Special audit time extension under Section 142A cannot be delegated from Assessing Officer to Commissioner of Income Tax

The Delhi HC held that the power to extend time for special audit under Section 142A lies exclusively with the Assessing Officer (AO) and cannot be delegated to the Commissioner of Income Tax (CIT). The court ruled that since the appointment of a special auditor involves civil consequences and is part of assessment proceedings rather than administrative power, the AO cannot abdicate this function by merely making recommendations to the CIT. The CIT has no jurisdiction to extend the audit timeframe as the AO remains in control of assessment proceedings. The case was decided in favor of the assessee, establishing that the discretionary power vested in the AO is non-delegable.

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Issues Involved:
1. Whether the extension given to the Chartered Accountant for submission of the audit report was in consonance with the proviso appended to Section 142(2C) of the Income Tax Act, 1961.

Summary:

Issue 1: Extension of Time for Audit Report Submission

The appellant/revenue challenged the common order dated 03.06.2020 passed by the Income Tax Appellate Tribunal concerning Assessment Years (AYs) 2007-08 and 2008-09. The core issue was whether the extension given to the Chartered Accountant for submitting the audit report was in line with the proviso to Section 142(2C) of the Income Tax Act, 1961.

The Tribunal's impugned order disposed of the appeals filed by the revenue and the cross-objections filed by the respondent/assessee for the mentioned AYs. The Tribunal also addressed a separate order concerning a group company, B.L. Kashyap and Sons Ltd (BLK).

Background:

The respondent/assessee, engaged in construction and allied services, was subjected to a search action on 19.02.2008 under Section 132 of the Income Tax Act. Subsequently, a notice under Section 153A was issued on 24.12.2008. The Assessing Officer (AO) issued a show cause notice on 27.11.2009 for a special audit under Section 142(2A), which was objected to by the assessee but was rejected by the AO on 08.12.2009. The Commissioner of Income Tax (CIT) approved the special audit on 15.12.2009, appointing Dinesh Mehta & Co. with a 120-day timeframe, later extended by 60 days upon the auditor's request.

Submissions of Counsel:

Appellant/Revenue's Arguments:

1. Extension of time under Section 142(2C) is an administrative act, not a judicial power.
2. The AO satisfied himself for the need for an extension and recommended it to the CIT, fulfilling the conditions of the proviso to Section 142(2C).
3. The form of the letter issued by the AO should not determine the validity of the exercise of power.
4. Procedural errors should not invalidate the assessment if substantive justice is served, and no prejudice is caused to the assessee.

Respondent/Assessee's Arguments:

1. Only the AO has the power to extend the timeframe for the audit, not the CIT.
2. The extension granted by the CIT was illegal and invalid, making the assessment order beyond the prescribed period of limitation.
3. The power to extend time is discretionary and must be exercised by the AO based on good and sufficient reasons.
4. The extension of time impacts the limitation period and has substantive civil consequences.

Analysis and Reasons:

The court examined the relevant provisions of Section 142 of the Income Tax Act. It concluded that both the discretion to direct an audit and the extension of the timeframe for submitting the audit report are vested solely in the AO. The role of the CIT is limited to granting approval for the audit and nominating the auditor. The CIT's involvement in extending the timeframe was beyond the statutory authority, as the power to extend time was non-delegable and vested only in the AO.

Conclusion:

The court held that the extension of time granted by the CIT was not in consonance with the proviso to Section 142(2C) of the Act. Consequently, the assessment order dated 10.08.2010 was barred by limitation. The question of law was answered against the revenue and in favor of the assessee, and the appeals were disposed of accordingly.

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