High Court Of Rajasthan : Jaipur Bench
Shiv Kant & Bros. & Ors. vs. Union Of India
Sections 142(2A), 158BC
Bhagwati Prasad, J.
Civil Writ Petn. No. 3304 of 2002
31st May, 2002
Counsel Appeared
Paras Kuhad, for the Petitioner : J.K. Singhi, for the Respondent
JUDGMENT
BHAGWATI PRASAD, J. :
The petitioners in the present writ petition are partnership firms. These firms were subjected to procedure of search and seizure. After such seizure, while mechanism provided in the IT Act, 1961 (hereinafter referred to as ‘the Act’) was in process to determine the tax liability, cases were transferred from Delhi to Kota. The petitioners feel that order of transfer of the cases from Delhi to Kota was without jurisdiction, illegal and void. Still, the petitioners have not chosen to impugn the order of transfer. A notice under s. 158BC of the Act was issued to the petitioners namely Ispat Traders and Shivchand & Brothers on 28th Sept., 2001. The opportunity provided in this notice was less than statutory period. Another notice was issued in respect of aforesaid firms afresh on 28th Jan.,2002, requiring these firms to file the return of block period. These firms filed the return of undisclosed income for the block period in response to the aforesaid notices on 22nd March, 2002. Notice was issued to the third petitioner on 12th March, 2002. The third petitioner also filed return in response to the notice.
While all the aforesaid proceedings were continuing, a direction under s. 142(2A) of the Act was issued by the AO directing the petitioners to get a special audit done of accounts on 22nd April, 2002. The petitioners claimed that such direction was issued without recording his satisfaction and without framing his opinion in respect of nature and complexity of accounts. The petitioners claim that books of account of all the aforesaid firms were seized on 7th April, 2000, the date of search.
During this entire period, no whisper of complexity in the account of books was ever raised. Such contingency is not reflected in various notices issued and the questionnaire supplied to the petitioner. The AO was required to complete the assessment on or before 30th April, 2002, as that was the statutory time-limit.
It is claimed by the petitioners that on 10th/11th April, 2002, the CIT came to Kota along with one chartered accountant, Mr. Goyal. He held his camp office in Income-tax office at Kota. The petitioners were called for discussions and in the presence of Mr. Goyal, chartered accountant discussions took place. After discussion, Mr. Goyal advised the petitioners as to why did they not go to the Settlement Commission. This could have made the AO free from this time-barring matter. It is also urged that CIT, Jaipur discussed the matter with the AO. It is claimed by the petitioners that it was at that point of time, certain directions were issued by the CIT for taking appropriate measures under s. 142(2A) of the Act. The petitioners claim that they came to know that the AO
would be issuing directions under s. 142(2A). Consequently, the petitioners claim that they received directions under s. 142(2A). The propriety and legality of these directions is being challenged by the petitioners. The petitioners have been directed to get their accounts audited by Ms. Maya Agrawal, FCA of M/s Pramod & Associates, Mahavir Nagar, Kota. The petitioners claim that she appears to be an associate of Mr. Goyal who came from Jaipur along with CIT.
The petitioners claim that they have answered the questionnaire given to them. Sufficient explanation was furnished by them. It is claimed that no adverse assessment order was likely to be passed against the petitioners. The petitioners claim that in view of an arrangement entered into between the Asstt. CIT (Central Circle), Kota, CIT, Jaipur and Mr. Goyal, CA the Department has decided to take recourse to s. 142(2A) of the Act. While arriving at such an agreement it is alleged that it was in the mind of the authority that assessment order, if passed, will go in favour of the petitioners. It is also alleged that in case assessment order is not passed before 30th April,2002, it would get barred by limitation. It is alleged that it was in these circumstances the assessing authority has issued a direction to the petitioners under s. 142(2A) of the Act.
In the aforesaid background of facts, the petitioners claim that there was nothing on record that any approval was obtained by the CIT by the AO. Further, there was nothing on record to suggest that any exercise as required under the Act was undertaken by the AO. The issuance for directions by the AO under s. 142(2A) at the directions of the CIT are vitiated being arbitrary and against the judicial system.
