THE issue before the Bench is - Whether when assessee
had huge related party transactions and also failed to furnish bifurcated
expenses incurred on SEZ and non-SEZ projects, resorting to Special Audit
provisions cannot be faulted with in such a case. And the answer favours the
Revenue.
Facts of the
case
The assessee is a
real estate developer engaged in creation, execution and sale of residential
and
commercial projects. It also earns income from Special Economic Zone (SEZ) on
which it had claimed deduction u/s 80-IAB. It had filed its return of income on
15th October, 2010 declaring income of Rs.474,34,24,620/-. As per the assessee,
for computing the said income, they had followed Percentage of Completion Method
(POCM). It had also claimed deduction of Rs.178.63 crores u/s 80-IAB in respect
of profits derived from projects in SEZ areas. The assessee had granted loans
and advances to its subsidiaries and shown interest income @ 6.5% per annum in
respect of said loans and advances as received from its subsidiaries. Statutory
notice u/s 143(2) with a detailed questionnaire was issued to the assessee
fixing the case for scrutiny assessment. On the said date, part details were
filed but in the meanwhile another questionnaire was issued. The assessee
claimed that it had complied with the details, information and clarifications
requisitioned. However, show cause notice u/s 142(2A) was issued for referring
the accounts for special audit and the assessee was asked to respond. The
assessee objected against it on the ground that it was unwarranted and contrary
to law. The AO had directed the assessee to get their accounts for the FY
2009-10 from a Chartered Accountant, who was nominated as per the provisions
relating to conduct of special audit u/s 142(2A). The Special Auditor was
required to submit report in Form 16 as per Rule 14A of the Income Tax Rules
within sixty days from the date of receipt of the directions and the assessee
was asked to extend full and complete cooperation for completion of the special
audit within the stipulated time. The assessee had challenged the said direction
of special audit stating and pleading that the mandate was contrary to the
statutory pre-conditions stipulated in Section 142(2A).
During assessment, AO had made
observations with regard to DLF Phase-V project, Jallandhar Project, City Court
Sikandar Pur project and Courtyard project. A reference was also made relating
to Cross Point Project and Kolkatta Project and observations on various entries.
Thereafter method of accounting on issue of stock to the contractors stands
elucidated and observed that on the basis of the entries, there was difficulty
in understanding the accounts. There were multiple transactions in relation to
sale of plots and development cost with sister concerns. Transactions relating
to land purchases were routed through various related group concerns which were
very intricate and complex. Project at Indore, Kakanad and Begur were referred
to. AO noted that it appeared that different revenue recognition methods had
been adopted. Lastly, reference was made to the special audit reports for the
earlier years and detailed working of each project undertaken in the earlier
years had resulted in additions. Books of accounts and related bills and
vouchers were not only complex but voluminous as there were large numbers of
ongoing projects.
In
response, assessee had submitted that consistently it was following the policy
of accounting construction costs only when bills were approved and verified and
thereupon final liability became crystalised or due for payment. Entry with
regard to purchases of stocks was made not upon receipt of material but after
the inspection and when the material was accepted. On the question of Internal
Development Charges (IDC), it was stated that saleable area at PhaseV Gurgaon
stood increased and this was the cause for confusion and errors made in the
special audit report for the last year. Several factual assertions made by AO
were disputed, on the questions relating to submissions of reply or part
replies, sale of construction material, bills, vouchers in respect of Cross
Point and Kolkatta Projects and material issued note and material receipt note.
The assessee claimed that entries in the books of account including stock
register, were explained to AO. With regard to the observations on land
purchases through various related concerns, it was stated that this was not
complex and the observation made by AO was vague, ambiguous and confused and was
driven by focused intent to subject the accounts for special audit. The assessee
had themselves stated that substantial additions had been made on POCM issue
earlier. It may have succeeded before CIT(A) in the AY 2007-08 and 2008-09, but
further appeals were pending. With regard to AY 2006-07, addition of more than
Rs.120 crores stands sustained in the first appeal. The assessee had made
inquisitive observations with regard to AY 2009-10 as it was indicated that the
assessee had made addition of Rs. 120.62 crores on the lines of the Special
Auditor's working for the AY 2008-09.
