THE issues before the Bench are - Whether when the AO dropped the opinion originally formed for special audit u/s 142(2A) and there is nothing on record to show that there was any fresh development compelling the AO to change his mind and come to the conclusion that ‘certain complexities have been noted in the accounts of the assessee’, proposal approved for special audit is not valid; Whether it is incumbent on the AO to issue another show-cause notice to the assessee u/s 142 (2A), after he changed his mind and proposed special audit and invite the assessee's objections and Whether when as per records, there is no application of mind by the CCIT before granting approval to the proposal for special audit sent by the AO to him, the approval granted by the CCIT for special audit is of no effect and is a nullity. And
the verdict goes in favour of the assessee.
the verdict goes in favour of the assessee.
Facts of the case
Assessee is engaged in the business of construction and sale of real estate. During assessment proceedings, on 21/11/2011 AO issued a show cause notice u/s 142(2A) for special audit observing the complexity in the books of account that crores of advances were taken from DLF Limited which was invested in more than hundred companies to avoid deemed dividend and section 40A(2)(b), payments were made to companies on account of development rights under the head stock for which no details were provided such as quantum of rights, basis of purchase and sale price or revenue recognition which made account complex, no details were provided for reimbursement of expenses of Rs. 25.40 crores and no revenue was recognized on receipt of sale consideration which was given a colour of advance.
Assessee replied the show cause notice on 24/11/2011 objecting the proposal of special audit and stated that addition on account of profit and sale of development rights in preceding year had already been deleted by ITAT. Basis of revenue recognition and the facts being the same, ITAT allowed the appeal of the assessee regarding revenue recognition. Assessee produced books of account on 18/11/2011 which were test checked but AO had not raised any queries or explanation thereafter which implied that there was no complexity in the accounts. Books of account are maintained as per the accounting standards issued by the ICAI and audited u/s 44AB. Further DLF Limited is a company in which the public was substantially interested and when advances were made by it to the petitioner-firm, the provisions of Section 2(22)(e) of the Act were not attracted and that in any case, the advances were in the nature of business advances. As regards the applicability of Section 40A(2)(b), in the tax audit report the cases covered had been specifically mentioned. As regards of development rights, the parawise details with regard to the cost of development rights along with the relevant agreements had been furnished. It was claimed that the same method of accounting which was followed by the assessee previously was being continued without any deviation. There was only a difference of opinion between the assessee and the assessing authority on the question of revenue recognition which was also tested before the appellate authorities. Reimbursement of expenses were towards, the services rendered by DLF Land Limited regarding maintenance of books of accounts, secretarial record, filing of various statutory return forms, managing the bank accounts, taking steps for obtaining licences relating to land etc. for which service charges at 15% were also paid. Assessee further referred instruction no. 1076 issued by CBDT laying down guidelines for the selection of cases for special audit.
AO after receipt of replies, intended to complete the assessment himself as was apparent from the noting on order sheet dated 5/12/2011, 16/12/2011 and 19/12/2011 as per which the AO stated that the details regarding reimbursement of expenses were asked, details and confirmation of sundry creditors, unsecured loans along with confirmations giving the names and addresses of parties, PAN, amount received/refunded if any and mode of payment etc. were asked and on 19/12/2011 and 26/12/2011, submitted the details. AO submitted a report to CIT on 16/12/2011 that the submission of the assessee were examined with regards to the issues stated in the Show Cause Notice, CBDT Guidelines, provisions of law and judicial decisions relied upon. The assessee had been asked to file the necessary details which were being verified and examined in the course of the assessment proceedings. On 19/12/2011, AO written a letter to assessee that he desired further clarification from the assessee in respect of the return filed by the assessee regarding deduction of 24.19 crores in view of section 40(a)(ia), services charges for which details were not furnished, addition on account of sundry creditors and unsecured loans for which the assessee failed to produce confirmation and asked to submit the details by 26/12/2011. On 26/12/2011, Assessee replied and furnished the details.
