High Court Of Punjab & Haryana
Ludhiana Improvement Trust vs. CIT & Anr.
Section 142(2A)
Asst. Year 2006-07
M.M. Kumar & H.S. Bhalla, JJ.
Civil Writ Petn. No. 4763 of 2009
26th March, 2009
Counsel Appeared :
Ms. Radhika Suri, for the Petitioner
JUDGMENT
M.M. KUMAR, J. :
Ludhiana Improvement Trust (for brevity, ‘the petitioner-trust’) has approached this Court under Art. 226 of the Constitution with a prayer for quashing show-cause notices dt. 5th Dec., 2008 and 19th Dec., 2008 (P-1 & P-3) proposing to hold special audit under s. 142(2A) of the IT Act, 1961 (for brevity, ‘the Act’). The petitioner-trust has also challenged the order dt. 30th Dec., 2008 (P-6) being totally arbitrary and contrary to Art. 14 of the Constitution.
2. The petitioner-trust filed its return in respect of asst. yr. 2006-07 on 29th Oct., 2006 and the case was selected for scrutiny on 27th Oct., 2007. A notice under s. 143(2) of the Act was issued. The assessment was required to be completed on or before 31st Dec., 2008 as per the provisions of s. 143(3) of the Act. On 5th Dec., 2008, a show- cause notice (P-1) was issued proposing to hold special audit under s. 142(2A) of the Act. The petitioner-trust has alleged that the aforesaid course was adopted in order to extend the period of limitation provided by s. 143(3) of the Act, which was to expire on 31st Dec., 2008. It has been submitted that special audit under s. 142(2A) of the Act could be ordered only when the AO is satisfied that the nature of the accounts is complex. According to the learned counsel in the present case the books of account were not even inspected on or before the date of issuance of notice proposing to hold special audit. The petitioner-trust filed detailed objections on 12th Dec., 2008 to the show-cause notice by pleading that there was no cause to refer the matter to special audit and it was actuated by mala fide so as to extend the period of limitation (P-2). The petitioner-trust has claimed that books of account were produced on 18th Dec., 2008 for tendering its explanation to the queries raised in the show-cause notice. The books of account were impounded under s. 131(3)(b) of the Act. On 19th Dec., 2008, another notice was issued by the Dy. CIT, Ludhiana, to the petitioner-trust proposing special audit and the matter was posted for hearing on 26th Dec., 2008. The petitioner-trust filed objections to the second show-cause notice and asserted that it was registered under s. 12AA of the Act and the AO was required to determine whether its income had been applied to its objects. It is claimed that there was no necessity to order special audit. On 30th Dec., 2008, the respondents dismissed the objections and passed an order referring the matter to special auditor Shri P.C. Goyal (P-6). Ms. Radhika Suri, learned counsel for the petitioner-trust has argued that once books of account were produced for the first time on 18th Dec., 2008 there could not be any application of mind for recording the conclusion about the complex nature of the accounts and so many other discrepancies. In support of her submission learned counsel has placed reliance on a judgment of Hon’ble the Supreme Court rendered in the case of Sahara India (Firm) vs. CIT (2008) 216 CTR (SC) 303 : (2008) 300 ITR 403 (SC). According to the learned counsel the real import of the judgment of Hon’ble the Supreme Court is that special audit under s. 142(2A) of the Act should be resorted to in rarest cases where there was a genuine and honest attempt on the part of the AO to understand the accountancy measure by the assessee.
We have thoughtfully considered the submissions made by the learned counsel. It would first be appropriate to read the show-cause notices. A perusal of the show-cause notice dt. 5th Dec., 2008 (P-1) shows that the matter concerning completion of assessment under s. 143(3) of the Act was pending and on 26th Nov., 2008 a number of queries were raised by the respondent Department for furnishing details/supporting evidence on various points. However, the petitioner-trust failed to appear nor it filed any reply nor any request for adjournment was made. The respondent Department had already intimated to the petitioner-trust that time barring assessment is involved and compliance to the queries made were required to be ensured. In the second para of the show-cause notice it has been mentioned that according to the past history of the case a number of discrepancies/complexities in maintenance of accounts were noticed, which had resulted in reference made to the special auditor for conducting special audit as per the provisions of s. 142 (2A) of the Act in the preceding assessment year. The show-cause notice also disclosed the following three issues :
“1. You have claimed exemption which on the facts of the case was not eligible to you. Physical verification of the fixed assets was not conducted, which means valuation of the properties was not done properly. Complete books of accounts were not produced.”
5. It was pointed out that the discrepancies which existed in the earlier year were also found to be existing in the return for the asst. yr. 2006-07. The reply to the queries was not furnished. The respondents clarified that it was not possible to examine the books of account with reference to the vouchers for purchases/expenditure of different nature to find out the exact nature of such expenses. Some expenses were found to be capital in nature and needed to be capitalised as part of the closing stock. It quoted an example of the expenses on account of development and other works amounting to Rs. 7,66,92,810, which were debited in the trading account instead of capitalising the same as part of closing stock. Likewise, genuineness of entries in the balance sheet concerning current liabilities was also required to be ascertained particularly how the same has been treated in the P&L a/c for the assessment year under consideration. The Department also disclosed that in the preceding asst. yr. 2005-06 books of account were maintained on cash system basis and as a result of examination of books of account by the special auditor, the income of the petitioner-trust was assessed at Rs. 8.6 crores as against the income returned by the petitioner-trust at Rs. 40.54 lacs. The gap between two incomes was, thus, evident. Therefore, the Department thought it fit to issue show-cause notice by recording the opinion that complexities of the account of the petitioner-trust and the interest of the Revenue requires that the accounts be audited by a special auditor and to get a report of such audit on prescribed form.
