Allahabad H.C : the learned Addl. CIT has issued a show-cause notice for conducting for special audit under s. 142(2A) of the IT Act

High Court Of Allahabad

Purvanchal Vidyut Vitran Nigam Ltd. vs. Union Of India & Ors.

Section 142(2A)

Asst. Year 2007-08

Rajes Kumar & S.C. Nigam, JJ.

Civil Misc. Writ Petn. No. 71 of 2010

10th February, 2010

Counsel Appeared :

S.D. Singh , for the Petitioner : Shambhu Chopra, for the Respondents

JUDGMENT

Rajes Kumar, J. :

By means of the present petition the petitioner is seeking the following relief : “(I) a writ, order or direction in the nature of certiorari and to quash the order dt. 31st Dec., 2009 passed by the Addl. CIT, Range-2, Varanasi (Annex. 1 to this writ petition) and also the order dt. 31st Dec., 2009 passed by the CIT, Varanasi (Annex. No. 2 to the writ petition) for special audit of the petitioner’s accounts for asst. yr. 2007-08 and to further direct the learned Addl. CIT, Varanasi to complete the petitioner’s assessment for asst. yr. 2007-08 on the basis of the provisional balance sheet already submitted by the petitioner.”

The brief facts giving rise to the present writ petition are as follows. The petitioner is a subsidiary company of U.P. Power Corporation Ltd. The company was known as UPPCL from 14/15th Jan., 2000 till 11th Aug., 2003 and w.e.f. 12th Aug., 2003 UPPCL was converted as holding company of its subsidiary company, viz. M/s Purvanchal Vidyut Vitran Nigam Ltd., Pachchimanchal Vidyut Vitran Nigam Ltd., Madhyanchal Vidyut Vitran Nigam Ltd. and Dakshinanchal Vidyut Vitran Nigam Ltd.

The petitioner is a Government public limited company engaged in the business of distribution of electricity, construction of lines and service provided to the consumers. Under the provision of s. 619(2) of the Companies Act, 1956 (called the ‘Companies Act’ for short) the petitioner is required to get its annual accounts audited by the office of the Comptroller and Auditor General of India (hereinafter referred to ‘C&AG’). Admittedly, for the assessment year in dispute, viz. 2007-08, the petitioner could not get its accounts audited under s. 619(2) of the IT Act (called the ‘Act’ for brevity). It is the case of the petitioner that since the statutory audit under s. 619(2) of the Act could not be made, the petitioner appointed a private auditor and got its accounts audited on the basis of the provisional balance sheets and P&L a/c and on the basis of such audited reports the petitioner submitted return on 31st Oct., 2009 declaring the total loss of Rs. 11,51,99,56,110. The assessment case for the year under consideration was selected for scrutiny assessment and, accordingly, a notice under s. 143 of the Act was issued by the Addl. CIT, Varanasi. It appears that during the course of hearing the assessing authority issued notice dt. 22nd Dec., 2009 to the petitioner to show cause why a special audit be not carried out in your case to arrive at a correct figure of total income/loss of the assessee looking to the nature and complicity of the account. The contents of the notice are as follows : “Confidential Government of India Office of the Addl. CIT, Range-2, VaranasiNo. AADCP4092M/ADCIT/R-2/09-10 Dated: 22.11.2009 The Principal Officer/Managing

Director/Competent Authority M/s Purvanchal Vidyut Vitran Nigam Ltd. Vidyut Nagar Post, DLW, Bhikharipur, Varanasi. Sub : Assessment proceedings for asst. yr. 2007-08 : regarding Please refer to the above. During the course of hearing under s. 143(3) of the IT Act in your case following notices were issued but by and large no compliance was made : Sl. No. Notice Date of Remarks hearing 143(2) dt. 24.09.2008 and 11.10.2008 .Non-compliance 115WE(2) 24.9.2008 142(1) dt. 20.01.2009 29.01.2009 Non-compliance Show-cause notice under s. 20.02.2009 Part compliance 271(1)(b) dt. 11.02.2009 142(1) dt. 11.02.2009 20.02.2009 Power of attorney submitted. Asked to provide audited final accounts, tax audit report and notes to the account 142(1) dt. 2.12.2009 9.12.2009 Part compliance by Sri O.P.Shukla submitted coply of P/L a/c and balance sheet etc. Case was partly discussed, details as desired were informed. 142(1) & 115WE(2) dt. 18.12.2009 Requested for adjournment. Case 15.12.2009 re-fixed on 21.12.2009. ——— 21.12.2009 Furnished part details.

