Dlf Commercial Projects Corporation & Anr v. Assistant Commissioner Of Income Tax & Ors. …

* IN THE HIGH COURT OF DELHI AT NEW DELHI % Reserved on : 8[th] August , 2012. Date of Decision : 15[th] October, 2012. + W P(C) No.1868/2012 DLF COMMERCIAL PROJECTS CORPORATION & ANR. .... Appellant Through: Dr.Abhishek Manu Singhvi, Sr.Advocate with Mr.Ajay Vohra, Ms.Kavita Jha, Mr.Amit Sachdeva and Mr.Jaiveer Shergil, Advocates VERSUS ASSISTANT COMMISSIONER OF INCOME TAX & ORS. …..RespondentThrough: Ms.Suruchi Aggarwal, Advocate CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR R.V. EASWAR, J.: This is a writ petition filed by DLF Commercial Projects Corporation under Article 226/227 of the Constitution of India in the following circumstances. The petitioner is a partnership firm engaged in the business of construction and sale of real estate. In respect of the assessment year 2009-10, it filed a return of income on 25[th] September, 2009 declaring a loss of Rs.20,12,82,857/-. A notice under Section 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued by the ACIT, Circle-31(1), New Delhi, who is the first respondent in this petition and in response thereto the petitioner, between 7[th] September, 2011 and 4[th] November, 2011, explained its business model, the method of revenue recognition and the arrangement with DLF Land Limited, Page 1 of 39 another company, for rendering various services in connection with obtaining approvals and licences relating to land development rights. On 21[st] November, 2011 the first respondent issued a show cause notice under Section 142(2A) of the Act, proposing to refer the accounts of the petitioner for special audit. In this show cause notice, a copy of which has been annexed as Annexure H to the writ petition, the first respondent observed that he noticed certain complexities in the accounts of the petitioner on going through the books of accounts and the audited financial statements which necessitated the reference of the accounts of the petitioner to a special auditor in terms of Section 142(2A) of the Act. In particular, it was stated that the following complexities in the accounts were noted:- (a)The petitioner had received business advances of Rs.3717.42 crores from one of its partners, that is, M/s DLF Limited on which no interest was paid. This amount was invested in more than hundred companies which were part of the DLF Group of Companies. The petitioner has been used as a conduit to make huge advances to companies of the same group with a view to avoiding the applicability of the provisions of Section 2(22)(e) relating to deemed dividend and Section 40A(2)(b) of the Act. from one of its partners, that is, M/s DLF Limited on which no interest was paid. This amount was invested in more than hundred companies which were part of the DLF Group of Companies. The petitioner has been used as a conduit to make huge advances to companies of the same group with a view to avoiding the applicability of the provisions of Section 2(22)(e) relating to deemed dividend and Section 40A(2)(b) of the Act. (b)The petitioner was showing various payments made to companies on account of development rights under the head “stock”. No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex. account of development rights under the head “stock”. No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex. Page 2 of 39 (c)No details were available in the accounts with regard to the deduction of Rs.25.40 crores claimed in the profit and loss account under the head “reimbursement of expenses”.Rs.25.40 crores claimed in the profit and loss account under the head “reimbursement of expenses”. (b)The petitioner was showing various payments made to companies on account of development rights under the head “stock”. No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex. account of development rights under the head “stock”. No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex. Page 2 of 39 (c)No details were available in the accounts with regard to the deduction of Rs.25.40 crores claimed in the profit and loss account under the head “reimbursement of expenses”.Rs.25.40 crores claimed in the profit and loss account under the head “reimbursement of expenses”. (d)The petitioner in the relevant accounting year was dealing only in the purchase and sale of development rights on behalf of DLF Ltd. However, no revenue is recognized on receipt of the sale consideration, which is given a colour of advances by the petitioner. This is contrary to the significant accounting policy stated to be followed by the petitioner for revenue recognition-i.e., that revenue would be recognized in the financial year in which the agreements of sale are executed. purchase and sale of development rights on behalf of DLF Ltd. However, no revenue is recognized on receipt of the sale consideration, which is given a colour of advances by the petitioner. This is contrary to the significant accounting policy stated to be followed by the petitioner for revenue recognition-i.e., that revenue would be recognized in the financial year in which the agreements of sale are executed. In view of the above four issues, the Assessing Officer was of the view that the accounts of the petitioner were