Assessee contended that 16/11/2011, AO submitted a report to the CIT in which he had narrated the assessee's reply and the various points taken by the assessee regarding initiation of special audit and intimated the CIT of his intention to proceed with the assessment proceedings and himself examine the points on which special audit was originally proposed by him. On 22/12/2011, a letter was written from the office of CIT to AO to submit the relevant papers, notices, draft order if ready. On 26/12/2011, AO replied after narrating the chronology of events staring from the requisition of the books of accounts of the assessee on 11/11/2011 till the submission of the assessee's reply dated 24/11/2011 to the show cause notice issued u/s 142(2A) on 21st November, 2011, that the issue of loan advanced by DLF had been decided by ITAT in favour of assessee in preceding years, regarding reimbursement of expenses detailed note was submitted alongwith full details and invoices, the issue of non deduction of tax for disallowance u/s 40(a)(ia) was being examined, unsecured loans / sundry creditors were being examined. Further the assessee had been asked to file the details which were being verified and examined and the interest of the revenue was being protected. The draft order was also being enclosed.
AO submitted an affidavit that though it has been stated that the draft order was enclosed with the letter, it was not in fact enclosed. Assessee raised a query under RTI seeking clarification regarding the forwarding letter written by JCIT in which also it was mentioned forwarding the report of the AO alongwith a copy of draft assessment order. To this query also, the reply given to the assessee was the same that no such draft assessment order was placed in the file of AO. Thus, revenue denied that a draft assessment order was enclosed to the report dated 26th December, 2011 submitted by the ACIT to the CIT through proper channel, ie., through the JCIT and had also denied that a copy of the draft assessment order was forwarded by the JCIT to the CIT along with his forwarding letter. On 27/12/2011, i.e. one day after he sent a report to the CIT stating that the apparent complexities noticed in the accounts were answered by the assessee and the assessment was being proceeded with and further that the assessee had submitted its reply to the various points raised by him which will be examined and the interest of the Revenue would be protected, and to which report a copy of the draft assessment order was stated to be enclosed, AO sent a letter stating that books of account are complex in respect of applicability of section 40(a)(ia) on reimbursement of expenses, applicability of section 40A(2)(a) on service charges, genuineness of creditors and unsecured loans and sent for approval for special audit.
Point is that just one day before, AO was of the view that no special audit was requires as assessee satisfactorily answered the query raised subject to the details and clarifications being submitted by the petitioner which would be examined and verified to protect the interest of the Revenue and the draft assessment order was forwarded though it was denied in writ proceedings. The question is whether the report of AO dated 26/12/2011 be taken as an expression of opinion that there was no need for a special audit? What happened between 26th and 27th December, 2011 that compelled AO to change his mind that special audit was required to be carried out? If it was not incumbent upon him to issue another show cause notice to the petitioner under Section 142(2A) and invite the objections of the petitioner? Was there any application of mind by CCIT while approving the special audit?
AO sent a proposal to CIT on 27/12/2011 which was sent by CIT on the same date and got approved by the CCIT on the very same day. After getting approval AO passed an order for special audit to be conducted u/s 142(2A) of the Act on 29/12/2011. The Court had directed the filing of an affidavit on oath whether the AO had mooted the proposal for the special audit. In the affidavit it was stated that the proposal for special audit was sent by AO through the JCIT who forwarded the same to the CIT on 27.12.2011. As per the affidavit, AO submitted a proposal to the CIT on 27.12.2011 through the JCIT seeking proposal for referring the case of the assessee company to the special auditor and the CIT forwarded the proposal to the CCIT on the same date along with the copies of the report of the AO dated 26.12.2011. Assessee contended that it was not a proposal for conducting special audit but it was actually a report containing reasons why no special audit was necessary and also intimating the CIT of the intention to continue with the assessment proceedings. Further enclosing of the draft assessment order though denied by AO shows that AO did not drop the proposal for special audit.
