TaxTMI 
TaxTMI 
2021 (8) TMI 1014
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....s against the proposed referral for special audit within the meaning of Section 142(2A) of the Income Tax Act, 1961 (hereinafter referred to as the "said Act"), and had also challenged the impugned directions given by the respondent to the petitioners vide the communication dated 22.4.2021 under the said provisions. To be precise, following prayers were sought in both the petitions:- 7.... that this Hon'ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, direction or order and be pleased to: (a) quash and set aside the impugned order dated 8.4.2021 at Annexure-A to this petition; (b) quash and set aside the impugned directions of 22.4.2021 at Annexure-A to this petition; (c) pending the admission, hearing and final disposal of this petition, to stay implementation and operation of the notices at Annexure-A to this petition;" 3. However, at the time of hearing, the learned Sr. Advocate Mr. S. N. Soparkar did not press for the challenge to the impugned order dated 8.4.2021 and confined himself to the challenge to the impu....
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....all the details and submit the same. 4.3 On 19.3.2021, the respondent issued a notice under Section 142(2A) of the said Act and also supplied the Satisfaction Note drawn for referring the case for an independent audit. The petitioner objected to the said notice and sought the copies of the statements of Bharatbhai Padia and Chiragbhai Thakkar and also sought personal hearing vide the letters dated 27.3.2021 and 30.3.2021. 4.4 The petitioner was communicated vide letter dated 31.3.2021 to collect the requisite statements on 1.4.2021. The petitioner was also granted an opportunity of hearing by fixing the hearing on 5.4.2021, however, petitioner neither collected the statements, nor remained present for personal hearing. 4.5 The petitioner instead challenged the said notice dated 19.3.2021 before this Court by filing a petition being SCA No.6033 of 2021, which subsequently came to be withdrawn as per the order dated 5.4.2021. 4.6 On 5.4.2021, the petitioner intimated the respondent that the copies of the statements were not provided. On 6.4.2021 the petitioner was provided with the copies of the statements of Mr. Bharat Padiya and Mr. Chirag Thakkar. On 7.4.2021, the peti....
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....lf. However, in the instant case, the respondent has delegated upon the auditor, the investigation into the affairs of the petitioners, including the social functions, analysis of the seized documents and forming an adjudicatory opinion of the impact and the consequences of the same, not only on the income of the petitioners for the current year, but for the other years and other laws and other assessees. In this regard, reliance is placed on the decisions of the Delhi High Court and Calcutta High Court. 6.5 An appraisal report was made by the investigating team after a search, to the concerned Assessing Officer and such report encompassed complete and thorough analysis done on the seized documents by the investigating team, and therefore, the Assessing Officer had sufficient assistance to understand the seized documents. Therefore, the delegation of the work of both - the investigating officer as well as of the Assessing Officer upon the Special Auditor is bad and illegal. 6.6 As regards the voluminous 50 TB of data and 22000 plus loose papers found during the search operation, it is submitted that during the post-search investigation proceedings, personal hearin....
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....aving not challenged the orders dated 8.4.2021 disposing of the objections of the respective petitioners against the proposed referral for special audit under Section 142(2A) of the Act, the Court is required to examine the challenge to directions dated 22.4.2021 only. 7.2 Section 142(1)(ii) and (iii) entitles the Assessing Officer to call upon the assessee to produce such account or document as the Assessing Officer may require or to give information as the Assessing Officer may require. 7.3 Section 142(2),(2A) also requires the assessee to furnish a report of such audit in the prescribed form (Form 6B) setting forth such particulars as may be prescribed and such other particulars as may be required by the Assessing Officer. 7.4 Form 6B is in three parts. The first part requires the special auditor to examine balance sheet, profit and loss account etc., the second part requires the special auditor to obtain all the information necessary for the purpose of audit, and the third part requires the opinion of the special auditor. It is submitted that the report by the special auditor in the form 6B is not restricted to the Annexure stated in the said form but....