During the course of assessment proceedings as stated above Sri O.P. Shukla, attended and submitted photocopy of Form 3CB, Form 3CD and provisional balance sheet as at 31st March, 2007. As per the computation of income the assessee has incurred losses to the tune of Rs. 11,51,99,56,110. It is to be pointed out that the auditors have mentioned in Form 3CB that “we have examined the provisional balance sheet as on 31st March, 2007 and the provisional P&L a/c for the year ended …………” It is also stated that the financial statements are the responsibility of the company’s management. Our responsibility to express an opinion on these financial statements based on our audit. It was further stated that the figures of the financial statements are provisional. Audit as required under the Companies Act, 1956 has not been conducted for the relevant financial year.

It is further seen that cash in hand have been shown at a negative figure of Rs. 52,30,50,115 for which no sufficient reason on record. It is not possible to have a negative cash balance. The auditors have also pointed out that irregularity in depositing TDS has been observed.

As it may be seen from the earlier chart that no proper compliance has been made to produce the books of accounts and other details as asked earlier and also informed to the representative of assessee as well as looking to the facts that the accounts are not audited and hence the final results as mentioned in the provisionally audited accounts are not acceptable and also looking to the observation by the auditors the correct position of loss cannot be determined, you are hereby given a notice in compliance to the provisions of s. 142(2A) of the IT Act to show cause that why not a special audit be carried out in your case to arrive at a correct figure of total income/loss of the assessee, looking to the nature and complexity of the accounts. You are hereby requested to submit your compliance latest by 29th Dec., 2009 by 3.30 P.M. at my office, failing which it may be presumed that you have no explanation to offer and you are in agreement with the proposal of undersigned for special audit under s. 142(2A) of the IT Act. Notice under s. 142(1) of the IT Act is also enclosed for the compliance of details asked earlier and production of books of account along with bills and vouchers. (Sandeep Jain) Encl : As above.” Addl. CIT, Range-2, Varanasi.

5. The petitioner filed reply to the show-cause notice on 29th Dec., 2009 of the various queries being made in the notice. The contents of the reply are as follows :

“Show-cause notice under s. 142(2A) for special audit :

(a) That the learned Addl. CIT has issued a show-cause notice for conducting for special audit under s. 142(2A) of the IT Act. It is hereby submitted that as abovementioned the assessee company is Government organization and all the receipts and expenses has been incurred on day-to-day business and prior approval of its respective authority.

(b) That assessee company has filed return declaring total loss during the year to the tune of the Rs. 11,51,99,56,110 and the auditor has finalized the balance sheet along with tax audit report under s. 44AB of the IT Act and submitted tax audit report in Form No. 3CB. We would like to draw your kind attention that the auditor has not made audit as required as per Companies Act, 1956 and as report submitted the auditor provisionally due to the statutory obligation is required for submit the return of income. (c) That as per the your letter dt. 22nd Dec., 2009 as mentioned that you have only issued notice and fixed the date for compliance for 6 times and as mentioned the notices issued by your goodself have not been served on the assessee company properly. It has observed above that the notices served on the assessee company properly. It has observed above that the notices served on the assessee company after closing of our office after at 5:00 PM or on the date on which hearing was fixed which can verifiy the notice received and annexed thereof. (d) It is crystal clear that the assessee’s company has already expressed its inability to furnish the audited accounts by the statutory auditor and has submitted the return of income within stipulated time-limit under s. 139(1) of the IT Act. (e) That you have made query on 9th Dec., 2009 through order sheet entry on the request of assessee’s counsel and the

compliances of your query has already been done on 18th Dec., 2009/21st Dec., 2009 and assessee is able to reconcile the negative cash in hand and you can easily verify from the negative cash balance without any show- cause notice under s. 142(2A) and arrive at a correct figure of cash in hand hence there are no complexity to reconcile the cash in hand; it may be easily verifiy and reconciled by the assessee company and there is no need to appoint a special auditor and expend huge amount as per the r. 14B(2) of the IT Rules, we would like to draw your kind attention that w.e.f. 1st June, 2007 all the expenses incurred by the IT Department and will pay the amount of minimum Rs. 3,750 per hour and maximum Rs. 7,500. As per the Act maximum six months will be available to the auditor to complete the audit and we observe that if the minimum one month is taken to complete the audit the minimum 240 hours will be engaged and minimum Rs. 9 lacs will be payable to the auditor. The assessee’s company is suffering huge losses and total accumulated loss as on 31st March, 2009 is Rs.

