2024 (5) TMI 702 - HC - Income Tax

AO's satisfaction for special audit under section 142(2A) not subject to judicial review unless mala fide shown

The Jharkhand HC upheld the AO's order for special audit under section 142(2A) of the Income Tax Act, ruling that the AO's satisfaction for ordering ... Special audit u/s 142(2A) - Complexity and Volume of Transactions - Reasonable Opportunity to be Heard - materials for arriving at satisfaction for the special audit - HELD THAT:- The satisfaction indicated u/ss (2-A) for forming an opinion by the Assessing Officer shall not be open to judicial scrutiny and wherever it is shown to the Court that there are materials for arriving at satisfaction for the special audit of the accounts of an assessee by an Accountant as defined in explanation to sub-section (2) of section 288, the writ Court shall be denuded of its power of judicial review under Article 226 of the Constitution of India. The submission that by passing an order under sub-section (2A) the period of limitation which shall be expiring on 31st day of March 2024 would be extended by six months and thereby cause prejudice to the assessee cannot be countenanced in law. Unless it is demonstrated by producing materials to the satisfaction of the Court that the exercise of powers under sub-section (2-A) by the AO is with mala fide intention, the writ Court shall not exercise its powers under Article 226 of the Constitution. In the opinion of this Court, the Assessing Officer for valid and justifiable reasons may exercise the powers under sub-section (2-A) till the last date of the financial year. Having regard to the initial stage of inquiry, we shall be careful to see that no prejudice is caused to the assessee and would therefore simply indicate that (i) there are certainly doubts about the correctness of the accounts (ii) multiplicity of transactions is apparent (iii) Hawala transactions are like specialized transactions and (iv) the accounts are complex and certainly voluminous. The order granting approval dated 20th March 2024 for special audit under section 142 (2-A) of the Income Tax Act takes note of every detail of the case. This would evince no doubt that at this stage, the statutory Authority is required to form a prima facie opinion and not to render a conclusive finding. The Latin word “prima facie” which means at first glance shall refer to materials based on which the statutory Authority shall form an opinion. To a limited extent, we may agree with the learned counsel for the petitioner-Company that five days to respond to the notice under section 142 (2-A) was not sufficient and the Assessing Officer passed the order without looking at the objections raised by the petitioner-Company. Even so, there is no law of universal application that every order passed in breach of natural justice must be interfered by the Court. The requirement in law that every order that ensues civil consequence must be passed following the rules of natural justice shall vary from case to case and no strait-jacket formula can be prescribed. We are not in agreement with the learned counsel for the petitioner-Company that serious prejudice has been caused to the petitioner-Company on account of violation of the rules of natural justice. We are not inclined to interfere with the order but time indicated in the order for submission of report by the nominated Auditor is extended by a further three months. The nominated Auditor shall confine the inquiry to the matters indicated herewith. Issues Involved:1. Violation of Natural Justice.2. Approval for Special Audit u/s 142 (2-A) of the Income Tax Act, 1961.3. Exercise of Powers by the Assessing Officer.Summary:1. Violation of Natural Justice:The petitioner, Mongia Steel Limited, challenged the orders for a special audit of its Books of Account for the Assessment Years 2016-17, 2018-19, and 2022-23, arguing that the orders were passed in violation of natural justice. The petitioner claimed that the order dated 20th March 2024, by the Principal Commissioner of Income Tax (Central), Patna, did not consider their objections and that the Assessing Officer incorrectly recorded that no reply was submitted to the show-cause notice dated 1st March 2024. The Court acknowledged that the five-day response time to the notice under section 142 (2-A) was insufficient and that objections raised by the petitioner were not adequately considered. However, the Court held that not every procedural breach necessitates interference unless substantial prejudice is demonstrated.2. Approval for Special Audit u/s 142 (2-A):The petitioner sought to quash the order dated 23rd March 2024, directing a special audit u/s 142 (2-A) and the approval granted by the Principal Commissioner of Income Tax (Central) on 20th March 2024. The Court noted that the Assessing Officer has wide powers to safeguard revenue interests and that the opinion for a special audit must be based on factors like the complexity of accounts, volume of transactions, and interests of the Revenue. The Court found that the statutory requirements for forming an opinion for a special audit were met and that the Principal Commissioner's order detailed the necessity for the audit.3. Exercise of Powers by the Assessing Officer:The Court examined whether the Assessing Officer's exercise of power u/s 142 (2-A) was justified. The Court emphasized that the satisfaction for forming an opinion for a special audit is not subject to judicial scrutiny unless shown to be mala fide. The Court observed that there were valid reasons for the special audit, including discrepancies in sales data, suspected Hawala transactions, and voluminous unexplained transactions. The Court concluded that the Assessing Officer's decision was based on substantial material and was not arbitrary.Conclusion:The Court did not interfere with the order dated 23rd March 2024, for the special audit but extended the time for the nominated Auditor to submit the report by three months. The Auditor was directed to confine the inquiry to specific matters and not refer to any internal documents prepared by the Income Tax Department. The writ petitions were disposed of accordingly.