Delhi Development Authority & Anr. v. Union of India & Anr.

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The Tax PublishersW. P. (C.) Nos. 356 of 2011, 19746 of 2005, 605 of 2008, 846 of 2009, 1386 of 2007,426 of 2012 and 553 of 2010 2013 TaxPub(DT) 0616 (Del-HC) : (2013) 052 (I) ITCL 0135 : (2013) 350 ITR 0432 : (2013) 259 CTR 0518 : (2013) 214 TAXMAN 0130 : (2013) 089 DTR 0054 INCOME TAX ACT, 1961 --Assessment--Special audit under section 142(2A) Notice of audit based on notes of accounts--Assessee was a statutory authority and maintaining books of accounts in accordance with law and was subject to audit by Comptroller and Auditor Generals (CAG). During assessment proceedings books of account were produced and within a two days, assessing officer directed special audit under section 142(2A) even without examining account or checking books of account. Assessing officer for this purpose had taken into account examining 'notes on accounts' and directed statutory audit under section 142(2A). *Held:* Not justified. Without forming an opinion that there was complexity of account and safeguarding interest of revenue direction of special audit under section 142(2A) was, therefore, not valid, being without fulfilling conditions precedent. The note reveals that the assessing officer felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in number. Detailed scrutiny of a large number of entries by itself, on standalone basis, will not amount to complexity of accounts. The accounts do not become complex because merely there are a large number of entries, e.g., a petrol pump may have substantial sales, to thousands of customers daily at prices fixed under law/rules, but this, by itself, will not be the accounts complex. Similarly, an assessing officer is required to scrutinize the entries and verify them, but this does not require services of a special auditor or a chartered accountant to undertake the said exercise. Section 142(2A) is not a provision by which the assessing officer delegates his powers and functions, which he can perform, to the special auditor. The said provision has been enacted to enable the assessing officer to take help of a specialist, who understands accounts and accounting practices to examine the accounts when they are complex and the assessing officer feels that he cannot understand them and comprehend them fully, till h7 0 bjbjUU -7'7'+l2 2 2 2 2 2 2 F )))8&DjD[1]F LR,,,,,,,,Q[1]QQQQQQ$[1]S [1]'U Q2 ,,,,,Q92 2 ,,R999,p2 ,2 ,Q9,Q99@OD2 2 F,, uLF %):3 EF R0LR5E0V90VF9F F 2 2 2 2 [1]INCOME TAX ACT, 1961 --Assessment--Special audit under section 142(2A) Notice of audit based on notes of accounts--Assessee was a statutory authority and maintaining books of accounts in accordance with law and was subject to audit by Comptroller and Auditor Generals (CAG). During assessment proceedings books of account were produced and within a two days, assessing officer directed special audit under section 142(2A) even without examining account or checking books of account. Assessing officer for this purpose had taken into account examining 'notes on accounts' and directed statutory audit under section 142(2A). Held: Not justified. Without forming an opinion that there was complexity of account and safeguarding interest of revenue direction of special audit under section 142(2A) was, therefore, not valid, being without fulfilling conditions precedent. The note reveals that the assessing officer felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in specialist and mandated by the Act to undertake the said exercise. The case of the assessee is that it is maintaining separate accounts for Nazul I and Nazul II lands and the General Development Account. The said accounts are audited by the Comptroller and Auditor General and have been accepted by the Central Government. [Para 24] Court also finds merit in the contention raised by the petitioner that the assessing officer have repeatedly in all orders, for the purpose of recording reasons, taken the 'notes of accounts' and verbatim incorporated the same. This is apparently correct and, therefore, discloses non-consideration and non-application of mind, which constitutes an error in the decision making process. It is an easy and convenient manner to transfer the obligation of scrutiny and examination to the special auditor. It may be true and correct that certain aspects mentioned in the notes of accounts may, if required and necessary and after in depth examination, justify appointment of a special auditor but the assessing officer has to be cautious and careful to segregate them from others while recording the reasons. If such an exercise is undertaken, it will show due and proper application of mind and not exercise of power under section 142(2A) on the pretend or on the pretext that such power exists and, therefore, should be exercised. Existence of the power is not in dispute; it is the exercise of power, which is in dispute and question. The exercise of power must withstand and meet the requirements prescribed. Failure to exclude irrelevant and extraneous matters negates the 'opinion' as the said matters should not cloud or dent formation of opinion. Reasons recorded must be genuine and have a nexus with the twin statutory requirements, i.e., complexity of accounts and interests of the revenue. [Para 25] What is rather surprising and noticeable is that right from the first year 2003-04 onwards and in all the assessment years thereafter, the assessing officer have directed special audit. The reasons given for the assessment year 2003-04 have been substantially followed in the subsequent years or have been taken from the notes of accounts for the year in question. [Para 27] One more additional factor for the initial assessment years may be noted that the petitioner DDA was granted registration as a charitable institution under section 12AA of the Act in 2006 with retrospective effect with effect from 1-4-2002. This fact was not in the knowledge of the respondent authorities when the first few orders for special audit were passed. Counsel for the Revenue has relied upon section 13(3) of the Act and submitted that the registration under section 12AA is not final and facts and accounts of each year have to be examined. There can be no doubt that facts and accounts of each year have to be examined but this is different from stating or alleging that section 13(3) is applicable. Various contentions and issues have to be examined before a finding is recorded that section 13(3) is attracted and applicable. It is the contention of the petitioner that misappropriation, if any, by the employees or third persons which causes loss to the petitioner cannot be a ground to invoke section 13(3) as the petitioner is a distinct taxable entity. The petitioner suffers when there is misappropriation of the funds or misuse of assets/funds because of mala fide or criminal intent of a third person. These are aspects and facts which are to be examined in the assessment proceedings. However, the contentions raised by the petitioner are relevant factors which have to be considered. It is different matter that the assessing officer may or may not accept the said contention. The contention is as such not an accounting issue, unless it is held that the accounts indicate or prima facie show misuse or wrong use of funds by related persons and section 13(3) is attracted. For details and exact figures in a given matter, special audit may be justified. The legal contention raised by the petitioner cannot be decided by a special auditor and has to be decided by the assessing officer. [Para 37] In these circumstances, there is no option but to quash the direction/ orders for special audit in each of these years. The writ petitions are allowed and the orders under section 142(2A) are quashed. This, however, does not mean that if the assessing officer during the course of the assessment proceedings feels and requires special audit, he cannot record reasons and justify special audit. It will be open to the assessing officer in the course of the assessment proceedings to record fresh reasons and direct special audit under section 142(2A). It will be equally open to the petitioner to contest the direction for special audit in accordance with law on the ground that the mandatory conditions stipulated in the said section are not satisfied. [Para 38] Pursuant to interim orders passed in writ petitions the assessment proceedings for the assessment years 2003-04 onwards have been stayed. Now, assessment proceedings have to be restarted but taking up of all the assessment years together would unnecessarily entail difficulties and result in assessments being framed in haste and hurry. The petitioner and the assessing officer will be put to considerable inconvenience. In these circumstances, the assessment proceedings for the assessment year 2003-04 shall be taken up for scrutiny and hearing first and will be completed before the assessment proceedings for other years are taken up for hearing. The interim stay orders granted earlier will continue for the assessment years 2004-05 onwards till the assessment proceedings for the assessment year 2003-04 are concluded. [Para 39] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersW. P. (C.) Nos. 356 of 2011, 19746 of 2005, 605 of 2008, 846 of 2009, 1386 of 2007,426 of 2012 and 553 of 2010
2013 TaxPub(DT) 0616 (Del-HC) : (2013) 052 (I) ITCL 0135 : (2013) 350 ITR 0432 : (2013) 259 CTR 0518 : (2013) 214 TAXMAN 0130 : (2013) 089 DTR 0054