The petitioners claim that such directions have been issued without any scrutiny having been made. The account books of the petitioners were left with the AO for almost two years. The AO had not utilised this occasion to scrutinise such account books. As such, he could not have concluded that accounts involved complexity. Before a drastic action like the one impugned was ordered, it was necessary that AO should have exercised his jurisdiction properly and undertaken the scrutiny of papers available with him. The AO has chosen to go for less cumbersome method in ordering audit by issuing directions instead of doing scrutiny himself. Such directions have been issued mechanically without giving a speaking order. The seized documents which might have looked by the AO are outside the scope of scrutiny for issuing direction under s. 142(2A). The AO is under obligation to do the assessment himself. He cannot empower the chartered accountant to examine and investigate on his behalf. The order appears to have been passed only for getting the time extended. Under s. 158(BC) the assessment is required to be made within two years. Thus, the order is bad in the eye of law. Supporting the case, learned counsel for the petitioner submitted that exercise of issuing directions under s. 142(2A) by the AO is in absence of two requisite conditions, namely, (a) complexity of accounts; (b) interest of Revenue. The AO has only framed an objective opinion. This should have been done after due application of mind. There is no opinion framed by the AO, therefore, there was no application of mind at his end. Unless there was application of mind at the level of AO, there was no question of approval being accorded by the CIT for the purposes of issuing directions under s.142(2A) of the Act. Thus, the whole exercise is vitiated. It has further been submitted on behalf of the petitioners that the order which has been passed by the AO under s. 142(2A) is not after framing an opinion by the AO.
9. On such assertions being made by the petitioners, counsel for the Department was called on 29th May, 2002, and requested to keep the records of the instant case ready for perusal of the Court. The records have been called and a copy has been placed on record. The same have also been shown to the counsel for the petitioners. After perusal of the record, it is submitted by the counsel for petitioners that the reference letter which has been shown today, clearly brings out the fact that there was no application of mind either on the part of the AO or the CIT; further no opinion was formed by the AO before referring the matter to the CIT for approval as provided under s.142 of the Act. Therefore, it has been claimed by the petitioners that powers conferred under s. 142(2A) could not have been invoked. The petitioner has placed reliance on following decisions of the Courts : (i) H.P. State Forest Corpn. Ltd. vs. Jt. CIT (2001) 170 CTR (HP) 133 : (2001) 252 ITR 837 (HP), (ii) Peerless General Finance & Investment Co. Ltd. vs. Dy. CIT (1999) 156 CTR (Cal) 512 : (1999) 236 ITR 671 (Cal), (iii) Swadeshi Cotton Mills Co. Ltd. vs. CIT (1987) 63 CTR (All) 335 : (1988) 171 ITR 634 (All).
10. This has further been submitted by the petitioners that the documents sought to be audited are all the seized documents, whereas under the provisions of the Act only accounts can be ordered to be audited and not all the other documents. By passing such an order, the AO has abrogated his powers to scrutinise the documents. It has further been claimed by the petitioners that auditors have been appointed on extraneous considerations. The appointed auditor was the person who came along with CIT and, therefore, this is colourable exercise of powers. It has also been claimed by the petitioners that before passing order of special audit, no opportunity of hearing was provided as it envisages civil addition liability in terms of payment of audit fees, etc. Such burden of fees is determined by the petitioners and, therefore, exercise of jurisdiction of AO is without jurisdiction.
11. I have considered the submissions made by the petitioner and have perused the record produced by the petitioners along with writ petition. The proceedings as produced by the respondent Department on the directions issued to the counsel for the Department were also perused. Learned counsel for the petitioners in arguments stressed that one Mr. Goyal, chartered accountant accompanied the CIT while he visited Kota and submitted that it was with the aid and advice of Mr. Goyal, the present exercise of ordering audit has been undertaken just to benefit one Ms. Maya Agarwal. The officials of the IT Department were present at the time of hearing and it was submitted on their behalf that the Department will not insist upon the audit being carried out by Ms. Maya Agarwal. Another auditor will be substituted and in case petitioner has any objection about the auditor to be appointed by the respondent-Department, due weightage will be given to his objection, if raised. Thus, apprehension of the petitioner that exercise of audit has been taken at the instance of Mr. Goyal for some undisclosed reasons and considerations for Ms. Maya Agarwal will have no bearing in the proceedings because she has been represented to be excluded from the audit and will be substituted. Thus, apprehension of the petitioners regarding extraneous consideration has no bearing in the present controversy.