complex. He, therefore, called upon the petitioner to show cause why the accounts should not be got audited by special auditor under Section 142(2A), as it would be necessary to determine the taxable income for the year. 2. Annexure I to the writ petition is a copy of the petitioner’s reply to the show cause notice dated 21[st] November, 2011. The reply is dated 24[th]November, 2011 and it runs to about 21 pages (excluding annexures). A perusal of the reply shows that the petitioner had strong objections to the proposal of the first respondent to get the accounts of the petitioner audited by a special auditor. It was pointed out that in the assessment year 2007-08 an addition of Rs.37.4 crores had been made on account of profit and sale of development rights, but it was deleted by the CIT(Appeals) as being without any basis, whose order was confirmed by the Tribunal. It was pointed out that Page 3 of 39 the petitioner had followed a certain basis of revenue recognition and the facts being the same, the order of the Tribunal should govern the case for the assessment year 2009-10 also. It was claimed that this issue, which was already adjudicated upon by the Tribunal, cannot form the basis for the conclusion that the accounts of the petitioner are complex. It was further pointed out that on 18[th] November, 2011 the petitioner had produced the books of accounts before the first respondent who had test-checked them but had not raised any queries or explanation thereafter which implied that there was no complexity in the accounts. It was submitted that the petitioner maintained its books of account as per the accounting standards issued by the Institute of Chartered Accountants of India and that the accounts were also audited in terms of Section 44AB. 3. As regards the observation of the first respondent that there was a diversion of the borrowed funds to sister concerns in order to avoid the provisions relating to Section 2(22)(e) and Section 40A(2)(b), the petitioner sought to explain the facts and in particular pointed out that DLF Ltd. is a company in which the public was substantially interested and when advances were made by it to the petitioner-firm, the provisions of Section 2(22)(e) of the Act were not attracted and that in any case, the advances were in the nature of business advances. As regards the applicability of Section 40A(2)(b), the petitioner drew the attention of the Assessing Officer to the tax audit report in which the transactions covered by the Section have been specifically mentioned, without any adverse inferences being drawn. 4. The petitioner also objected to the proposal of the first respondent to consider the question of showing the payments made on account of development rights as its stock as resulting in complexity of the accounts, in the Page 4 of 39 absence of any details with regard to the quantum of the development rights. It was pointed out that the parawise details with regard to the cost of development rights along with the relevant agreements had been furnished under cover of letters dated 4[th] and 11[th] November, 2011. It was claimed that the same method of accounting which was followed by the assessee previously was being continued without any deviation in the relevant previous year and, therefore, no adverse inference can be drawn by merely observing that the accounts involve complexity. There was only a difference of opinion between the assessee and the assessing authority on the question of revenue recognition which was also tested before the appellate authorities. 5. In respect of the reimbursement of Rs.25.40 cores, the petitioner drew the attention of the first respondent to the note filed by it on 4[th] and 11[th]November, 2011 along with complete details and invoices on account of service charges and reimbursement of expenses aggregating to Rs.25.40 crores. It was claimed that after the details were submitted, the first respondent had not raised any queries. It was pointed out that the reimbursement of expenses was in pursuance of the services provided by the DLF Land Ltd. under agreements dated 1[st] April, 2007 and 16[th] July, 2007 which contemplates the maintenance of books of accounts, secretarial record, filing of various statutory return forms, managing the bank accounts, taking steps for obtaining licences relating to land etc. It was in consideration of such services rendered by DLF Ltd. that the petitioner was liable to pay service charges at 15% of the expenses incurred. It was thus submitted that there was no complexity with respect to this issue. 6. With regard to the revenue recognition on sale of development rights on behalf of DLF Ltd., it was pointed out that the first respondent did not Page 5 of 39 appreciate or comprehend the nature of the business activities of the petitioner. Strong objection was taken to the observation of the respondent that the petitioner was trying to colour the nature of business receipts by showing them as advances. The petitioner thereafter sought to explain in detail the nature of its activities. It was urged that by no stretch of imagination can the relationship between the petitioner and DLF Ltd. lead to an inference that the accounts maintained by the petitioner were complex, necessitating a special audit under Section 142(2A). 