Special Audit u/s142-2A relying upon the audit Reports of CAG without recording detailed reasons not sustainable. Order passed must show independent application of mind to the material on record-High Court
Prelude:
Section 142(2A) of the Income tax Act, 1961 (the Act) contains the provisions regarding powers of the Assessing Officers (AO) to order special audit aka “Special Tax Audit” of an assessee by a chartered accountant. The sub-section 2A provides that where AO doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, and finds its necessary, he may, with the proper approval direct the assessee to get the accounts audited by a chartered accountant, nominated by the Commissioner and to furnish a report of such audit in the prescribed form 6B.
However the proviso provides that the no special audit shall be directed by the AO unless the assessee has been given a reasonable opportunity of being heard..In the instant case, a controversy arose as to the validity of the order directing ‘Special Audit’ of the assessee.
Special Audit u/s142-2A relying upon the audit Reports of CAG without recording detailed reasons
ABCAUS Case Law Citation:
ABCAUS 2159 (2018) (01) HC
The Challenge/Grievance:
This income tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Income Tax Department (ITD/Revenue) against the order passed by the Commissioner of Income Tax (Appeal) deleting the addition made by the Assessing Officer (AO) on account of unexplained share application u/s 68.
This writ petition was filed under Articles 226 & 227 of the Constitution of India by the petitioner assessee praying to quash the impugned Order passed by the AO for conduct of ‘Special Audit’ under section 142(2A) of the Income-tax Act, 1961.
Section 260-A of the Income Tax Act, 1961 (the Act) by the assessee against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) confirming the disallowance of expenses incurred for repairs, refurbishing and making improvements on the buildings taken on lease, treating them as capital expenditure.
This income tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Income Tax Department (ITD/Revenue) against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) deleting the addition made by the Assessing Officer (AO) and upheld by the First Appellate Authority (FAA/CIT-A) with respect to reimbursement of expenses received by the assessee where TDS u/s 194C was deducted thereon.
Brief Facts of the Case:
The petitioner was a State Government Undertaking which was exempt from
payment of Income Tax under the provisions of Section 11 of the Act. The assessee was already subject to Audit at the hands of the Comptroller and Auditor General of India (C & AG) as well as the independent Chartered Accountant itself and had already produced Audit Reports for the two years in question.
Notice to the petitioner assessee was issued by the AO giving only one day’s time to show cause against such notice for which the assessee prayed for some time and finally submitted its objections within 10 days. But without waiting for the objections to be furnished and considered by the said Assessing Authority, he passed the impugned order under Section 142 (2A) of the Act, directing ‘Special Audit’ vide impugned order.
Contention made on behalf of the Appellant Assessee:
The core contention of the petitioner was that the Assessing Authority directed the ‘Special Audit’ at the fag-end of the period of limitation before which the said Authority was expected to pass the assessment orders and that too without giving a reasonable opportunity of hearing to the petitioner.
It was also urged before the Court that the AO merely referred and relied upon the Audit objections and Audit Paras given by the Comptroller and Auditor General of India (C & AG) for the said period to which the assessee had given
its due reply and explanations to the said Comptroller and Auditor General of India and it was for their consideration and there was no independent application of mind and formation of reasonable belief by the AO himself to direct such ‘Special Audit’ in the case of the petitioner assessee, which is exempt from payment of Income Tax under the provisions of Section 11 of the Act.
Observations made by the High Court:
The Hon’ble High Court opined that the impugned orders passed by the Respondent Assessing Authority were passed mechanically without due application of mind particularly in the case of an assessee, which was a Government Undertaking engaged in the activity of a public purpose and it was exempt from Income Tax as such even though exemption given to it under Section 11 of the Act, may be conditional.
The Hon’ble High Court observed that the purpose of Section 142 (2A) of the Act is to get a true and fair view of the Accounts produced by the assessee so that upon the ‘Special Audit’ conducted at the instance of the Revenue may yield more revenue in the form of Income Tax and it is not expected to be mere paper exercise or a repetitive audit exercise. Therefore, the special circumstances must exist to direct the ‘Special Audit’ under Section 142 (2A) of the Act and such special circumstances or the special reasons must be discussed in detail in the order under Section 142(2A) of the Act itself.
The Hon’ble High Court opined that from the facts, it was prima facie apparent that the Assessing Authority had not only directed the ‘Special Audit’ rather mechanically, but at the fag-end of the limitation period, perhaps just to buy more time to pass the assessment orders in the case of the assessee, which for the period in question enjoyed the exemption from Income Tax under Section 11 of the Act.
The Hon’ble High Court observed that the reasons recorded and communicated to the assessee for such ‘Special Audit’ prima facie indicated that the Assessing Authority had merely quoted the observations and objections of the Comptroller and Auditor General of India, its Audit Paras and its explanation and reply by the petitioner assessee and adding a few lines of his own as Assessing Authority’s observations, directed the ‘Special Audit’.
It was also noted that the order neither disclosed the discussion on the objections of the assessee for there being no justification for ‘Special Audit’ and the AO did not even wait for the objections to be placed on record and before they were furnished, the AO had already passed the order on while the limitation for passing the assessment order was expiring within couple of days.
The Hon’ble High Court opined that the hot-haste, the casual and cavalier attitude of the AO in which he was invoking a serious provision of the Act against an assessee which was a Government Undertaking engaged in a public purpose and being exempt from Income Tax under the State Act itself, were very telling facts, in the perspective of which, invoking of these provisions of Section 142 (2A) of the Act in this manner was absolutely not called for.
Decision/ Conclusion/Held:
The Hon’ble High Court quashed the orders passed u/s 142 (2A) and directed the AO to reconsider the matter and consider the objections and written submissions filed by the petitioner assessee in the correct perspective and pass fresh orders. It was also directed that if the AO still decides to order ‘Special Audit’, he shall record the detailed reasons for the same showing the independent application of mind to the material on record and not to just rely upon the Audit Reports given by the other agencies.
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