Allahabad H.C : Whether before ordering special audit under section 142(2A) satisfaction of complexity of accounts is required to be arrived at by discussing accounts in meticulous details

High Court Of Allahabad

U.P. State Industrial Development Corpn. Ltd. vs. CCIT

Assessment Year : 2008-09

Section : 142

Sunil Ambwani And Pankaj Mithal, Jj.

Civil Misc. Writ Tax No. 1051 Of 2011

July 29, 2011


1. We have heard Shri S.K. Garg for the petitioner. Shri Ashok Kumar appears for the Income Tax Department.

2. By this writ petition the petitioner, a Government company within the meaning of Section 617 of the Companies Act, 1956 incorporated with the object of industrial development in the State of UP, has challenged the order passed by the Chief Commissioner of Income-tax dated 28.4.2011, granting approval under Section 142 (2A) of the Income Tax Act, 1961, for Special Audit, with directions dated 3.5.2011 given by the Deputy Commissioner of Income Tax-VI, Kanpur, for preparing the balance sheet, profit and loss accounts with annexures relating to assessment year 2008-09, to be made by M/s Kapoor Tandon & Co., 24/57, First Floor, Birhana Road, Kanpur, the nominated Chartered Accountants and to furnish the report in the prescribed Form duly signed and verified by the said Chartered Accountant, setting forth for such particulars as may be prescribed under Rule 14-A in Form No. 6B upto 30th June, 2011. The petitioner has also prayed for a direction commanding respondent no. 3 not to proceed further in compliance to the order dated 30.6.2011, read with order dated 3.5.2011, and further not to proceed in making assessment for the assessment year 2008-09 in pursuance to directions dated 3.5.2011. The petitioner has also prayed for directions commanding the respondent no. 4, not to proceed with the Special Audit, under Section 142 (2A) for the financial year 2007-08 during the pendency of the writ petition.

3. The petitioner had earlier approached this Court by filing a Writ Petition No. 257 of 2001 on the grounds that sufficient and adequate opportunity was not given to the petitioner before directing Special Audit under Section 142 (2A) of the Act. The writ petition was disposed of on 3.3.2011 with following directions:-

“1. The UP State Industrial Development Corporation Ltd. (UPSIDC) (the Petitioner) is a statutory Corporation of State of Uttar Pradesh. It has filed the present writ petition against the order dated 29.12.2010 passed by the Assessing Officer for the assessment year 2008-2009 directing the petitioner to get its accounts audited under sub-section (2A) of section 142 {Section 142 (2A)} of the Income Tax Act, 1961 (the Act).


2. The Petitioner filed its return for the aforesaid assessment year on 30th of September,2008. According to the Petitioner:

Its accounts are audited by the auditor appointed by Comptroller & Auditor General of India (the CAG);

As auditor was not so appointed by the CAG, the auditor’s report was not submitted along with the return;

The Petitioner filed the auditor’s report before the Assessing Officer on 18.8.2010 as soon as it was made available to it.

3. Subsequently, the Petitioner filed a supplementary report on 15.11.2010 claiming benefit under section 80-I of the Act.

4. A proposal was sent by the Assessing Officer to the Chief Commissioner of Income Tax, Kanpur (the CCIT) on 18.11.2010 for his approval for requiring the petitioner to get its accounts audited under section 142 (2A) of the Act.

5. The CCIT issued notice to the petitioner on 23.11.2010 requiring it to appear before him on 30th of November, 2010. This notice was not on the basis of the aforesaid proposal but on the report of the CIT-II, Agra who is not the Assessing Officer of the Petitioner.

6. On 30th of November, 2010 a fresh notice was issued to the Petitioner to appear on 7.12.2010.

7. The Petitioner appeared on 7.12.2010 and filed its reply.

Thereafter, the case was adjourned to 15.12.2010.

8. On 15.12.2010, the Petitioner was given the proposal of the Assessing Officer dated 18.11.2010 and further date was fixed to 21.12.2010. The case was heard and it appears that a supplementary report was called by the CCIT on 21.12.2010.

9. The Assessing Officer sent his supplementary report on 23.12.2010.

10. The CCIT after considering the supplementary report dated 23.12.2010 granted approval on 28.12.2010. Thereafter, the impugned order was passed on 29.12.2010 by the Assessing Officer.

