Allahabad H.C : Submission of audited accounts per se would not oust jurisdiction or authority of Assessing Officer to pass a direction for special audit

High Court Of Allahabad

U.P. Samaj Kalyan Nirman Nigam Ltd. Vs. CIT – II, Lucknow

Assessment Year : 2010-11

Section : 142

Rajiv Sharma And Arvind Kumar Tripathi (Ii), JJ.

Writ Petition No. 3492 Of 2013 (M/B)

May  1, 2013


1. Heard Sri Jaideep Narain Mathur, Senior Advocate, assisted by Sri Neerav Chitravanshi, Sri Anuj Kudesia and Sri Ashish Agarwal, learned Counsel for the petitioner and Sri D.D. Chopra, learned Counsel for the opposite parties.

2. Through the instant writ petition under Article 226 of the Constitution of India, the petitioner prays for following reliefs :

“[A] Issue an order, direction or writ in the nature of certiorari quashing the impugned order 28.03.2013 issued by the Opposite Party No.2 (Annexure No. 1 to this writ petition), whereby opposite party no.3 has been appointed to conduct the audit of the accounts of the petitioner under Section 142 (2A) of the Income Tax Act, 1961 for the Assessment Year 2010-11.

[B] Issue an order, direction or writ in the nature of mandamus commanding the opposite parties not to give effect to the impugned order dated 28.03.2013 issued by the opposite party no.2 (Annexure 1 to this writ petition) and further be pleased to restraint the opposite parties from proceeding further in any manner in pursuance to the impugned order dated 28.03.2013 issued by the Opposite Party No.2 (Annexure 1).

[C] Issue any other appropriate writ, order or direction which the Hon’ble Court may deem just, fit and proper in the facts and circumstances of the case.

[D] Award the costs of the petition to the petitioner.”

Shorn off unnecessary details the facts of the case are as under :

3. The petitioner is a Government Company, registered under Section 617 of the Companies Act, 1956. The entire paid up share capital is held by the Government of Uttar Pradesh. The object of the petitioner’s company is to promote the interest of the members of the Scheduled Caste and Scheduled Tribes or Backward Classes and schemes connected therewith and accordingly, the income arising from that activity is exempted under Section 10 (26B) of the Income Tax Act, 1961 [hereinafter referred to as the “Act”]

4. The books of accounts of the petitioner are audited by the statutory auditors duly appointed by the Comptroller & Auditor General of India as well as Accountant General, U.P. It is submitted that for the year 2009-2010, accounts were audited and on the basis of the said audited accounts, the report was filed as per provisions of the Income-tax Act.

5. Admittedly, the petitioner is filing its Income Tax Returns regularly from the time it came into existence alongwith the audited balance sheet, profit and loss account as well as the audit report. The assessment proceedings upto the assessment year 2009-10 were completed and account books were duly accepted but while going through the account books as well as the reports of the Comptroller & Auditor General of India and the Accountant General and the auditor’s report submitted by M/s Dubey Pandey & Company Chartered Accountants, Lucknow, during the assessment proceedings for the Assessment Year 2010-11, the Assessment Officer noticed certain discrepancies which are complex in nature and not understandable and as such, the Assessing Authority after obtaining necessary approval from the competent authority, issued a show cause notice under Section 142 (2) (A) of the Act for appointment of a Special Auditor for examining the books of accounts to which reply was tendered, but the reply so tendered was not found satisfactory and as such, orders were passed for appointment of a Special Auditor to audit the accounts books of the petitioner by M/s Mahendra Kumar Satya & Company, Chartered Accountants, 4th Floor, Sri Ram Tower, Ashok marg, Lucknow, which in turn was directed to furnish a report of such audit in the prescribed form duly signed and verified by the Chartered Accountant. Being aggrieved by the said order, the instant writ petition has been filed.

6. Mr. Jaideep Narain Mathur, Senior Advocate, appearing on behalf of the petitioner submits that the accounts which are maintained are not complex or not understandable. There is no basis for justification to get the same audited in exercise of the powers conferred under Section 142(2A) of the Act. Next he submitted that the impugned order dated 28.3.2013 passed under the aforesaid provisions of the Act reflects non-application of mind as the formation of opinion of the Assessing Authority must be objective and not subjective satisfaction.