7. In addition to the aforesaid submission the petitioner drew the attention of the first respondent to Circular No. 204 dated 24[th] July, 1996 issued by the CBDT in connection with the scope of Section 142(2A). It also brought to the notice of the Assessing Officer the instruction No.1076 issued by the CBDT on 12[th] July, 1977 laying down guidelines for the selection of cases for special audit. The attention of the Assessing Officer was also drawn to several authorities. 7. In addition to the aforesaid submission the petitioner drew the attention of the first respondent to Circular No. 204 dated 24[th] July, 1996 issued by the CBDT in connection with the scope of Section 142(2A). It also brought to the notice of the Assessing Officer the instruction No.1076 issued by the CBDT on 12[th] July, 1977 laying down guidelines for the selection of cases for special audit. The attention of the Assessing Officer was also drawn to several authorities. 8. It appears that after the receipt of the reply of the assessee dated 24[th]November, 2011, the assessment proceedings went ahead pursuant to the notices issued earlier under Section 143(2) and Section 142(1) of the Act. This is evident from the order sheet notings dated 5[th] December, 2011, 16[th]December, 2011 and 19[th] December, 2011. These order sheet notings were been obtained by the assessee under the Right to Information Act, 2005 by an application made on 20[th] February, 2012 and is annexed to the writ petition as annexure B. It may be relevant to reproduce the order sheet notings, so far as is necessary for our purpose, as follows:- Page 6 of 39 “05.12.2011:Present Shri Anil Aggarwal, CA and made submissions. To furnish details regarding reimbursement of expenses to DLF Ltd. U/s 40(a)(ia). Case adjourned to 16[th] Dec. submissions. To furnish details regarding reimbursement of expenses to DLF Ltd. U/s 40(a)(ia). Case adjourned to 16[th] Dec. 16.12.2011: Attended Shri Anil Aggarwal, CA and submitted details. Case discussed partly. He is required to file the following:- submitted details. Case discussed partly. He is required to file the following:- Detailsand confirmation of Sundry Creditors amounting to `2,14,26,677/- shown in the balance sheet as on 31.03.2009. Creditors amounting to `2,14,26,677/- shown in the balance sheet as on 31.03.2009. Details of unsecured loan amounting to `1,11,50,000/- shown in the balance sheet as on 31.03.2009 along with confirmations giving the names and addresses of parties, PAN, amount received/refunded if any and mode of payment etc. Details of unsecured loan amounting to `1,11,50,000/- shown in the balance sheet as on 31.03.2009 along with confirmations giving the names and addresses of parties, PAN, amount received/refunded if any and mode of payment etc. Case adjourned to 19[th] Dec. 19.12.2011: Attended Shri Anil Aggarwal and submitted details. Case adjourned for 26 Dec. details. Case adjourned for 26 Dec. 26.12.2011: Attended Shri S.K. Sharma on behalf of firm and Shri Anil Aggarwal CA and AR and submitted reply to show cause. To submit details of unsecured loans and sundry creditors. Case adjourned for 28 Dec.”and Shri Anil Aggarwal CA and AR and submitted reply to show cause. To submit details of unsecured loans and sundry creditors. Case adjourned for 28 Dec.” 9. On 16[th] December, 2011, that is, in the midst of the assessment proceedings and on the day on which the assessee’s case was posted for hearing before the first respondent, he submitted a report to the CIT, Delhi-XI, New proceedings and on the day on which the assessee’s case was posted for hearing before the first respondent, he submitted a report to the CIT, Delhi-XI, New Page 7 of 39 26.12.2011: Attended Shri S.K. Sharma on behalf of firm and Shri Anil Aggarwal CA and AR and submitted reply to show cause. To submit details of unsecured loans and sundry creditors. Case adjourned for 28 Dec.”and Shri Anil Aggarwal CA and AR and submitted reply to show cause. To submit details of unsecured loans and sundry creditors. Case adjourned for 28 Dec.” 9. On 16[th] December, 2011, that is, in the midst of the assessment proceedings and on the day on which the assessee’s case was posted for hearing before the first respondent, he submitted a report to the CIT, Delhi-XI, New proceedings and on the day on which the assessee’s case was posted for hearing before the first respondent, he submitted a report to the CIT, Delhi-XI, New Page 7 of 39 Delhi, “through proper channel” with reference to the show cause for proposal for special audit under Section142(2A) in the assessee’s case for the assessment year 2009-10. A copy of this report was filed before us on behalf of the Revenue along with copies of other documents from the record. A perusal of the seven pages report shows several aspects. It is first seen that the report has been submitted in response to the letter written by the CIT on 11[th] November, 2011 (through which proposals for special audit under Section 142(2A) were sought); thereafter it narrates the various developments leading to the issue of the letter 24[th] November, 2011 by the Assessing Officer. It is stated that the assessee produced the books of accounts on 