TaxTMI 
TaxTMI 
2012 (9) TMI 410
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....respect of 2003-04 forms the basis of the subsequent orders. We have heard and are disposing of the said writ petitions by this common judgment. For the sake of convenience, we have treated Writ Petition (Civil) No. 19746-47/2005, as the lead case as the said writ petition pertains to assessment year 2003-04 and is against the first order directing special audit. Wherever required, facts peculiar to each assessment year have been noticed and dealt with. 3. We may note that earlier Writ Petition (Civil) No. 19746-47/2005 was disposed of vide order dated 29th November, 2006 on the ground that clearance/approval of Committee of Disputes had not been obtained, but on Appeal by Special Leave filed by the petitioner herein, the said order was set aside and the matter remanded for fresh decision on merits in view of the judgment of the Supreme Court in Rajesh Kumar and Ors. v. Deputy CIT and Ors. [2007] 2 SCC 181. 4. Before we go to the factual matrix of the present case, it may be relevant to read and consider the provision of Section 142(2A) and examine the decisions of the Supreme Court and High Courts on the scope and ambit of the power under the said Section. Section 142(2A) of....
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....t be granted or passed mechanically. The same should be done having regard to materials on record. Explanation of the assessee could be a relevant factor. Commissioner/Director can form a different opinion than to one expressed by the Assessing Officer who initiates the process. The scope and ambit of Section 142(2A) was examined. Interpretation of the said section as discussed and made in the said judgment has been referred to below. 6. The ratio expressed in Rajesh Kumar's case (supra) was referred to a larger Bench of three Judges and their judgment in the case of M/s Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-I & Anr. [2008] 14 SCC 151, affirms the view that principles/rules of natural justice have to be complied with before an order under Section 142(2A) is passed. It was held that the said rules are not embodied in writing and are not capable of a precise definition, but they have evolved under the common law to check every arbitrary exercise of power by the State and functionaries. The principle implies a duty to act fairly i.e. fair play in action and prevent miscarriage of justice. The audi alteram partem rule, it was observed, has many facets b....
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....fect that direction under Section 142(2-A) entails civil consequences because the assessee has to pay substantial fee to the special auditor is knocked off. 27. True it is that the payment of auditor's fee is a major civil consequence, but it cannot be said to be the sole civil or evil consequence flowing from directions under Section 142(2-A). We are convinced that special audit has an altogether different connotation and implications from the audit under Section 44-AB. Unlike the compulsory audit under Section 44-AB, it is not limited to mere production of the books and vouchers before an auditor and verification thereof. It would involve submission of explanation and clarification which may be required by the special auditor on various issues with relevant data, document, etc. which, in the normal course, an assessee is required to explain before the assessing officer. Therefore, special audit is more or less in the nature of an investigation and in some cases may even turn out to be stigmatic. We are, therefore, of the view that even after the obligation to pay auditor's fees and incidental expenses has been taken over by the Central Government, civil consequences would stil....
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....le to the Assessing Officer because of an invalid order under Section 142(2A) of the Act. However, it will be open to the appellants to question before the appellate authority, if so advised, the correctness of the material gathered on the basis of the audit report submitted under Sub-section 2A of Section 142 of the Act." 10. The Supreme Court clarified that law on the subject as expounded by them will apply prospectively and it will not be open to the appellant i.e. the assessee, to urge before appellate authority that the extended period of limitation under Explanation 1(iii) to Section 153(3) of the Act which is applicable to the cases of special audit, was not available to the Assessing Officer because the direction for special audit was invalid. This clarification and observation was required because once the order directing special audit was declared invalid, then the assessment order passed by the Assessing Officer would be barred by limitation. The appellant in the said case was, therefore, prohibited from raising the said contention. It was also clarified that the assessee could question before the appellate authority, if so advised, the correctness of material gathere....
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....the Assessing Officer recorded relevant findings which were germane, cogent and not extraneous. It was not based merely on ipse dixit of the Assessing Officer. It was held:- "A bare perusal of the provision would show that the opinion of the Assessing Officer has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessed and (ii) the interests of the Revenue. The word "and" signifies conjunction and not disjunction. In other words, the twin conditions of "nature and complexity of the accounts" and "the interests of Revenue" are the pre-requisites for exercise of power under Section 142(2A). Although the object behind enacting the said provision is to assist the Assessing Officer in framing the assessment when he finds the accounts of the assessed to be complex and is to protect the interests of Revenue but recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinising the accounts of an assessed to determine his true and correct income, on to an auditor. True that an order under the said provision cannot be passed on the ipse dixit of the Assessing Officer merely because he finds ....