42,20,94,15,577 and no revenue will be received from the such special audit under s. 142(2A) of the IT Act. Hence on the basis of the such issue that the negative cash balance has been shown and account is provisional no notice under s. 142(2A) may kindly be issued in the interest of justice. (f) That the assessee company has already disclosed the accurate income from sale of power, accurate expenditure from purchase of power, electricity duty received and payable to the Government, loan received from the Government organization and paid within time the expenses incurred under the head repair and maintenance, employees cost, administrative expenses and general expenses and are fully vouched four zones and four divisions and about one thousand sub- units and power stations it is a huge tambu of electricity division and it is not possible for any person to produce the bills and vouchers once in a time as required by your goodself. All the expenses incurred was fully vouched and paid prior to the approval of the respective authority hence no negative observation and inference may be withdrawn against the assessee company and no any complexity in nature of accounts the details of purchase of power and other relevant details has already been furnished before your goodself on 18th Dec., 2009/21st Dec.,

2009. (g) That the assessee company has claimed depreciation as per the Electricity Act, 1948 @ 7.84 per cent and as per r. 5(1A) of the IT Rules Appendix 1A the depreciation is admissible for assets of an undertaking engaged in the generation and distribution of power, a copy of Appendix 1A is enclosed for your kind perusal. No any rate has coated depreciation has charged under the IT Act. In the assessee’s case the depreciation charged by the assessee company has already been accepted by the IT Department for the asst. yrs. 2004-05 and 2005-06 hence it is a settled law and no adverse inference may be drawn. (h) That before the issue of show-cause notice the reasonable opportunity to the assessee must be provided for hearing of the case in the interest of principles of natural justice. To explain the accounts proper in manner, the CBDT Circular No. 1076, dt. 12th July, 1977, the CBDT has issued instruction/guidelines which are binding on the authority and special auditor can be appointed only the under the following condition— (i) There are reports of missfeasance, gross neglect or breach of duty on the part of principal officer or director in relation to the affairs of the company. (ii) The company’s affairs have been the subject of the search or seizure under the IT Act or been the subject of a prove under the Foreign Exchange Regulation Act. (iii) The company has foreign collaboration arrangement where the company’s principle is a foreign company and deduction of head office expenses etc. have been claimed. (iv) Where the company has export/import with a yearly turnover of more than 1 crore of rupees. (v) Where there are allegations of substantial tax evasion. (vi) Where the ITO has any other information necessitating special audit. It is hereby submitted that the above condition will not be applicable in the assessee company’s case and in view of the various judicial pronouncements the following principle emerged which are kept in mind while exercising the power under s. 142(2A)— (i) The AO should form an opinion that the nature of the accounts of the assessee is complex. (ii) The interest of the Revenue will be adversely affected if the special audit is not directed, the opinion should be formed objectively on the basis of material before him and should be based on relevant consideration. (iii) The Chief CIT or CIT should grant approval to such a proposal after applying all the material placed before him. (iv) The guidelines issued by the CBDT contained in instruction as above are binding on the authority and special auditor can be appointed only if the case falls under any of clause mentioned therein provided the conditions mentioned under s. 142(2A) are fulfilled. (i) That above condition for issue of show- cause notice will not be applicable in the assessee company’s case due to the following reason— (a) That the assessee company has already filed return under s. 139(1) of the IT Act within stipulated time-limits. All the information regarding balance sheet, P&L a/c is already available in data records of online system. The assessee is a company and filed return and signed through digital signature and the AO easily examined balance sheet, P&L a/c after filing the return but since expiry of one year no any query has been issued on the provisional balance and negative cash in hand when the time-limit is came to expiry on 31st Dec., 2009 and only once a weak (including four holidays from 25th to 28th December) in hand for completing the assessment, the learned

AO has issued notice under s. 142(2A) of the IT Act. The assessee’s company is Government body and for the audit it has more limitation all the purchase of power and sale of power and expenses incurred are fully vouched which details already been submitted before the learned Addl. CIT, but the learned AO the facts of the case and only ground that the accounts is the provisional and cash in hand is negative hence we cannot determine the correct position of losses. It is well settled law that even in case to which principal of audi alteram partem is not applicable and legislature has left the matter to the wisdom of the authority, the authority must ensure its action is inspired by reason and not on arbitrary and extraneous consideration. The requirements of reasonableness and fair play are in essences emanates from doctrine of natural justice. (b) That the proper opportunity of the hearing before the issued show-cause notice under s. 142 (2A) has not been given to the assessee company. The assessee company has already submitted the details and information as required by your goodself and explanation on some points is required to explain the issues but learned AO without given any opportunity the negative cash balance and other issue which explanation has already been furnished and without having made any query regarding the explanation on the accounts he has issued shown-cause notice without any reason that the account is nature in complexity though the negative cash balance and reason for the provisional accounts submitted to the IT Department may easily be explained to the authority. In the case of Sahara India (Firm) vs. CIT & Ors. (2008) 216 CTR (SC) 303 : (2008) 7 DTR (SC) 27 : (2008) 300 ITR 403 (SC), Hon’ble Supreme Court has already given finding that the excercise of the power under s. 142(A) leads to serious civil consequences and therefore even in absence of any expression provision for affording an opportunity of pre-opportunity decisional hearing to an assessee and in absence of any express provision in s. 142(2A) barring giving of a reasonable opportunity to an assessee required of observance of principals of natural justice is to be read into said provision, it could not be said that since a post-decisional hearing in terms of subs. (3) of s. 142 is contemplated required of natural justice is fully met.