12. The petitioners have further gone on record to suggest that it was a device to save time-barring assessment by bringing the same in the purview of the audit. It has been done to furnish sufficient opportunity to the Department. The argument is too presumptive to be accepted. The time-limit was to expire on 30th April, 2002. The exercise of ordering audit is shown to have been generated on or around 10/11th April, 2002. At least three weeks period was available to the Department to have undertaken any exercise for assessment. Without any relevant material, such inferences cannot be recognized. A shadow on the exercise of statutory powers can only be permissible if there is sufficient material. Unfounded assumption cannot be permitted to statutory exercise of jurisdiction.
13. Learned counsel for the petitioners has further submitted that directions issued by the AO appears on the basis of the directions issued by the CIT. Such an assertion as contained in para 11 of the writ petition is more in the form of a derivative conclusion from the manner of proceedings as alleged to have taken place on 10/11th April,2002. Allegations in para 11 of the writ petition falls short of establishing the fact that directions have been issued under the instructions of CIT. There is no foundations available on record to suggest that orders have been passed under the directions of the CIT by the AO, so much so, statement contained in para 11 of the writ petition also do not make out any cause for personal information of the petitioners. It only states that : “The petitioners came to know from the AO himself that he would be issuing directions under s. 142(2A) of the IT Act by getting the special audit of accounts.”
14. This statement does not show that AO himself has told that he has done so on instructions of CIT. May be the petitioner added certain things by imagination and thus concluded that order was passed under the instructions of CIT. The petitioners have further claimed that if this order was not passed under s. 142(2A), assessment would become time-barred. This again is a conclusion which is only presumption of the petitioners. If it was a conclusion like one as suggested by the petitioners, then of course, it could not have been under the directions of the CIT.
15. This is suggested that this was in the mind of the AO that he is going to lose the case for the statutory period. Therefore, he has thought of approaching the matter under the scheme of the Act as provided under s. 142(2A) of the Act. These are permutation and combination available for doing a mental gymnastics. There was no material on record to conclude that such allegations had in fact any foundation. Merely on the basis of apprehension, quasi- judicial orders are not required to be touched and therefore flight of imagination of the petitioner is not considered sufficient enough to cause any shadow of the doubt in the mind of the Court. There is no convincing material on record to deduce that the exercise of ordering an audit under s. 142(2A) was not an independent exercise of jurisdiction. It cannot therefore be said that it was under the directions of the CIT.
16. I have seen the order of AO as produced before me. The same has been placed on record. It records that : “It was observed that sales outside books of account have been made, which was also accepted by the partners, during the course of search and seizure operation itself. It was also observed that stock of all the three firms are lying in a common place and stock of any firm cannot be bifurcated. During the course of assessment proceedings, it was noticed that stock register is not maintained properly by all the three firms. The following defects were detected in the stock register : (a) Day-to-day balancing has not been done. (b) Different items such as GI sheets angles, etc. have been clubbed in a single account. (c) Quantity/measurement of the stock has not been mentioned in the stock register.” (Emphasis, italicised in print, supplied) These observations of the AO in the recommendation to the CIT record an admission of the petitioners that sales have been taken outside the books of account. If sales has taken place outside the books of account, then necessary corollary of this submission is that there is an attempt of the tax evasion. The petitioner has relied on the judgment of Allahabad High Court in the case of Swadeshi Cotton Mills Co. Ltd. (supra) wherein it has been observed thus :”The exercise of power to direct special audit depends upon the satisfaction of the ITO with the added approval of the CIT. But he must be satisfied that the accounts of the assessee are of a complex nature, and, in the interests of the Revenue, the accounts should be audited by a special auditor. The special auditor is also an auditor like the company’s auditor, but he has to be nominated by the CIT and not by the company. The accounts are again to be audited at the cost of the company………………
2. As regards companies, only those cases are to be referred for special audit where : (i) 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, or (ii) the company’s affairs have been the subject of a search or seizure under the IT Act or been the subject of a probe under the Foreign Exchange Regulations Act, or (iii) the company has foreign collaboration arrangements; or (iv) where the company’s principal is a foreign company and deduction of head office expenses, etc., have been claimed, or (v) where the company has import/export business with a yearly turnover of more than a crore of rupees, or (vi) where there are allegations of substantial tax evasion, or (vii) where the ITO has any other information necessitating special audit. As regards non-company assessees, the following cases should be referred for a special audit ………………. While the above guidelines give a broad spectrum of the area of selection, the actual selection should be confined to a few carefully selected cases needing special probe. Further, when a case is referred for special audit for any particular assessment year, it would be desirable if the other intervening years as well as the latest assessment years are also covered. While submitting such cases for approval to the CIT, the reasons for selecting the case/cases should be stated….'” If law laid down in Swadeshi Cotton Mills Co. Ltd.’s case (supra) is applied, then it stands out that as and when there are allegations of substantial tax evasion, then Board has laid down guidelines to select cases for audit under s. 142(2A) of the Act. The AO is under the obligation to follow them and if in the background of such directions, the AO has found that petitioners have admitted that there were sales outside the account books, then obviously, the AO was conscious of the fact that such sales would result in tax evasion and in this background while submitting the case for approval to the CIT, this reason is stated in the letter. It cannot therefore be said that the AO had not applied its mind and had acted mechanically at the instance of CIT.
