2008 (3) TMI 354 - AT - Income Tax

Tribunal upholds special audit direction, deems report crucial for assessment process.

The Tribunal upheld the direction for a special audit under section 142(2A) given by the Assessing Officer, ruling that the direction was valid and not ... Limitation Issues Involved:1. Direction for special audit under section 142(2A).2. Validity of the assessment based on the special audit report.3. Limitation period for completing the assessment.Issue-wise Detailed Analysis:1. Direction for Special Audit under Section 142(2A):The assessee challenged the direction of the Assessing Officer (AO) for a special audit under section 142(2A), arguing that there was no complexity in the accounts requiring such an audit. The AO had observed discrepancies in the accounts, such as differences in expenses claimed and TDS amounts, discrepancies in outstanding amounts with certain parties, and intertwined accounts with sister concerns. Based on these observations, the AO directed a special audit with the previous approval of the Commissioner. The assessee argued that the direction was invalid as it was given without providing an opportunity of hearing, citing the Supreme Court judgment in Rajesh Kumar v. Dy. CIT [2006] 287 ITR 91. However, the Tribunal held that the direction for special audit is not appealable under section 246, and the validity of such direction cannot be challenged before appellate authorities. The Tribunal noted that the direction was given by the competent authority and was followed by the assessee, who did not challenge it by filing a writ petition. Consequently, the period for special audit must be excluded from the limitation period for completing the assessment.2. Validity of the Assessment Based on the Special Audit Report:The assessee contended that the assessment based on the special audit report was invalid as the direction for the special audit was not legally tenable. The Commissioner of Income-tax (Appeals) rejected this plea, holding that the special audit report is relevant material for assessment under section 143(3), as supported by the Delhi High Court in Addl. CIT v. Jay Engineering Works Ltd. [1978] 113 ITR 389 and the Rajasthan High Court in Pani Devi v. Union of India [2000] 245 ITR 798. The Tribunal upheld this view, stating that the special audit report was a crucial part of the assessment process, and the AO had made the assessment based on facts gathered by the special audit, not merely on the auditor's opinion.3. Limitation Period for Completing the Assessment:The assessee argued that the assessment was barred by limitation, as the direction for special audit was invalid and the period for special audit could not be excluded. The Tribunal noted that the direction for special audit was given on March 24, 2005, and served on March 28, 2005, with an initial period of 120 days for submitting the audit report, which was extended twice. The audit report was submitted on September 14, 2005, and the assessment was completed on November 10, 2005. The Tribunal held that the period for special audit must be excluded from the limitation period, as the direction for special audit was valid and in force. The Tribunal also rejected the argument that the extension of the audit period was invalid due to the application for extension being filed after the expiry of the initial period, citing the Supreme Court judgment in CIT v. Ajanta Electricals [1995] 215 ITR 114, which held that in the absence of specific provisions, applications for extension can be filed even after the expiry of the initial period. Consequently, the Tribunal concluded that the assessment was completed within the statutory period and dismissed the grounds of appeal raised by the assessee.