Whether submission of audited accounts per se would oust jurisdiction of AO to pass a direction for special audit u/s 142 - NO: HC

THE issues before the Bench are - Whether the submission of audited accounts per se would oust the jurisdiction or authority of the AO to pass a direction for special audit u/s 142; Whether when a Government company provides unsatisfactory response to the queries and the show cause notice issued u/s 142 pursuant to discrepanices noticed by the AO, a special audit is rightfully warranted; Whether there can be any violation of principle of natural justice, when the the assessee was duly served with a show cause notice, before issuing direction for special audit; Whether the expression 'accounts of the assessee' can be given a narrow interpretation,
so as to confine it to only the accounts of the assessee; Whether the proceedings u/s 142 (2A) is strictly a judicial proceeding and requires elaborate reasoning and Whether when the opportunity has been given to the assessee alongwith proper reason for framing the opinion that the nature of the accounts is complex and in the interest of the revenue, special audit is necessary, the approval granted by the Commissioner cannot be said to be mechanical and without application of mind. And the verdict goes in favour of the Revenue.

Facts of the case

The assessee is a Government Company, registered u/s 617 of the Companies Act, 1956, whose entire paid up share capital is held by the Government of Uttar Pradesh. The object of the assessee company is to promote the interest of the members of the Scheduled Caste and Scheduled Tribes or Backward Classes and schemes connected therewith and accordingly, the income arising from that activity is exempted u/s 10 (26B) of the Income Tax Act, 1961 ("Act"). The books of accounts of the assessee are audited by the statutory auditors duly appointed by the Comptroller & Auditor General of India ("CAG") well as Accountant General, U.P. It is submitted that for the year 2009-2010, accounts were audited and on the basis of the said audited accounts, the report was filed as per provisions of the Income-tax Act. During the AY 2009-10, the AO noticed certain discrepancies in the accounts books and reports of the CAG pertaining to the assessee, which were not understandable and complex in nature. A show cause notice u/s 142 was issued to which no satisfactory reply came, and therefore, the AO passed an order for appointment of Special Auditor to audit the books of the assessee.

Aggrieved, the assessee filed this writ petition before the High Court.

The counsel for the assessee contended that the accounts which were maintained were not complex or not understandable. He argued that there was no basis for justification to get the same audited in exercise of the powers conferred u/s 142(2A). Next the AR submitted that the impugned order was passed without application of mind as the formation of opinion of the Assessing Authority must be objective and not subjective satisfaction. The AR elaborated that prior to ordering the special audit and obtaining approval from Commissioner, Income Tax the assessee was not given an opportunity as per law to rest it case.

In the countr argument, the Departmental Representative highlighted the discrepancies in the books of the assessee and contended that after considering the assessee's submission in response to show cause notice u/s 142 (2A) of the Act as well as documents, it was found that all the replies and documents were not satisfactory and as such, the AO had formed an opinion that accounts of the assessee being complex in nature as well as not understandable and as such it did not reflect correct income. The DR argued that since this may have resulted in loss of revenue and accordingly, ordered special audit u/s 142 (2A) after obtaining necessary approval from the Commissioner, Income Tax, was ordered.

Having heard the parties, the High Court held that,

+ before dealing with the rival submissions, we would like to mention that it is a settled principle of law that while exercising its jurisdiction under Art. 226 of the Constitution of India, this Court does not sit as a Court of appeal and a patent illegality or lack of inherent jurisdiction in passing the impugned action/letter would be a limited ground for invoking the jurisdiction of this Court. There cannot be any dispute to the proposition that the competent authority under the provisions of the Act is vested with power to direct special audit, provided the conditions and requirements of Section 142 (2A) of the Act are satisfied. The provisions of this section contemplate that at any stage of the proceedings, the Assessing Officer having regard to the nature and complexity of accounts of the assessee and interest of the Revenue, is of the opinion that it is necessary to do so, he may with the previous approval of the specified authority direct the assessee to get accounts audited by an accountant defined in Explanation below Section 288(2) of the Act. The discretion vested in the Assessing Officer, thus, is a wider magnitude and of course has to be exercised in consonance with the provisions of the section, keeping in view the facts and circumstances of the case;

