TaxTMI 
TaxTMI 
2019 (9) TMI 734
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....or under Section 142 (2A) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). Brief Facts 4. The facts and grounds urged in both the petition are more or less similar and furthermore since identical arguments have been advanced, the same are being decided by a common judgment. However, facts narrated in WP (C) No. 9359/2019 are being noted and discussed for the purpose of deciding the petitions. 5. The Petitioner contends that it is engaged in the business of lending, investment, financial advisory services and distribution of third-party financial products and has been consistently following the same method of accounting for the purpose of maintaining its books of account and filing its tax return. For assessment year 2016-17, the year under consideration, the Petitioner originally e-filed its return of income declaring total income of Rs. 44,64,06,770/-. The return of income was revised declaring same total income. The case of the Petitioner was selected for scrutiny through CASS and notice was issued under section 143(2) of the Act. During assessment proceedings, Respondent No.1 called for various information, details and data, which were duly furnished by the....
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....) v. CIT(2008) 14 SCC 151 and also the decision of this Court in Sahara India Financial Corporation Ltd. v. CIT (2017) 399 ITR 81 (DEL). It was urged that considering that there was no change in the nature of business of the Petitioner, its business could not be categorized as "specialized nature of business activities". Petitioner had undertaken transactions by way of giving loans and advances in the normal course of business of financing and each and every transaction is fully and appropriately recorded in the books of accounts and this is apparent on the face of the financial statement. Petitioner controverted that it has several subsidiaries, and explained that all the transactions entered into by the Petitioner with its sole subsidiary viz Religare Housing Development Finance Corporation are duly disclosed in the related party transaction schedule of audited financial statement. Regarding SEBI order dated 14.03.2019, it was argued that vide an earlier letter dated 06.05.2019 filed before principal CIT, Petitioner had elaborately explained the background of the aforesaid order, and that there was no revenue loss to the Income Tax Department. Thus, essentially the contention of ....
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.... accounts of the assessee were "complex" in nature, and having regard to the interests of Revenue. After the amendment of the said provision, the scope, of the provision has been expanded. However, the exercise of the power under the amended provision has to be guarded and exercised with circumspection. The expanded, enlarged provisions of Section 142 (2A) would still require, as a condition precedent, the Assessing Officer to demonstrate the complexity of the accounts of the assessee, which an ordinary prudent person, reasonably informed about accounts and law, is not in a position to comprehend. The provision of Section 142 (2A) cannot be construed to mean that in every case where there is a large volume of accounts and multiplicity of transactions, the Assessing Officer can direct the conduct of a special audit under the aforesaid provision. Such an interpretation would be highly irrational and illogical in as much as, in case of every assessee having substantial turnover and reported taxable income, it would become possible to order conduct of a special audit in routine merely on the ground that the volume of accounts and multiplicity of transactions is large. The nature of bus....
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....indicates that in order to make reference for special audit under Section 142 (2A) of the Act, certain essential jurisdictional conditions are required to be satisfied and in absence thereof, the direction for special audit may not be warranted. This provision was amended by the Finance Act, 2013 whereby the words "volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activities of theAssessee" have been inserted after the expression "the nature and complexity of the accounts", w.e.f. 1.6.2013. Prior to the amendment, special audit under Section 142(2A) of the Act could have been directed only in case the accounts of the Assessee were "complex" in nature and having regard to the interests of the revenue. The reason behind the amendment can be inferred from the Memorandum Explaining provisions in the Finance Bill, 2013, which reads as follows: "Direction for special audit under sub-section (2A) of section 142 The existing provisions contained in sub-section (2A) of section 142 of the Income-tax Act, inter alia, provide that if at any stage of the proceeding, the Assessing Officer having....