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....s an order of assessment requiring the assessee to pay the tax in terms thereof. All these powers are vested in the Assessing Officer under Chapter XIV relating to "procedure for assessment". Section 142(2A) of the Act forms part of this procedure and mandates that if at any stage of the proceedings before the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and interest of the Revenue, he is of the opinion that it is necessary so to do, he may with the previous approval of the Chief Commissioner direct the assessee to get the accounts audited by an accountant as defined in the Explanation below sub-section 2 of Section 288 and nominated in this regard. Exercise of power by the Assessing Officer under this provision is subject to satisfaction of the limitations specified in the section itself. The Assessing Officer must form an opinion that having regard to the nature and complexity of the accounts, it would be in the interest of the Revenue to direct special audit under this provision. Formation of this opinion cannot be strictly equated to an order. This is merely a formation of an opinion during the course of assessment proceedings an....
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....isfaction of the Assessing Officer would normally be a sufficient ground for the Assessing Officer to exercise his jurisdiction under this provision and to record the opinion on a subjective satisfaction recorded objectively. The Assessing Officer is not required to loose sight of the provisions of the Act and the objects sought to be achieved thereunder. The orders should be founded on application of mind relatable to the nature and complexity of the accounts and in the interest of the Revenue. Once these ingredients are satisfied, the scope of judicial review of such a direction would normally be not possible, as the High Court in exercise of its powers under section 226 of the Constitution of India does not sit as a Court of Appeal over such orders particularly when they are interim orders and post-decisional protection and remedy is available to the assessed under the same very provisions." (emphasis supplied) 13. The aforesaid observations are relevant as it is accepted by the Revenue that for the assessment year 2003-04 and 2004-05, the Assessing Officer did not call for, examine or consider the books of accounts or even sample accounts. Highlighted portion of the aforesai....
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....r office and it was agreed that we can come some other day to attend the case. On 20th December, 2004, we had attended the hearing and given all the explanations and clarifications that your goodself had sought. The clarifications were on the same points as were raised in the Questionnaire dated 1st November, 2003. After the hearing, your goodself had informed us that another Questionnaire would be framed and we would be informed of the same as soon as the same was ready. The next date of hearing was fixed on 3rd January, 2005. On 3rd January, 2005 since the undersigned was out of station, the case could not be attended and as such we had also not received any new Questionnaire and all the points raised in the previous Questionnaire had already elaborately explained on 20th December, 2004. The undersigned again attended your good Offices on 11th January, 2005 and had already explained the above position personally when your goodself informed about the service of the above-referred letter on 11th itself which had not been received till then. Your goodself would appreciate that there is no reason for the case to be decided ex-parte. Regarding the compliance of statutory requiremen....
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....missioner, the petitioner had vide reply dated 20th December 2004, stated that (i) the petitioner was maintaining Receipts and Payments based government accounts and the system of accounting and manner of preparing accounts was drawn up and based on the recommendations of the Accountant General, India. DDA (Budget and Accounts) Rules, 1982 were applicable and the accounts were drawn up based on the cash receipts, but at the year end the accounts were converted into Income and Expenditure based accounts and this accounting system had been followed in the earlier years. There was no change. The petitioner had initiated steps for conversion of Receipts and Payment based government accounting into transaction based Double Entry Accounting. (ii) The reconciliations, referred to in the Notes, relate to position as on 31st March, 2002 and prior period liability or asset was adjusted to a separate account. The same did not affect the year accounting and had no bearing on the transactions/income for the year 2002-03. (iii) Regarding policy on ground rent and service charges, it was stated that the petitioner had introduced a scheme for payment of one-time capitalized ground rent and this wa....
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....ved in inter se transfer of funds and Personal Ledger Accounts were personal accounts and had no bearing on the income and expenditure accounts of the petitioner. The personal accounts were subject to re-conciliation. 17. Thereafter, ACIT sent a questionnaire on 18th January, 2005 to the petitioner. In response, vide letter of the same date to the Assistant Commissioner of Income Tax, it was stated that the Ground Rent and Service Charges up to 31st March, 2002 were accounted for on accrual basis, but the same had been accounted for on cash basis from the financial year 2002-03 as a scheme for payment of one-time capitalized ground rent and service charges was introduced. However, new allotments were made on free-hold basis and, therefore, no ground rent or service charges were levied. The earlier year payments had been accounted for and the change made did not affect the income earned. The Land and Building Department was a department of the Central Government and was not under the DDA. There was no agreement between the Central Government and the DDA. Development was being undertaken under the scheme of Large Scale Acquisition, Development and Disposal of Land in Delhi dated 2....