In the case of Swadeshi Cotton Mills Co. Ltd. vs. CIT (1987) 63 CTR (All) 335 : (1988) 171 ITR 634 (All), the Hon’ble Allahabad High Court has given finding that honest attempt to understand the accounts must first be made. The 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, the power under s. 142(2A) can’t be lightly exercised the satisfaction of the authority should not be subjective satisfaction. It should be based an objective assessment being had to the nature of the accounts must indeed be of a complex nature this is primary requirement for directing of special audit. The expression complexity in s. 142(2A) would mean that the state or quality of being intricate or complex or that is difficult to understand. Difficulty in understanding would however not lead to the conclusion that the accounts are complex in nature. The formation of opinion under s. 142(2A) that the accounts of the assessee is required and expert audit should indisputable be based on objective consideration. No order can be passed on whims or caprice all that is difficult to understand should not be regarded as complex, what is complex ? To one may appear simple to another. It depends upon ones level of understanding or compensation sometimes what appears to be complex on the face of it, may not be really so if one tries to understand it carefully. Therefore the special audit should not be directed on a cursory look at the account there should be an honest attempt to understand the accounts of the assessee. It is hereby mentioned that the learned AO has not made any honest attempt to understand the accounts and issued the show-cause notice only for saving his face and inability for completion of assessment.

In the case of Jhunjhunwala Vanaspati Ltd. vs. Asstt. CIT (2004) 188 CTR (All) 434 : (2004) 266 ITR 657 (All) and in the case of U.P. State Handloom Corporation Ltd. vs. CIT (1988) 69 CTR (All) 195 : (1988) 171 ITR 640 (All) the Hon’ble Allahabad HIgh Court relied on the facts that two sets of accounts were maintained by the assessee it did not mean that the nature of the accounts was difficult to understand and order under s. 142(2A) could not be made on that sole basis.

It is hereby mentioned that the special audit cannot be ordered merely because the cash in hand is negative. That it is hereby submitted that mere facts that the negative cash in hand can be reconciled by the auditor could not be a justification to order special audit of the accounts of the assessee which is a State public sector undertaking and whose accounts have been audited by the statutory auditors. An audit places a heavy burden on the person whose accounts are to be audited particularly on an origination like the assessee. Its employees and officer will have to assist the auditor who has to dig out the old records for the purpose. The assessee company has already explained negative cash in hand as per Annex. A and the learned AO can easily understand the accounts before formation

of opinion. It is not difficult to understand the reason for the negative cash balance and reconciliation furnished by the assessee.”

6. On the consideration of the aforesaid reply the assessing authority has passed the order dt. 31st Dec., 2009 under s. 142(2A) of the Act and directed for the special audit under s. 142(2A) of the Act. The reasons are as follows : “Office of the Addl. CIT, Range 2, Varanasi F.No. Addl. CIT/R-2/Vns/142(2A)/PVVNL/2009-10 dt.

31st Dec., 2009 To The Principal Officer/MD, M/s Purvanchal Vidyut Vitaran Nigam Ltd., Vidyut Nagar, P.O. DLW, Varanasi. Sir, Sub: Assessment proceedings under s. 143(3)-special audit under s. 142(2A) of the IT Act,

1961 in the case of M/S Purvanchal Vidyut Vitran Nigam Ltd. for the asst. yr. 2007-08. Please refer to the subject cited above.

2. During the course of assessment proceedings for the asst. yr. 2007-08, it has been noticed that final accounts i.e. balance sheet and P&L a/c are provisional as per the report of the auditor, carrying out the tax audit as submitted before me. On perusal of the said provisional audited accounts as carried out by the auditors M/s Jamuna Shukla & Associates following points have been noticed/qualified— (a) As per Form No. 3CB of the said audit report, it has been mentioned that,