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....iscussed. Further the applicability of the ratio of the Supreme Court decisions, even to the amended Section 142 (2A) of the Act is evident from the following paras: "28. The rationale for the amendment, therefore, is that the erstwhile expression "nature and complexity of the accounts" had been interpreted in a restrictive manner by courts. The petitioner submits that such an amendment runs afoul of the guarantee under Article 14 of the Constitution. Before dealing with the constitutionality of the aforesaid amendment, it would be fitting to recollect the basic principles that must be kept in mind by the Courts while dealing with the challenge to the constitutionality of a legislative enactment. These principles were succinctly stated by the Supreme Court in Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar, AIR 1958 SC 538: "14. The principle enunciated above has been consistently adopted and applied in subsequent cases. The decisions of this Court further establish- (a) that a law may be constitutional even though it relates to a single individual if, on account of some special circumstances or reasons applicable to him and not applicable to others, that single individual....
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....erence must be accorded to the legislative process. Where the legislation is sought to be challenged as being unconstitutional and violative of Article 14 of the Constitution, the Court must remind itself to the principles relating to the applicability of Article 14 in relation to invalidation of legislation. The two dimensions of Article 14 in its application to legislation and rendering legislation invalid are now well recognised and these are: (i) discrimination, based on an impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders-if such conferment is without any guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy ....
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....efore dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the Assessing Officer for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that 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 Commission....
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.... Commissioner of Income Tax does not exercise the jurisdiction of the appellate authority rather the approving authority. Approval means and connotes supporting and accepting of an act and conduct done by another person. Therefore, it would be his duty to examine on receipt of his proposal, whether the Assessing Officer has correctly done it or not, if he finds that this requirement has not been fulfilled then he must not approve of the same." (iv) In accordance with the principles of natural justice, the assessee must be given the opportunity of a pre-decisional hearing before action is taken under Section 142(2A). 37. While this decision of the Supreme Court was prior to the amendments inserted by the Finance Act, 2013, this Court sees no reason as to why these holdings of the Supreme Court in Sahara (supra) would not be applicable to the amended Section 142(2A). The fact that the AO's determination under this provision must be based on objective material and not subjective satisfaction, that he must make an honest attempt at understanding the accounts of the assessee, that the grant of approval by the higher authority must not be mechanical, that principles of natural ju....
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....nded provisions are not without fetters and safeguards. The power under Section 142 (2A) of the Act cannot be exercised lightly, and the Assessing Officer must exercise his discretion in a reasonable manner by taking into account all relevant and germane aspects. The exercise of the power would be subject to the guiding principles laid down by the Supreme Court in Sahara India (Firm) (supra), as notice by this Court in Sahara India Finance Corporation Ltd.(supra). 19. Now let's examine the reasons assigned by Respondent No. 1 in the impugned order dated 06.018.2019 directing special audit. While testing the reasoning on the touchstone of the principles enunciated by the Supreme Court in Sahara India (Firm) (supra), we would like to underscore that while exercising jurisdiction under Article 226 of the Constitution of India, the Court does not be sit in appeal over the order passed by the Assessing Officer. The subjective satisfaction is a subject matter which falls exclusively within the domain of the Assessing Officer. In Article 226, we would not like to tread or invade into the jurisdiction of the AO. As long as the exercise of the jurisdiction is based on cogent reasons, Court....
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....vant portion of the impugned order reads as under: "15. Anomalies and complexities noted in the books of accounts of the assessee: During the course of assessment proceedings various anomalies and complexities were noted in the books of accounts of the Assessee company. These were communicated to assessee company vide show cause notice dated 30.05.2019 and subsequently vide show cause notice issued under section 142(2A) of the Act. The reply of the assessee company filed on 06.06.2019, 12.06.2019, 17.06.2019 and 28.06.2019, in this regard, have been considered and the same has been disposed of issue wise as under: a. The assessee company is a Non-banking Finance Company (NBFC) engaged in the business of financing. The assessee borrowed loans from Various Banks, Financial Institutions and others on which interest was paid. The said loans were given to various parties and interest received from them was declared as income. Total loans of Rs. 682 Crores borrowed by the assessee company and total amount of Rs. 232 Crores lent by the assessee were outstanding as on 31/03/2016. The assessee declared interest income of Rs. 125.40 Crores during the year and has claimed interest expen....
