The assessee carries on business as a builder and developer. The dispute which is raised before the Court in these proceedings arises from a direction which has been given on 21 March 2014 by the Assistant Commissioner of Income Tax, Central Circle-II, Kanpur, under Section 142(2A) of the Income Tax Act, 1961, directing a special audit for assessment year 2011-12. The order of the Assistant Commissioner of Income Tax is based on a sanction granted by the Commissioner of Income Tax (Central), Kanpur on 13 March 2014.
2. For Assessment Year 2011-12, the assessee filed a return of income showing a total income of Rs.67.77 lacs. The assessee claimed a deduction under Section 80-IB(10) for AY 2010-11. A notice was issued under Section 143(2) of the Act on 28 September 2012. Another notice under Section 142(1) of the Act was issued on 26 September 2013, by which the assessee was called upon to furnish a copy of the audit report together with all underlying schedules and annexures besides, producing the books of account, bills and vouchers for verification. The assessee failed to comply with the requisition, following which a notice under Section 271(1)(b) of the Act was issued. On 6 November, 2013 a penalty of Rs.10,000 was imposed upon the assessee for non-compliance of the notice. A fresh notice was issued under Section 142(1) of the Act on 7 November 2013. Prosecution proceedings were initiated against the petitioner under Section 276D of the Act, inter alia, for wilfully withholding a copy of the audit report, books of account and other documents.
3. On 8 January 2014, summons were issued under Section 131 of the Act against the Directors of the Company requiring them to furnish the audit report for the AY 2011-12 together with the books of account, bills and vouchers for verification. On 7 February 2014, a notice was issued under Section 142(2A) of the Act, calling upon the assessee to show cause as to why a special audit should not be ordered. The notice adverted to the previous background noted earlier, and to the failure of the assessee to cooperate in pursuance of the various notices that were issued for the production of the tax audit report, books of account, bills and vouchers. The notice stated that since the assessee is a builder, who is engaged in the business for several years, various projects would be conducted at a time during a financial year. Considering the past record up to AY 2010-11, separate books of account for each unit and each building project are being kept. However, no statutory audit report under Section 44AB of the Act and no audit to justify the claim under Section 80-IB(10) of the Act was filed. Similarly, no profit and loss account and balance sheet had been filed unit wise. The notice accordingly indicated that it was proposed to order a special audit on the ground that (i) complexity is involved in the books of account; and considering (ii) the volume of accounts; (iii) specialised nature of business activities through different project units; and (iv) interest of the revenue.
4. The assessee responded to the notice to show cause on 14 February 2014. In the reply, the assessee proceeded on the basis that the special audit under Section 142(2A) of the Act could be ordered only where there is a complexity in the accounts and the interest of the revenue so requires. The assessee submitted that the grounds which were raised in the show cause notice were, therefore, contrary to the provisions of Section 142(2A) of the Act. Evidently, the reply of the assessee, as we shall note ignores the amendment which was brought about in Section 142(2A) by the Finance Act, 2013 with effect from 1 June 2013. According to the assessee, the failure to furnish a tax audit report could result in imposition of a penalty but could not justify a special audit. The assessee submitted that the complexity of accounts is a prerequisite for invoking Section 142(2A) of the Act and hence the notice was contrary to law.
5. The Assistant Commissioner of Income Tax by a letter dated 14 February 2014, sought the approval of the Commissioner of Income Tax (Central) Kanpur. The letter adverted to the factual background of the case including the failure of the assessee to produce the tax audit report, books of account, bills and vouchers despite several opportunities and the audit report in support of the claim under Section 80-IB(10) of the Act. Moreover, it was stated that in submitting that a special audit under Section 142(2A) of the Act could be ordered only on the ground of the complexity of the accounts, the assessee had relied upon the pre-amended provision of the statute whereas with effect from 1 June 2013, besides the existing two conditions, four more conditions had been substituted. In this case, it was submitted that all the four newly inserted conditions are applicable. The Commissioner of Income Tax (Central), Kanpur, granted his approval to the proposal on 13 March 2014. Following this, the CIT (Central), Kanpur, by an order dated 21 March 2014 ordered a special audit under Section 142(2A).
6. On behalf of the assessee, it has been submitted by learned Senior Counsel that (i) the same method of accounting which has been followed by the assessee had been accepted by the Assessing Officer for the period between 2001 to 2010-11; (ii) though the ACIT in the notice to show cause had relied upon the complexity of the accounts as one of the reasons for proposing a special audit, this ground was given up when he moved the CIT (Central), Kanpur. In spite of this, the CIT (Central), Kanpur, has adverted to the complex accounting procedure to justify a special audit; (iii) the assessee had failed to produce the books of account before the Assessing Officer because of a dispute in the management and without the production of books, the stage of special audit had not arrived under Section 142(2A) of the Act; (iv) Section 142(2A) of the Act is not a substitute for the provisions of Section 145A of the Act and it is always open to the Assessing Officer to reject the books and to carry out a best judgment assessment.
7. On the other hand, it has been urged on behalf of the Revenue that (i) the record of the case would indicate that there has been a complete and total obstruction on the part of the assessee to respond to several notices which were issued for the production of the tax audit report under Section 44AB of the Act, the audit report in support of the claim for a deduction under Section 80-IB(10) of the Act and the books of account, bills and vouchers; (ii) the assessee proceeded on a manifestly incorrect notion that a special audit could be only justified on the complexity of the accounts whereas Section 142(2A) of the Act has now been amended with effect from 1 June 2013 by the Finance Act, 2013, to cover additional grounds; (iii) it is an incorrect reading of the proposal which was submitted by the ACIT to urge that the ground of complexity of accounts was given up; (iv) the grounds which have been raised both by the CIT (Central), Kanpur, and the ACIT in ordering a special audit, are squarely within the purview of Section 142(2A) of the Act.