Held that,
++
while examining the question of complexity in accounts, we have to apply the
test of "reasonable man" by replacing the word and qualities of a reasonable
man, with the word and qualities of a reasonably competent Assessing Officer.
The question of complexity of accounts has to be judged applying the yardstick
or test; whether the accounts would be complex and difficult to understand to a
normal assessing officer who has basic understanding of accounts etc., without
the aid, assistance and help of a special auditor. Thus due regard has to be
given to nature and character of transactions, method of accounting, whether
actuarial were adopted for making entries, basis and effect thereof, etc.,
though mere volume of entries might not be a justification by themself as volume
and complexity are somewhat different. Accounts should be intricate and
difficult to understand. Every scrutiny assessment entails investigation and
verification of the books of accounts, genuineness of the transactions or
entries reflected in the books, computation of income etc. It is an exercise
which demands expertise and a degree of skill to understand the accounts and
decipher whether true and full income has been disclosed; whether there has been
jugglery in the accounts or camouflage has been adopted. No undesirable
assumptions should be made and a return filed is presumed to be correct, but a
deep and in depth scrutiny depending upon the facts may be warranted. Section
142(2A) is an enabling provision to help and assist the Assessing Officer to
complete scrutiny assessment with the help of assistance of an
accountant;
++
what is apparent that the matter of computation of income by applying POCM has
been subject matter of debate and opposite positions have been taken and adopted
by the Revenue and the petitioner. As noticed above, the petitioner, in respect
of Phase V, Gurgaon project has stated that during the assessment year 2009-10,
the saleable area had increased due to increased permissible height in the
building from 25,34,775 sq. ft. to 37,65,972 in respect of one building and
12,49,200 sq. ft. to 19,25,500 sq. ft. in respect of second building. This
necessarily would involve reworking of the entire project costs including
reduced budget costs of all components etc. like EDC, IDC, construction cost,
etc. This is also discernible from the reply filed by the petitioner in which
they have disputed the calculations made by the special auditors in the last
assessment year. Referring to the reply of the petitioner, AO has observed that
during the assessment proceedings on number of instances or entries, queries
were raised and 4 or 5 persons were required to clarify the facts. The ledger
account did not contain narration therefore scrutiny of the entries had become
cumbersome and difficult;
++ on
the question of loans and advances to the subsidiaries, the petitioner had
submitted that the loans and advances to the subsidiaries should not and would
not affect interest payments in the hands of the holding company. We are not
primarily concerned with the legal submissions in the present case because the
legal principle applicable depends upon facts which have to be verified and
ascertained. The petitioner in response to the show cause notice had stated that
the petitioner had own funds to the extent of Rs.12,830 crores and had borrowed
funds to the extent of Rs.12,638 crores during the year in question. The
petitioner has granted loans and advances to the extent of Rs.10,14,344.97 lacs
to the subsidiary companies @ 6.5% per annum which as per the petitioner was the
borrowing costs. It was claimed that in view of the aforesaid position, the
petitioner was not evading tax as the transactions were tax and revenue neutral.
The Assessing Officer has observed that it has to be shown and established that
the charging of interest @ 6.5% was a revenue neutral exercise. This could be
only ascertained after all entries were examined by the special auditor. On the
question of commercial expediency, it has been observed in the impugned order
that it would come into play when the actual picture was ascertained i.e.
extending of loan to the subsidiary and charging of interest was thoroughly
examined;
++
with regard to the profit from SEZ and non-SEZ projects it was noted that profit
of Rs.1,78,63.73 lacs has been declared on SEZ income/turnover of Rs.2,38,31.36
lacs and profit of Rs.6,57,01.92 lacs has been declared on non-SEZ
income/turnover of Rs.24,19,20.81 lacs. The order records that the petitioner
was required to submit comparative detail with regard to expenditure in SEZ and
non-SEZ income projects but this was not filed. The affairs of the company,
therefore, were not transparent and required audit. SEZ and non-SEZ income
figures mentioned by the Assessing Officer were contested in the reply.