11. We have heard Sri S.K Garg and Sri Ashish Bansal, counsel for the Petitioner and Sri Shambhu Chopra, counsel for the Department.

12. The counsel for the Department was requested to obtain instructions and produce the photostat copy of the order sheet of the CCIT. This has been done. Counsel for the Department. The counsel for the petitioner has also filed a supplementary affidavit that is taken on record. With the consent of the parties, the writ petition is disposed of at this stage.


13. A perusal of the photostat copy of the order sheet of the CCIT indicates that the approval was granted on 14.12.2010. This was before the date fixed namely 15.12.2010 by the CCIT. Subsequently, he again granted approval on 28.12.2010 considering the supplementary report dated 23.12.2010. It is not disputed that copy of this supplementary report was not given to the petitioner.

14. Considering the aforesaid facts, it cannot be said that the petitioner was afforded reasonable opportunity to have his say in the matter. In view of this, the approval granted on 14.12.2010 as well as 28.12.2010 and the order dated 29.12.2010 passed by the Assessing Officer are quashed.

15. The copy of the proposal dated 18.11.2010 has already been given to the counsel for the Petitioner. The copy of the supplementary proposal dated 23.12.2010 has also been handed over to them. The petitioner may appear before the CCIT in the week commencing 28th of March, 2011 and file certified copy of this order. The petitioner along with the certified copy of the judgment will also file his objections against the same. The CCIT may again decide the question of granting approval. Thereafter, the Assessing Officer may pass appropriate order.

16. The first approval is dated 14.12.2010. This approval as well as subsequent approval and orders have been quashed. In view of this, we clarify that the time from 14.12.2010 till the Petitioner files certified copy of this order before the CCIT along with his objections will be excluded in calculating the limitation for passing order under section 142(2A) of the Act.

17. With these observations, the writ petition is allowed.”

4. The petitioner did not file certified copy of the order with CCIT Kanpur. The counsel filed the judgment verified by him, on which the Income Tax Officer (Tech. & Judl.), in the Office of Chief Commissioner of Income Tax, Kanpur sent a letter dated 11.4.2011, requesting to furnish the certified copy of the judgment dated 3.3.2011, and to present its case before the CCIT, Kanpur on 28.4.2011.

5. On 28.4.2011 after discussing the matter with Shri S.K. Garg, Advocate; Shri C.L. Kanodia, FCA; Shri S.K. Maheshwari, Deputy Manager and Shri Rajesh Canodia, CA, who attended the office, the CCIT Kanpur invoked the provisions of Section 142 (2A) of the Act, with the findings that for the assessment year 2008-09 the return was filed by e-filing. The case was selected for scrutiny and the notice under Section 142 (2) was issued on 20.8.2009, fixing compliance for 11.09.2009. Since no compliance was made by the assessee, a letter dated 12.1.2010 was sent to the assessee requiring a copy of Audited Balance Sheet & Profit & Loss, with its annexures and enclosures etc, and the date of compliance was fixed for 18.1.2010. Since no compliance was was made, a penalty notice was issued on 4.5.2010 fixing date of compliance for 12.5.2010, which also not complied with, on which a summon under Section 131 dated 16.6.2010 fixing date of compliance for 24.6.2010 was issued. Shri S.K. Maheshwari, Deputy Manager attended the office on 24.6.2010 and sought adjournment on which the matter was adjourned for 6.7.2010.

6. From the order of CCIT Kanpur we find that a printout of the copy of e-return filed electronically by the assessee was taken out, from which it was noted that the assessee while uploading the return had mentioned that tax audit was completed by M/s P.D. Agarwal & Co., Chartered Accountant on 29.9.2008. To verify this fact, a letter was written on 05.7.2008 to M/s P.D. Agarwal & Co, who informed by its letter dated 05.7.2010 that the audit of financial year 2007-08 relevant to the assessment year 2008-09, has not been completed by them and therefore, a copy of the tax audit report in Form 3CA & 3CD could not be provided. The assessee company had thus made a false statement, in verifying and uploading the e-return, on which the Assessing Officer was directed to examine the penal provisions.