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....ounted scraps, transactions with foreign subsidiaries and the sales routed through them without availing any actual services, etc. 7.10 The petitioners being in the business of specialized activity of developing the molecules on behalf of third parties, and the technology transfer getting involved into the transactions required specialized skill and knowledge. 7.11 As regards the correctness of books of accounts, it was found from the impounded material that numerous transactions reflected in the bank statements were recorded in some other names. The said facts were duly accepted by Shri Harshil Dalal, Group CFO of the assessee company during the course of recording his statement. 7.12 Thus, the ingredients of Section 142(2A) with regard to the nature and complexity, volume, doubts about the correctness and multiplicity of transactions being found in existence and since it was in the interest of revenue, the special audit has been directed after complying with the requirement of principles of natural justice. Reliance is placed on the decisions in case of Ulhas Securities (P) Ltd. Vs. DCIT, reported in 393 ITR 514 (Guj), in case Cama Hotels Ltd. Vs. Samir....
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....hallenge the decision making process followed by the respondent while passing the said order dated 8.4.2021. 9. In the backdrop of the aforesaid, and for the better appreciation of the rival contentions raised by the learned Advocates for the parties, it would be germane to reproduce the relevant provisions contained in Section 142(2A) of the Act, the Rule 14A of the Income-Tax Rules, as also the Form No.6B annexed to the Rules:- "Inquiry before assessment. 142. (1) xxx (2) xxx (2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by t....
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....ficer ...... by his order No........ dated ..... are annexed hereto. In * my/our opinion and to the best of * my/our information and according to explanations given to * me/us, these are true and correct. Place .. Date ... Signed Accountant ** Notes : 1.*Delete whichever is not applicable. 2.**This report has to be given by the accountant nominated by the Chief Commissioner or Commissioner of Income-tax under section 142(2A) 3. Where any of the matters stated in this report is answered in the negative or with a qualification, the report shall state the reasons therefor. ANNEXURE Statement of particulars 1. Books of account maintained 2. Method of accounting employed. Indicate whether there isany change from the method of accounting employed in the immediately preceding previous year 3. (i) Method of valuation of opening and closing stock of (a) Raw materials (b) Stores (c) Work-in-progress (d) Stock-in-trade (ii) State whether there is any change in the method of valuation of any of the aforesaid items as compared to the method employed in th....
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....ts of the company used wholly or partly for the purposes or benefit of any of the persons referred to in (i) above [state whether any such person is an employee of the assessee or not] 9. Details of amounts not deductible under section 40A : (a) Particulars of payments which appear to be excessive or unreasonable in terms of section 40A(2)(a) (b) Particulars of payments in excess of Rs. 2,500 * made otherwise than by a crossed cheque or draft - section 40A(3) (c) Particulars of expenditure or allowance in excess of the limits specified in section 40A(5)(c) ** (d) Particulars of expenditure incurred by way of fees and salary to an ex-employee in excess of Rs. 60,000 - section 40A(6) ** (e) Provisions for payment of gratuity not allowable section 40A(7) (f) Where the assessee is a company, the amount of intereston deposits not allowable under section 40A(8) † 10. Whether any amount is borrowed on a hundi from, or anyamount due thereon (including interest on the amount borrowed) is repaid to, any person otherwise than through an account payee cheque? If so, give details. 11. (a) Particulars of prof....
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....the issue as to whether in every case, where the Assessing officer issues a direction under Section 142(2A) of the IT Act, 1961, the assessee has to be heard before such an order is passed? In the said case, the Supreme Court while agreeing with the decision of the Two-Judge Bench in case of Rajesh Kumar Vs. DCIT (Supra) held that the exercise of power under Section 142(2A) of the said Act leads to serious civil consequences, and therefore, even in absence of express provision for affording an opportunity of pre-decisional hearing to an assessee, and in absence of any express provision in Section 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. The observations made in the said case of Sahara India (Firm) with regard to the consequences that would follow to the order of special audit passed in exercise of the powers conferred under Section 142(2A) being relevant, they deserve to be reproduced and the same read as under:- "21. In the light of the aforenoted legal position, we are in respectful agreement with the decision of this Court in Rajesh Kumar (su....
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.... required to do the work which the Assessing Officer would do in normal course but may also be required to do the work which could be in the nature of investigation. 12. It may further be noted that Section 142(2A) was amended w.e.f. 1.6.2013, whereby the words "the nature and complexity of the accounts, volume of accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature on business activities of the assessee, and", have been substituted for the words "the nature and complexity of the accounts of the assessee". The Division Bench of this Court in case of Tehmul Burjor Shethna Vs. ACIT (supra), considering the said amendment, has observed the following - "17. At this juncture, it may be germane to refer to the explanatory notes to the provisions of the Finance Act, 2013 issued by the Central Board of Direct Taxes vide Circular No.03/2014 dated 24th January, 2013, which to the extent the same are relevant for the present purpose, read thus: "35. Direction for special audit under subsection (2A) of section 142 35.1 Sub-section (2A) of section 142 of the Income-tax Act, before its amendment b....