7. Elaborating his submission, Sri Mathur submits that since prior to ordering the special audit and obtaining approval from Commissioner, Income Tax (opposite party No.1), the petitioner ought to have given an opportunity as per law but no such opportunity was given to the petitioner. Thus, the impugned order is liable to be set-aside. To strengthen his aforesaid arguments, Mr. Mathur has relied upon the cases of Rajesh Kumar v. Dy CIT [2006] 287 ITR 91/157 Taxman 168 (SC) and Sahara India (Firm) v. CIT, Central-I [2008] 300 ITR 403/169 Taxman 328 (SC).

8. Refuting the assertion of the petitioner, Mr. D.D. Chopra, learned Counsel for the opposite parties submits that the order for special audit has been passed on the grounds that (i) the assessee has not charged percentage @ 12.5% in its many of its projects; (ii) the value of work done differs in the two audit reports furnish by the assessee; (iii) during the year, the assessee has changed the accounting policy from accrual basis to cash basis in respect of interest earned on bank deposits; and (iv) the accounts have not been prepared as per AS-7 (revised).

9. On the strength of the decisions rendered in U.P. State Industrial Development Corpn. Ltd. v. Chief CIT [2011] 203 Taxman 337/15 65 (All.), Uttaranchal Welfare Society v. CIT [2004] 141 Taxman 560 and Rajesh Kumar Prop. Surya Trading v. Dy CIT [2005] 144 Taxman 865 (Delhi)], it has been contended that after considering the assessee’s submission in response to show cause notice under Section 142(2A) of the Act as well as documents, it was found that all the replies and documents were not satisfactory and as such, the Assessing Authority has formed an opinion that accounts of the assessee being complex in nature as well as not understandable and as such it does not reflect correct income, which may result in loss of revenue and accordingly, ordered special audit under Section 142 (2A) of the Act after obtaining necessary approval from the Commissioner, Income Tax, Lucknow. Thus, the writ petition is liable to be dismissed.

10. Before dealing with the rival submissions, we would like to mention that it is a settled principle of law that while exercising its jurisdiction under Art. 226 of the Constitution of India, this Court does not sit as a Court of appeal and a patent illegality or lack of inherent jurisdiction in passing the impugned action/letter would be a limited ground for invoking the jurisdiction of this Court.

11. Having heard Counsel for petitioner at great length as well as examining the facts and circumstances of the present case, we are of the considered view that impugned order dated 28.3.2013 does not suffer from a patent illegality or inherent lack of jurisdiction on the part of the Assessing Officer.

12. There cannot be any dispute to the proposition that the competent authority under the provisions of the Act is vested with power to direct special audit, provided the conditions and requirements of Section 142 (2A) of the Act are satisfied. The provisions of this section contemplate that at any stage of the proceedings, the Assessing Officer having regard to the nature and complexity of accounts of the assessee and interest of the Revenue, is of the opinion that it is necessary to do so, he may with the previous approval of the specified authority direct the assessee to get accounts audited by an accountant defined in Explanation below Section 288(2) of the Act. The discretion vested in the Assessing Officer, thus, is a wider magnitude and of course has to be exercised in consonance with the provisions of the section, keeping in view the facts and circumstances of the case.

13. In the case of Gurunanak Enterprises v. CIT [2003] 259 ITR 637/130 Taxman 23 (Delhi), the Division Bench of the Hon’ble Delhi High Court has held as under :

“A bare perusal of the provision would show that the opinion of the AO has to be formed only by having regard to : (i) the nature and complexity of the accounts of the assessee; and (ii) the interests of the Revenue. The word ‘and’ signifies conjunction and not disjunction. In other words, the twin conditions of ‘nature and complexity of the accounts’ and ‘the interests of the Revenue’ are the pre-requisites for exercise of power under s. 142(2A). Although the object behind enacting the said provision is to assist the AO in framing the assessment when he finds the accounts of the assessee to be complex and is to protect the interest of the Revenue recourse to the said provision cannot be held by the AO merely to shift his responsibility of scrutinising the accounts of an assessee to determine his true and correct income, on to an auditor. True that an order under the said provision cannot be passed on the ipse dixit of the AO merely because he finds some difficulty in understanding the accounts. There has to be a genuine and honest attempt on his part to understand the accounts of the assessee, appreciate the entries therein and if in doubt, seek explanation from the assessee or his representative, rather than pass on the buck to the special auditor. A cursory look at the books of account is not sufficient. It needs little emphasis that the opinion required to be formed by the AO for exercise of power under s. 142(2A) must be based on objective consideration and not on the basis of subjective satisfaction.”