We have examined the provisional balance sheet as at 31st March, 2007 and the provisional P&L a/c for the year ended on the date, attached herewith of Purvanchal Vidyut Vitran Nigam Ltd., Vidyut Nagar, P.O., DLW, Varanasi permanent account No. AADCP4092M” It was further clarified by the auditors that the figures of the financial statements are provisional. (b) In Form No. 3CD, against Column No. 12(a), the auditor has made following comments— ‘No inventory is maintained by the company except for the stores, materials required for maintenance of lines and sub-stations. Such stores materials are valued at established.’ (c) Against Column 17(k), it has been mentioned by the auditor that, ‘the balance sheet and P&L a/c are provisional, no contingent liability has been stated.’ (d) Against Column 21(1), the auditor has mentioned that, ‘In respect of electricity duty payable to UP Government and interest on secured loans provided for during the year, such liabilities have been transferred to the holding company, the UPPCL, as such the status of the payment or otherwise rest with the holding company.’ (e) Against Column 27(a), the comment of auditor is as under : ‘We have verified the compliance with the provisions of Chapter XVII-B regarding the deduction of tax at source and regarding the payment thereof to the credit of Central Government in accordance with the auditing standards generally accepted in India which include test checks and the concept of materiality. Various non-compliance were observed, however the same cannot be given due to non-availability of sufficient information.’ (f) It is worthy to mention that the details of unit trading has not been quantified by the auditors in their report. (g) It was further observed that as per the Sch. ’10’ of provisional balance sheet. ‘loans and advances’ there is negative figure of (-) Rs. 3,61,17,059 as on 31st March, 2007. As per the narrations mentioned in Sch. ’10’ of the unsecured advances to the tune of Rs. 3,57,44,435 is also shown as negative balance. (h) In Sch. “11” of balance sheet, current liabilities to the tune of Rs. 19,95,03,431 has been shown as electricity duty and other levies payable to the Government and no further proof has been mentioned there. Similarly, other liabilities and payable amounts to UPPCL may also attract the provisions of s. 43B. (i) The net amount of prior period income/expenditure has been shown for an amount of Rs. 1,59,59,646 and the provision of bad/doubtful debts has been made against the revenue from sale of power 5 per cent on the incremental basis. (j) As per Sch.

“8” of balance sheet, Rs. 52,30,50,115 has been shown negative balance as cash in hand. (k) It was also observed that how and why the consumer contribution be treated as capital receipt and capitalized accordingly. 3. Looking to the above- mentioned qualifications as well as acknowledging the fact that the P&L a/c and balance sheet are provisionally audited, the assessee was provided an opportunity of being heard in view of proviso to s. 142(2A) of the IT Act, 1961. The Authorised Representative, Shri. O.P. Shukla advocate attended in response to the said notice and submitted his detailed reply vide letter dt. 29th Dec., 2009. However, books of accounts were not produced for verification, details of TDS etc. have also not been submitted in the light of the observation of the auditor. A further opportunity was provided to the Authorised Representative of the assessee on his request on 30th Dec., 2009 wherein he has submitted his written reply dt. 30th Dec., 2009 along with its enclosures, however, no books of account produced.

In its reply, it was conceded by the assessee that the provisional P&L a/c and balance sheet have been filed because, the statutory auditor appointed under s. 619(2) of the Companies Act, by the office of the C&AG of India, has not completed the audit till date. However, the assessee company has already provided the relevant documents yet, the statutory auditor has not provided the signed copy of the balance sheet and P&L a/c till date, therefore, the assessee company is unable to submit the balance sheet along with tax audit report and the delay is on the part of the statutory auditor.

It is further noteworthy to mention that in the earlier years also, while submitting the return of income the provisional balance sheet were submitted. However, now a copy of balance sheet as on 31st March, 2006 (asst. yr. 2006-07) duly signed by the statutory auditor M/s M.B. Gabhawala on 12th Feb., 2009 has been furnished where the loss as per P&L a/c as on 31st March, 2006 has been worked out to Rs. 6,03,89,57,805 against the returned loss for the asst. yr. 2006-07 as per provisional balance sheet and P&L a/c of Rs. 13,57,43,92,601. This shall have cascading effect in the balance sheet and P&L a/c for the current year also. This clearly indicates that there is huge difference in losses between loss shown in the final audited account and provisional P&L a/c and balance sheet for the asst. yr. 2006-07 running into Rs. 753.54 crores. Full reconciliation of the negative cash balance is also not submitted as there is a difference of approximately Rs. 49 lakhs even after going through submissions given before me.

In this scenario, the financial results shown in the provisional accounts are not presenting true and correct figure of the assessable loss under the IT Act, 1961. Looking to the above complexities and in order to safeguard the interest of Revenue it is necessary that special audit under s. 142 (2A) of the IT Act, 1961 be carried out.