18[th] November, 2011 and after verification of the books, a show cause notice dated 21[st] November, 2011 was issued containing the proposal for special audit and that the assessee-firm was required to furnish its reply by 24[th] November, 2011. The reply submitted by the assessee is thereafter discussed in considerable detail along with the extracts, wherever necessary, from the reply. The penultimate paragraph of the report is relevant and extracted below:- “The submission of the assessee is being examined with regards to the issues stated in the Show Cause Notice, CBDT Guidelines, provisions of law and judicial decisions relied upon. Further as regards to the issue to business advance received form one of its partner i.e. M/s DLF limited which has further been advanced to Land owning Companies, the same is being examined during the course of assessment proceedings. Similarly regarding the claim of “Reimbursement of expenses” the assessee has submitted that a detailed note along with full details and Invoices on account of Service Charges amounting to ` 1.21 Crore and reimbursement of expenses amounting to ` 24.19 Crores, Page 8 of 39 aggregation total expenses at Rs 25.40 Crores has been furnished by the assessee which are being examined. The assessee has been asked to file the necessary details which are being verified and examined in the course of the assessment proceedings.” 10. It appears that a hearing took place on 16[th] December, 2011 pursuant to the hearing notices issued by the Assessing Officer. We have already extracted the order sheet entry dated 16[th] December, 2011 which shows what actually transpired in the course of the hearing. 11. On 19[th] December, 2011 a letter was written by the Assessing Officer to the assessee which is marked as Annexure J to the writ petition. The subject matter of the letter, as seen from the letter itself, is- “Sub: show cause notice u/s 142(1) w.r.t. Assessment Proceedings u/s 143(3) of the IT Act, 1961 for the A.Y. 2009-–10 in the case of M/s DLF Commercial Project Corpn. regarding-” A perusal of the letter shows that the Assessing Officer had gone through the reply of the assessee submitted on 24[th] November, 2011 and that he desired further clarification from the assessee in respect of the return filed by the assessee. In particular, clarifications in respect of the following points were sought:- 11. On 19[th] December, 2011 a letter was written by the Assessing Officer to the assessee which is marked as Annexure J to the writ petition. The subject matter of the letter, as seen from the letter itself, is- “Sub: show cause notice u/s 142(1) w.r.t. Assessment Proceedings u/s 143(3) of the IT Act, 1961 for the A.Y. 2009-–10 in the case of M/s DLF Commercial Project Corpn. regarding-” A perusal of the letter shows that the Assessing Officer had gone through the reply of the assessee submitted on 24[th] November, 2011 and that he desired further clarification from the assessee in respect of the return filed by the assessee. In particular, clarifications in respect of the following points were sought:- (a)Deduction of Rs.24,19,70,094/- claimed by the assessee on which no tax was deducted at source. The assessee was asked to show cause why the provisions of Section 40(a)(ia) should not be invoked to disallow the deduction claimed. was deducted at source. The assessee was asked to show cause why the provisions of Section 40(a)(ia) should not be invoked to disallow the deduction claimed. Page 9 of 39 (b)Service charges were paid by the assessee to the extent of Rs.1,20,98,508/-. The assessee was asked why it should not be disallowed for want of details and documentary evidence. Rs.1,20,98,508/-. The assessee was asked why it should not be disallowed for want of details and documentary evidence. (c)Sundry credits of Rs.2,14,26,677/- appearing in the balance sheet as on 31[st] March, 2009. The assessee was asked to show cause why the amount cannot added as income since the assessee failed to furnish confirmation letters. 31[st] March, 2009. The assessee was asked to show cause why the amount cannot added as income since the assessee failed to furnish confirmation letters. (d)Unsecured loans of Rs.1,11,50,000/-. The assessee was asked to show cause why in the absence of confirmations which were directed to be filed, the amount cannot be added as unconfirmed loans. cause why in the absence of confirmations which were directed to be filed, the amount cannot be added as unconfirmed loans. Towards the end of the letter, the Assessing Officer stated as follows:- “In this regard you are given an opportunity to explain your case with all the details and documentary evidences. The date for compliance is fixed for 26.12.2011 at 11.00 A.M. Penalty u.s. 271(1)(b) may be imposed in case of failure to comply. Please note that in case of non-compliance in any manner, the case shall be decided on merits on the basis of material available on records.” 