14. In another case of Ramesh Chand Industries Ltd. v. Union of India [1998] 100 Taxman 570 (Del), the Division Bench of the Hon’ble Delhi High Court has held as under :

“A bare reading of the provision shows that all that is required for initiation of special audit is formation of the opinion that it is necessary so to do depending on the availability of the abovesaid two facts. The provision does not use the words ‘reason to believe’. Recording of reasons is not an essential requirement of the provision. The AO must obtain previous approval of the Chief CIT or the CIT. The intervention of such a high ranking authority is an in-built protection to the assessee again any arbitrary or unjust exercise of the power by the AO. It is not the case of the petitioner that such previous approval of the Chief CIT or the CIT has not been obtained. There is no allegation of mala fide. This Court would not in exercise of its writ jurisdiction sit in appeal over the formation of the opinion by the AO.”

15. Reference in this regard can also be made to the case of Super Cassettes Industries Ltd. v. Asstt. CIT [1999] 102 Taxman 202 (Delhi), which reads as under :

“8. In Abhay Kumar and Co.’s case (supra) validity of s. 44AB and s. 271B of the Act was under challenge. The learned Judge also interpreted s. 44AB. The emphasis was on the question whether this section was applicable to commission agents or not. The petitioners therein were commission agents. During the course of this judgment, the learned Judge had observed :

‘The assessee is not put to double jeopardy in having to get his accounts audited once under s. 142(2A) and again under s. 44AB. In fact, s. 142(2A) was a dormant provision which was to be invoked in a given situation that has been made explicit by incorporating the same in s. 44AB. The two provisions are consistent.’

8.1 In our opinion, even this observation does not advance the petitioner’s case before us. The learned Judge has held the two provisions to be consistent and not hit by the rule of double jeopardy. The specific object behind enacting sub-s. (2A) into s. 142 is to assist the AO in framing an assessment when he finds the accounts of the assessee to be complex, by having the services of a special auditor at hand. Special audit can also be ordered so as to protect the interest of the Revenue. Such objects may or may not be achieved by the audit contemplated by s. 44AB.”

The above enunciated principle clearly shows that there has to be objective consideration and application of mind by the Assessing Officer, based upon the material and proper examination of the books of account produced by the assessee, before a direction, as contemplated under Section 142(2A), can be issued to the assessee. In the present case, during pendency of the assessment proceedings, the reply filed by the assessee was found to be unsatisfactory. After examination of the books of account and the documents, the Assessing Officer was of the opinion that it would be in the interest of Revenue to direct special audit under the provisions of the Act. The contention raised before us is that there is no application of mind and no reasons have been provided in the impugned direction by the Assessing Officer. We find no merit in this contention. Before passing the impugned direction, the Assessing Officer had issued a detailed questionnaire under Section 142 (1) of the Act to the petitioner requiring him to furnish the details, to which the petitioner has furnished the reply dated 16.1.2013. Thereafter, not being satisfied with the reply so tendered by the petitioner, a show cause notice was issued to the petitioner on 25.2.2013, to which the petitioner again submitted his reply dated 7.3.2013 on 8.3.2013 but the reply so tendered was found unsatisfactory and as such, the Assessing Officer formed an opinion that it is necessary in interest of Revenue a proposal for special audit under Section 142 (2A) is being sent to Commissioner, Income Tax, Lucknow. The order dated 14.3.2013 is reproduced as under :

“Assessee’s reply dated 7.3.2013 to show cause notice under Section 142 (2A) & other replies & documents filed by assessee are examined but not found satisfactory. The basis of charging centage from 0 to 12.5% is not clear. It is also not clear that revenue has been recognized by the assessee as per AS-7 (revised). As per AS-7 (revised) revenue from contract work should be recognized on the basis of percentage of completion method, however it appears that assessee has recognized revenue on deposit work as cost plus centage charges. Further, assessee has also charged method of accounting in respect of interest income.

