2019 (11) TMI 1191 - HC - Income Tax

Court upholds validity of special audit direction, dismissing challenge and vacating interim relief.

Tehmul Burjor Sethna Versus Asst. Commissioner of Income Tax Central Circle 1 (1)

Tehmul Burjor Sethna Versus Asst. Commissioner of Income Tax Central Circle 1 (1) - [2019] 418 ITR 596 (Guj) Issues Involved:1. Validity of invoking Section 142(2A) of the Income Tax Act.2. Requirement of maintaining books of account.3. Complexity and multiplicity of transactions.4. Specialized nature of business activity.5. Procedural compliance and application of mind by the authorities.6. Allegations of mala fides.7. Timeliness and purpose of invoking Section 142(2A).8. Limited scrutiny under CASS for Assessment Year 2017-18.9. Irrelevant directions in the terms of reference.10. Separate assessment year-wise show cause notices.11. Involvement of the Trust in accommodation entries.Detailed Analysis:1. Validity of Invoking Section 142(2A) of the Income Tax Act:The petitioner challenged the invocation of Section 142(2A) for special audit, arguing that he was not required to maintain personal books of account. The court noted that the term 'accounts' in Section 142(2A) has a broader meaning than 'books of account' and includes records of financial transactions. The court upheld the invocation of Section 142(2A), stating that the Assessing Officer (AO) found the accounts complex, voluminous, and involving multiplicity of transactions, thus justifying the special audit.2. Requirement of Maintaining Books of Account:The petitioner argued that he was not statutorily required to maintain books of account. The court observed that while the petitioner may not be required to maintain statutory books of account, he is still obligated to provide a correct account of his income. The court held that the seized material indicating various financial transactions falls within the ambit of 'accounts' under Section 142(2A).3. Complexity and Multiplicity of Transactions:The court noted that the AO found the accounts complex and involving multiplicity of transactions, which justified the special audit. The court referred to the voluminous documentary evidence seized during the search, which included records of financial transactions not reflected in the returns of income.4. Specialized Nature of Business Activity:The AO found that the petitioner was involved in the specialized business of providing accommodation entries and money laundering. The court held that even if the petitioner was not required to maintain statutory accounts, the specialized nature of his business justified the invocation of Section 142(2A).5. Procedural Compliance and Application of Mind by the Authorities:The court examined the procedural compliance and application of mind by the AO and the Principal Commissioner of Income Tax (PCIT). The court found that the AO had given the petitioner an opportunity of hearing and had duly considered the objections raised. The PCIT had also given an opportunity of hearing and had independently arrived at the conclusion that a special audit was necessary. The court held that there was no mechanical approval by the PCIT.6. Allegations of Mala Fides:The petitioner alleged mala fides against the AO, claiming that the special audit was initiated to harass him. The court found that the allegations of mala fides were not substantiated and were not specifically spelt out in the petition. The court held that bald allegations of mala fides without substantial evidence do not warrant interference.7. Timeliness and Purpose of Invoking Section 142(2A):The petitioner argued that the special audit was initiated to buy time as the assessment was becoming time-barred. The court noted that this contention was raised for the first time before the court and was not part of the objections raised earlier. The court found that the sequence of events and the facts of the case did not support this contention.8. Limited Scrutiny under CASS for Assessment Year 2017-18:The petitioner contended that for Assessment Year 2017-18, the AO could only examine the issue identified in the limited scrutiny notice under CASS. The court held that the scrutiny assessment for this year was based on the material seized during the search and not through CASS. Therefore, the CBDT instructions for limited scrutiny under CASS were not applicable.9. Irrelevant Directions in the Terms of Reference:The petitioner argued that the terms of reference for the special audit contained irrelevant directions. The court acknowledged that some directions were not germane but held that this did not vitiate the entire process. The court directed that the special auditors should confine their inquiry to relevant directions.10. Separate Assessment Year-wise Show Cause Notices:The petitioner contended that separate show cause notices were not issued for different assessment years. The court held that this issue was beyond the scope of the present petition, which was limited to challenging the direction for special audit under Section 142(2A).11. Involvement of the Trust in Accommodation Entries:The petitioner argued that the basis for referring the matter for special audit was the involvement in accommodation entries through the Trust, but no such reference was made in the Trust's assessment orders. The court found that the AO had treated the deposits in the Trust's bank account as income in the hands of the Trust and had added certain amounts to the petitioner's income based on transactions related to the Trust.Conclusion:The court upheld the validity of the direction under Section 142(2A) for a special audit, finding no infirmity in the procedure followed by the AO and the PCIT. The court dismissed the petition, discharging the rule with no order as to costs, and vacated the interim relief granted earlier.