7. The petitioner vide its letter dated 22.11.2010 was required to file various details with explanation on the issues mentioned in the letter to which no compliance was made. The assessing officer found that there was no option but to conduct special audit and made a proposal to that effect. The CCIT Kanpur found that the assessee was given number of opportunities before sending the proposal for Special Audit. The assessee however did not produce the books of account till the date of appointment of auditors. He has also observed that 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, as per annual report submitted by the assessee. The auditor has discussed/mentioned various discrepancies, misfeasance and gross negligence in their report as per guidelines issued by the Board in its Instruction No. 1076 dated 12.7.1977, which attracts the provisions of Special Audit.

8. In the order of CCIT, Kanpur dated 28.4.2011, challenged in this writ petition, it has been observed that the petitioner company provided wrong information to the court in obtaining the order in the earlier writ petition. It was submitted before the High Court that the date was fixed on 15.12.2010, whereas the approval for special audit was made on 14.12.2010. The High Court proceeded on the premise that no opportunity was given to the assessee and quashed the approval for Special Audit dated 14.12.2010 and subsequent order. The CCIT has clarified that he had actually approved the proposal for special audit in the case of UPSIC on 14.12.2010, and not in the case of UPSIDC. In the case of UP Small Industrial Development Corporation-the petitioner the order was passed on 28.12.2010. This fact has not been denied by Shri S.K. Garg. A pretext has been made that since a wrong mention has been made in the order of the assessing authority, the assessee believed that the order was passed on 14.12.2010. The basis of the belief in the context that the date of order of approval, which was challenged in the earlier writ petition, has not been denied, and has not been explained.

9. Shri S.K. Garg, learned counsel for the petitioner has relied upon Sahara India (Firm) v. CIT [2008] 300 ITR 403 (SC)/ 169 Taxman 328 in submitting that since the order of Special Audit visits serious civil consequences, and amounts to investigation, it can be passed only when the necessary ingredients are satisfied namely that there should be satisfaction recorded by A.O., of complexity of the accounts, and interest of revenue and that both the requirements should be read conjunctively and not disjunctively. He submits that neither the assessing authority or CCIT examined the auditor’s reports nor arrived at any findings of complexity of accounts, before concluding that the matter requires special audit. He submits that the reasons given in the order, namely that there are reports of misfeasance, gross neglect or breach of duty by itself, cannot be a ground for special audit. In such case if the accounts are not produced or if the assessing authority is not satisfied, the A.O., can proceed to make best judgment assessment under Section 144 of the Act. Shri S.K. Garg also submits that the assessment has become barred by time.

10. We may firstly deal the conduct of the petitioner. It is not denied that in this case the order of sanction was earlier passed on 28.12.2010. This fact was cleverly concealed from this Court in presenting a case by Shri S.K. Garg, who has been appearing for the assessee-company in all the proceedings including the earlier writ petition. He had argued that no opportunity was given by the CCIT before giving the approval. He does not deny that the order dated 14.12.2010, which was projected to be the order of approval passed in the case of the petitioner, was actually passed in the case of UPSIC, which is a different government company. In the absence of denial, that the approval was given on 28.12.2010, we have no hesitation in finding that the petitioner-company got the order from this Court earlier, by concealment of facts and thereafter did not either get the order corrected, or filed the certified copy in the office of CCIT, Kanpur.

11. Further we find that before approaching the Court in this writ petition the petitioner has acquiesced to the order dated 28.4.2011 passed by the CCIT Kanpur, and the order dated 3.5.2011 passed by Deputy Commissioner, Income Tax-VI, Kanpur. The petitioner sent a letter on 23.6.2011 for extending the date for submitting the Special Audit Report under Section 142 (2A), within one month so as to make the expiry date as 31.7.2011. In reply to this letter the Deputy Commissioner, Income Tax VI, Kanpur-the Assessing Officer granted time to the petitioner on 30.6.2011, to provide all the relevant records necessary for the purposes of Special Audit to the nominated Auditor at Kanpur. Instead of availing the extension of time, the petitioner company has rushed to this Court and has filed this writ petition on 27.7.2011, to be heard today on 29.7.2011, seeking stay of the order on the grounds that the provisions of Section 142 (2A) have not been complied with.