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....ssion "accounts". The expression "account" has been defined in the Black's Law Dictionary to mean thus: "A detailed statement of the mutual demands in the nature of debit and credit between parties, arising out of contracts or some fiduciary relation. A statement in writing, of debits and credits, or of receipts and payments, a list of items of debits and credits, with their respective dates. A statement of pecuniary transactions; a record or course of business dealings with parties; a list or statement of monetary transactions, payable, accounts receivable, etc. in most cases showing a balance or result of comparison between items of an opposite nature". In P. Ramanatha Aiyar's Law Lexicon, "account" has inter alia been defined to mean: (i) a statement of moneys received and paid with calculation and balance, (ii) a formal record of debts and credits relating to the person named or caption placed at the head of the ledger account, (iii) computation, and (iv) a statement of fact or occurrence. Thus, the expression "account" also takes within its ambit a statement of pecuniary transactions, a record or course of dealings with parties as well as co....
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....e books would show that the entries were made therein long after the purported transactions took place. In support of his contentions he also relied upon the dictionary meanings of the words "account" and "regularly kept". 21. The word "account" has been defined in Words and Phrases, Permanent Edn., Vol. I-A at pp. 336 to 338 to mean (i) a claim or demand by one person against another creating a debtor-creditor relation; (ii) a formal statement in detail of transactions between two parties arising out of contracts or some fiduciary relation. At p. 343 of the same book the word has also been defined to mean the preparation of record or statement of transactions or the like; a statement and explanation of one's administration or conduct in money affairs; a statement or record of financial transactions, a reckoning or computation; a registry of pecuniary transactions or a reckoning of money transactions; a written or printed statement of business dealing or debits and credits; or a certain class of them. It is thus seen that while the former definitions give the word "account" a restrictive meaning the latter give it a comprehensive meaning. Similarly is the above word define....
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....ter with which the Act is dealing, or the context in which the words are used, to show the intention of the legislature that they must be given a restrictive meaning. Thus, if the word "account"is to be given a wider meaning, it would include a record of financial transactions and not merely a formal statement of transactions. 23. It has been oft repeated by the learned counsel for the petitioner that the petitioner being an individual, is not under any statutory obligation to maintain any books of account and has not been maintaining any books of account and that in the absence of any accounts, the question of complexity in the accounts does not arise and hence, it is not permissible for the Assessing Officer to invoke the said provision. It has also been contended that even if the amended provision talks of audit for specialised nature of business activities of assessee, the prerequisite condition of maintenance of books of account as per statutory requirement is a must. Besides, the petitioner has consistently taken a stand in the proceedings under section 153A of the Act and pursuant to the notice for referring the matter for special audit that he does not maintain boo....
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.... of the opinion that the petitioner is involved in the business of providing accommodation entries and money laundering. While such business may not be legal, even then it is a specialised business activity and the Assessing Officer may not have the wherewithal to decipher the documentary evidence. Under the circumstances, when the Assessing Officer finds that having regard to the specialised nature of business activities of the assessee, the accounts are required to be audited by an accountant as contemplated under sub-section (2A) of section 142 of the Act, it is permissible for the Assessing Officer to do so. Therefore, even if for the sake of argument the petitioner's contention that as he is not required to maintain accounts statutorily the question of complexity and volume of accounts would not arise were to be accepted, even then the petition would fail on the count that a direction to get the accounts audited by an accountant can also be given if the Assessing Officer having regard to the specialised nature of business of the petitioner is of the opinion that it is necessary to do so." 13. Having regard to the amended provision of Section 142(2A) in the light of the afor....
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....ort of such audit in the prescribed form duly signed and verified by such accountant; and (ii) setting forth such particulars as may be prescribed and other particulars as the assessing officer may require. The prescribed form mentioned in the said provision is the Form No.6B as stated in Rule 14A of the said Rules, which requires that the report of the audit of the accounts of the assessee required to be furnished under Section 142(2A) shall be in Form No.6B. 15. The Form No.6B reproduced earlier, for the proper understanding may also be divided into three parts. The first part of the Form requires the auditor to examine the balance sheet and profit and loss account, etc., and to obtain the information and explanation necessary for the purpose of the audit. The second part pertains to the opinion of the auditor on the information and explanation given to him by the assessee and the third part pertains to the furnishing of the prescribed particulars and other particulars as were required by the assessing officer. For the purpose of furnishing prescribed particulars, there is an Annexure below the said Form No.6B, i.e. the statement of particulars. 16. So far as the f....