INCOME TAX ACT, 1961

--Assessment--Special audit under section 142(2A) Notice of audit based on notes of accounts--Assessee was a statutory authority and maintaining books of accounts in accordance with law and was subject to audit by Comptroller and Auditor Generals (CAG). During assessment proceedings books of account were produced and within a two days, assessing officer directed special audit under section 142(2A) even without examining account or checking books of account. Assessing officer for this purpose had taken into account examining 'notes on accounts' and directed statutory audit under section 142(2A). Held: Not justified. Without forming an opinion that there was complexity of account and safeguarding interest of revenue direction of special audit under section 142(2A) was, therefore, not valid, being without fulfilling conditions precedent.

The note reveals that the assessing officer felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in number. Detailed scrutiny of a large number of entries by itself, on standalone basis, will not amount to complexity of accounts. The accounts do not become complex because merely there are a large number of entries, e.g., a petrol pump may have substantial sales, to thousands of customers daily at prices fixed under law/rules, but this, by itself, will not be the accounts complex. Similarly, an assessing officer is required to scrutinize the entries and verify them, but this does not require services of a special auditor or a chartered accountant to undertake the said exercise. Section 142(2A) is not a provision by which the assessing officer delegates his powers and functions, which he can perform, to the special auditor. The said provision has been enacted to enable the assessing officer to take help of a specialist, who understands accounts and accounting practices to examine the accounts when they are complex and the assessing officer feels that he cannot understand them and comprehend them fully, till h7

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[1]INCOME TAX ACT, 1961

--Assessment--Special audit under section 142(2A) Notice of audit based on notes of accounts--Assessee was a statutory authority and maintaining books of accounts in accordance with law and was subject to audit by Comptroller and Auditor Generals (CAG). During assessment proceedings books of account were produced and within a two days, assessing officer directed special audit under section 142(2A) even without examining account or checking books of account. Assessing officer for this purpose had taken into account examining 'notes on accounts' and directed statutory audit under section 142(2A). Held: Not justified. Without forming an opinion that there was complexity of account and safeguarding interest of revenue direction of special audit under section 142(2A) was, therefore, not valid, being without fulfilling conditions precedent.