12. On 26[th] December, 2011 the assessee replied to the above letter of the Assessing Officer and furnished a detailed reply in respect of the points raised in the letter of the Assessing Officer. A copy of this letter is annexed to the writ petition as Annexure K. 13. It is thus seen that upto 26[th] December, 2011 the assessing proceedings continued without interruption, have been commenced on 23[rd] August, 2010 WP(C) 1868/2012 Page 10 of 39 when the case was selected under CASS and notice was issued on that day under Section 143(2). The Assessing Officer, however, had issued a show cause notice on 21[st] November, 2011 under Section 142(2A) for special audit to which, as we have already seen, the assessee replied by letter dated 24[th]November, 2011 objecting to the proposal to refer the accounts of the assessee to special auditor. We have also seen that on 16[th] December, 2011 the Assessing Officer had submitted a report to the CIT in which he had narrated the assessee’s reply and the various points taken by the assessee and had also intimated the CIT of his intention to proceed with the assessment proceedings and himself examine the points on which special audit was originally proposed by him. when the case was selected under CASS and notice was issued on that day under Section 143(2). The Assessing Officer, however, had issued a show cause notice on 21[st] November, 2011 under Section 142(2A) for special audit to which, as we have already seen, the assessee replied by letter dated 24[th]November, 2011 objecting to the proposal to refer the accounts of the assessee to special auditor. We have also seen that on 16[th] December, 2011 the Assessing Officer had submitted a report to the CIT in which he had narrated the assessee’s reply and the various points taken by the assessee and had also intimated the CIT of his intention to proceed with the assessment proceedings and himself examine the points on which special audit was originally proposed by him. 14. Things appear to have taken a new turn after this report was sent by the Assessing Officer to the CIT. We have examined the original files produced before us by the Standing Counsel for the Revenue who has also submitted copies of the relevant communications between the departmental authorities inter se, as also copies of the correspondence between the assessee and the departmental authorities. The chronology of the events which took place from 26[th] December, 2011 is also interesting. There is a letter written by the ITO (Headquarters) on behalf of the CIT, Delhi-XI on 22[nd] December, 2011 to the first respondent. This letter refers to the report submitted by the Assessing Officer on 16[th] December, 2011 which was duly forwarded by the JCIT of the concerned range to the CIT on 19[th] December, 2011. The letter of the CIT dated 22[nd] December, 2011 proceeds to issue the following directions to the Assessing Officer:- WP(C) 1868/2012 Page 11 of 39 “In this regard, I am directed to request your goodself to kindly submit to this office the relevant folders pertaining to the M/s DLF Commercial Projects Corporation (PAN: AAAAFD2181R) for A.Y. 2009-10 containing all the relevant papers and notices issued so far to the assessee. Further, I am also directed to request your goodself to kindly submit the interim position of the matter and also please intimate if draft orders are ready. Yours faithfully, Encl: As above. (Umesh Kumar) Income-Tax Officer (Hqrs.) Delhi-XI, New Delhi.” 15. On receipt of the above letter, the Assessing Officer responded to the same by a letter dated 26[th] December, 2011 addressed to the CIT, Delhi-XI, a copy of which has been submitted by the learned Standing Counsel. A perusal of this letter shows that after narrating the chronology of events staring from the requisition of the books of accounts of the assessee on 11[th] November, 2011 till the submission of the assessee’s reply dated 24[th] November, 2011 to the show cause notice issued under section 142(2A) on 21[st] November, 2011, the Assessing Officer pertinently wrote as follows:- “In view of the submission of the assessee to the issues stated in the Show Cause Notice, the apparent complexities noticed and confronted to the assessee have been answered to by the assessee. Further as regards to the issue of business advance received from one of its partner i.e. M/s DLF limited which has further been advanced to Land Owning Companies WP(C) 1868/2012 Page 12 of 39 on which additions were made in the previous years and the issue being held in favour of the assessee by the ITAT; the same issue does not exist in the A.Y. 2009-10. “In view of the submission of the assessee to the issues stated in the Show Cause Notice, the apparent complexities noticed and confronted to the assessee have been answered to by the assessee. Further as regards to the issue of business advance received from one of its partner i.e. M/s DLF limited which has further been advanced to Land Owning Companies WP(C) 1868/2012 Page 12 of 39 on which additions were made in the previous years and the issue being held in favour of the assessee by the ITAT; the same issue does not exist in the A.Y. 2009-10. Regarding the claim of “Reimbursement of expenses” the assessee submitted that a detailed note along with full details and Invoices on account of Service Charges amounting to `1.21 Crore and reimbursement of expenses amounting to `24.19 Crores, aggregating total expenses at `25.40 Cores has duly been furnished during the assessment proceedings. The assessee has been