Special audit order under section 142(2A) upheld despite insufficient notice and procedural lapses

The HC upheld the AO's order directing special audit under section 142(2A) of the Income Tax Act despite the petitioner-Company's challenge. The court found that discrepancies in seized documents and digital devices, including suspicious transactions spread over fourteen pages, provided sufficient material for the AO to form a prima facie opinion for special audit. While acknowledging that five days' notice was insufficient and the AO passed the order without considering objections, the court ruled no serious prejudice occurred. The AO's satisfaction under section 142(2A) is not subject to judicial scrutiny unless mala fide intention is demonstrated. The court extended the auditor's report submission deadline by three months but otherwise dismissed the petition.

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Issues Involved:
1. Violation of natural justice in the issuance of special audit orders u/s 142(2-A) of the Income Tax Act, 1961.
2. Challenge to the approval granted by the Principal Commissioner of Income Tax for the special audit.

Summary:

Issue 1: Violation of natural justice in the issuance of special audit orders u/s 142(2-A) of the Income Tax Act, 1961.

Saluja Steel and Power Private Limited challenged the orders passed u/s 142(2-A) of the Income Tax Act, 1961, directing a special audit of its Books of Account for the Assessment Years 2020-21 and 2022-23. The petitioner argued that the orders were passed in violation of the principles of natural justice, as the Assistant Commissioner of Income Tax did not consider the show-cause reply filed by the petitioner. The court noted that the petitioner was given only five days to respond to the notice dated 1st March 2024, which was insufficient and deprived the petitioner of a fair opportunity to object to the proposed special audit.

Issue 2: Challenge to the approval granted by the Principal Commissioner of Income Tax for the special audit.

The petitioner also challenged the approval granted by the Principal Commissioner of Income Tax (Central), Patna, for the special audit. The court examined the provisions of sub-section (2-A) to section 142 of the Income Tax Act, which allows the Assessing Officer to direct a special audit if there are doubts about the correctness of the accounts, multiplicity of transactions, or complexity of the accounts, among other factors. The court found that the Assessing Officer had valid reasons for forming an opinion for the special audit based on the materials collected during the search and seizure operations, which revealed significant discrepancies in the petitioner's accounts.

Court's Findings:

The court held that the exercise of powers u/s 142(2-A) by the Assessing Officer was justified and based on valid reasons. However, the court acknowledged that the petitioner was not given sufficient time to respond to the notice, constituting a breach of natural justice. Despite this, the court found that the petitioner did not suffer any substantial prejudice due to the breach, as the objections raised by the petitioner lacked merit.

Directions Issued by the Court:

1. The time for submission of the special audit report by the nominated Auditor was extended by three months.
2. The nominated Auditor was directed to confine the inquiry to the matters indicated in para no.5 of the order dated 23rd March 2024.
3. The Auditor was instructed not to refer to any internal document/appraisal report prepared by the Income Tax Department concerning the petitioner-Company.

The writ petitions were disposed of accordingly.

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