After considering the reply of the assessee, making an honest attempt to understand the submissions, and providing reasonable opportunity, I am of the opinion that it is necessary to direct the assessee to get accounts audited looking to the nature and complexities of the accounts and in the interest of Revenue. Therefore, after obtaining prior approval of the learned CIT, Varanasi, as communicated vide letter F. No. CIT/VNS/Spl. Audit/2009-10, dt. 31st Dec., 2009, I hereby direct the assessee company to carry out the audit under s. 142(2A) of the IT Act, 1961 as mentioned above from Shri V.K. Jindal of M/s V.K. Jindal & Company, Chartered Accountants, D-53/118-B, Plot No. 11, Kaliya Nagar (Near Peshwanibag), Rathyatra Crossing, Varanasi, as nominated by the CIT, Varanasi. The assessee shall submit his audit report and details after getting it conducted by 30th April, 2010.

9. The assessee is requested to extend its full cooperation by production of books of accounts and relevant bills and vouchers and other documents to the auditors appointed, so that compliance can be made properly. Sd/

31st Dec., 2009 (Sandeep Jain) Even No. of date Addl. CIT, Range-2, Varanasi. (1) Copy to the learned CIT, Varanasi with reference to his letter F. No. CIT/Vns/Spl. Audit/200910, dt. 31st Dec., 2009 for favour of kind information. (2) Copy to M/s V.K. Jindal & Company, Chartered Accountants, D-53/118-B, Plot No. 11, Kaliya Nagar (Near Peshwanibag), Rathyatra Crossing, Varanasi with a request to carry out such audit, as directed and also to submit as follows :

(i) to find out the correct and true affairs in the form of drawing P&L a/c and balance sheet, so that exact profit/loss assessable as per IT Act can be quantified.

(ii) Prepare correct cash flow to ascertain the reason for such negative cash balance/and reconciliation thereof.

(iii) Any lapse of the assessee with respect to the non-deduction and non-payment of TDS, specially with respect to the expenditure, here the provisions of s. 40(a)(ia) is applicable.

(iv) To examine the capital receipts as discussed above.

(v) To examine the purchase and sale of units along with expenditure incurred by the assessee after examining the books of accounts/bills/vouchers or other records / documents. He should contact assessee and make effort to complete the desired audit within stipulated time. Sd/31st Dec., 2009 (Sandeep Jain)” Heard Sri S.D. Singh, learned counsel for the petitioner, and Sri Shambhu Chopra appearing on behalf of the respondents.

Learned counsel for the petitioner submitted that, admittedly, the petitioner could not get its annual accounts audited for the asst. yr. 2007-08 under s. 619 of the Companies Act. On the basis of the books of accounts the petitioner has prepared provisional balance sheet and P&L a/c and on the basis of the provisional balance sheet and P&L a/c the books of accounts were got audited through the private auditor, viz. M/s Jamuna Shukla & Associates under s. 44AB of the IT Act and submitted the return on the basis of the said audit report showing the loss of about Rs. 11.5 Arabs (Rs. 11,51,99,56,110). He submitted that the loss has been disclosed in the return on the basis of the entries in the books of accounts. He submitted that each and every detail furnished in the P&L a/c and the balance sheet are verifiable from the books of accounts, but the assessing authority without making sincere effort in getting the entries verified from the books of accounts formed the opinion that the account books are of a complex nature and directed for the special audit under s. 142(2A) of the Act. He submitted that in the impugned order various such grounds have been taken which have not been stated in the show-cause notice and which amounts to not providing proper opportunity as contemplated under the proviso of s. 142(2A) of the Act and the law laid down by the apex Court in the case of Sahara India (Firm) vs. CIT (2008) 216 CTR (SC) 303 : (2008) 7 DTR (SC) 27 : (2008) 300 ITR 403 (SC). He further submitted that the CIT has mechanically granted the approval to the proposal of special audit vide its order dt. 31st Dec., 2009, which is Annex. ‘2’ to the writ petition, and, therefore, the order passed under s. 142(2A) by the assessing authority is bad in law and liable to be set aside. Sri Shambhu Chopra, standing counsel, states that the object of getting the special audit is to arrive at a correct income for the purposes of the assessment. The purpose to get the accounts audited under s. 142(2A) of the Act is part of the assessment proceeding. He submitted that in the present case the proper opportunity has been given by issue of show-cause notice. In the show-cause notice the reasons have been given and, therefore, it is not the case where proper opportunity has not been given. He submitted that the petitioner is a subsidiary company of UPPCL and under it there are several branches, viz. at Varanasi, Allahabad, Gorakhpur, Mirzapur, etc. Each branch maintains its separate accounts. The petitioner has, in the return, disclosed a huge loss of about Rs. 11,51,99,56,110. Admittedly, the accounts were not got audited under s. 619 of the Companies Act, which is the statutory audit. This statutory audit is being carried on by the competent expert auditors from the office of the C&AG of India. The purpose of such audit is to check irregularities in the books of account, embezzlement, etc. The petitioner has prepared a provisional P&L a/c and balance sheet and after engaging a private chartered accountant company got the accounts audited under s. 44AB on the basis of such provisional balance sheet and P&L a/c. Even such chartered accountant has pointed out various discrepancies in its audit report which has been referred by the assessing authority in the show-cause notice as well as in the order passed under s. 142(2A) of the Act. In these circumstances, it was necessary to get the accounts audited by an expert auditor and to get a proper balance sheet and P&L a/c. He submitted that the loss claimed was in Arabs. On perusal of the provisional balance-sheet, loan and advance account, it was found that there was a negative figure of Rs. 3,61,17,059 as on 31st March, 2007 and there was unsecured advance to the tune of Rs. 3,57,44,435 which was also shown as negative balance. He submitted that various other discrepancies have been pointed out in the order itself which lead to the inference that the accounts of the petitioner need a proper scrutiny. He submitted that in the asst. yr. 2006-07 in the provisional balance sheet and P&L a/c the petitioner has disclosed the loss of Rs. 13,57,43,92,601 but in a statutory audit the loss was worked out at Rs. 6,03,89,57,805. He submitted that in the reply, while explaining the figure of the cash-in-hand, the petitioner admitted the discrepancy in the opening balance. It has been admitted that the assessee-company has taken the opening balance as on 31st March, 2007 at Rs. 17,59,09,955 in place of opening cash of Rs.