After hearing both the parties, the Hon’ble High Court held that,
++ the provisions of sub-section (2A) of Section 142 require the AO 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 the AO who is to form the opinion and not for anyone else. The approval to be granted by the CIT or the CCIT, is an inbuilt protection against arbitrary or unjust exercise of power by the AO and therefore a heavy duty is cast on the high ranking authority to see that the approval is not granted in a ritualistic manner. The approval must reflect the application of mind to the facts of the case. There was no proposal initially by the AO for special audit and that he did not form any opinion that the accounts of the assessee were complex and a special audit was required to protect the interests of the revenue. This is clear from the report dated 26.12.2011 submitted by the AO to the CIT. AO examined the accounts of the assessee on 18.11.2011 and issued a proposal for special audit u/s 142(2A) on 21.11.2011 which was replied by the assessee on 24/11/2011 and vide report dated 16/12/2011, AO stated that the submissions of the assessee are being examined with regard to the issues raised in the show cause notice, the CBDT guidelines, the provisions of law and the judicial decisions relied upon. The assessment proceedings were posted on 16.12.2011. The proceedings were adjourned to 19.12.2011 on which day the assessee appeared through its representative and submitted some details and the case was again adjourned to 26.12.2011. On 26.12.2011, a reply to the show cause notice was filed by the assessee and it was required to submit details of unsecured loans and sundry creditors on 28.12.2011 to which date the proceedings were adjourned;
++ on 26.12.2011, in the report submitted to CIT, AO narrated the reply submitted by the assessee to the show cause notice issued on 21.11.2011 u/s 142(2A) and after considering the same, expressed a clear opinion that ‘the apparent complexities noticed and confronted to the assessee have been answered to by the assessee’. Thus, clears that the AO did not form the opinion that the accounts of the assessee were complex and in order to protect the interests of the revenue, a special audit was required. Further, it was mentioned that a draft order had been prepared which is enclosed with the final report for the perusal of the CIT. It is very difficult to treat this report of the AO as a proposal submitted by him to the CIT for special audit of the accounts of the assessee. However, it contains a clear statement that since the complexities in the accounts have been answered by the assessee and since the details and material submitted by the assessee would be examined in the course of the assessment proceedings which were pending on that date, no special audit was required;
++ further if it has been stated by the AO that the draft order was enclosed to the final report, the presumption would be that it was enclosed and it would be for the revenue authorities to rebut the presumption with strong evidence to show that it was not. They have merely stated in the reply to the RTI enquiry raised by the assessee that the draft order was not enclosed with the final report dated 26.12.2011. This is a perfunctory manner of discharging the burden placed on them. If the draft assessment order had not been enclosed with the final report, there would be some correspondence on record from the office of the CIT drawing the attention of the AO to the omission to enclose the draft order and asking him to send the same forthwith. However no such correspondence is referred. Even the forwarding letter of the JCIT refers to draft assessment order. The appending of the draft assessment order would only be an act in furtherance of that intention or opinion; the non-enclosing of the draft assessment order cannot be taken to mean that no opinion was formed by the AO that the special audit was not required in the assessee's case;
++ if the AO on 26.12.2011 did form an opinion that no special audit was required in the assessee's case is correct, there is an end of the matter and the approval granted by the CCIT on 27.12.2011 and communicated to the AO through the CIT on 28.12.2011 is without any effect. It is permissible to the AO to change his opinion so as prospector or guardian of the revenue since protection of the interests of the revenue is one of the two criteria for reference to the special auditor. In the present case it would be difficult to justify the change of opinion. If the revenue wishes to put forth a contention to the effect that there was a change of opinion on the part of the AO, that should naturally be supported by very strong evidence or drastic change in the factual or legal position. When on 27.12.2011, AO submitted a proposal for special audit, he ought to have pointed out to the material or evidence or the compelling circumstances under which he had changed his mind, that too, overnight. The fact that the earlier opinion was changed overnight is a clear pointer to the position that there could have been no such new facts or change in the legal position which could have compelled a change of mind. Moreover, the AO was under a duty to overcome his own reasons given just a day before as to why there was no need for a special audit, which duty he has not been able to discharge. A perusal of the letter dated 27.12.2011 written by the AO to the CIT shows that the reasons given by him for a change of mind are very vague and unconvincing. He has merely stated that on going through the books of accounts, the audited financial results and the balance sheet and profit and loss account ‘certain complexities have been noted in the accounts of the assessee’ and referred four issues. The assessee has submitted its response to the four issues raised by the AO in the course of the assessment proceedings on 