High Court Of Kerala
Madhurapuri Chits and Finance Co. (P.) Ltd. vs. CIT
Block Period 1-4-1995 To 18-10-2001
Section : 142, 158BC
C.N. Ramachandran Nair And P.S. Gopinathan, JJ.
IT Appeal No. 136 Of 2010
June 2, 2011
JUDGMENT
C.N. Ramachandran Nair, J. – This appeal is filed by the assessee challenging the order of the Tribunal reversing the first appellate order that was in favour of the assessee. The assessee is a private limited company engaged in chit business and assessment involved is one for the block period commencing from April 1, 1995, to October 18, 2001. After search and seizure of the books of account and other documents, the Assessing Officer issued notice under section 158BC to which the assessee filed return declaring nil undisclosed income. The Assessing Officer noticed that the accounts were neither correct, complete nor written properly for him to find out the exact undisclosed income suppressed by the assessee. He, therefore, proceeded to appoint an auditor under section 142(2A) of the Act after getting prior approval from the Commissioner of Income-tax. When the proposal was communicated to the assessee, the assessee agreed with the officer by stating that the accounts are complex and has mistakes and, therefore, they have no objection in appointing an auditor under section 142(2A). In fact, in the reply sent to the officer, the assessee even requested the officer to authorise the auditor to be appointed by the officer under section 142(2A) to audit the accounts of the two directors of the assessee-company also. After obtaining consent from the assessee, the officer appointed a special auditor under section 142(2A), who filed a report after verifying the accounts and determining undisclosed income, which is over 1.49 crores from chit business and Rs. 3 lakhs towards undisclosed income from interest. When the assessee contested the assessment in appeal, the Commissioner of Income-tax (Appeals) held that block assessment cannot be made on the report of the auditor appointed under section 142(2A) and on this ground he set aside the assessment. Even though the assessee contested the findings of the special auditor based on which assessment is made, the Commissioner of Income-tax (Appeals) did not go into the reasonableness of the income estimated based on which the assessment is made. In other words, he allowed the appeal only on the technical objection raised by the assessee. On further appeal filed by the Department before the Tribunal, the Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and restored the block assessment completed under section 158BC of the Act. It is against this order of the Tribunal, the assessee has come up with this appeal.
2. We have heard advocate Sri P. Balakrishnan appearing for the appellant-assessee and the standing counsel appearing for the Department.
3. The learned counsel for the assessee submitted that block assessment has to be based on evidence and materials collected during search and so much so, the Assessing Officer cannot rely on the audit report prepared by the special auditor appointed under section 142(2A) of the Act. The learned standing counsel, on the other hand, submitted that the block assessment is not based on special auditor’s report but based on accounts and materials seized during search conducted under section 132 of the Act and all what the officer has done is to seek the assistance of a special auditor to assess the undisclosed income revealed by books of account and other materials seized.
4. After hearing both sides and after going through the orders of the authorities below, we are of the view that the appointment of an auditor under section 142(2A) does not invalidate a block assessment completed under section 158BC of the Act. Section 142(2A) authorises the Assessing Officer to appoint an auditor nominated by the Chief Commissioner if at any stage of the proceedings before him, he needs the assistance of an independent auditor to be appointed by the Department. Nothing in this section bars the Assessing Officer to get audit of accounts seized by him in search proceedings. Of course, section 158BC read with section 158BB authorises block assessment of undisclosed income found as a result of search or requisition of books of account or other documents and such other materials or information that are available with the Assessing Officer and relatable to such evidence. Admittedly, in this case, the books of account and other materials have been seized from the assessee in the course of search under section 132 and, therefore, the officer is entitled to find out from these materials as to what is the undisclosed income. If the seized records disclose concealed income, the same obviously can be assessed in block assessment under section 158BC read with section 158BB of the Act. The assistance of an auditor to be appointed by the Department can, therefore, be utilised to estimate undisclosed income borne out in the seized records and accounts. On receipt of the special auditor’s report, if the Assessing Officer finds that the income returned by the assessee for the relevant period was less than the income disclosed from the seized records and found out by the special auditor, then such income is certainly assessable as the undisclosed income based on the seized records. Therefore, what the special auditor appointed under section 142(2A) does is only to assist the Assessing Officer to find out the undisclosed income available from the seized records. So much so, in our view, the appointment of an auditor by the Department under section 142(2A) is permissible for auditing the accounts seized from the assessee and such audit report and findings by the auditor could be relied on by the Assessing Officer for making block assessment under section 158BC of the Act.
5. It is seen from the orders that the assessee on receipt of the notice from the officer proposing appointment of an auditor under section 142(2A) agreed with the officer that the accounts contained mistakes and it is maintained in a complex manner justifying audit under section 142(2A). In fact, the assessee volunteered to offer audit of accounts of the directors of the assessee also by the auditor appointed by the Department under section 142(2A) of the Act. In view of the consent given by the assessee for the appointment of an auditor by the Department, we do not think the assessee can at a later stage object against the appointment of the auditor or reliance of the auditor’s report in the assessment. The challenge against the Tribunal’s order on this ground cannot, therefore, be accepted. We, therefore, confirm the order of the Tribunal upholding the validity of appointment of auditor under section 142(2A) and reliance of his report in assessment.
6. The learned counsel for the appellant raised a contention that neither the first appellate authority nor the Tribunal considered on the merits the contest made by the assessee against the income assessed and the basis thereof. It is seen that the Assessing Officer has largely relied on the special auditor’s report, which was contested by the assessee before all the authorities. The Tribunal has noted that the assessee did not want a cross-examination for the auditor to be appointed under section 142(2A) of the Act and, therefore, the assessee cannot object against the auditor’s report. We do not think any cross-examination is required to sustain the challenge against the findings of the auditor, if the same is otherwise tenable. Even though the assessee has not filed separate objection to the auditor’s report, the counsel for the assessee submitted that the assessee filed serious objection before the officer for making assessment based on the report submitted by the auditor appointed under section 142(2A) of the Act. We find force in this contention because neither the first appellate authority nor the Tribunal has considered the assessee’s challenge against the estimation of undisclosed income assessed by the officer based on the auditor’s report. In our view, it was the duty of the Commissioner of Income-tax (Appeals) to closely examine the auditor’s report based on which the assessment is made and if required, the first appellate authority could get clarification from the auditor as well as from the officer. Since the correctness of the undisclosed income of estimate is not considered by the first appellate authority as well as the Tribunal, we think the assessee should be given one more opportunity to contest the assessment on quantum addition.
7. We, therefore, allow the appeal by partly setting aside the orders of the Tribunal and direct the first appellate authority to restore the appeal to his file only for deciding on the correctness of the undisclosed income assessed after issuing notice to the assessee and the Assessing Officer. The appeal should be disposed of on the merits, within a period of three months from the date of receipt of a copy of this judgment. However, in view of the findings above, the assessee shall not be entitled to raise the legality of the appointment of the auditor and the reliance by the officer of the special auditor’s report for the purpose of assessment. In other words, the contest in appeal should be limited to the estimation of undisclosed income made by the auditor that was accepted by the officer.
8. The appeal is allowed in part as above.
[Citation : 338 ITR 202]