69,40,44,052. Therefore, having regard to the fact that the account books were not audited under s. 619 of the Companies Act; the accounts were got audited under s. 44AB on the basis of the provisional balance sheet and P&L a/c and the various discrepancies pointed out by auditor itself and having regard to the huge loss claimed for about Rs. 11,51,99,56,110, the assessing authority has rightly come to the conclusion that the nature of the account was complex and in the interest of Revenue and it is necessary to get the special audit. He further submitted that in the present case it cannot be said that the CIT has not applied its mind while granting the approval. He submitted that perusal of the order reveals that the CIT after consideration of the proposal sent by the Addl. CIT and on a consideration of the facts and circumstances and the material on record has granted the approval. He submitted that the balance sheet and P&L a/c is part of the account. The various discrepancies have been found in the provisional balance sheet and P&L a/c.

10. Having heard learned counsel for the parties, we have perused the impugned order and the material available on record. The apex Court, in the case of Rajesh Kumar vs. Dy. CIT (2006) 206 CTR (SC) 175 : (2006) 287 ITR

91 (SC) while considering the scope of s. 142(2A) of the Act has held that before issuing the direction for the special audit it is necessary to give opportunity to the assessee. It appears that having regard to the said decision the proviso to s. 142(2A) of the Act has been added providing an opportunity to the assessee before issuing the direction for the special audit. However, the issue involved in the case of Rajesh Kumar (supra) has been referred to the Larger Bench. The Larger Bench of the apex Court in the case of Sahara India (Firm) (supra) has affirmed the decision in the case of Rajesh Kumar (supra). It has been held that the opportunity to the assessee is necessary before issuing the direction under s. 142(2A) of the Act. The apex Court has held as follows :

“The upshot of the entire discussion is that the exercise of power under s. 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre- decisional hearing to an assessee and in the absence of any express provision in s. 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar’s case (supra).”

The apex Court has further held as follows : “A bare perusal of the provisions of sub-s. (2A) of the Act would show that the opinion of the AO that it is necessary to get the accounts of assessee audited by an accountant 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 prerequisites for exercise of power under s. 142(2A) of the Act. Undoubtedly, the object behind enacting the said provision is to assist the AO in framing a correct and proper assessment based on the accounts maintained by the assessee and when he finds the accounts of the assessee to be complex, in order to protect the interests of the Revenue, recourse to the said provision can be had. The word “complexity” used in s. 142(2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. vs. CIT (1987) 63 CTR (All) 335 : (1988) 171 ITR 634 (All), it is a nebulous word. Its dictionary meaning is : ‘The state or quality of being intricate or complex or that is difficult to understand. However, all that is 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. Sometimes, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully.’ Thus, before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the AO to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the AO for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the AO merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief CIT or the CIT in terms of the said provision being an in-built protection against any arbitrary or unjust exercise of power by the AO, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the section is not turned into an empty ritual. Needless the emphasise that before granting approval, the Chief CIT or the CIT, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the AO. The approval must reflect the application of mind to the facts of the case.”