19.12.2011 which could not be considered as reply to show cause notice issued u/s 142(2A) on 21.11.2011 as in the show cause notice, AO did not raise the issue of sundry credits and unsecured loans appearing in the balance-sheet. The letter dated 19.12.2011 was only a letter seeking clarifications from the assessee on four points in the course of the assessment proceedings, and cannot be read as, nor was it purported to be, a show-cause notice u/s 142(2A). Thus, no opportunity was given to the assessee to show cause as to why special audit shall not be directed. The proviso to Section 142(2A) envisages a show-cause notice wherein it is necessary for the AO to make out a case of complexity of accounts and protection of the interests of the revenue and it should be open to the assessee to show that none of the two criteria is satisfied. That opportunity was not afforded to the assessee because the AO proceeded to send the proposal for special audit on 27.12.2011 to the CCIT through the CIT concerned, just one day after the assessee wrote the letter to him in the course of the assessment proceedings. The proposal thus suffers from, and is vitiated by, the lack of opportunity to the assessee which is statutorily mandated;
++ further while approving the proposal, the CCIT took no time to give his approval to the special audit. He overlooked that no notice had been given by the AO to the assessee u/s 142(2A) before forwarding the proposal on 27.12.2011. This shows non-application of mind on his part. He approved the proposal on the same day, namely, 27.12.2011. The fact that the CCIT has also approved the proposal on 27.12.2011 itself is borne out by the endorsement made by him on the note put up by the ACIT (Headquarters). It is difficult to accede to the proposition that the CCIT could have applied his mind in such a short period of time to the proposal put forward by the AO on 27.12.2011, both the proposal and the approval bear the same date. In these circumstances, there could not have been a serious application of mind on the part of the CCIT. It was merely a ritualistic or mechanical approval given by the CCIT;
++ in view of the above, there is nothing on record to show that there was any fresh development between 26th December and 27th December, 2011 compelling the AO to change his mind and come to the conclusion that ‘certain complexities have been noted in the accounts of the assessee’ and therefore special audit was required to be carried out. In any event, it was incumbent on the AO to issue another show-cause notice to the assessee u/s 142 (2A), after he changed his mind and proposed special audit on 27.12.2011, and invite the assessee's objections. The record demonstrates no application of mind by the CCIT before granting approval to the proposal for special audit sent by the AO to him on 27.12.2011. Thus, the approval granted by the CCIT on 27.12.2011 for special audit is of no effect and is a nullity. The direction for special audit issued by the AO on 28.12.2011 and the order dated 29.12.2011 containing the terms of reference to the special auditors are hereby quashed.
Assessee is engaged in the business of construction and sale of real estate. During assessment proceedings, on 21/11/2011 AO issued a show cause notice u/s 142(2A) for special audit observing the complexity in the books of account that crores of advances were taken from DLF Limited which was invested in more than hundred companies to avoid deemed dividend and section 40A(2)(b), payments were made to companies on account of development rights under the head stock for which no details were provided such as quantum of rights, basis of purchase and sale price or revenue recognition which made account complex, no details were provided for reimbursement of expenses of Rs. 25.40 crores and no revenue was recognized on receipt of sale consideration which was given a colour of advance.
Assessee replied the show cause notice on 24/11/2011 objecting the proposal of special audit and stated that addition on account of profit and sale of development rights in preceding year had already been deleted by ITAT. Basis of revenue recognition and the facts being the same, ITAT allowed the appeal of the assessee regarding revenue recognition. Assessee produced books of account on 18/11/2011 which were test checked but AO had not raised any queries or explanation thereafter which implied that there was no complexity in the accounts. Books of account are maintained as per the accounting standards issued by the ICAI and audited u/s 44AB. Further DLF Limited is a company in which the public was substantially interested and when advances were made by it to the petitioner-firm, the provisions of Section 2(22)(e) of the Act were not attracted and that in any case, the advances were in the nature of business advances. As regards the applicability of Section 40A(2)(b), in the tax audit report the cases covered had been specifically mentioned. As regards of development rights, the parawise details with regard to the cost of development rights along with the relevant agreements had been furnished. It was claimed that the same method of accounting which was followed by the assessee previously was being continued without any deviation. There was only a difference of opinion between the assessee and the assessing authority on the question of revenue recognition which was also tested before the appellate authorities. Reimbursement of expenses were towards, the services rendered by DLF Land Limited regarding maintenance of books of accounts, secretarial record, filing of various statutory return forms, managing the bank accounts, taking steps for obtaining licences relating to land etc. for which service charges at 15% were also paid. Assessee further referred instruction no. 1076 issued by CBDT laying down guidelines for the selection of cases for special audit.
