2018 (6) TMI 963 - AT - Income Tax

Tribunal Invalidates Proceedings & Audit, Orders Time-Barred Assessments Quashed

Sh. Sunder Mal Sat Pal Versus The DCIT, Central Circle-III, Ludhiana

Sh. Sunder Mal Sat Pal Versus The DCIT, Central Circle-III, Ludhiana - TMI Issues Involved:1. Validity of initiation of proceedings under Section 153C.2. Alleged disregard of principles of natural justice in framing the assessment.3. Legality of directions to get accounts audited by a special auditor under Section 142(2A).4. Various specific disallowances and additions made by the Assessing Officer.Detailed Analysis:1. Validity of Initiation of Proceedings under Section 153C:The Assessee contested the initiation of proceedings under Section 153C as being 'bad in law.' The Tribunal examined the sequence of events leading to the initiation of these proceedings, including the search and seizure operation under Section 132(1) and the subsequent issuance of notices and show cause for a special audit. The Tribunal concluded that the initiation of proceedings under Section 153C was not justified due to the lack of proper grounds and the absence of a clear connection between the seized documents and the assessee.2. Alleged Disregard of Principles of Natural Justice:The Assessee argued that the assessment was framed in total disregard of the principles of natural justice. The Tribunal noted that the Assessee had cooperated with the department and attended all proceedings, submitting required documents. However, the Assessing Officer's reliance on non-cooperation and the intricate nature of the seized material as reasons for ordering a special audit was found to be unjustified. The Tribunal emphasized that the Assessing Officer did not provide a reasonable opportunity for the Assessee to be heard, thus violating the principles of natural justice.3. Legality of Directions to Get Accounts Audited by a Special Auditor under Section 142(2A):The Tribunal scrutinized the Assessing Officer's decision to direct a special audit under Section 142(2A). The Tribunal highlighted that the Assessing Officer failed to demonstrate the 'nature and complexity of the accounts' or any other statutory conditions required for ordering a special audit. The Tribunal referenced several judicial precedents, including decisions by the Delhi High Court and the Supreme Court, which emphasize the necessity of a detailed and reasoned satisfaction by the Assessing Officer regarding the complexity of accounts before directing a special audit. The Tribunal found that the Assessing Officer's reasons were inadequate, as they primarily focused on non-cooperation and the need to reconcile loose papers and redraw financial statements, which are not valid grounds for a special audit.4. Various Specific Disallowances and Additions:The Tribunal addressed multiple specific disallowances and additions made by the Assessing Officer across different assessment years. These included:- Disallowance of Rs. 35,539/- for non-payment of TDS.- Additions of Rs. 69,770/-, Rs. 18,02,160/-, Rs. 3,00,946/-, and Rs. 10,70,000/- for alleged discrepancies in books of accounts, payments to M/s Om Industries, negative cash balance, and entries in katcha books, respectively.- Disallowance of Rs. 8,732/- under Section 40A(3), and other smaller disallowances for alleged interest received and car insurance payments.- Disallowances and additions for subsequent years, including Rs. 19,123/- under Section 40A(3), Rs. 9,77,000/- for discrepancies in cash/loans, and Rs. 15,000/- for non-deduction of TDS.The Tribunal found that many of these disallowances and additions were based on the special auditor's report, which was itself rendered invalid due to the improper initiation of the special audit. Consequently, these disallowances and additions were also deemed unjustified.Conclusion:The Tribunal concluded that the initiation of proceedings under Section 153C and the direction for a special audit under Section 142(2A) were both invalid. The assessment orders were found to be framed in violation of the principles of natural justice. As a result, the Tribunal held that the assessments were time-barred and legally unsustainable. All appeals filed by the Assessee were allowed, and the orders passed by the Assessing Officer were quashed.