show caused as to why an amount of `24,19,70,094/- being reimbursement of expenses to M/s DLF Land Ltd. be not disallowed for non-deduction of TDS under Section 40 (a) (ia) of the Income Tax Act, 1961. Further the assessee has been show caused as to why the service charges of `1,20,98,508/- paid to DLF Land Ltd. be not disallowed. The assessee has submitted its reply to the show cause. The same are being examined during the course of assessment proceedings. Similarly with regard to the confirmations of the sundry creditors the assessee has been show caused as to why an amount of `2,14,26,677/- not be added to the total income. Also the assessee has been required to show cause as to why a sum of `1,11,50,000/- being the unsecured loans outstanding as on 31.03.2009 be not brought to tax for want of confirmations. The assessee has submitted its reply to the show cause. The same are being examined during the course of assessment proceedings. The assessee has been asked to file the necessary details which are being verified and examined and the interest of the revenue is being protected. The draft order is being enclosed for kind perusal. This is for your kind information. Yours faithfully, Encl: As above. WP(C) 1868/2012 Page 13 of 39 (Vikas Singh) Asstt. Commissioner of Income-Tax –Circle 31(1), New Delhi.” The assessee has submitted its reply to the show cause. The same are being examined during the course of assessment proceedings. The assessee has been asked to file the necessary details which are being verified and examined and the interest of the revenue is being protected. The draft order is being enclosed for kind perusal. This is for your kind information. Yours faithfully, Encl: As above. WP(C) 1868/2012 Page 13 of 39 (Vikas Singh) Asstt. Commissioner of Income-Tax –Circle 31(1), New Delhi.” 16. Though it has been stated in the above letter of the Assessing Officer, the first respondent herein, that the draft order of assessment was enclosed with the letter, the affidavit filed by the first respondent before us, states that the draft assessment order said to have been enclosed with the letter dated 26[th]December, 2011 was in fact not so enclosed. This information has also been given to the assessee under the Right to Information Act to a query raised by the assessee. In the reply under the RTI Act it has been stated by the first respondent that “regarding the draft order mentioned in the proposal dated 26[th]December, 2011 as annexure, please be informed that no draft order was sent with the proposal and the same was inadvertently mentioned in the letter”. The assessee had also raised a query under the RTI Act seeking clarification regarding the letter dated 27[th] December, 2011 written by the Joint Commissioner of Income Tax, Range 31, New Delhi to the CIT, Delhi-II forwarding the report of the Assessing Officer “along with a copy of draft assessment order”. To this query also, the reply given to the assessee by letter dated 1[st] May, 2012 was the same, namely, that no such draft assessment order was placed in the file of ACIT, Circle 31(1). In short, the Revenue has denied that a draft assessment order was enclosed to the report dated 26[th] December, 2011 submitted by the ACIT to the CIT through proper channel, ie., through the JCIT and has also denied that a copy of the draft assessment order was forwarded by the JCIT to the CIT along with his forwarding letter dated 27[th]December, 2011 to the CIT concerned. The query raised by the petitioner and WP(C) 1868/2012 Page 14 of 39 the reply given by the departmental officers under the RTI Act are crucial as we shall presently show. 17. On 27[th] December, 2011, i.e. one day after he sent a report to the CIT stating that the apparent complexities noticed in the accounts were answered by the assessee and, therefore, the assessment is being proceeded with and further that the assessee had submitted its reply to the various points raised by him which will be examined and the interest of the Revenue would be protected, and to which report a copy of the draft assessment order was stated to be enclosed for the perusal of the CIT, the first respondent sent a letter to the CIT-II, New Delhi (on 27[th] December, 2011) in F.No.ACIT/CIR.31(1)/2011-12/429, in which he appears to have taken a volte face as the following contents of the letter would show:- “To, Dated : 27/12/2011 CIT-XI New Delhi (Through Proper Channel) Sir, Subject: Proposal for special Audit u/s 142(2A) in the case of DLF Commercial Projects Corporation (PAN: ) for A.Y. 2009-10- Regarding In connection with the assessment for A.Y. 2009-10 books of Accounts were called for vide order sheet entry dated 11 November 2011. On going through the books of accounts as well as the audited financial results including the balance sheet and the profit and WP(C) 1868/2012 Page 15 of 39 loss account certain complexities have been noted in the accounts of the assessee. “To, Dated : 27/12/2011 CIT-XI New Delhi (Through Proper Channel) Sir, Subject: Proposal for special Audit u/s 142(2A) in the case of DLF Commercial Projects Corporation (PAN: ) for A.Y. 2009-10- Regarding In connection with the assessment for A.Y. 2009-10 books of Accounts were called for vide order sheet entry dated 11 November 2011. On going through the books of accounts as well as the audited financial results including the balance sheet and the profit and WP(C) 1868/2012 Page 15 of 39 loss account certain complexities have been noted in the accounts of the assessee. The assessee is a partnership firm consisting of two partners namely M/s DLF Limited with 76% profit sharing ratio and M/s DLF Housing and Construction Ltd. with 24% profit sharing ratio. Both the partners are engaged in the activity in the real estate alongwith the partnership firm. The assessee has been show caused on the following points: 1.Appliciability of section 40(a)(ia) on reimbursement of expenses to the tune of ` 24,19,740,494/-. to the tune of ` 24,19,740,494/-. 