The other reasons assigned in the recommendatory letter dt. 17th April, 2002, placed on record by the respondent Department under the directions of this Court issued on 28th May, 2002, parts of which have been quoted hereinabove, rule out any possibility of application of the case relied upon by the learned counsel for the petitioners in the matter of H.P. State Forest Corpn. Ltd. (supra). The Division Bench of Himachal Pradesh High Court has proceeded in that case on the basis of facts obtaining in that case wherein it has been observed thus :
“We have considered the rival contentions of the parties and, in our view, the petition-deserves to be allowed. It is true that the power has been exercised under sub-s. (2A) of s. 142 of the Act. But, it is equally true that so far as the order passed vide Annex. P/1, impugned in the present petitioner is concerned, it does not state that the AO had considered the relevant factors which were required to be borne in mind under sub-s. (2A) of s. 142 of the Act. It is, no doubt, true in the affidavit and further affidavit, several factors have been pointed out before this Court as to why the action was required to be taken. In our opinion, however, when those factors have not been reflected in the impugned order, Annex. P/1, the same cannot be pressed in aid at the time of hearing of the petition.”
The law laid down by Himachal Pradesh High Court in aforesaid case was in the background that there was no reason assigned and the reasons were attempted to be supplied by the affidavit. The Hon’ble Division Bench of Himachal Pradesh in view of the law laid down in Mohinder Singh Gill vs. Chief Election CIT AIR 1978 SC 851 was persuaded to allow the petitioner but in the instant case, such application is not warranted. The AO had categorically stated after critical examination. He has given reasons including the one that there was an admission of partners that sale has taken place outside the books of account, then, necessarily tending to indicate that there was a tax evasion.
The relevant consideration for ordering audit and the order was thus in conformity with law as laid down in Swadeshi Cotton Mills Co. Ltd.’s case (supra) wherein it has been observed that special audit depends upon the satisfaction of the CIT with the added approval of the CIT. In view of the aforesaid, the case relied upon by the learned counsel for the petitioners in the matter of U.P. State Handloom Corpn. Ltd. (supra) also does not come to the rescue of the petitioners, on the contrary, it supports the Revenue wherein the Court has observed that assessee had filed provisional balance sheet showing that assessee was not sure of the correctness of the account books. In the instant case, the assessee has admitted that sales have taken place outside the account books. Once this fact stands out, then conclusion has to be in favour of Revenue that accounts books are untrue. Therefore, when accounts are accepted to be not truthful, then it cannot be said that exercise of jurisdiction by AO was not in conformity with the powers conferred on him.
The case relied upon by the learned counsel for the petitioners in the matter of Peerless General Finance & Investment Co. Ltd. (supra) is of no assistance to the petitioners as that was the case on the basis of proposal which was made without placing material before the Chief CIT. In the instant case, there was a definite proposal made before the CIT with detailed material and thus this case has no application in the facts and circumstances of the present case
The discussions made hereinabove show that AO has objectively considered the material available with him and has reached to a bona fide conclusion about the nature of accounts placed before him that there had been admitted sale out of account books. The day-to-day balancing has not been done. The stocks of three firms were lying in common place and their bifurcation was not possible in such contingencies to identify separate dominance of the petitioners firms on the stocks available. The exercise undertaken under s. 142(2A) will be of substantial assistance and thus case of the petitioners as stated and made out before this Court falls short of making out a case wherein it cannot be said that an exercise has been taken by the respondent Department which is not in conformity with the provisions of s. 142(2A). Therefore, this Court feels that no interference is called for.
The writ petition having no force is dismissed.
[Citation : 270 ITR 499 ]
