Allahabad H.C : In December, 1975 the business premises and registered office of the company were searched by the IT Department under s. 132(1) of the IT Act, 1961

Counsel Appeared :

Bharat Agarwal & R.R. Agarwal, for the Petitioner : M. Katju, for the Respondent

SHETTY, C.J. :

Swadeshi Cotton Mills Co. Ltd. (hereinafter referred to as ‘the Company’), is the petitioner in this writ petition. The company has got branches at Kanpur, Naini, Pondicherry, Maunath Bhanjan, Rai Bareilly and Udaipur. Its registered office is at Kanpur. Each branch has been maintaining separate books of account. In December, 1975 the business premises and registered office of the company were searched by the IT Department under s. 132(1) of the IT Act, 1961 (hereinafter referred to as ‘the Act’). The authorities seized voluminous records and account books and removed them in five almirahs and two steel trunks.

2. The IAC, D Range, Kanpur, examined the account books seized. He found that the accounts were of complicated nature. Accordingly, he submitted a report to the Commissioner, Kanpur seeking approval for special audit as required under s. 142(2A) of the Act. He had suggested in his report that the chartered accountant appointed for that purpose may have to visit various units of the company and get the accounts verified there itself. Accepting the aforesaid report, the Commissioner made an order as follows: “On a careful consideration of the facts of the case, I agree with you that in view of the nature and complexity of accounts of the case and in the interests of Revenue, the accounts of Swadeshi Cotton Mills Co. Ltd., Kanpur including those of its branches for the asst. yrs. 1974-75 and 1975-76 should be audited by an accountant as contemplated under s. 142(2A) of the IT Act, 1961, I hereby accord statutory approval for the same. Sd/M.D. Verma CIT, Kanpur”. Thereafter a special auditor was nominated fixing his remuneration.

The company challenging the validity of the order appointing the special auditor has preferred this petition raising several questions including the validity of ss. 142(2A), (2B), (2C), and (2D) of the Act. But at the time of hearing, the learned counsel for the petitioner submitted that he is pressing only one question. He urged that there was absolutely no material before the IAC or before the Commissioner to hold that the accounts of the company are of such a nature and complexity which call for special audit. He also submitted that the accounts of the company had been regularly audited by qualified auditors and there was no reason at all to find fault with the system of auditing.

As a preliminary to the consideration of the contention urged, we may deal with the relevant provision of the Act. Sec. 142 of the Act has been amended by adding sub-ss. (2A), (2B), (2C) and (2D) by the Taxation Laws (Amendment) Act, 1975. It has come into force w.e.f. 1st April, 1976. Under sub-s. (2A), the ITO has been empowered to direct an assessee in a case where the nature and complexity of the accounts and the interests of the Revenue so require, to get his accounts audited by a chartered accountant and furnish a report of such audit in the prescribed manner. Such a direction can be issued only with the prior approval of the Commissioner. The chartered accountant for the purposes of conducting the special audit is also to be nominated by the Commissioner. The expenses of and incidental to including the remuneration of the special auditor, must be paid, by the assessee. The report of such audit has to be submitted in the prescribed form duly signed and verified by such auditor. Sub-s. (2B) of s. 142 of the Act provides that special audit could be directed even though the accounts of the assessee have been already audited in accordance with law. Under sub-s. (3) of s. 142 of the Act the assessee is entitled to an opportunity of being heard in respect of a material collected under special audit, if it is to be relied upon for assessment.

The exercise of power to direct special audit depends upon the satisfaction of the ITO with an added approval of the Commissioner. Both must be satisfied that the accounts of the assessee are of complex nature and in the interests of Revenue the accounts should be audited by a special auditor. The special auditor is also an auditor like the company’s auditor, but he has to be nominated by the Commissioner but not by the company. The accounts are again to be audited at the cost of the company. This is the substance of the statutory provisions. The power thereunder cannot, in our opinion, be lightly exercised. The satisfaction of the authorities should not be subjective satisfaction. It should be based on objective assessment regard being had to nature of the accounts. The nature of the accounts must indeed be of complex nature. That is the primary requirement for directing a special audit. But the word ‘complexity’ used in sub-s. (2A) of the Act is a nebulous word. Its dictionary meaning is: “The state of quality being intricate or complex ‘or’ that is difficult to understand”. However, all that are difficult to understand should not be regarded as complex. What is complex to one may be simple to another. It depends upon one’s level of understanding or comprehension. Sometime, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully. Therefore, special audit should not be directed at a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee.

7. Of course, the CBDT has issued instructions regulating the discretion conferred by sub-s. (2A) of s. 142 of the Act. Instruction No.1076, dt. 12th July, 1977 so far as it is relevant for this case provides: “Subject : Guidelines for selection of cases for audit under s. 142(2A) of the IT Act, 1961. The Board have laid down the following guidelines for selection of cases for audit order s. 142 (2A) of the IT Act, 1961.

2. As regards companies, only those cases are to be referred for special audit where: (i) there are reports of misfeasance, gross neglect or breach of duty on the part of the principal officer or director in relation to the affairs of the company, or (ii) the company’s affairs have been the subject of a search or seizure under the IT Act or have been the subject of a probe under the Foreign Exchange Regulations Act, or (iii) the company has foreign collaboration arrangements, or (iv) where the company’s principal is a foreign company and deduction of head office expenses etc., have been claimed, or (v) where the company has import/export business with an yearly turnover of more than a crore of rupees, or (vi) where the allegations of substantial tax evasion. (vii) where the ITO has any other information necessitating a special audit.

3. As regards non-company assessee, the following cases should be referred for a special audit:

xx xx xx xx

4. While the above guidelines give a broad spectrum of the area of selection, the actual selection should be confined to a few carefully selected cases needing special probe. Further, when a case is referred for special audit for any particular assessment year, it should be desirable if the other intervening years as well as the latest assessment years are also covered. While submitting such cases for approval to the CIT the reasons for selecting the case/cases should be stated.” These guidelines are no doubt binding on the IT authorities. But they should not be construed as a mandate to the authorities for directing special audit in every case falling under those guidelines. If that would be the object then, we must say that they would run counter to the provisions of sub-s. (2A) of s. 142 of the Act. It is, therefore, necessary to observe that the requirements of sub-s. (2A) must first be satisfied in every case with the objective assessment of the accounts of the assessee as to its nature and complexity. Without there being any such finding, special audit ought not to be directed.

8. In the present case, it is not disputed that there was search in the business premises of the company leading to the seizure of voluminous records. The accounts of the company have been scrutinised by the IAC and has formed an opinion as follows: ” The accounts pertaining to the purchase of raw material from various cotton purchase centres maintained by the company, the despatch of cotton to various branches and units of the company, issue of cotton at the receiving centres for manufacturing process, yarn produced and various shortages and wastage in manufacturing process and final coming out of finished products for sale, are most complicated and they require special audit by qualified chartered accountant.”

9. This report has been accepted upon consideration by the Commissioner. Special audit has been directed only in respect of two years, i.e., 1974-75 and 1975-76. The IAC and the Commissioner with due regard to the nature of account books have been satisfied that the accounts of the company are of complex nature and it is necessary in the interests of Revenue that special audit should be conducted. We do not think that there is any arbitrary exercise of the powers. The contention urged for the petitioner is, therefore, rejected.

10. In the result, the petition fails and is dismissed. Petitioner must pay costs of this petition. Advocate’s fee is assessed at Rs. 500.

[Citation : 171 ITR 634]