11. In the case of Rajesh Kumar (supra) the apex Court has held as follows :

“The hearing given, however, need not be elaborate. The notice issued may only contain briefly the issues which the AO thinks to be necessary. The reasons assigned therefore need not be detailed ones. But, that would not mean that the principles of natural justice are not required to be complied with.”

12. The balance sheet and the P&L a/c are part of the books of account. In the present case, admittedly, the books of account have not been got audited under s. 619 of the Companies Act by the C&AG of India, which is a statutory audit. The requirement to get the account audited under the aforesaid provision in the case of the Government company is to see whether books of account have been properly maintained or not; income has been properly deduced and to check the irregularities, appropriation of money and embezzlement. Under this provision the accounts are being audited by the expert auditors. The petitioner has prepared the provisional balance sheet and P&L a/c and on the basis of such provisional balance sheet and P&L a/c got the accounts audited through the private chartered accountant company and submitted the IT return on the basis of the provisional balance sheet and the P&L a/c annexing the auditor’s report under s. 44AB of the Act. Such auditor has pointed out several discrepancies. This shows that the books of account have never been properly audited on the basis of final balance sheet and P&L a/c and the final authenticated balance sheet and P&L a/c have never been prepared and got audited. The assessing authority, in its order, has pointed out that the books of account have never been produced despite several opportunities being given. For the sake of example, one of the paras in the reply, annexed as Annex. ‘5’ to the writ petition, is referred hereinbelow to show that the petitioner has admitted the discrepancies in the figures shown in the provisional balance sheet : “(a) That the assessee company has shown the closing cash-in-hand as on 31st March, 2007 Rs. ()69,89,60,070.16 including the cash-in-hand account group No. 24.110 cash with SDO Rs. 75,612.11, cash with PI Rs. 34,159.20 and cash with TI Rs. 76,97,753.47. It is hereby submitted that the assessee company audit as on 31st March, 2006 was not finalized till the submission of return for the financial year 2006-07 i.e. asst. yr. 2007-08 and the assessee company has taken opening balance as on 31st March, 2007 Rs. 17,59,09,955 in place of opening cash Rs. 69,40,44,052 and the net effect of closing cash has come to Rs. 52,30,50,115.16 and after taking the actual opening cash balance from audited final account Rs. 69,40,44,052 the net cash effect will become as on 31st March, 2007 Rs. 49,17,905.54. A copy of ledger account from the books of the assessee company, permanent imprest account group 24.210, temporary imprest group 24.220, cash with SDO group a/c 24.260 is enclosed for your kind perusal along with copy of audited balance sheet audited by the statutory auditor as on 31st March, 2006 is enclosed for your kind perusal. The detailed Annex. A is enclosed separately.”

In the circumstances, we are of the view that the present is the case where the opportunity has been given to the assessee and there are proper reasons for forming the opinion that the nature of the account is complex and in the interest of Revenue, special audit is necessary. Therefore, the direction for the special audit for the reasons stated in the order cannot be said to be without any material. We are also of the view that on the facts and circumstances the approval granted by the CIT, Varanasi, cannot be said to be mechanical and without application of mind.

The proceeding under s. 142(2A) of the Act is not strictly a judicial proceeding and, therefore, the elaborate reasoning is not required to be given. In the case of Rajesh Kumar (supra) the apex Court has held that the hearing given need not be elaborate. The notice issued may only contain briefly the issues which the AO thinks to be necessary. The reasons assigned, therefore, need not be a detailed one. We are further of the view that under Art. 226 of the Constitution of India, in a writ jurisdiction, this Court can consider whether there was material for the issue of direction and not the sufficiency of the material.

It may be mentioned here that after insertion of the proviso to sub-s. (2D) to s. 142 of the Act by the Finance Act, 2007 w.e.f. 1st June, 2007 the remuneration of the accountant is now payable by the Chief CIT or the CIT and, therefore, there is no financial burden on the petitioner.

It may be mentioned here that in para (e) of the reply, referred hereinabove, the petitioner admitted that the auditor will take six months’ time to complete the audit, which itself shows the complexity of the account. Unless the final balance sheet and P&L a/c are prepared by the auditor after examining the books of account verifying the various entries, etc. the correct income cannot be deduced for the purposes of assessment. This exercise cannot be done by the assessing authority during the course of assessment proceeding. This exercise is only possible by the chartered accountants who are expert for the job. Therefore, direction to get the account audited and to prepare final balance sheet and P&L a/c cannot be said to be without jurisdiction or exceeding jurisdiction or outside the ambit of the provision.

On the facts and circumstances, we decline to exercise of our extraordinary jurisdiction under Art. 226 of the Constitution of India. The writ petition is accordingly dismissed.

[Citation : 329 ITR 508]

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