2017 (8) TMI 1074 - HC - Income Tax

Court upholds constitutionality of amended Income Tax Act provision on special audits, stresses procedural safeguards. Orders under Section 142(2A) to be reviewed.

Sahara India Financial Corporation Ltd. Lucknow, Sahara India Commercial Corporation Ltd., Patanjali Ayurveda Ltd., Smt. Vinay Sharma, Shri Dhir Chand Sharma, Geeta Sharma, Guru Prasad Sharma, Versus Commissioner of Income Tax Delhi and Ors. & Deputy Commissioner of Income Tax And Anr.

The court upheld the constitutionality of the amendment to Section 142(2A) of the Income Tax Act, 1961, finding that the new grounds for ordering a ... Constitutional validity of the amendment to Section 142(2A) - arbitrary powers of AO - special audit of accounts - it was contended that sch unguided discretion, having no nexus to the object of Section 142(2A), submits the petitioner, is contrary to the principles of equality enshrined in Article 14. - nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee. Held that:- Section 142(2A) was enacted to facilitate investigation into the accounts of an assessee for the proper determination of tax liability. It deals with cases where the AO needs to take the assistance of a Chartered Accountant in order to be able to understand the assessee’s accounts and determine the correct tax liability. It is, therefore, abundantly clear from the aforesaid dictum, that Section 142(2A)confers an important power on the Revenue to curb tax evasion and balances it with the inconvenience that an assessee may face. The impugned amendments to Section 142(2A) also have to be viewed in that light and hence must be considered to be reasonable. It is clear that in fiscal matters, the Legislature has the ability to amend the law retrospectively. Moreover, Section 142(2A) of the Act does not confer any vested right on the petitioner, which could not be taken away by retrospective amendment. Therefore, even if the amendments to Section 142(2A) were given retrospective effect, the same would be within the powers of the Legislature There is no merit in the challenge. - Writ petitions dismissed. Issues Involved1. Constitutionality of the amendment to Section 142(2A) of the Income Tax Act, 1961.2. Validity of the orders made under Section 142(2A).Issue-Wise Detailed Analysis1. Constitutionality of the Amendment to Section 142(2A) of the Income Tax Act, 1961Facts and Contentions:- The petitioners challenged the constitutionality of the amendment to Section 142(2A) of the Income Tax Act, 1961, arguing that it violated Article 14 of the Constitution of India. The amendment expanded the grounds for ordering a special audit, adding 'volume of accounts,' 'doubts about the correctness of accounts,' 'multiplicity of transactions in the accounts,' and 'specialized nature of business activity of the assessee' to the existing 'nature and complexity of the accounts.'- The petitioners contended that these new grounds were subjective, arbitrary, and conferred unbridled power on the Assessing Officer (AO), making the provision violative of Article 14.- The Revenue argued that the amendment was necessary to protect the interests of the revenue and assist the AO in accurately determining the taxable income of assessees with complex accounts.Analysis and Conclusions:- The court emphasized the principles of constitutional validity, noting that a law may be constitutional even if it relates to a single individual or confers discretionary power on the executive, provided there are adequate safeguards to prevent abuse.- The court referred to the Supreme Court's decision in Sahara India (Firm), which held that the AO's decision to order a special audit must be based on objective criteria, not subjective satisfaction, and must be approved by a higher authority with due application of mind.- The court found that the procedural safeguards in the amended Section 142(2A), including the requirement for prior approval by the Chief Commissioner or Commissioner and the necessity of a pre-decisional hearing for the assessee, were sufficient to prevent arbitrary use of power.- The court held that the new grounds added by the amendment did not fundamentally alter the nature of the provision and were not inherently more subjective than the original ground of 'nature and complexity of accounts.'- The court concluded that the amendment to Section 142(2A) was constitutional and did not violate Article 14.2. Validity of the Orders Made Under Section 142(2A)Facts and Contentions:- Several writ petitions challenged the validity of specific orders made under Section 142(2A), arguing that the orders were based on the new grounds introduced by the amendment and were arbitrary and unjust.- The petitioners contended that the orders were made without proper examination of the accounts and were merely an attempt by the AO to shift the responsibility of scrutinizing the accounts to the special auditor.Analysis and Conclusions:- The court noted that detailed hearing and arguments were not addressed by the parties about the individual merits of the challenge to the orders.- The court decided that it would not be appropriate or fair to pronounce finally on the validity of the reference to the special auditors in these cases without a detailed examination.- The court directed that these matters be listed before the concerned roster bench dealing with income tax matters for further hearing and decision.Final Judgment- The court dismissed the writ petitions challenging the constitutionality of the amendment to Section 142(2A) [W.P.(C) 2879/2014, 4408/2015, 8841/2015, 9464/2015, 8877/2015, 8878/2015, 9138/2015, 9139/2015, and 9140-9152/2015] as unmerited.- The petitions challenging the validity of specific orders made under Section 142(2A) were directed to be listed before the concerned roster bench for further hearing and decision.