Unless AO used power u/s 142(2A) with mala fide intention, writ court not to interfere

Unless proved that AO used power u/s 142(2A) with mala fide intention, the writ court not to interfere – High Court 

In a recent judgment, the Hon’ble Jharkhand High Court has held that unless it is demonstrated by producing materials to the satisfaction of the Court that the exercise of powers u/s 142(2A) by the Assessing Officer is with mala fide intention, the writ Court shall not exercise its powers under Article 226 of the Constitution.

ABCAUS Case Law Citation:
ABCAUS 4088 (2024) (06) HC

Important Case Laws relied upon:
Sahara India (Firm) Lucknow Vs. Commissioner of Income Tax, Central-I and Anr.” (2008) 14 SCC 151
Malloch v. Aberdeen Corporation” (1971) 2 ALL ER 1278 (HL)
Escorts Farms Ltd. v. Commr., Kumaon Division” (2004) 4 SCC 281

In The instant case the assessee had filed a Writ Petition before the Hon’ble High Court challenging the orders passed under section 142(2A) of the Income Tax Act, 1961 (the Act) for a special audit of its Books of Account by a nominated Chartered Accountant.

The appellant Company was issued a notice under section 148 of the Act for reopening the income tax assessment, after a search and seizure was conducted at the premises of Business Group of Companies.

For the purpose of scrutiny under section 143(3) for the relevant Assessment Year a notice under section 142(1) was issued for furnishing specific details. The petitioner-Company, submitted a reply thereof but a second notice under section 142(1) was issued for some suspected transactions by the petitioner-Company.

In the notice u/s 142(1) the Assessing Officer referred to huge transactions of several crores of rupees in cash by the assessee. Such materials were collected during the search and seizure and included documents and digital data. The petitioner-Company filed its response and endeavored to clarify that it had already filed its Income Tax Returns for the relevant Assessment Year even before a search was conducted.

Still, a show-cause notice was issued under section 142(2-A) for a special audit of its Books of Accounts, and upon seeking approval of the Principal Commissioner of Income Tax the impugned order was passed.

The company challenged the order for the audit of the Books of Accounts by a nominated Accountant on the ground of violation of natural justice. On a similar ground, the petitioner-Company questioned the order granting approval for the special audit under section 142(2-A) of the Act.

The Petitioner company submitted that the exercise of powers under sub-section (2-A) to section 142 of the Income Tax Act follows serious civil consequences to the assessee. It was submitted that the exercise of powers under sub-section (2-A) is hedged with the statutory requirements contained thereunder to avoid unnecessary harassment and safeguard the interest of the assessee but without recording his satisfaction as to “six conditions” provided thereunder, the entire burden is now sought to be shifted upon the petitioner-Company.

It was further submitted that by affording five days’ time to respond to the notice, the petitioner-Company was deprived of the opportunity of putting forth its objection against the proposed exercise of power under sub-section (2-A) to section 142.

It was contended that the order passed by the Principal Commissioner approving special audit did not take note of its objections, and the Assessing Officer wrongly recorded that the petitioner-Company did not submit its reply to the show-cause notice.

The Hon’ble High Court observed that on a plain reading of the provisions under sub-section (2-A), it becomes clear that the Assessing Officer can exercise the powers thereunder at any stage of the proceedings before him. Sub-section (2-A) provides that if the Assessing Officer thinks that it is necessary to cause a special audit he may with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner direct the assessee to get the accounts audited by a nominated Accountant. The opinion so formed by the Assessing Officer shall be based on (i) the nature and complexity of accounts, (ii) the volume of the accounts, (iii) doubts about the correctness of the accounts, (iv) multiplicity of transactions in the accounts or (v) specialized nature of business activity of the assessee. While forming an opinion for the special audit by a nominated Accountant, the Assessing Officer is also required to have regard to the interests of the Revenue. In the milieu of such varied requirements as provided under sub- section (2-A), this cannot be a requirement in law that the Assessing Officer must refer to each of the aforementioned factors separately and narrate the supporting facts thereof while exercising the power under sub-section (2A) of the Act.

The Hon’ble High Court noted that in the notice under section 142(1) to the petitioner-Company, the Assessing Officer referred to huge discrepancies in sale descriptions in the seized documents that were verified with Tally data. During the searches, several documents and digital devices were seized and the information, retrieved from the mobile phone of the directors and employees of the petitioner-Company revealed suspected transactions. The unexplained transactions and the details of suspicious transactions are spread over fourteen pages in the said notice.

The Hon’ble High Court opined that the satisfaction indicated under section 142(2A) for forming an opinion by the Assessing Officer shall not be open to judicial scrutiny and wherever it is shown to the Court that there are materials for arriving at satisfaction for the special audit of the accounts of an assessee by a Chartered Accountant, the writ Court shall be denuded of its power of judicial review under Article 226 of the Constitution of India.

With respect to the contention of the assessee that by passing an order under sub-section (2-A) the period of limitation would be extended by six months and thereby cause prejudice to the assessee cannot be countenanced in law. Unless it is demonstrated by producing materials to the satisfaction of the Court that the exercise of powers under sub-section (2A) by the Assessing Officer is with mala fide intention, the writ Court shall not exercise its powers under Article 226 of the Constitution.

The Hon’ble High Court opined that the Assessing Officer for valid and justifiable reasons may exercise the powers under sub-section (2-A) till the last date of the financial year.

The Hon’ble High Court further opined that no doubt that at the stage of granting approval for tax audit u/s 142(2A) of the Act, the statutory Authority is required to form a prima facie opinion and not to render a conclusive finding. The Latin word “prima facie” means at first glance shall refer to materials based on which the statutory Authority shall form an opinion.

However, the Hon’ble High Court noted that an order passed in violation of natural justice becomes susceptible in law. The Hon’ble Supreme Court gave the proposition that reasonable opportunity must be given to the assessee before the power under section 142(2A) is exercised by the Assessing Officer. After the amendment, this requirement to follow natural justice is incorporated in sub-section (2A) by providing that reasonable opportunity of being heard shall be provided to the assessee. To a limited extent, the Hon’ble High Court expressed agreement with the contention that five days to respond to the notice under section 142(2-A) was not sufficient and the Assessing Officer passed the order without looking at the objections raised by the petitioner-Company.

However, the Hon’ble High Court further noted that the Hon’ble Supreme Court had held that the rules of natural justice shall not apply in cases where it would be of no use if an opportunity of hearing shall be a mere ritual and without the possibility of any change in the decision on merits.

The Hon’ble High Court opined that a notice under section 142(2-A) of the Income Tax Act is only a step towards the assessment of income tax and the nominated Auditor’s report is not the final decision. Moreover, the objections so laid by the petitioner-Company prima facie do not reflect any merit. In a proceeding under Article 226 of the

Constitution, the writ Court shall not exercise its discretionary jurisdiction where the records reveal that the petitioner-Company has, in fact, no defense to object to a special audit under sub-section (2-A) to section 142.

As a result, the Hon’ble High Court declined to interfere with the orders appointed a tax auditor but directed that he shall not refer to any internal document/appraisal report prepared by the Income Tax Department concerning the petitioner-Company. 

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