2.Applicability of section 40A(2)(a) on service charges to the tune of ` 1,20,98,508 paid to DLF Land Ltd. And whether it is wholly and exclusively for the purpose of business of ` 1,20,98,508 paid to DLF Land Ltd. And whether it is wholly and exclusively for the purpose of business 3.Genuineness of creditors to the tune of ` 2,14,26,677/- 4.Genuineness of unsecured loan to the tune of ` 1,11,50,000/- 2. The assessee has submitted his reply vide letter dated 26.12.2011. However the submissions of the reply needs detailed examination in view of the complexity of the accounts. It is therefore proposed that approval for special audit may be accorded in the case on the abovementioned issue (Terms of Reference) or any other issue noticed thereafter. Submitted for kind consideration. Yours sincerely, ( Vikas Singh) Asstt. Commissioner of Income Tax, Circle - 31(1), New Delhi.” WP(C) 1868/2012 Page 16 of 39 The point to be noted is that just the previous day, that is, 26[th] December, 2011 the first respondent had come to the conclusion that a special audit was not required since the points raised by him in the show cause notice were satisfactorily answered by the petitioner and that the assessment can be proceeded with, subject to the details and clarifications being submitted by the petitioner which will be examined and verified to protect the interest of the Revenue. The draft assessment order would also appear to have been enclosed with the letter dated 26[th] December, 2011, though it is now denied by the first respondent. The crucial questions which arise are the following:- 1.Was the first respondent satisfied with the reply filed by the assessee-petitioner on 26[th] December, 2011 to the show cause notice issued under Section 142(2A) and whether his report dated 26.12.2011 be taken as an expression of opinion that there was no need for a special audit? petitioner on 26[th] December, 2011 to the show cause notice issued under Section 142(2A) and whether his report dated 26.12.2011 be taken as an expression of opinion that there was no need for a special audit? 2.If the answer to the first question is in the affirmative, what is it that happened between 26[th] December, & 27[th] December, 2011 which compelled the Assessing Officer to change his mind and come to the conclusion that “certain complexities have been noted in the accounts of the assessee” and, therefore, special audit was required to be carried out?happened between 26[th] December, & 27[th] December, 2011 which compelled the Assessing Officer to change his mind and come to the conclusion that “certain complexities have been noted in the accounts of the assessee” and, therefore, special audit was required to be carried out? 2.If the answer to the first question is in the affirmative, what is it that happened between 26[th] December, & 27[th] December, 2011 which compelled the Assessing Officer to change his mind and come to the conclusion that “certain complexities have been noted in the accounts of the assessee” and, therefore, special audit was required to be carried out?happened between 26[th] December, & 27[th] December, 2011 which compelled the Assessing Officer to change his mind and come to the conclusion that “certain complexities have been noted in the accounts of the assessee” and, therefore, special audit was required to be carried out? 3.Assuming that it is open to the Assessing Officer to change his mind, was it not incumbent upon him to issue another show cause notice to the petitioner under Section 142(2A) and invite the objections of the petitioner? was it not incumbent upon him to issue another show cause notice to the petitioner under Section 142(2A) and invite the objections of the petitioner? WP(C) 1868/2012 Page 17 of 39 4.Was there any application of mind on the part of the CCIT before approving the proposal for special audit sent by the first respondent on 28.12.2011? approving the proposal for special audit sent by the first respondent on 28.12.2011? 5.What would be the impact of the answers to the aforesaid four questions upon the validity of the order passed by the CCIT granting approval for special audit? upon the validity of the order passed by the CCIT granting approval for special audit? 18. On the very same day on which the JCIT forwarded the report of the Assessing Officer to the CIT, the CIT wrote a letter to the Chief Commissioner of Income Tax, Delhi-II under the subject “proposal for special audit under Section 142(2A) of the IT Act, 1961-Reg.”