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....t the revenue loss/gain temporarily." (emphasis supplied) 20. The Assessing Officer recorded that conversion from receipt and payment system of accounting into accrual system needed a closed monitoring and it was observed as under:- "But the conversion from Receipt & payment system of accounting to accrual system itself involves lot of accounting complexities for such a large organization like DDA. Hence this conversion needs to be closely monitored w.r.t. the accounting treatment given to various issues. The assesse himself stated that in respect of ground rent & service charge, the accounting system has been changed to cash basis as accrual system involves assumption about the future act of the allottee. Whether the system of accounting followed by the DDA w.r.t. various entries were in accordance to I.T. Act, 1961 has to be examined rather that going into the practicality and logics of the accounting system followed by DDA." (emphasis supplied) 21. With regard to one-time settlement scheme, it was observed that there were complexities whether "the change was in accordance with Income Tax provisions or not and this had to be examined." With respect to the income from Naz....
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....ns. Firstly, the note reveals that the Assessing Officer felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in number. Detailed scrutiny of large number of entries by itself, on standalone basis, will not amount to complexity of accounts. The accounts do not become complex because merely there are large number of entries, e.g., a petrol pump may have substantial sales, to thousands of customers daily at prices fixed under law/Rules, but this by itself will not be the accounts complex. Similarly, an Assessing Officer is required to scrutinize the entries and verify them, but this does not require services of a special auditor or a Chartered Accountant to undertake the said exercise. Section 142(2A) is not a provision by which the Assessing Officer delegates his powers and functions, which he can perform to the special auditor. The said provision has been enacted to enable the Assessing Officer to take help of a specialist, who understands accounts and accounting practices to examine the accounts when they are complex and the Assessing Officer feels that he cannot understand them and comprehend them fully, till he has help and....
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.... by the petitioner that the Assessing Officers have repeatedly in all orders, for the purpose of recording reasons, taken the "notes of accounts" and verbatim incorporated the same. This is apparently correct and, therefore, discloses non-consideration and non-application of mind, which constitutes an error in the decision making process. It is an easy and convenient manner to transfer the obligation of scrutiny and examination to the special auditor. It may be true and correct that certain aspects mentioned in the Notes of Accounts may, if required and necessary and after in depth examination, justify appointment of a special auditor but the Assessing Officer has to be cautious and careful to segregate them from others while recording the reasons. If such an exercise is undertaken, it will show due and proper application of mind and not exercise of power under Section 142(2A) on the pretend or on the pretext that such power exists and, therefore, should be exercised. Existence of the power is not in dispute; it is the exercise of power, which is in dispute and question. The exercise of power must withstand and meet the requirements prescribed. Failure to exclude irrelevant and ext....
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....ence, no revenue impact Accounting Policy No. 14 (a) and (b) ✓ ✓ ✓ ✓ ✓ ✓ ✓ 4 Nazul I & II being Authority's revolving fund, income thereon needs to be examined Nazul I & II record transactions on Central Government Account and accounts forms part of L&B Deptt. Of the Government. Accounting Policy No. 1 and Nazul Notification ✓ ✓ ✓ ✓ ✓ ✓ ✓ 5 Basis of estimation of WDV of old assets as on 31.3.2002 Estimation made is only in respect of tables, chairs at nominal value of Rs.50 & 100-Total depreciation on these is less than 10 lacs. Now u/s 11 no diff between capital & revenue expenditure Accounting Policy No. 4 ✓ ✓ ✓ ✓ ✓ ✓ ✓ 6 Reworking of WDV consequent to change in depreciation rates Under income tax, income tax rates being constantly applied. Hence, no change for income tax purposes. Even in books since basis adopted is written down value, there is no need for re-working of opening written down valu....