AO after receipt of replies, intended to complete the assessment himself as was apparent from the noting on order sheet dated 5/12/2011, 16/12/2011 and 19/12/2011 as per which the AO stated that the details regarding reimbursement of expenses were asked, details and confirmation of sundry creditors, unsecured loans along with confirmations giving the names and addresses of parties, PAN, amount received/refunded if any and mode of payment etc. were asked and on 19/12/2011 and 26/12/2011, submitted the details. AO submitted a report to CIT on 16/12/2011 that the submission of the assessee were examined with regards to the issues stated in the Show Cause Notice, CBDT Guidelines, provisions of law and judicial decisions relied upon. The assessee had been asked to file the necessary details which were being verified and examined in the course of the assessment proceedings. On 19/12/2011, AO written a letter to assessee that he desired further clarification from the assessee in respect of the return filed by the assessee regarding deduction of 24.19 crores in view of section 40(a)(ia), services charges for which details were not furnished, addition on account of sundry creditors and unsecured loans for which the assessee failed to produce confirmation and asked to submit the details by 26/12/2011. On 26/12/2011, Assessee replied and furnished the details.
Assessee contended that 16/11/2011, AO submitted a report to the CIT in which he had narrated the assessee's reply and the various points taken by the assessee regarding initiation of special audit and intimated the CIT of his intention to proceed with the assessment proceedings and himself examine the points on which special audit was originally proposed by him. On 22/12/2011, a letter was written from the office of CIT to AO to submit the relevant papers, notices, draft order if ready. On 26/12/2011, AO replied after narrating the chronology of events staring from the requisition of the books of accounts of the assessee on 11/11/2011 till the submission of the assessee's reply dated 24/11/2011 to the show cause notice issued u/s 142(2A) on 21st November, 2011, that the issue of loan advanced by DLF had been decided by ITAT in favour of assessee in preceding years, regarding reimbursement of expenses detailed note was submitted alongwith full details and invoices, the issue of non deduction of tax for disallowance u/s 40(a)(ia) was being examined, unsecured loans / sundry creditors were being examined. Further the assessee had been asked to file the details which were being verified and examined and the interest of the revenue was being protected. The draft order was also being enclosed.
AO submitted an affidavit that though it has been stated that the draft order was enclosed with the letter, it was not in fact enclosed. Assessee raised a query under RTI seeking clarification regarding the forwarding letter written by JCIT in which also it was mentioned forwarding the report of the AO alongwith a copy of draft assessment order. To this query also, the reply given to the assessee was the same that no such draft assessment order was placed in the file of AO. Thus, revenue denied that a draft assessment order was enclosed to the report dated 26th December, 2011 submitted by the ACIT to the CIT through proper channel, ie., through the JCIT and had also denied that a copy of the draft assessment order was forwarded by the JCIT to the CIT along with his forwarding letter. On 27/12/2011, i.e. one day after he sent a report to the CIT stating that the apparent complexities noticed in the accounts were answered by the assessee and the assessment was being proceeded with and further that the assessee had submitted its reply to the various points raised by him which will be examined and the interest of the Revenue would be protected, and to which report a copy of the draft assessment order was stated to be enclosed, AO sent a letter stating that books of account are complex in respect of applicability of section 40(a)(ia) on reimbursement of expenses, applicability of section 40A(2)(a) on service charges, genuineness of creditors and unsecured loans and sent for approval for special audit.
Point is that just one day before, AO was of the view that no special audit was requires as assessee satisfactorily answered the query raised subject to the details and clarifications being submitted by the petitioner which would be examined and verified to protect the interest of the Revenue and the draft assessment order was forwarded though it was denied in writ proceedings. The question is whether the report of AO dated 26/12/2011 be taken as an expression of opinion that there was no need for a special audit? What happened between 26th and 27th December, 2011 that compelled AO to change his mind that special audit was required to be carried out? If it was not incumbent upon him to issue another show cause notice to the petitioner under Section 142(2A) and invite the objections of the petitioner? Was there any application of mind by CCIT while approving the special audit?