Having regard to the nature and complexity of assessee’s accounts and considering it necessary in interest of revenue a proposal for special audit under Section 142 (2A) is being sent to CIT-II, through proper channel for kind approval.”

16. On receipt of the said proposal, the Commissioner had approved the proposal of the Assessing Officer and remitted the same to the Assessing Officer. Thereafter, impugned order was issued for special audit. In these circumstances, we cannot hold that there was no application of mind by the concerned officer before issuing the impugned direction.

17. We also find no merit in the contention raised on behalf of the petitioner that the expression ‘accounts of the assessee’ can only refer to the books of account of the assessee and not the other records available before the Assessing Officer for examination or otherwise. The complexity of accounts of the assessee is to be determined not only by the books of account, but even by other documents which are available, in the course of an assessment and at any stage subsequent thereto may become available to the Assessing Officer. To give a narrow meaning to the expression ‘accounts’ so as to confine it to the books of account, submitted by the assessee simplicitor, would amount to giving an interpretation which would completely defeat the very object of the section. The mere fact that the petitioner has submitted audited account and, therefore, there is no occasion for directing special audit, is also of no help to the petitioner. Submission of audited accounts per se would not oust the jurisdiction or authority of the Assessing Officer to pass such a direction. Of course, he is expected to issue directions after due application of mind and in accordance with the principles aforenarrated. The Assessing Officer, while applying his mind, to the facts and circumstances of the case, need not confine himself only to the books of account submitted by the assessee, but can take into consideration such other documents related thereto and which would be part of the assessment proceedings. In the case at hand, the books of account as well as other records have rightly been considered by the Assessing Officer before issuing the impugned direction.

18. In Rajesh Kumar (supra), two sets of accounts were maintained by the assessee and it is only on the basis of the aforesaid facts, provisions of Section 142 (2A) were invoked and as such, the Apex court has held that merely for maintaining two sets of accounts will not arrive at a conclusion that the accounts so maintained are difficult to understand.

19. In Sahara India (Firm) (supra), the Apex Court held that no notice was issued while referring the matter to the Special Auditor and as such, there is a violation of principle of natural justice.

20. The facts of the aforesaid cases are not applicable in the instant case, insofar as discrepancies in maintaining the accounts have been pointed by statutory Auditor appointed by the Comptroller & Auditor General of India vide his report dated 9.2.2011. Para-4 of the said report dated 9.2.2011 is produced as under :

“(i) Figure of Sundry Debtors, Sundry Creditors (Including head “Interest on unutilized funds”), Loans and Advances (Including Advance Income Tax, TDS, Service Tax & VAT). Account of U.P. Government, Security (TDR) in hand, Balance in PLA in Lucknow Treasury, Advances (Client) and other liabilities are subject to confirmation, reconciliation and consequent adjustment, if any.

(Refer Note No. 1.00, 7.00 & 19.00 of ‘Notes on accounts’)

While making adjustments in Client Account with related WIP A/c, the Company came out with certain Client Heads where recovery was assessed as not possible. Therefore, an amount of Rs.13,35,702.59 (Prev. Yr. Rs.65,74,193.19) has been provided for as Bad & Doubtful Debts during the year.

(ii) No effect has been taken in the financial statement on account of shortage/excess which may arise after checking of consumption statement for the year 2009-10 and in respect of certain units for earlier years-Amount unascertained. The system of preparing consumption statements of Individual Deposit Works carried out by the Company allows giving accounting effect, if any, towards recoveries to be made from various concerned staff of the units. Any delay in preparing/checking these consumption statements and any legal issues arising there-from causing undue delay in realizing dues from concerning staff, affects recoverability of the said amounts. A sum of Rs.NIL (Prev. Yr. Rs.18,60,740.04) has been provided for/written off as Bad & Doubtful Debts on this account during the year.

(Refer Note No. 11.00, 24.00 & 29.00 of ‘Notes of accounts’).

(iii) Interest on investment out of unutilized government funds has been treated as funds received from government and the same is partly disclosed as ‘Current Liabilities’ and remaining taken to profit & loss account as ‘Other Income’. Since interest accrued on funds employed by the company out of its own resources and that of unutilized government funds has not been separately identified, the company has, as a consistent practice since earlier years, bifurcated interest on fixed deposits with banks and interest on saving accounts maintained at head office on the basis of formula adopted by it.