Discrepancies were alleged. Reference was made to the earlier reports of the
statutory auditor and the fact that in the special audit reports no adverse
inference was drawn in respect of deduction under Section 80IAB. Further
provisions of Section 142(2A) were not invoked for the AY 2009-10 in regard to
SEZ accounts. We do not find any merit in the contention raised by the
petitioner that related party transactions or reasonableness of interest paid to
the petitioner on loans and advances by its subsidiary was an issue which was
never raised in the show cause notice and therefore, there was violation of
principles of natural justice. This question was specifically raised in the show
cause notice and answer or reply was called for. Even if the said aspect was not
independently examined by raising a written question in the assessment
proceedings, it is apparent that the Assessing Officer had transactions between
the petitioner and related companies. The petitioner had stated that till 25th
February, 2013, ten hearings were held before the Assessing Officer and 78
queries were raised through questionnaire/order sheet/verbally. The claim of the
petitioner was that he has complied with all the queries. Thus it is accepted
and admitted position that detailed queries in writing and orally were raised.
This shows due application of mind and focus on the issues and aspects that
arose for consideration. The said facts are indicative of the assessing
officer's conduct in trying to understand the accounts and whether true and
correct income had been disclosed. The aforesaid submissions of the petitioner,
therefore, do not appeal to us;
++ in
view of the aforesaid discussion, we are satisfied that in the present case the
Assessing Officer had applied his mind to various aspects like nature of
accounts, method of maintaining accounts, entries recorded etc. and reached the
conclusion that the accounts were complex and it was in the interest of the
Revenue that special audit u/s 142 (2A), should be directed. No doubt in the
past also special audit was directed but the Assessing Officer has not directed
special audit in the present assessment year without examining the accounts for
the year in question, the entries made, peculiarity involved etc. Special audit
has not been directed for getting over the limitation or in routine. Powers u/s
142(2A) have to be exercised in terms of the legislative provisions. The object
and purpose behind the legislation is to facilitate investigation and proper
determination of the tax liability. The importance and relevancy of the
legislation cannot be underestimated and it is a power available with the
Assessing Officer to aid and assist him. Accounts should be accurate and provide
real time record of the financial transactions of the assessee. Preparation of
accounts is the work of the accountant on the payrolls or employed by the
assessee. In order to ensure reliability and accuracy, enterprises resort to
internal audit and an external audit which can be a statutory audit. Internal
audits are normally conducted in house generally by acquainted or qualified
accountants. Statutory audit is compulsory under the Companies Act, 1956. Enron
and other cases abroad and Satyam's case in India have highlighted the need and
necessity to have controls and system of checks, perhaps even beyond scope of
traditional audit. Financial statements and accounts are being increasingly
exiguously examined to rule out possibility of wrong doings, cover up or evasion
of taxes. Financial statements and accounts are coming under increasing scrutiny
and investigation. A Chartered Accountant is a financial investigator and
prober, is required to be curious, tenacious and well conversant to identify and
unearth frauds, misreporting and wrong claims in the accounts;
++
the aforesaid observations should not be construed as a general expression or
opinion, that every account or statement of income must be viewed with
suspicion, distrust and scepticism. The past instances are mere warnings, for
closer and more indepth scrutiny. It is also a fact that the business
transactions have become more complicated and accounting entries more complex
than ever before. This may be one of the causes why possibly the frauds could
not be detected in some cases. Indeed such cases have made the audit work more
comprehensive, intrusive and investigative. Ethical managements may at times
regard such enquiries as an unwarranted intrusion or a hounding approach.
Section 142(2A) does not permit fishing or roving inquiry approach or a witch
hunt but is a regulated provision which accepts the need and necessity of the
Assessing Officer to take help of an expert accountant i.e. a Chartered
Accountant, a person who is academically qualified and has practical experience
to understand accounts and unearth tax evasion or furnishing of inaccurate
particulars etc. The provision balances the right of the Revenue with the
inconvenience which the assessee may face. Assessing Officers are not Chartered
Accountants and when required and permissible, therefore, can take help and
assistance from the qualified specialists to complete the assessment and
determine the taxable income of an assessee. In view of the aforesaid we do not
find any merit in the present Writ Petition. Stay order is vacated and the
assessment proceedings will continue as per law. There will be no order as to
costs.
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