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 is not subject to judicial scrutiny unless mala fide intention is demonstrated. The court found valid reasons for the audit including doubts about account correctness, multiplicity of transactions, hawala transactions, and complex voluminous accounts. While acknowledging that five days' notice was insufficient and violated natural justice principles, the court determined no serious prejudice was caused to the petitioner-company. The court extended the auditor's report submission deadline by three months but otherwise declined to interfere with the order.

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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.

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