TaxTMI 
TaxTMI 
2018 (12) TMI 831
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....der Section 142 (2A). The petitioner resisted the show cause notice, in its reply dated 20.03.2013, contending that there were no complexities in its accounts, and that the proposal outlining the nine points on which special audit was proposed, had been adequately explained during course of the assessment proceedings; it is alleged that on 21.03.2013, the revenue issued another show cause notice, on identical grounds, which was again resisted. Ultimately, the impugned order of 28.03.2013, directing special audit, was issued. 3. The impugned order, directing special audit, inter alia, states as follows: 9.1 As per Para no 2 of Significant Accounting policies the inventory have been valued as under: - a) Raw material, packing material is valued at cost price excluding allowable VAT based on FIFO method as per AS-2 b) Work in progress is valued at selling price of equivalent productions units calculated on the basis on % of completion reduced by cross profit margin and packing material cost c) Finished goods (manufactured) is valued at sales value reduced by gross margin d) Finished goods (Traded) is valued at purchase price or net realizable ....
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....distances between the three units, it is necessary for the company maintain imprest account. However, the assessee failed to justify the effect of the various imprest-accounts on the method Of-accounting and the complexity in the accounts. 9.6 Cash flow statement filed with reply dated 24.09 2012 has been perused and it is found that the same is not in commensuration with Accounting Standard-3 (revised) issued by ICAI. When confronted the assessee company filed its revised Cash Flow Statement on 11.02.2013, made as per AS-3 (revised) issued- by ICAI. The auditors in their report have mentioned that the balance sheet, profit and loss account and cash flow statement dealt with this report are in agreement with the books which is not correct in view of revised cash flow statement filed and in view of revised statement of cash flow the financial results of the assessee company cannot be accepted as true and correct and audit under section 44AB is also not considered reliable in view of discrepancies which gives rise to complexity of accounts as whole of the transactions of cash are required to be examined and verified in view of revised cash flow statement submitted. In this connect....
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....ue income of the assessee company for the assessment year 2010-11. It is significant to mention here that during the assessment proceedings for the assessment year 2009-10, certain additions were made on certain issues at random basis for which a proposal under section 263 has been submitted to your good self-seeking cancellation of the assessment on grounds mentioned therein. Similar issues are arising during the assessment year 2010-11 and in the absence of complete information and details correct income of the assessee company cannot be determined. Information sought for from the assessee is voluminous and complex in view of clarifications sought for by this office as evident from reply filed on 15-01-2013 (copy enclosed) in which reply to about 35% queries was not filed and whatever information was filed that was not fully supported with vouchers and relevant documents. 9.10 Unit wise books of account and relevant records are not produced. As the assessee company has claimed deduction under section 8010 for the first time since start of its business operations, it is required to produce separate audit report for each unit which is not produced along with balance sheet and pr....
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....evidence regarding the date of operation of activity by various different units without corroborative evidence increase the complexity of the accounts. 9.14 In the course -or assessment proceedings the- assessee was offered ample opportunity for filing the desired and required information which is evident from the date of issue of first questionnaire on 31-03-2012 and thereafter a specific questionnaire on 04-09-2012 in which information on various issues was called for. Since then the assessee company has not been submitting complete information even after seeking, various adjournments and did not produce complete books of account and relevant documents to examine the genuineness of expenses debited to the books of account and also to arrive at correct and true income of the assessee company for the assessment year 2010-11. 4. It is argued by Mr. Ajay Vohra, learned senior counsel on behalf of the petitioner that scrutiny and notice under Section 143(2) dated 07.09.2011 was served on the assessee and thereafter two questionnaires dated 31.07.2012 and 04.09.2012 were issued; they were duly and adequately responded. The hearings were time to time attended and the questionnaire....
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....e transactions therein have been explained and the same are supported with the requisite bills and vouchers. These accounts were also test checked from the books of accounts produced on 11.02.2013 and no defect was stated, which is also on record. It is argued that the assessee follows cash accounting for this purpose; which was explained to the AO during the proceedings. Given these, there was no complexity warranting special audit on this point. 6. It is pointed out that the reply given by the assessee to the AO's queries are consonant with Accounting Standard-3 (Revised) issued by ICA. In the Cash Flow Statement, dividend paid by the company was shown under Operating Activities in order to assist users to determine the ability of the company to pay dividend out of operating cash flows. The company wants that users of its financial statements to be aware about the fact that the company has ample amount of operational cash inflows and it has the ability to pay of the dividend declared out of such operational cash inflows. It is argued that the revenue's view that dividend paid should be reflected in the cash flow statement, was taken note of and a revised statement was issued o....
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....elhi Development Authority v Union of India 350 ITR 452 (Del). It was argued that in Peerless General Finance and Investment Co Ltd v Dy CIT (236 ITR 671), the Calcutta High Court held that the Commissioner, before granting approval must have before him the materials on the basis of which an opinion has been formed. A prior approval can be granted only when the materials for appointment of the extraordinary procedure are required to be taken by the AO. The AO has to place all the materials before the CIT to show that he intends to take recourse to the said provision having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue. Reliance was also placed on the ruling in Swadeshi Cotton Mills Co Ltd v Commissioner of Income Tax (171 ITR 634), where the Allahabad High Court held that special audit should not be directed after a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee. 10. Mr. Asheesh Jain, learned counsel for the revenue, submitted that the AO was justified in directing special audit. It was noticed that the assessee was maintaining accounts of imprest with various perso....
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....imed this exemption for the first time since start of its operation, its genuineness also needed to be examined in view of business activities carried on in respect of trading and manufacturing which is a cumbersome process. 12. It was also pointed out by Mr. Jain that in the original return of income the assessee company declared income under normal provisions to the tune of Rs. 285769730/- and in revised return the same has been reduced substantially to Rs. 19084670/-. Complete details and explanation has not been filed in the course of assessment proceedings and from the details filed correct income of the assessee company cannot be deduced. Income of the assessee company for this very purpose is not determinable due to complex nature of accounts kept by it. Analysis and Conclusions 13. The relevant statutory provisions governing the special audit are incorporated in Section 142 of the Income Tax Act which is titled "inquiry before assessment". Sub-sections (2A), (2B), (2C), (2D), (3) & (4) are relevant in this behalf. They are as under:- "(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the acc....
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....etermined shall be paid by the Central Government.] (3) The assessee shall, except where the assessment is made under Section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) or any audit under subsection (2A) and proposed to be utilised for the purpose of the assessment. (4) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year." 14. The relevant principles governing the applicability of the provisions have been set out in the judgment of the Supreme Court in Sahara (supra): "... 6. A bare perusal of the provisions of Sub-section 2A of the Act would show that the opinion of the Assessing Officer that it is necessary to get the accounts of assessee audited by an Accounta....
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.... the requirement of the previous approval, envisaged in the Section is not turned into an empty ritual. Needless to emphasise that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case." 15. The provisions of sub-section Section 142 (2A) require the Assessing Officer to form an opinion that having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, it is necessary to get the accounts audited by a special auditor nominated by the CIT or the CCIT. The proviso makes it incumbent upon the AO to give the assessee a reasonable opportunity of being heard before special audit is directed. The direction to conduct special audit has to be, under the sub-section, given with the previous approval of the CIT or CCIT. It is thus the Assessing Officer who is to form the opinion and not for anyone else. The approval to be granted by the CIT or the CCIT, as held by the Supreme Court in the case of Sahara India (Firm)....