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....policies w.r.t.- Fixed Assets Rent of Staff Quarters Valuation of Stocks Revenue Recognition Recoveries/payments to Nazul Accounts No specific finding about complexity Policy No. 4, 6, 7, 11 x x X ✓ ✓ ✓ ✓ 15 Expenditure on Commonwealth Games need to be verified No specific finding about complexity Vague comment x x x X x ✓ ✓ 16 License fee/services charges for use of Nazul properties such as staff quarters involves complexity No specific finding about complexity Accounting Policy No. 11(c) x x x X x x ✓ 17 Land Premia in respect of lands nazul lands appropriated to housing projects transferred to Nazul Account No specific finding about complexity Accounting Policy No. 11 (B) and Notes No. 4 x x x X x x 18 Non-recovery of old balances from Slum Department and Sports Authority of India Has no accounting implication for the year Note No. 10 x x x X x x ✓ 19 Short booking of license fee of Rs. 26 l....
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....sing Officer who had perused and examined the same and adjourned the case to 5th November, 2007. On 5th November, 2007, the matter was again adjourned to 26th November, 2007, with direction that the petitioner should explain how their activities were covered under the definition of "Charity" i.e. Section 2(15) of the Act. Before the next date of hearing, show cause notice dated 13th November, 2007, was issued under Section 142(2A). Reply was filed on 22nd November, 2007. Thereafter order dated 11th December, 2007 was passed under Section 142(2A). As noticed above, the recommendation for special audit was made on 17th October, 2007, within two days after the books of accounts were produced on 15th October, 2007. The letter dated 17th October, 2007 has not been placed on record by the respondent. In the show cause notice dated 13th November, 2007, it was stated by the respondent that the petitioner in the course of assessment proceedings had explained that the cash book, record of receipts and payments was kept zone wise and at the end of the month the summary of receipts and payments under different heads were submitted to the Head Office for consolidation. At the end of the year, l....
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....he hearing, the petitioners were informed that there was change in jurisdiction and the case was transferred to Deputy Director of Income Tax (Exemption) Trust Circle-II. The petitioner was asked to and had filed reply to the questionnaire along with a note on the accounting procedure and had produced sample books on 26th November, 2008. Books of accounts were not opened by the Assessing Officer nor any specific query was raised on any entry in the books. On 4th December, 2008, show cause notice was issued and after reply was filed on 11th December, 2008, impugned order directing special audit dated 29th December, 2008 was passed. 32. In the assessment year 2007-08, reference is made to complexity of accounts as accounts were maintained at zonal level and then transferred to the Head Office on monthly basis and applicability of Section 269SS was involved. This amounts to complexity of accounts. The petitioner on the other hand has stated that questionnaire dated 12th November, 2008 was issued by the Director of Income Tax (Exemption) Range-I, but subsequently jurisdiction was transferred to Deputy Director of Income Tax, Trust Circle-II and the case was adjourned to 26th Novembe....
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....t year 2009-10, in the counter affidavit, it is stated that the books of accounts were produced. Cash book etc were maintained on zone level and entries were subsequently made on monthly basis at the Head Office. This process involved complexity. Verification of loan and deposits and applicability of Section 269SS also involved complexity. The Director of Income Tax (Exemption) while granting approval for audit has stated that special audit had been directed for the assessment year 2008-09 and the reasons were not being repeated. He has further recorded that the direction for special audit was derived from the fact that the assessee had failed to give proper reply regarding declared income and whether any part of the property was used for benefit of person referred in Section 13(3). Special audit was necessary to examine irregularities committed in connection with the expenditure in relation to Commonwealth games. It is pointed out by the petitioner that in the show cause notice, there is no reference to Section 13(3) or any related person and misuse of assets or funds by a related person. Irregularities can be examined and verified by the Assessing Officer and for this purpose, sp....
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....facts which are to be examined in the assessment proceedings. However, the contentions raised by the petitioner are relevant factors which have to be considered. It is different matter that the Assessing Officer may or may not accept the said contention. The contention is as such not an accounting issue, unless it is held that the accounts indicate or prima facie show misuse or wrong use of funds by related persons and Section 13(3) is attracted. For details and exact figures in a given matter, special audit may be justified. The legal contention raised by the petitioner cannot be decided by a special auditor and has to be decided by the Assessing Officer. 38. In these circumstances, we have no option but to quash the direction/orders for special audit in each of these years. The writ petitions are allowed and the orders under Section 142(2A) are quashed. This, however, does not mean that if the Assessing Officer during the course of the assessment proceedings feels and requires special audit, he cannot record reasons and justify special audit. It will be open to the Assessing Officer in the course of the assessment proceedings to record fresh reasons and direct special audit un....