AO sent a proposal to CIT on 27/12/2011 which was sent by CIT on the same date and got approved by the CCIT on the very same day. After getting approval AO passed an order for special audit to be conducted u/s 142(2A) of the Act on 29/12/2011. The Court had directed the filing of an affidavit on oath whether the AO had mooted the proposal for the special audit. In the affidavit it was stated that the proposal for special audit was sent by AO through the JCIT who forwarded the same to the CIT on 27.12.2011. As per the affidavit, AO submitted a proposal to the CIT on 27.12.2011 through the JCIT seeking proposal for referring the case of the assessee company to the special auditor and the CIT forwarded the proposal to the CCIT on the same date along with the copies of the report of the AO dated 26.12.2011. Assessee contended that it was not a proposal for conducting special audit but it was actually a report containing reasons why no special audit was necessary and also intimating the CIT of the intention to continue with the assessment proceedings. Further enclosing of the draft assessment order though denied by AO shows that AO did not drop the proposal for special audit.
After hearing both the parties, the Hon’ble High Court held that,
++ the provisions of sub-section (2A) of Section 142 require the AO 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 the AO who is to form the opinion and not for anyone else. The approval to be granted by the CIT or the CCIT, is an inbuilt protection against arbitrary or unjust exercise of power by the AO and therefore a heavy duty is cast on the high ranking authority to see that the approval is not granted in a ritualistic manner. The approval must reflect the application of mind to the facts of the case. There was no proposal initially by the AO for special audit and that he did not form any opinion that the accounts of the assessee were complex and a special audit was required to protect the interests of the revenue. This is clear from the report dated 26.12.2011 submitted by the AO to the CIT. AO examined the accounts of the assessee on 18.11.2011 and issued a proposal for special audit u/s 142(2A) on 21.11.2011 which was replied by the assessee on 24/11/2011 and vide report dated 16/12/2011, AO stated that the submissions of the assessee are being examined with regard to the issues raised in the show cause notice, the CBDT guidelines, the provisions of law and the judicial decisions relied upon. The assessment proceedings were posted on 16.12.2011. The proceedings were adjourned to 19.12.2011 on which day the assessee appeared through its representative and submitted some details and the case was again adjourned to 26.12.2011. On 26.12.2011, a reply to the show cause notice was filed by the assessee and it was required to submit details of unsecured loans and sundry creditors on 28.12.2011 to which date the proceedings were adjourned;
++ on 26.12.2011, in the report submitted to CIT, AO narrated the reply submitted by the assessee to the show cause notice issued on 21.11.2011 u/s 142(2A) and after considering the same, expressed a clear opinion that ‘the apparent complexities noticed and confronted to the assessee have been answered to by the assessee’. Thus, clears that the AO did not form the opinion that the accounts of the assessee were complex and in order to protect the interests of the revenue, a special audit was required. Further, it was mentioned that a draft order had been prepared which is enclosed with the final report for the perusal of the CIT. It is very difficult to treat this report of the AO as a proposal submitted by him to the CIT for special audit of the accounts of the assessee. However, it contains a clear statement that since the complexities in the accounts have been answered by the assessee and since the details and material submitted by the assessee would be examined in the course of the assessment proceedings which were pending on that date, no special audit was required;
++ further if it has been stated by the AO that the draft order was enclosed to the final report, the presumption would be that it was enclosed and it would be for the revenue authorities to rebut the presumption with strong evidence to show that it was not. They have merely stated in the reply to the RTI enquiry raised by the assessee that the draft order was not enclosed with the final report dated 26.12.2011. This is a perfunctory manner of discharging the burden placed on them. If the draft assessment order had not been enclosed with the final report, there would be some correspondence on record from the office of the CIT drawing the attention of the AO to the omission to enclose the draft order and asking him to send the same forthwith. However no such correspondence is referred. Even the forwarding letter of the JCIT refers to draft assessment order. The appending of the draft assessment order would only be an act in furtherance of that intention or opinion; the non-enclosing of the draft assessment order cannot be taken to mean that no opinion was formed by the AO that the special audit was not required in the assessee's case;