12. We find it useful to quote the decision of Supreme Court in Living Media Ltd. v. CIT [2002] 255 ITR 268/ 123 Taxman 75, in which the Supreme Court was not impressed with the submission that the assessment in respect of the concerned assessment year has become time barred. The Supreme Court did not find justification to interfere in the order of the High Court summarily dismissing the writ petition, and did not see any reason to conclude that the order was for any reason other than the complexity of the appellant’s accounts, which are referred to in some detail in the Joint Commissioner’s order. In the note appended some of the facts have been given namely that the A.O, while issuing the impugned order formed an opinion that the order was necessary in view of the nature, and complexity of the accounts of the assessee. On his own showing the petitioner in that case had filed voluminous details running into approximately 500 pages to explain the queries raised by the assessing authority. Further the details running into about thousand pages were also filed by the assessee before the assessing authority. This prima facie supported the formation of the opinion by the A.O. for conducting Special Audit.

13. In the present case we find that firstly the assessee company, which claimed that as Government Company its accounts are audited under Section 227 of the Companies Act, 1956 by the auditors appointed by the Controller and Auditor General of India, New Delhi, made a false statement in the e-return that its accounts have been accounted by P.D. Agrawal & Co on 29.9.2008. The auditor was given notice, to which a reply was given on 5.7.2010, that they had not completed the audit for the relevant financial year. Subsequently the petitioner in response to the notice issued by the A.O. delayed submission of accounts. The accounts were submitted after a period of two years. The auditor’s report, appended to the account and referred to by the CCIT-Kanpur, clearly demonstrates that the account was not produced before the auditor as well. We find it useful to quote the comments of the auditors in their report dated 18.8.2010, in paragraph 4 (a) and (b) as follows:-

“4. Further to our comments in the Annexure referred to above, we state that:

(a) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit, except certain records of C.E. Kanpur office which is under joint custody of SIT. Further party ledger, lease deed register, Allotment Register, Plot wise register, transfer registers are not completed. In view of the above we are unable to make our comments.

(b) In our opinion proper books of account as required by law have been kept by the company, so far as appears from our examination of such books, read with our comments in para (a) above and subject to Note No. 5 of Schedule “9” regarding non provision of enhanced land compensation amounting to Rs. 219.22 crores decided against the Company by Lower/High Courts but pending appeals. Note No. 2 (a) Part (B) of Schedule “18” regarding non accounting of various interest accrued amounting to Rs. 5.53 crores due to the reasons explained in the relevant note thereon. Further the balance shown under the head industrial land under development in the balance sheet under Current Assets (as per Schedule “9”) amounting to Rs. 664.66 crores which is after netting off negative amount of Rs. 58.21 crores refer to Note No. 23 of Schedule “18”. In the previous year the Company has sought expert opinion for the accounting treatment in this regard but as informed the opinion is still awaited. In view of the above we are unable to make our comments.

(c) The Balance Sheet, Profit and Loss account and Cash Flow Statement referred to in this report are in agreement with the books of account except the party account in respect of advance premium, A.R.S. and earnest money deposit accounts, are subject to reconciliation and impact thereof is not ascertainable.

(d) In our opinion the Balance Sheet, Profit and Loss account and Cash Flow Statement dealt with by this report comply with the Accounting Standards referred to sub-section (3C) of Section 211 of the Companies Act, 1956 except to the extent applicable the accounting/disclosure of land acquisition and disposal activities since inception and payment made as advance to the contractors through Chief Engineer Division, Kanpur amounting to Rs. 6, 05, 21, 740/- without submitting bills/invoice included in Industrial Land under development under Current Assets.


4. In respect of its Internal Control

In our opinion and according to the information and explanations given to us during the course of audit, there are adequate internal controls system commensurate with the size of the company and the nature of its business with regard to purchase of stores, plant and machinery equipments and other assets, however in certain areas internal control needs further strengthening like allotments of industrial plots, payment of advances/development expenditures and collection of demand drafts and deposit into bank, we observed that MIS in respect of party ledger, lease deed register, Allotment Register, Plot wise register, transfer register full allottee wise details of earnest money are not completed.