. In this letter, a copy of which is placed at page 174 of the writ petition, the CIT stated as follows:- “In this Connection, please find enclosed herewith proposals for special Audit u/s 142(2A) of the I.T. Act 1961 as received from the ACIT, Circle-31(1), New delhi vide letter F No ACIT/Circle-31(1)/2011-12/429 dt. 27/12/2011 duly forwarded by Joint CIT, R-31. New Delhi vide F.No. JCIT/E-31/11-12/442 dt. 27.12.2011 in the following case. In this regard, the Name of CA firm that is empanelled for special Audit u/s 142(2A) of the Income-Tax as per the list drawn up by the Office of CCIT (Coordination), New Delhi vide F.No. Addl. CIT(Coord.)/Enpanelment-u/s 142(2A)/2011-12/8263 dt. 13/10/11.2011(Copy Enlosed) as proposed for the purpose of special Audit is as follows. WP(C) 1868/2012 Page 18 of 39 1. M/s Dhanesh Gupta & Co., 1-1/16, Ansari Road, Shanti Mohan House, Daryaganj, New Delhi-110002. Daryaganj, New Delhi-110002. The same are hereby forwarded for kind consideration and approval please. Yours faithfully, Encl: As above. (Gopal Kamal) Commissioner of Income Tax Delhi-XI, New Delhi.” 19. Again on the very same day, i.e., 27[th] December, 2011 the CCIT-II, New Delhi sent a communication to the CIT with the caption “most urgent” and under the subject “proposal for special audit under Section 142(2A) of the IT Act in the case of M/s DLF Commercial Project Corporation-A.Y. 2009-10-Reg.”. This letter contained the approval of the CCIT-II for referring the case of the petitioner for special audit under Section 142(2A) to M/s Dhanesh Gupta and Co., CAs. Pursuant to the approval, the first respondent passed the impugned order on 28.12.2011 containing the direction for a special audit on the following four points:- a. Applicability of Section 40(a) (ia) on reimbursement of expenses to the tune of `24,19,70,494/-. expenses to the tune of `24,19,70,494/-. 19. Again on the very same day, i.e., 27[th] December, 2011 the CCIT-II, New Delhi sent a communication to the CIT with the caption “most urgent” and under the subject “proposal for special audit under Section 142(2A) of the IT Act in the case of M/s DLF Commercial Project Corporation-A.Y. 2009-10-Reg.”. This letter contained the approval of the CCIT-II for referring the case of the petitioner for special audit under Section 142(2A) to M/s Dhanesh Gupta and Co., CAs. Pursuant to the approval, the first respondent passed the impugned order on 28.12.2011 containing the direction for a special audit on the following four points:- a. Applicability of Section 40(a) (ia) on reimbursement of expenses to the tune of `24,19,70,494/-. expenses to the tune of `24,19,70,494/-. WP(C) 1868/2012 Page 19 of 39 b. Applicability of Section 40A(2) (a) on service charges to the tune of `1,20,98,508/- paid to DLF Land Ltd. and whether it tune of `1,20,98,508/- paid to DLF Land Ltd. and whether it is wholly and exclusively for the purpose of business. c. Genuineness of creditors to the tune of `2,14,26,677/- d. Genuineness of unsecured loan to the tune of `2,14,26,677/-. It is the aforesaid order that is impugned in the writ petition as also the order dated 29.12.2011 passed by the first respondent containing the terms of reference to the special auditor. 20. The relevant statutory provisions governing the special audit are incorporated in Section 142 of the Income Tax Act which is titled “inquiry before assessment”. Sub-sections (2A), (2B), (2C), (2D), (3) & (4) are relevant in this behalf. They are as under:- “(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts 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[7] duly signed and verified by such accountant and setting forth such particulars as may be prescribedand such other particulars as the Assessing Officer may require : WP(C) 1868/2012 Page 20 of 39 [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.] (2B) The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. (2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer : Provided that the Assessing Officer may, [suo motu, or on an application] made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit ; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee. (2D) The expenses of, and incidental to, any audit under sub-section (2A) (including the remuneration of the accountant) shall be determined by the Chief Commissioner or Commissioner (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVIID for the recovery of arrears of tax : (2D) The expenses of, and incidental to, any audit under sub-section (2A) (including the remuneration of the accountant) shall be determined by the Chief Commissioner or Commissioner (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVIID for the recovery of arrears of tax : [Provided that where any direction for audit under sub-section (2A) is issued by the Assessing Officer on or after the 1st day of June, 2007, the expenses of, and incidental to, such audit (including the remuneration of the Accountant) shall be determined by the Chief Commissioner or Commissioner in accordance with such guidelines as may be prescribed[_ ]and the expenses so determined shall be paid by the Central Government.] (3) The assessee shall, except where the assessment is made under section 144, be given an oppor