(Refer Policy No. 4.00 of ‘Accounting Policies’ & Note No. 12.00 of ‘Notes on accounts.)

Due to non-availability, the Company was unable to provide GO dated 04.12.1993 or any amendments thereto and in the absence of the same, we are unable to comment on the formula adopted by the Company for bifurcation of interest earned at HO between ‘Current Liabilities’ and ‘Other Income’ and also interest earned at Units.

Further, this unconfirmed/reconciled balance of Rs.4039.82 Lacs (Prev. Yr. Rs.3407.82 Lacs) under the heading “Interest on unutilized fund” shown as liability to Govt. in the books of the Company is though accrued but not crystallized as ownership is not confirmed as yet. Pending crystallization of fund, it is yet to be decided and correctly classified either as “Short Term Fund” or “Long Term Loan Fund” liability from the State Govt.

(iv) The Company receives funds from clients for execution of various construction repair works. While funds received are credited in a separate account, the expenses incurred against it are shown as work-in-progress. The Company has, during the year, carried out an exercise and based on the same WIP to the extent of Rs.492.17 Cr. (Prev. Yr. Rs.345.12 Cr.) has been adjusted from Client account through Policy decision in this regard.

It has been explained to us that during the year under audit the company has followed the system of adjustment of funds received against a project with the corresponding work in progress on the basis of internal documentation in respect of projects where completion certificate has not been received from the clients.

Further, however, on the basis of information and explanation furnished to us, whereas some adjustments have been done during the year few adjustments have not been done for want of relevant information. Pending adjustments have resulted in overstatement of the figure of work in progress Rs.90,006.05 Lacs (Prev. Yr. Rs.1,30,195.79 Lacs). The amount of such overstatement have not been determined and disclosed by the company.

(v) We would like to draw attention to ‘Accounting Policy No. 7.00’ which deviates from the Basic Accounting Principles to be strictly on “Accrual Concept” than on “Hybrid Concept”;

Further, there is a change in accounting policy in respect of accounting of “Interest earned on Saving Bank Accounts” from accrual basis to cash basis. According to the Corporation, the same has been done for practical purposes. Net profit has been understated by Rs.1,18,01,436.00 (Prev. Yr. NIL)

(Refer significant accounting Policy No. 7.04 & Notes on account No. 23.00)

There is another change in policy in accounting for VAT refundable from Commercial Tax Authorities as per Annual Returns & VAT Audit Reports of the Units. The Corporation has not accounted for the same as refund receivable and simultaneously no credit has been given to the respective clients account. Therefore, Current Assets (VAT Refund Receivable) as well as Current Liabilities (Client Account) are understated by Rs.20,27,371.00 (Prev. Yr. NIL).”

Thus, from perusal of the above report, it reflects that Auditor have pointed out many infirmities in the Assessee’s acccount. In Purvanchal Vidyut Vitran Nigam Ltd. v. Union of India [2010] 329 ITR 508/188 Taxman 355 (All.), it has been held that the object behind enacting Section 142 (2A) is to assessed the assessing officer in framing a correct and proper assessment based on the accounts maintained by the assessee and when the assessing officer finds the accounts of the assessee to be complex, in order to protect the interest of the revenue. Further it was held that where the opportunity has been given to the assessee and their proper reason for framing the opinion that the nature of the accounts is complex and in the interest of the revenue, special audit is necessary and the direction for special audit cannot be said to be without material and the approval granted by the Commissioner of Income Tax cannot be said to be mechanical and without application of mind. Furthermore, the proceedings under Section 142 (2A) of the Act is not strictly a judicial proceeding and, therefore, the elaborate reasoning is not required to be given. In the instant case, notice issued to the petitioner has contained issues in brief, which the Assessing Officer thinks to be necessary and the reasons assigned therein is perfectly justified and opportunity has also been provided to the petitioner prior to impugned order. Moreover, the ingredients of Section 142 (2A) of the Act are that the Assessing Authority must form an opinion with regard to the nature and complexity of the accounts, which has been done. Therefore, the case laws relied upon by the petitioner’s counsel are not applicable in the instant case.

21. We see no merit in this writ petition and the same is dismissed accordingly at the admission stage itself.

No order as to costs.

[Citation : 357 ITR 12]

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