+ the above enunciated principle clearly shows that there has to be objective consideration and application of mind by the Assessing Officer, based upon the material and proper examination of the books of account produced by the assessee, before a direction, as contemplated under Section 142(2A), can be issued to the assessee. In the present case, during pendency of the assessment proceedings, the reply filed by the assessee was found to be unsatisfactory. After examination of the books of account and the documents, the Assessing Officer was of the opinion that it would be in the interest of Revenue to direct special audit under the provisions of the Act. The contention raised before us is that there is no application of mind and no reasons have been provided in the impugned direction by the Assessing Officer. We find no merit in this contention. Before passing the impugned direction, the Assessing Officer had issued a detailed questionnaire under Section 142 (1) of the Act to the petitioner requiring him to furnish the details, to which the petitioner has furnished the reply dated 16.1.2013. Thereafter, not being satisfied with the reply so tendered by the petitioner, a show cause notice was issued to the petitioner on 25.2.2013, to which the petitioner again submitted his reply dated 7.3.2013 on 8.3.2013 but the reply so tendered was found unsatisfactory and as such, the Assessing Officer formed an opinion that it is necessary in interest of Revenue a proposal for special audit under Section 142 (2A) is being sent to Commissioner, Income Tax, Lucknow. On receipt of the said proposal, the Commissioner had approved the proposal of the Assessing Officer and remitted the same to the Assessing Officer. Thereafter, impugned order was issued for special audit. In these circumstances, we cannot hold that there was no application of mind by the concerned officer before issuing the impugned direction;

+ we also find no merit in the contention raised on behalf of the petitioner that the expression 'accounts of the assessee' can only refer to the books of account of the assessee and not the other records available before the Assessing Officer for examination or otherwise. The complexity of accounts of the assessee is to be determined not only by the books of account, but even by other documents which are available, in the course of an assessment and at any stage subsequent thereto may become available to the Assessing Officer. To give a narrow meaning to the expression 'accounts' so as to confine it to the books of account, submitted by the assessee simplicitor, would amount to giving an interpretation which would completely defeat the very object of the section. The mere fact that the petitioner has submitted audited account and, therefore, there is no occasion for directing special audit, is also of no help to the petitioner. Submission of audited accounts per se would not oust the jurisdiction or authority of the Assessing Officer to pass such a direction. Of course, he is expected to issue directions after due application of mind and in accordance with the principles aforenarrated. The Assessing Officer, while applying his mind, to the facts and circumstances of the case, need not confine himself only to the books of account submitted by the assessee, but can take into consideration such other documents related thereto and which would be part of the assessment proceedings. In the case at hand, the books of account as well as other records have rightly been considered by the Assessing Officer before issuing the impugned directiont

+ thus, from perusal of the above report, it reflects that Auditor have pointed out many infirmities in the Assessee's acccount. In Purvanchal Vidyut Vitran Nigam Ltd. Versus Union of India, it has been held that the object behind enacting Section 142 (2A) is to assessed the assessing officer in framing a correct and proper assessment based on the accounts maintained by the assessee and when the assessing officer finds the accounts of the assessee to be complex, in order to protect the interest of the revenue. Further it was held that where the opportunity has been given to the assessee and their proper reason for framing the opinion that the nature of the accounts is complex and in the interest of the revenue, special audit is necessary and the direction for special audit cannot be said to be without material and the approval granted by the Commissioner of Income Tax cannot be said to be mechanical and without application of mind. Furthermore, the proceedings under Section 142 (2A) of the Act is not strictly a judicial proceeding and, therefore, the elaborate reasoning is not required to be given. In the instant case, notice issued to the petitioner has contained issues in brief, which the Assessing Officer thinks to be necessary and the reasons assigned therein is perfectly justified and opportunity has also been provided to the petitioner prior to impugned order. Moreover, the ingredients of Section 142 (2A) of the Act are that the Assessing Authority must form an opinion with regard to the nature and complexity of the accounts, which has been done. Therefore, the case laws relied upon by the petitioner's counsel are not applicable in the instant case.