The note reveals that the assessing officer felt that the case required detailed scrutiny or monitoring, verification of entries, which were substantial in specialist and mandated by the Act to undertake the said exercise. The case of the assessee is that it is maintaining separate accounts for Nazul I and Nazul II lands and the General Development Account. The said accounts are audited by the Comptroller and Auditor General and have been accepted by the Central Government. [Para 24] Court also finds merit in the contention raised by the petitioner that the assessing officer have repeatedly in all orders, for the purpose of recording reasons, taken the 'notes of accounts' and verbatim incorporated the same. This is apparently correct and, therefore, discloses non-consideration and non-application of mind, which constitutes an error in the decision making process. It is an easy and convenient manner to transfer the obligation of scrutiny and examination to the special auditor. It may be true and correct that certain aspects mentioned in the notes of accounts may, if required and necessary and after in depth examination, justify appointment of a special auditor but the assessing officer has to be cautious and careful to segregate them from others while recording the reasons. If such an exercise is undertaken, it will show due and proper application of mind and not exercise of power under section 142(2A) on the pretend or on the pretext that such power exists and, therefore, should be exercised. Existence of the power is not in dispute; it is the exercise of power, which is in dispute and question. The exercise of power must withstand and meet the requirements prescribed. Failure to exclude irrelevant and extraneous matters negates the 'opinion' as the said matters should not cloud or dent formation of opinion. Reasons recorded must be genuine and have a nexus with the twin statutory requirements, i.e., complexity of accounts and interests of the revenue. [Para 25] What is rather surprising and noticeable is that right from the first year 2003-04 onwards and in all the assessment years thereafter, the assessing officer have directed special audit. The reasons given for the assessment year 2003-04 have been substantially followed in the subsequent years or have been taken from the notes of accounts for the year in question. [Para 27] One more additional factor for the initial assessment years may be noted that the petitioner DDA was granted registration as a charitable institution under section 12AA of the Act in 2006 with retrospective effect with effect from 1-4-2002. This fact was not in the knowledge of the respondent authorities when the first few orders for special audit were passed. Counsel for the Revenue has relied upon section 13(3) of the Act and submitted that the registration under section 12AA is not final and facts and accounts of each year have to be examined. There can be no doubt that facts and accounts of each year have to be examined but this is different from stating or alleging that section 13(3) is applicable. Various contentions and issues have to be examined before a finding is recorded that section 13(3) is attracted and applicable. It is the contention of the petitioner that misappropriation, if any, by the employees or third persons which causes loss to the petitioner cannot be a ground to invoke section 13(3) as the petitioner is a distinct taxable entity. The petitioner suffers when there is misappropriation of the funds or misuse of assets/funds because of mala fide or criminal intent of a third person. These are aspects and facts which are to be examined in the assessment proceedings. However, the contentions raised by the petitioner are relevant factors which have to be considered. It is different matter that the assessing officer may or may not accept the said contention. The contention is as such not an accounting issue, unless it is held that the accounts indicate or prima facie show misuse or wrong use of funds by related persons and section 13(3) is attracted. For details and exact figures in a given matter, special audit may be justified. The legal contention raised by the petitioner cannot be decided by a special auditor and has to be decided by the assessing officer. [Para 37] In these circumstances, there is no option but to quash the direction/ orders for special audit in each of these years. The writ petitions are allowed and the orders under section 142(2A) are quashed. This, however, does not mean that if the assessing officer during the course of the assessment proceedings feels and requires special audit, he cannot record reasons and justify special audit. It will be open to the assessing officer in the course of the assessment proceedings to record fresh reasons and direct special audit under section 142(2A). It will be equally open to the petitioner to contest the direction for special audit in accordance with law on the ground that the mandatory conditions stipulated in the said section are not satisfied. [Para 38] Pursuant to interim orders passed in writ petitions the assessment proceedings for the assessment years 2003-04 onwards have been stayed. Now, assessment proceedings have to be restarted but taking up of all the assessment years together would unnecessarily entail difficulties and result in assessments being framed in haste and hurry. The petitioner and the assessing officer will be put to considerable inconvenience. In these circumstances, the assessment proceedings for the assessment year 2003-04 shall be taken up for scrutiny and hearing first and will be completed before the assessment proceedings for other years are taken up for hearing. The interim stay orders granted earlier will continue for the assessment years 2004-05 onwards till the assessment proceedings for the assessment year 2003-04 are concluded. [Para 39]