Landmark Judgements of Supreme Court on Section 142(2A) [Special audit]
Special Audit under section 142(2A) - Show cause is mandatory - SLP dismissed against High Court ruling that Assessing Officer is required to give pre-decisional hearing to assessee before making order proposing conduct of special audit under section 142(2A); in absence of pre-decisional hearing, decision to have special audit would be invalid and held to be bad in law
On appeal by the assessee, the Tribunal held that show cause notice was required to be given to the assessee by the Assessing Officer before making the order proposing conduct of special audit under Section 142(2A) of the Act and even if the administrative Commissioner approves the said proposal after giving opportunity to the assessee, nonetheless such a course of action would be vitiated because of non-compliance to the principles of natural justice at the stage of making the proposal.
High Court by impugned order held that opportunity of hearing is required to be given to assessee by Assessing Officer before making order proposing conduct of special audit under section 142(2A). It further held that in absence of pre-decisional hearing, decision to have special audit was invalid and consequently all proceedings conducted thereafter stood vitiated. Special leave petition filed against impugned order was to be dismissed. [In favour of assessee] (Related Assessment years : 2005-06 to 2007-08) – [PCIT v. Vilson Particle Board Industries Ltd. (2021) 130 taxmann.com 281 (SC)]
Notice issued in SLP filed against impugned order of High Court that where on queries raised by Assessing Officer regarding several issues such as interest passed on to clients, TDS deductions on advances made to a company for construction, reduction in sales turnover, etc., assessee failed to furnish necessary details and reconcile books of account, and several replies of assessee to queries of Assessing Officer revealed complexity in accounts of assessee, impugned notice for special audit under section 142(2A) was justified
Inquiry before assessment (Special audit) - Assessee-company, engaged in business of construction, filed its return of income. Assessing Officer raised queries regarding several issues such as details of interest passed on to clients, TDS deductions on advances made to a company for construction, huge reduction in sales turnover during year, etc. However, assessee had not submitted satisfactory reply to these queries and failed to produce its ledger, accounts and documents as called for. Thus, Assessing Officer passed an order for special audit under section 142(2A). High Court by impugned order held that non-specific reply of assessee revealed complexity in accounts of assessee and raised doubts about correctness of transactions and lead Assessing Officer to seek further verification, thus, impugned order passed for a special audit under section 142(2A) was justified. An instant special leave petition (SLP) was filed by assessee against said order of High Court. Notice was to be issued in SLP filed by assessee against impugned order of High Court. [In favour of assessee] (Related Assessment year : 2017-18) – [NBCC (India) Ltd. v. Addl. CIT (2020) 275 Taxman 1 : 120 taxmann.com 211 (SC)]
Where assessee was afforded opportunity of being heard by Assessing Officer, remedy of writ was not available from direction of special audit issued under section 142(2A)
Special audit (Writ remedy) – Assessee’s return was selected for scrutiny assessment - Notice was issued to assessee under section 143(2) seeking assessee’s reply on certain discrepancies found in Income-tax Return. On assessee's reply being found unsatisfactory, notice of compulsory audit of assessee's books of account was issued under section 142(2A) - Assessee challenged such notice before writ Court on ground that no prior opportunity of hearing was provided. Since assessee was afforded opportunity of hearing before making direction of special audit under section 142(2A), interference from Writ Court was not warranted. [In favour of revenue] (Related Assessment year : 2017-18) – [Madhya Pradesh Audyogik Kendra Vikas Nigam v. PCIT, Bhopal (2020) 122 taxmann.com 286 (MP)]
Section 142(2C) even prior to amendment by Finance Act, 2008 with effect from 01.04.2008, did not preclude exercise of jurisdiction and authority by Assessing Officer to extend time for submission of audit report directed under section 142(2A), without an application by assessee
Inquiry before assessment (General) – Section 142(2C), prior to amendment by Finance Act, 2008 with effect from 01.04.2008, did not preclude exercise of jurisdiction and authority by Assessing Officer to extend time for submission of audit report directed under section 142(2A), without an application by assessee. Said amendment was intended to remove an ambiguity and is clarificatory in nature. [In favour of revenue] – [CIT, New Delhi v. Ram Kishan Dass (2019) 263 Taxman 657 : 103 taxmann.com 414 (SC)]
