CIT has no power to grant extension to submit Special Tax Audit Report u/s 142(2A)

CIT has no power to grant extension to submit Special Tax Audit Report u/s 142(2A), it is vested with Assessing Officer (AO) – High Court  

ABCAUS Case Law Citation:
ABCAUS 3830 (2024) (01) HC

Important Case Laws relied upon by parties:
Yum Restaurant v CIT, (2005) SCCOnline Del 555
State of Bihar v J.A.C Saldanha, (1980) 1 SCC 554
State of Karnataka vs Munniyalla, (1985) 1 SCC 196
Anirudhsinhji Karansinhji Jadeja v. State of Gujarat, [1995] 5 SCC 302
Commissioner of Police v. Gordhandas Bhanji, AIR 1952 SC 16
The Purtabpore Co. Ltd. v. Cane Commissioner of Bihar & Ors., 1969 (1) SCC 3085
State of UP v. Maharaja Dharamander Prasad Singh, (1989) 2 SCC 505
Rajesh Awasthi v. Nand Lal Jaishwal, (2013) 1 SCC 501

In the instant case, the Income Tax Department  / Revenue had challenged the order passed by the the  Income Tax Appellate Tribunal (ITAT) in holding that CIT has no power to grant extension for submission of tax audit report.

The following question of law was framed by the Hon’ble High Court :

Whether the extension given to the Chartered Accountant appointed under the provisions of Section 142(2A) of the Income Tax Act, 1961 (the Act) for submission of the audit report was in consonance with the proviso appended to Section 142(2C) of the Act?

The respondent/assessee was engaged in the business of construction and allied services, was subjected to a search action under Section 132 of the Act.

Later, the AO issued a show cause notice to the respondent/assessee seeking its response to having a special tax audit conducted concerning its affairs in the exercise of powers under Section 142(2A) of the Act. The objections were filed by the respondent/assessee. The AO, however, rejected the objections and orders the special tax audit.

Again, the Commissioner of Income Tax (CIT) issued a show cause notice before approving the conduct of a special audit, as proposed by the AO. Once again, the respondent/assessee filed its objections which were rejected by the CIT.

 The order of CIT was communicated to the AO. The letter indicated that the approval had been granted based on the reasoning outlined in the order sheet. Furthermore, the CIT also indicated that he had appointed a Chartered Accountancy firm. Besides this, the timeframe for completion of the audit, was also indicated in the approval letter.

On the same day, the AO informed the respondent/assessee that the CIT had approved conducting a special audit of its accounts via communication of even date. A copy of the CIT’s approval letter was enclosed with the communication addressed to the respondent/assessee.

However,

Since a Special Auditor was appointed, the end date for framing the assessment order was extended by virtue of the provisions of Section 153B Explanation (ii), read with the first proviso appended to the said provision.

In the interregnum, the initial timeframe granted for completion of the audit, which was 120 days, was extended by another 60 days at the request of the Special Auditor.

It is notable that the AO forwarded the request for an extension of time the ACIT, who in turn forwarded it to the CIT. the DCIT headquarters conveyed to the AO that the CIT had considered the request and had conveyed that an extension of 60 days for furnishing the audit report, as requested by the concerned auditor had been granted, with a caveat though that no further extension would be allowed.

The AO on the very next day conveyed to the respondent/assessee that the CIT had granted the auditor an extension of 60 days for furnishing the audit report.

Thus, the moot question was whether the extension of time for submitting the audit report was granted by the specified authority having regard to the provisions of the proviso appended to Section 142 (2C) of the Act.

The Hon’ble High Court observed that a plain reading of sub-section (2A) of Section 142 of the Act would show that the AO has been invested with the power to direct the assessee to get its accounts audited at any stage of the proceedings, with the previous approval of the authority specified in that provision, if in his opinion it is necessary to do so.

Further, the proviso appended to sub-section (2C) of Section 142 confers a discretion on the AO to extend the timeframe initially stipulated by the Assessing Officer (AO) for submission of audit report by the assessee, either on his own, i.e., suo motu, or on an application being made in that behalf by the assessee

The Hon’ble High Court opined that it is evident from a plain reading of the provisions that both the discretion to trigger the process for issuance of a direction to the assessee for getting the accounts audited within a specified timeframe and the extensions, if any, that are granted is that of the Assessing Officer (AO) and the only role envisaged for the specified authority in triggering an audit of the assessee’s account is to grant approval to the proposal framed by the AO for getting the accounts audited and nominate the accountant to audit the account. Therefore, under the proviso appended to sub-section (2C) of Section 142 of the Act, the legislature has invested the power in the AO to grant an extension of time as well, which can be for one or more periods, with a maximum timeframe (which includes the original period specified by the AO for completion of the audit) not exceeding 180 days.

Whether power of special audit time extension u/s 142(2C) can be exercised by an authority other than the AO?

The Hon’ble High Court opined that since the legislature vested the discretion to extend the timeframe solely in the AO, he could not have abdicated that function and confined his role to only making a recommendation to the CIT. The CIT had no role in extending the timeframe as the AO was in seisin of the assessment proceedings.

The Hon’ble High Court expressed concurrence with the assessee’s contention that the decision taken to get an audit conducted under Section 142(2A) of the Act is a step in the process of assessment proceedings and, therefore, is clearly not an administrative power; as the appointment of a special auditor entails civil consequences.

The Hon’ble High Court opined that given that the initial exercise of the power has been explicated as one that is not administrative, the CIT(A) could not have extended the time based on the recommendation of the AO. However, the enunciation of this legal principle does not derogate from our observation above that since the discretionary power was vested in the AO (which was non-delegable), it could not have been exercised by the CIT, irrespective of the nature of the power.

Accordingly, the question of law was answered against the revenue and in favour of the assessee.

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