Special Audit u/s 142(2A) Stay Period to be excluded for Limitation concluding Block Assessment u/s 158BE-Supreme Court

In a recent judgment, Supreme Court has upheld that special audit u/s 142(2A) was an integral step towards assessment proceedings and hence High Court was right in holding that period for which special audit was stayed shall be excluded in counting limitation for concluding block assessment u/s 158BE.

Case Law Details:
Civil Appeal No. 2667 OF 2007
VLS Finance Ltd. & ANR.  (Appellant) vs. Commissioner of Income Tax & ANR. (Respondents)
Date of Judgment: 28/04/2016
Coram: Justice A.K. SIKRI and Justice ROHINTON FALI NARIMAN

Important Case Law Referred:
Auto and Metal Engineers and other Vs. Union of India and Others  (1998) 229 ITR 399
Commissioner of Income Tax Vs. Dhariwal Sales Enterprises (1996) 221 ITR 240

Brief Facts of the Case:
A Search and seizure took place in the business premises of the appellant companies on 22nd June, 1998 on the strength of warrant of autorization dated 19th June, 1998. The search was followed by further searches from time to time till 5th August. Notice under Section 158BC(c) was issued on 28th June, 1999 requiring the appellants to furnish return for the block period from April 1, 1988 to 22nd June, 1998. This notice was withdrawn and another notice was issued on 26.07.1999. In response thereto, the appellants filed return for the aforesaid block period on 10th September, 1999.

A direction for for conducting special audit for the aforesaid block period under Section 142(2A) was issued to appellants on 29.06.2000, which was served on 19th July, 2000. Since As per Section 158BE of the Act, assessment is to be completed within two years from the end of the month in which the last of the authorisation for search under Section 132 or for requisition under Section 132A, as the case may be, the appellants by a Writ Petition in Delhi High Court challenged direction of special audit u/s 142(2A).

The appellants submitted that the time limit for completion of Block Assessment expired on 30th June, 2000 in terms of Section 158BE , since 2 years period expired on that date. It was further submitted that the authorization executed on 22nd June, 1998 could not have been utilized for conducting further search till August, 1998. it was also contended that the order under Section 142(2A) was issued in violation of principles of natural justice as there was no complexity in the accounts of the appellants and, therefore, there was no justification in law to order special audit under Section 142(2A). The Court stayed the  direction for special audit dated 29-06-2000. This stay remained in operation during the pendency of the writ petition.

Finally, the Delhi High Court vide judgment dated 15th December, 2006. quashed the direction for special audit on the ground that no hearing was afforded to the appellant before issuing such direction. However, the High Court decided the question of limitation in favour of the Department holding that the period between 24th August, 2000, i.e, date on which interim order was passed staying special audit direction under Section 142(2A) dated 29th June, 2000 and 15th December, 2016, i.e., when the High Court has passed the order setting aside the direction for special audit, be excluded in counting limitation for concluding block assessment  holding that the special audit was not only a step in the assessment proceedings, but an important and integral step, in the absence of which an assessment order could not be made.

Aggrieved, the appellants went in appeal before the Apex Court who observed that the core issue was one of limitation, involving following two questions:

(a) Whether the period of limitation expired on 31st August, 2000 or the last date for completing block assessment was 30th June, 2000?
(b) Whether the period between 24th August, 2000 to 15th December, 2006, when interim stay was in operation, required to be excluded for the purposes of counting limitation period?

Important excerpts from the Judgment:

We may also refer to the judgment of the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Dhariwal Sales Enterprises . That was a case where special audit report under Section 142(2A) of the Act was called for but could not be submitted. The High Court held that time period spent for obtaining a copy of the report upto the time when intimation of non-submission was given by the assessee would be excluded.

We, therefore, agree with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the Court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, may not be a valid argument to the issue that is being dealt with. The assessing officer had, after going through the matter, 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 judicial review of such an order of the assessing officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted. 

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