SLP dismissed against High Court’s ruling that where audit had taken place, period of limitation for passing assessment order would be extended by time taken for special audit; mere irregularities in order of audit would not invalidate proceedings
Block assessment in search cases (Time limit for completion of) - High Court by impugned order held that where audit had taken place, period of limitation for passing assessment order would be extended by time taken for special audit, mere irregularities in order of audit would not invalidate proceedings. Special Leave Petition filed against said order was to be dismissed - [In favour of revenue] (Block period 1990-91 to 2000-01) – [Shyamal Sarkar v. CIT, Siliguri (2017) 250 Taxman 18 : 84 taxmann.com 167 (SC)]
Stay of special audit qualifies as stay of assessment proceedings and, therefore, period for said stay has to be excluded while counting limitation period for block assessment proceedings
Block assessment in search cases (Time limit for completion of) - Whether where effect of a stay is to prevent Assessing Officer from effectively passing assessment order, such stay order may be treated as stay of assessment proceedings and, therefore, period for such stay is to be excluded while computing period of limitation for completing block assessment - Held, yes - Whether special audit is an integral part of assessment proceedings, i.e., without special audit it is not possible for Assessing Officer to carry out assessment; consequently stay of special audit qualifies as stay of assessment proceedings and, therefore, period for said stay has to be excluded while counting limitation period for block assessment proceedings. Further, said benefit of exclusing period of stay is not dependent upon final outcome of proceedings in which interim stay is granted. [In favour of revenue] (Related Assessment years : 1994-95 to 1998-99)- - [VLS Finance Ltd. v. CIT (2016) 239 Taxman 404 : 68 taxmann.com 368 (SC)]
Special audit – Natural justice – Administrative order - Even an administrative order or decision in matter involving civil consequence has to be made consistently with the rules of natural justice,
unless the statute conferring the power excludes its application by express language. Therefore, assessee would have to be given a reasonable opportunity of being heard before passing an order for special audit under section 142(2A)
Exercise of power under section 142(2A) leads to serious civil consequences and, therefore, even in absence of an express provision for affording an opportunity of pre-decisional hearing to an assessee and in absence of any express provision in section 142(2A) barring giving of a reasonable opportunity to an assessee, requirement of observance of principles of natural justice is to be read into said provision [See proviso to section 142(2A) inserted with effect from 01.06.2007] (Related Assessment year : 2003-04) – [Sahara India (Firm) v. CIT (2008) 300 ITR 403 : 216 CTR 303 : 206 Taxation 180169 Taxman 328 : 7 DTR 27 (SC)]
KEY NOTE :- The Finance Act, 2007 has inserted a proviso to section 142(2A) with effect from 01.06.2007, providing for an opportunity to be given to the assessee before issuing a direction under section 142(2A) to get the accounts audited.
Chartered accountant, nominated by commissioner to audit assessee’s accounts, refused to audit accounts for ‘frivolous reasons’ - No evidence of collusion between chartered accountant and assessee - This would not amount to failure on assessee’s part to comply with directions
under section 142(2A), so as to justify best judgment assessment being made under section 144(b) The Commissioner issued directions under section 142(2A) and nominated a Chartered Accountant for auditing the assessee's accounts. Though the assessee was willing to produce the records, the Chartered Accountant refused to audit the accounts. The ITO, accordingly, completed a best judgment assessment under section 144(6). When the assessee challenged this assessment in writ, the High Court held that despite the fact that the Chartered Accountant refused to audit the accounts for reasons ‘patently frivolous’ and that there was no collusion between the Chartered Accountant and the assessee, there was a ‘failure’ on the assessee’s part to comply with the directions under section 142(2A) and, hence, the best judgment assessment was valid. On appeal:
Held : If for a frivolous reason the Chartered Accountant declined to undertake the audit of the assessee's accounts, obviously the assessee could not be held responsible. There was no default or failure to comply with the directions issued under section 142(2A) on the assessee’s part, so as to attract the provisions
of section 144(b). The best judgment assessment was, therefore, set aside with directions to appoint another Chartered Accountant within one month, for getting the accounts audited. - [Swadeshi Polytex Ltd. v. ITO (1983) 144 ITR 171 : 15 Taxman 19 (SC)]