INCOME TAX ACT, 1961

Section 142(2A)

Assessment - Special audit under section 142(2A) - Reason, assessee having entered into multiple related party transactions -

AO directed special audit of assessee's accounts under section 142(2A) on the ground that assessee had entered into multiple related party transactions and identification of related parties along with fair market value required determination. AO issued show cause notice to petitioner asking about objection to direction for special audit, thus complying with principles of natural justice. Assessee challenged this by way of writ petition contending that there was no honest attempt or application of mind on the part of AO to understand books of account of assessee company. Further, it was contended that several transactions had already been subjected to transfer pricing mechanism and 'TPO' had already examined such transactions, therefore, requirements of section 142(2A) were not satisfied. Assessee also objected to direction for special audit on ground that this direction asked auditor to carry out audit on specefic points. Petitioner contended that the impugned order contained a direction to the auditor to audit the accounts, whereas under section 142(2A) of the Act, the powers of the AO are to ask the assessee to have the audit of the accounts carried out. Held: The legislature has now considerably widened the scope of exercise of such powers by including several other situations besides the nature and complexity of the accounts of the assessee. Thus, additional expressions which now finds way into section 142(2A) of the Act are volume of the accounts, doubts about correctness of the accounts, multiplicity of the transactions in the accounts or specialized nature of business activities of the assessee. However, requirement of the formation of the opinion as to the special audit being in the interest of the Revenue continues to apply before and after the amendment. Nevertheless, the basic essential requirements of exercising the powers have been substantially widened by the legislature by way of such amendment. Merely because the impugned order contains a narration that the special auditor should conduct the audit in a particular manner, would not destroy the very essence of the order nor would the same be fatal to the order itself. It is true that section 142(2A) of the Act envisages the direction to the assessee to get the accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288 of the Act as may be appointed by the Principal Commissioner. However, inconsequential inaccuracy in the language used in the impugned order, would not be fatal to the order itself.

REFERRED : Sharad Kantilal Shah v. Deputy Commissioner, Central Circle 8(3) (2017) 393 ITR 594 (Bom-HC) : 2016 TaxPub(DT) 4272 (Bom-HC), Takshashila Realities (P) Ltd v. Dy. CIT, Circle 4(1)(2) (2017) 34 taxmann.com 172 (Guj-HC) and Habitat Shelters (P) Ltd. v. Pr. CIT (2018) 254 Taxman 160 (Karn-HC) : 2018 TaxPub(DT) 0976 (Karn-HC)

FAVOUR : Against the assessee.

A.Y. :

SUBSCRIBE FOR FULL CONTENT