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....res the nominated accountant to furnish such prescribed and other particulars as the Assessing Officer may require, his powers to call for the particulars can not be restricted to only those particulars as are stated in the Annexure i.e. the statement of particulars annexed to the said Form No.6B. The legislature having used the two phrases i.e. "such particulars as may be prescribed" and "such other particulars as the Assessing officer may require", in Section 142(2A), it would mean that the Assessing officer could ask the Accountant to set forth in his report the prescribed particulars as well as the other particulars as he may require considering the facts and circumstances of the case. If the submission of Mr.Soparkar that only those particulars could be furnished as are prescribed in the statement of particulars contained in the annexure to the Form 6B is accepted, the words "and such other particulars as the assessing officer may require" in Section 142(2A) would become redundant and otiose. 18. Even in the case of Sahara India (Firm) (supra) relied upon by Mr.Soparkar, it has been clearly observed while considering the consequences which would follow to the order of speci....
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.... 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 assistance of a special auditor. Interest of the Revenue being the other consideration. In the present case, the Revenue has not submitted that test check of entries was undertaken, but anomalies or mistakes were detected. For proceeding further, and to compute the taxable income, help and assistance of an accounting expert was required. Secondly, we notice that the Assessing Officer felt that special auditor is required for determining and deciding certain legal issues, i.e., nature and character of Nazul I and Nazul II land, payments received and the treatment of the said payments, receipts or expenditure in the books for the purposes of taxation. The special auditor cannot go into and examine the said legal issue or question regarding taxability. This has to be determined and decided by the Assessing Officer." 20. It may be noted that the aforesaid decision was rendered by the Delhi High Court considering the Section 142(2A) as it stood prior to its amendment in 2013. After the amendment on 1.6.2013, the scope of Section....
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....ire having regard to the facts and circumstances of the case, which even otherwise is permissible under Section 142(2A) read with the Form 6B prescribed under Rule 14A of the Rules. 21. Of course, there could not be any roving or fishing inquiry under the guise of special audit, however, whether a particular term of reference could be termed as a rowing or fishing inquiry or not would be a highly disputed question of fact. Apart from the fact that the learned Sr. Advocate Mr. M. R. Bhatt for the Revenue has furnished in the Excel Format the comments of the respondent justifying each of the directions issued by the respondent - Assessing Officer in the impugned order, this Court exercising an extraordinary jurisdiction under Article 226 of the Constitution of India cannot be expected to examine each and every question contained in the impugned directions, and opine as to which part of which question is required to be construed as a roving or fishing inquiry for being discarded. Even otherwise as transpiring from the show-cause notice dated 19.3.2021 along with the satisfaction note drawn by the Assessing officer and the order dated 8.4.2021, voluminous material was seized during ....
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....he report in the prescribed form, also setting forth the requisite particulars as prescribed in the questionnaire. Such directions could neither be said to be arbitrary, illegal nor beyond the scope of the said provision. It is neither permissible to the Court exercising the jurisdiction under Article 226 of the Constitution to enter into the disputed questions of facts, nor is it possible for the Court to analyse each and every direction and come to the conclusion whether it is bad in law or not. The submission of Mr.Soparkar that if some of the questions, which seem to be bad in law cannot be segregated, the entire impugned order containing the directions be quashed and set aside, also cannot be accepted. 23. It is axiomatic that when an authority has a jurisdiction to pass an order, the exercise of jurisdiction in wrongful manner in certain cases even though held to be illegal, would not necessarily render the order a nullity. All irregular or erroneous or illegal orders cannot be held to be null and void. The Supreme Court in case of Deepak Agro Foods Vs. State of Rajasthan & Ors., reported in (2008) 7 SCC 748 drawing a fine distinction between the orders which are null and ....
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....ter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the assessing officer would not proceed with the assessment till the time the special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The assessing officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the assessing officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the assessing officer at that time. It is stated at the cost of repetition that in the estimation of the assessing officer special audit was essential for passing proper assessment order. If the court, while undertaking judi....