do so, and therefore, the claim of inadequate opportunity was unfounded.5. Validity of Approval by the Principal Commissioner of Income Tax:The petitioner argued that the Principal Commissioner granted approval mechanically, without proper application of mind. The court reviewed the file and found that a detailed satisfaction note was prepared, demonstrating the Principal Commissioner's thorough consideration of the proposal. The approval was not granted mechanically but was based on a detailed evaluation of the facts and circumstances. The court concluded that the approval process was valid and in accordance with the law.Conclusion:The court dismissed the petition, upholding the legality of the special audit order under Section 142(2A) of the Income Tax Act. It found that the principles of natural justice were complied with, the AO had recorded the necessary satisfaction and reasons, the petitioner was given adequate opportunity to respond, and the approval by the Principal Commissioner was valid and well-considered. The court emphasized that the special audit was necessary given the complexity and volume of transactions and was in the interest of revenue.