2021 (11) TMI 219 - AT - Income Tax

Invalid Special Audit Reference Renders Assessment Order Void; Tribunal Holds Extension Barred

The Tribunal held that the reference to the special audit under Section 142(2A) was invalid, rendering the subsequent assessment order passed in the ... Validity of reference to special audit under Section 142(2A) - Requirement of 'nature and complexity of accounts' and 'interest of Revenue' as conjunctive preconditions - Challenge to special audit reference when assessment is alleged to be time barred - Admission of additional legal ground raising limitation bar plea - Assessment order void for being barred by limitation consequent to invalid statutory referenceAdmission of additional legal ground raising limitation bar plea - The additional ground challenging the validity of the reference to special audit as rendering the assessment time barred was admitted for adjudication. - HELD THAT: - The assessee sought to admit an additional ground contending that the assessment order was void as the reference to special audit was illegal and caused the assessment to be time barred. The Tribunal applied the test for admission of a legal ground where facts are on record and no further investigation is required, and having regard to precedents including the Apex Court's decision in National Thermal Power Corporation, admitted the additional ground. The Revenue's reliance on Rajesh Kumar (to contend non appealability of the special audit direction) was considered but the Tribunal noted authorities permitting examination of the validity of a special audit reference when limitation is in issue. The objection to admission was therefore rejected and the additional ground admitted for hearing. [Paras 5, 6, 8, 9, 10]Additional ground admitted and taken up for adjudication.Validity of reference to special audit under Section 142(2A) - Requirement of 'nature and complexity of accounts' and 'interest of Revenue' as conjunctive preconditions - The reference made by the Assessing Officer to special audit under Section 142(2A) was invalid as it was not founded on objective satisfaction of the conjunctive preconditions and was made merely to obtain information and to extend time for assessment. - HELD THAT: - Section 142(2A) mandates that the AO's opinion to refer for special audit must be formed with regard to the nature and complexity of the assessee's accounts and the interests of the Revenue, and such opinion must be based on objective criteria. The Tribunal reviewed the show cause notice, order sheet entries and the timeline: substantive queries were raised at the fag end of the limitation period, the show cause essentially noted missing explanations or workings rather than any intrinsic complexity of accounts, and the AO proceeded to seek approval and appoint a special auditor immediately after receiving the assessee's reply. The Tribunal concluded that the AO had not identified any complexity in the accounts and was effectively shifting his duty of scrutiny to a special auditor to secure extended time. On these facts the AO's reference lacked the requisite objective application of mind and was therefore contrary to law and invalid. [Paras 21, 30, 31, 32, 33]Reference to special audit under Section 142(2A) held invalid.Challenge to special audit reference when assessment is alleged to be time barred - Assessment order void for being barred by limitation consequent to invalid statutory reference - The assessment framed in the extended period consequent to the invalid special audit reference was held to be barred by limitation and therefore void. - HELD THAT: - The Tribunal identified the limitation date for AY 2014 15 and traced the assessment chronology showing initiation of substantive queries only shortly before the limitation date and the subsequent show cause and appointment of special auditor which led to completion of assessment after the original limitation. Since the reference to special audit was found invalid (not based on objective criteria of complexity and interest of Revenue but to obtain further information and buy time), the extension of the assessment period could not be availed. Consequently the assessment order passed in the extended period was barred by limitation. Having reached this legal conclusion, the Tribunal declined to decide remaining merits and allowed the additional ground. [Paras 19, 20, 33, 34, 35]Assessment order set aside as void being barred by limitation.Final Conclusion: The Tribunal admitted the additional ground challenging the special audit reference, held that the AO's reference under Section 142(2A) was invalid as it was not based on the requisite objective satisfaction of 'nature and complexity' and 'interest of Revenue' but was used to procure information and extend time, and consequently held the assessment for A.Y. 2014 15 to be barred by limitation and void; the appeal of the assessee is allowed on that ground. Issues Involved:1. Validity of the reference to special audit under Section 142(2A) of the Income Tax Act.2. Whether the assessment order passed was barred by limitation.Issue-wise Detailed Analysis:1. Validity of the Reference to Special Audit Under Section 142(2A):The assessee challenged the reference made by the Assessing Officer (AO) for a special audit under Section 142(2A) of the Income Tax Act, arguing that the preconditions for invoking this section were not satisfied. The AO must form an opinion that a special audit is necessary, considering the nature and complexity of the accounts and the interest of the Revenue. The AO's opinion must be based on objective criteria and not just subjective satisfaction.The Tribunal found that the AO did not point out any complexity in the accounts of the assessee. Instead, the AO noted certain deficiencies and shortcomings in the information provided by the assessee. The AO's reasons for the special audit were primarily to obtain further explanations and information, which is not the purpose of a special audit. The Tribunal also noted that the AO initiated the special audit at the fag end of the assessment period, indicating that the reference was made to extend the time for completing the assessment.2. Whether the Assessment Order Passed Was Barred by Limitation:The Tribunal held that the reference to the special audit was invalid. Consequently, the assessment order passed in the extended period, due to the invalid reference, was barred by limitation and hence void. The Tribunal emphasized that an invalid reference to a special audit cannot extend the statutory period for completing the assessment.Conclusion:The Tribunal allowed the additional ground raised by the assessee, holding that the assessment order was void due to the invalid reference to the special audit. The remaining grounds relating to the merits of the case were rendered academic and not addressed. The appeal of the assessee was allowed in these terms. The order was pronounced on October 26, 2021.