8. In assessing the correctness of the submissions which have been urged on behalf of the petitioner, it will be necessary to note at the outset that sub-section 2A of Section 142 of the Act has been amended with effect from 1 June 2013 by the Finance Act, 2013. As amended, the provision reads as follows:
"142(2A). If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require:
Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard."
9. As a result of the amendment, an audit within the meaning of that provision can be ordered on any of the following grounds, namely; (i) the nature and complexity of the accounts; (ii) volume of the accounts; (iii) doubts about the correctness of the accounts; (iv) where there is a multiplicity of the transactions in the accounts; (v) specialized nature of the business activity of the assessee; and the interest of the revenue. The Assessing Officer is empowered to direct that an audit of a nature stipulated in the provision should be carried out, though with the previous approval of the Chief Commissioner or the Commissioner.
10. In the present case, the record would make it abundantly clear that at various stages of the assessment for AY 2011-12, sufficient opportunities were granted to the assessee to produce the tax audit report under Section 44AB of the Act and besides it, the books of account, bills and vouchers as well as the annual audit report for justifying the claim under Section 80-IB(10) of the Act. The failure of the assessee to comply with the notices which were issued under Section 143(2) and Section 142(1) of the Act led to the imposition of a penalty of Rs.10000 under Section 271(1)(b) of the Act. That however does not dilute or detract from the jurisdiction of the Assessing Officer to order a special audit under Section 142(2A) of the Act provided the conditions mentioned in the provision are duly fulfilled. The notice to show cause which was issued to the assessee on 7 February 2014 refers to the basis on which it was opined, prima facie, that the accounts involved complexity. Besides this, the grounds which have been newly added by the Finance Act, 2013 were also referred to in justification of the proposal to get a special audit done. In the reply of the assessee, it was sought to be urged that the special audit could be ordered only where the complexity of the accounts and the interest of the revenue so justified. This submission was manifestly contrary to the amended provisions of sub-section 2A of Section 142 of the Act. In his proposal which he submitted to the CIT (Central), Kanpur, on 14 February 2014, the Assessing Officer noted this legal position in view of the amended provisions with effect from 1 June 2013 by drawing attention to the fact that besides the existing two conditions, four more conditions have been substituted and that all the four newly inserted conditions would be applicable. The proposal which was submitted by the Assessing Officer does not give up the ground of the complexity of the accounts. The Assessing Officer was dealing with the submission of the assesssee that it was only a complexity of the accounts which could justify a special audit.
11. The order which has been passed by the CIT (Central), Kanpur, granting his approval, takes note of the total failure on the part of the assessee to comply with the requisitions and notices which were issued to him. The CIT (Central), Kanpur, has noted that the assessee has deprived the Assessing Officer of relevant information which could have enabled him to determine the true and correct income. In granting his approval, the CIT (Central), Kanpur, has observed as follows:-
"3. Since assessee is a Builder and Colonizers, the project of the assessee spread over more than one accounting period and accordingly income has to be computed on percentage completion basis. This requires quantification of closing stock of raw material as well as work-in-progress for each year. In normal course, such information and other information require for computation of income would be available in Form 3CD filed by the assessee in pursuance to tax audit report u/s 44 AB of the Act. Since Percentage Completion Method as per Accounting Standard VII of the Institute of Chartered Accountant as well as calculation of work-in-progress is required complex accounting procedure. It appears to be a fit case for reference to the Accountant as prescribed under the Income Tax Act 1961 as per provisions of section 142 (2A) of the Act.
4. In view of the amendment and the facts that as per section (2A) of the Act reports to query before assessment and come into force w.e.f. 01/06/2013 it will be applied in the existing proposal also. Therefore, it is obvious that the reliance placed by the assessee on various case laws based on pre-amended section 142(2A) of the Act is not valid."
12. On the basis of this order, the Assessing Officer has ordered a special audit on 21 March 2014. In our view, the order allowing the special audit under Section 142(2A) of the Act is clearly justified and is founded on grounds which are statutorily recognized in sub-section (2A) of Section 142 of the Act. Once after the grant of a reasonable opportunity to the assessee as required by law, the Assessing Officer has indicated the material on the basis on which he has come to the conclusion that a special audit was necessary, it would not be open to the Court to test the sufficiency of the grounds. Undoubtedly, the Court would be justified in interfering in a case where there has been a breach of the procedural requirement of complying with the principles of natural justice or where there is absolutely no material whatsoever to sustain the conclusion that the grounds which have been relied upon do exist. The CIT (Central), Kanpur, as well as the Assessing Officer have furnished cogent reasons for holding that the grounds which are stipulated in Section 142(2A) of the Act have been duly established. Where the assessee as in the present case, had failed to produce the books of account, that does not leave the Assessing Officer with a recourse to Section 145A of the Act as the only available means to determine the income of the assessee for the purposes of an assessment. In any event, the requirement contained in Section 142(2A) of the Act about the specialized nature of the business activity of the assessee is broad enough to comprehend the facts such as those of the present case. The assessee, as the records would indicate, consistently obstructed the assessment proceedings by refusing to produce relevant information which was in its possession ostensibly because there was a dispute in the Management before the Company Law Board. The Assessing Officer was justified in holding that the interest of the revenue had to be protected by ordering a special audit in the facts of the present case.
13. For these reasons, we find that the impugned orders are in accordance with law. Hence, no case for interference is made out. The writ petition is, accordingly, dismissed.
Order Date :- 13.5.2014 VMA (Dr. D.Y. Chandrachud, C.J.) (Dilip Gupta, J.)