6. The petitioner-trust tendered detailed reply on 12th Dec., 2008 (P-2) and the Department again on 19th Dec.,2008 (P-3) wrote to the petitioner-trust. A perusal of para 4 of the letter shows that a detailed questionnaire was issued on 26th Nov., 2008, which was duly served on the petitioner-trust on 27th Nov., 2008. It was required to furnish reply to the queries as well as to produce complete books of account along with vouchers for examination on 5th Dec., 2008. However, neither the details were furnished nor books of account were produced for examination. However, on 8th Dec., 2008 few details were furnished, vide letter dt. 5th Dec., 2008, yet books of account were not produced. The books of account, which have been produced on 18th Dec., 2008 are quite voluminous, which were impounded and upon test checking of the impounded books, the following discrepancies were found: A/c Account head Balance as Balance as per Difference Code per ledger balance sheet/ income & expenditure a/c C4-1 Capital Fund (Cr.) 230,413,964 2,230,413,964 2,000,000,000 0301 Opening Stock (Dr.) 400,097,766 1,400,097,766 1,000,000,000 E402 Earnest Money 80,641,111 77,684,590 29,56,521 Payable (Cr.)
7. The entries in the ledger did not match with the entries made in the cash book. The aforesaid letter also disclosed a number of other things which led to the conclusion that the cash book and ledger were neither kept on ‘mercantile basis’ nor on ‘cash basis’ and that a number of adjustments are carried out at the close of the month in the cash book in respect of the entries pertaining to the earlier years as back as May, 1999 and subsequent period (even upto February, 2006). Such system goes to show that the books of account were maintained on mixed system of accountancy and Dy. CIT recorded the satisfaction that maintenance of mixed books of account by the petitioner-trust has been so complex that profits of the business carried by it relating to acquisition, development and sale of immovable properties cannot be ascertained correctly. The Dy. CIT felt that there were chances that some income chargeable to tax could be erroneously left to be computed. Accordingly, he proceeded to conclude as under :
“I am, therefore, of the opinion that keeping in view the complexity of the accounts involved in the maintenance of books of account and other documents by the Improvement Trust, Ludhiana and in the interest of Revenue, it is necessary to issue directions in your case for getting the accounts audited by an accountant after seeking prior approval of the CIT-III, Ludhiana. Before doing so you are hereby given an opportunity of being heard, which is fixed for 26th Dec., 2008 at 11.00 AM in my office at Ludhiana. Furnishing reply to this office letter you may conduct inspection of impounded books of account on 23rd Dec., 2008 at 1.00 AM (sic). Formal notices under ss. 142(1) and 143(2) are enclosed.”
8. It is further pertinent to notice that vide order dt. 30th Dec., 2008, special audit has been ordered after obtaining prior approval of the CIT-III, Ludhiana, vide order dt. 30th Dec., 2008 and have requisitioned the audit report within a period of 90 days from the receipt of the letter.
9. In the backdrop of the aforesaid factual position we are of the considered view that the instant petition lacks merit and is, thus, liable to be dismissed. The decision to undertake special audit for the asst. yr. 2006-07 does not emanate from the casual or in-serious approach of the respondents. It has come on record that the Department has issued a letter dt. 26th Nov., 2008 to the petitioner-trust, which posed a number of queries calling for details/supporting evidence on various issues. The petitioner-trust was to appear before the AO on 5th Dec., 2008 when it failed to appear nor any information was sent despite the fact that it was duly informed that time barring assessment is involved and as such compliance to the above queries was to be ensured by 5th Dec., 2008. Referring to the past history of a number of discrepancies and complexities in maintaining of books of account, respondent No. 2 had highlighted that in the preceding years also special audit has to be ordered, which involved various issues, some of which have already been adverted to in the preceding paras. Likewise, a number of other things have been recorded in the show-cause notice, dt. 19th Dec., 2008 (P-3), which has produced the past checking result from the impounded books of account. The respondents reached the conclusion about the complexity of the accounts involved in maintenance of books of account and other documents relating to the petitioner-trust by recording the satisfaction regarding such discrepancies and the voluminous books of account. Keeping in view the possibility of ignoring any income from the assessment and ensuring the interest of the Revenue, a show-cause notice was issued on 19th Dec., 2008 (P-3) and hearing was granted on 23rd Dec., 2008 to which the petitioner- trust had filed detailed reply on 26th Dec., 2008 (P-4). It was thereafter that on 30th Dec., 2008, respondent No. 2 has passed the order. There is neither any procedural lapse because the prior approval of the CIT-III, Ludhiana, was obtained before issuance of show-cause notice on 19th Dec., 2008. The principles of natural justice as laid down by their Lordships of Hon’ble the Supreme Court in the case of Sahara India (supra) and the principles requiring proper application of mind have been followed and applied. Moreover, even in respect of the last asst. yr.
2005-06, such a course was adopted and, therefore, there is no room to interfere in exercise of jurisdiction under Art. 226 of the Constitution. The argument that special audit has been ordered to gain more time by avoiding the application of limitation period which in normal course was to expire on 31st Dec., 2008, does not impress us because the petitioner-trust itself is delaying the proceedings before the respondents by their failure to attend and produce books of account. It does not lie in their mouth to make such a complaint. By delay the petitioner-trust was to be benefited. There is, thus, nothing unwarranted nor any lack of bona fide. Even in last assessment special audit was ordered. The writ petition is wholly misconceived and the same is dismissed.
[Citation : 328 ITR 183]