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....ced voluminous information in the form of agreement; balance sheets etc. on record which needs in depth verification for allowability of the said claim. The said information runs into 9 bulky volumes of more than 1000 pages. Justification regarding the investment into the subsidiary / associated companies/ partnership firms and resultant gain/loss has also not been provided. c. The assessee has made provision of Rs. 279.25 crores for diminution in value of investment made in subsidiary company during the year. Each year such provisions are made for diminution in the value of shares of subsidiary company which creates a suspicion as to how the value of investment in subsidiaries can diminish at such a level. Despite being confronted on this issue no satisfactory reply with the help of relevant supporting evidences could be furnished by the assessee. In fact the reply needs in depth backward integration and verification of the reasons/business expediency/sources having revenue implication that ultimately lead to such diminution. d. The assessee claimed legal and professional fees of Rs. 3,53,45,032/- in its profit and loss account. The assessee was asked to substantiate the sam....
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....ions as under: "With reference to the same, it is submitted that the assessee has already submitted ledger accounts, party-wise details and relevant information with respect to the points raised vide the subject mentioned SCN. The relevant extracts of the documents relating to the anomalies as mentioned in the SEBI report have been enclosed as per the reply in the preceding paras. However, of your goodself required any other information in respect of books of accounts, then please let us know specific requirement, the assessee shall submit the same...................." (f.ii) This shows that the assessee is reluctant to produce the books of account, as it will reveal the true nature of the transactions undertaken by the assessee. It must be appreciated that ledgers of particular expenses helps to understand the nature of the said expense but the books of account need to be verified in detail to understand the overall scenario of the business of the assessee and transactions undertaken by it. Non-production of the books of account further strengthens the view about the correctness of the same. g. As of now, enquiries were conducted and action was taken against the assessee com....
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....e extent of correct determination of taxable income. i. In view of the above discussed facts the statutory provisions with regard to ordering of special audit is satisfied in this case in view of the basic two ingredients i) Nature and complexity of accounts, its voluminous, doubts about the correctness of accounts, multiplicity of transactions, specialized nature of business activity of the assessee, and ii) Interest of the revenue for forming an opinion for the purpose of special audit u/s 142(2A) is satisfied in this case. j. Therefore, I am of the considered opinion in view of foregoing discussion and complexity involved in information submitted and in the interest of revenue, that this is a fit case for invoking provisions of section 142(2A) of the Income Tax Act, 1961 so as to determine correct and true income of the Assessee company for the A.Y. 2013-14." (Emphasis supplied) 21. The Assessing Officer deduced that the queries raised by the questionnaire dated 30.05.2019 remain conclusively unanswered. The Assessing Officer has held that the Petitioner company was unable to cull out the requisite details from the books of accounts to be furnished during the course....
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....naire raised by the Assessing Officer was not specifically answered, and if the same had been satisfactorily answered, he would have found the same to be useful for verification of various claims made by the assessing companies in its return of income for the assessment year under consideration [AY 2016-17]. The Petitioner also placed reliance on the judgment of the Kerala High Court in Muthoottu Mini Kuries v Deputy Commissioner of Income Tax 250 ITR 455 (Kerala) to contend that the direction to the assessee to get accounts audited without hearing the assessee would be unjustified. However, the ratio of the said judgment is not applicable to the facts of the present case. Each case turns on its own facts and the present case is distinguishable from the said judgment keeping in view the facts and circumstances in both the cases. For the foregoing reasons it is, thus, evident that the Petitioner was given sufficient opportunity of being heard. Thus, the contention of violation of principles of natural justice is also without merit. 23. Sections 142 (2A) (2D), 142 (3) and 142 (4) are the relevant provisions dealing with the considerations that are to be weighed while directing speci....