On the test checking of payment of advances, we found that payment made to the contractors through Chief Engineer Division, Kanpur amounting to Rs. 6, 05, 21, 740/- without submitting bills/invoices were debited in development instead of advances. Advance to others amounting to Rs. 16, 64, 30, 676.70 given to suppliers and Rs. 4, 61, 96, 050.33 given to various parties in earlier years were not yet adjusted. On test checking of Chief Engineer Kanpur office, we found that some files are not available to check and explained to us that these are at Branch level and at the branch explained that the maintenance of bond files exceeding Rs. One crore at Chief Engineer office. On test checking of Chief Engineer Kanpur office, it was found that work has been completed on 31.01.2008 as per extended time granted but the measurement has been taken on 10.12.2008 as per page No. 98-100 of M.B. S/5 in case of C.B. No. 09/CE/07-08. IN view of the above we observed that there is no control/system found about inter transfer of document files during the year and verification of work completed.

7. In respect of its Internal Audit System:-As explained and informed to us, the company is carrying the Internal Audit of all regional offices, construction divisions and head office at periodical intervals by the firms of Chartered Accountants. In our opinion internal audit system commensurate with the size and nature of its business. The final trial balance and annexure there of made available to us for audit are not verified/authenticated by the Internal Auditors. However, the same requires to be strengthened with identification of critical areas for risk based audit. We observed that internal audit has not been conducted within time and as per the scope of internal audit mentioned in the appointment letters. There is no timely compliance and review of compliance done by concerned divisions and Regional Officers on the observations made in the internal audit report. In our opinion the compliances of internal audit report must be verified by the internal auditors.”

14. We do not find that the CCIT Kanpur has committed any error in exercising his discretionary administrative powers under Section 142 (2A) in directing special audit. In Purvanchal Vidyut Vitran Nigam Ltd. v. Union of India [2010] 188 Taxman 355 this Court held that the proceedings under Section 142 (2A) are not strictly a judicial proceeding and therefore, elaborate reasons are not required to be given. In Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634/[1987] 32 Taxman 271 this Court held that the Inspecting Assistant Commissioner and the Commissioner of Income Tax with due regard to the nature of the account books were satisfied that the accounts of the company were of a complex nature and that it was necessary in the interests of the revenue that a special audit should be conducted. It was held that it could not said that there was any arbitrary exercise of the powers in directing the special audit under Section 142 (2A).

15. We also do not find any substance in the contention that in the present case the CCIT has not examined the accounts in arriving at a conclusion that accounts books were not complex in nature for which the special audit is required. The satisfaction of the complexity of the accounts is not required to arrive at by discussing the accounts in meticulous details. Where the approving authority has considered the account books along with auditors reports and finds that there was a malafide intention to avoid the verification of the books and accounts and that there are various comments on the auditors justifying gross neglect, and misappropriation of funds, the satisfaction, in this case for Special Audit, cannot be said to be without application of mind.

16. The order under Section 142 (2A) may have civil consequence as it involves investigation but that in the facts and circumstances of the present case where the activities of the UPSIDC were found to be extremely large, and that there is delay in carrying out the statutory audit coupled with the fact that full and detailed accounts including ledger of the parties was not complete and produced before the auditors, the satisfaction of the nature of the complexity of accounts and interest of revenue, is entirely justified.

17. The petitioner is a government company within the meaning of Section 617 of the Companies Act, 1956, carrying out its activities for industrial development of the State. As a government company, it also has socio economic responsibility to serve the people of the State. The company made a false statement in the return and thereafter did not make any effort to complete the audit for two years. In the end, when the audit report was submitted, it was found to be incomplete inasmuch as the ledgers were neither complete nor were produced before the auditors. In the facts and circumstances, the petitioner was not justified in taking shelter behind the technicalities and alleging that in case the tax authorities are not satisfied, they could have proceeded to make best judgment assessment.

18. On the findings recorded by us against the petitioner for having misled this Court in making the judgment in the earlier writ petition, decided on 3.3.2011, and further on the conduct of the petitioner in filing false return seeking time before the assessing authority and thereafter approaching this Court on the last day for obtaining the stay order, we dismiss the writ petition with costs of Rs. 1 lac (Rupees one lac only) on the petitioner. This cost will be deposited by the petitioner within one month in the account of the Allahabad High Court Legal Service Committee.

[Citation : 353 ITR 176]

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