++ if the AO on 26.12.2011 did form an opinion that no special audit was required in the assessee's case is correct, there is an end of the matter and the approval granted by the CCIT on 27.12.2011 and communicated to the AO through the CIT on 28.12.2011 is without any effect. It is permissible to the AO to change his opinion so as prospector or guardian of the revenue since protection of the interests of the revenue is one of the two criteria for reference to the special auditor. In the present case it would be difficult to justify the change of opinion. If the revenue wishes to put forth a contention to the effect that there was a change of opinion on the part of the AO, that should naturally be supported by very strong evidence or drastic change in the factual or legal position. When on 27.12.2011, AO submitted a proposal for special audit, he ought to have pointed out to the material or evidence or the compelling circumstances under which he had changed his mind, that too, overnight. The fact that the earlier opinion was changed overnight is a clear pointer to the position that there could have been no such new facts or change in the legal position which could have compelled a change of mind. Moreover, the AO was under a duty to overcome his own reasons given just a day before as to why there was no need for a special audit, which duty he has not been able to discharge. A perusal of the letter dated 27.12.2011 written by the AO to the CIT shows that the reasons given by him for a change of mind are very vague and unconvincing. He has merely stated that on going through the books of accounts, the audited financial results and the balance sheet and profit and loss account ‘certain complexities have been noted in the accounts of the assessee’ and referred four issues. The assessee has submitted its response to the four issues raised by the AO in the course of the assessment proceedings on 19.12.2011 which could not be considered as reply to show cause notice issued u/s 142(2A) on 21.11.2011 as in the show cause notice, AO did not raise the issue of sundry credits and unsecured loans appearing in the balance-sheet. The letter dated 19.12.2011 was only a letter seeking clarifications from the assessee on four points in the course of the assessment proceedings, and cannot be read as, nor was it purported to be, a show-cause notice u/s 142(2A). Thus, no opportunity was given to the assessee to show cause as to why special audit shall not be directed. The proviso to Section 142(2A) envisages a show-cause notice wherein it is necessary for the AO to make out a case of complexity of accounts and protection of the interests of the revenue and it should be open to the assessee to show that none of the two criteria is satisfied. That opportunity was not afforded to the assessee because the AO proceeded to send the proposal for special audit on 27.12.2011 to the CCIT through the CIT concerned, just one day after the assessee wrote the letter to him in the course of the assessment proceedings. The proposal thus suffers from, and is vitiated by, the lack of opportunity to the assessee which is statutorily mandated;
++ further while approving the proposal, the CCIT took no time to give his approval to the special audit. He overlooked that no notice had been given by the AO to the assessee u/s 142(2A) before forwarding the proposal on 27.12.2011. This shows non-application of mind on his part. He approved the proposal on the same day, namely, 27.12.2011. The fact that the CCIT has also approved the proposal on 27.12.2011 itself is borne out by the endorsement made by him on the note put up by the ACIT (Headquarters). It is difficult to accede to the proposition that the CCIT could have applied his mind in such a short period of time to the proposal put forward by the AO on 27.12.2011, both the proposal and the approval bear the same date. In these circumstances, there could not have been a serious application of mind on the part of the CCIT. It was merely a ritualistic or mechanical approval given by the CCIT;
++ in view of the above, there is nothing on record to show that there was any fresh development between 26th December and 27th December, 2011 compelling the AO to change his mind and come to the conclusion that ‘certain complexities have been noted in the accounts of the assessee’ and therefore special audit was required to be carried out. In any event, it was incumbent on the AO to issue another show-cause notice to the assessee u/s 142 (2A), after he changed his mind and proposed special audit on 27.12.2011, and invite the assessee's objections. The record demonstrates no application of mind by the CCIT before granting approval to the proposal for special audit sent by the AO to him on 27.12.2011. Thus, the approval granted by the CCIT on 27.12.2011 for special audit is of no effect and is a nullity. The direction for special audit issued by the AO on 28.12.2011 and the order dated 29.12.2011 containing the terms of reference to the special auditors are hereby quashed.
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