Ita/136/2010 Of Madhurapuri Chits v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE P.S.GOPINATHAN THURSDAY, THE 2ND JUNE 2011 / 12TH JYAISHTA 1933 ITA.No. 136 of 2010() --------------------- ITA.182/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ------------------- MADHURAPURI CHITS AND FINANCE COMPANY PRIVATE LIMITED, MEESHAKARAN BUILDING, M.M.ALI ROAD, CALICUT. BY ADV. SRI.P.BALAKRISHNAN (E) SRI.V.SREEKUMAR SRI.MOHAN PULIKKAL RESPONDENT/ APPELLANT ------------------------ THE COMMISSIONER OF INCOME TAX, CENTRAL, COCHIN. ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 02/06//2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A136/2010 ANNEXURES ANNEXURE A- COPY OF THE LETTER DT.29.7.2003 OF THE ASSESSING OFFICER.OFFICER. ANNEXURE B- COPY OF THE LETTER DT.30.8.2003 ADDRESSED TO THE ASSESSING OFFICER.ASSESSING OFFICER. ANNEXURE C- COPY OF THE LETTER DT.18.9.2003 ADDRESSED TO THE ASSESSING OFFICER.ASSESSING OFFICER. ANNEXURE D- COPY OF THE ORDER DT.15.10.2003 U/S 142(2A) OF TH AO WITH THE TERMS OF REFERENCE.WITH THE TERMS OF REFERENCE. ANNEXURE E- COPY OF THE ASST.ORDER DT.10.4.2004 ANNEXURE F- COPY OF THE AUDIT REPORT DT.12.4.2004 OF THE SPECIALAUDITOR U/S 142 (2A) AUDITOR U/S 142 (2A) ANNEXURE G- COPY OF THE ORDER DT.23.8.2005 OF THE COMMR. OF INCOME TAX (APPEALS)INCOME TAX (APPEALS) ANNEXURE H- CERTIFIED COPY OF THE ORDER DT.14.10.2009 OF INCOMETAX APPELLATE TRIBUNALINCOMETAX APPELLATE TRIBUNAL ANNEXURE I- COPY OF THE WRITTEN SUBMISSION DT.12.10.2009 SUBMITTED BEFORE THE TRIBUNAL.SUBMITTED BEFORE THE TRIBUNAL. //TRUE COPY// PA TO JUDGE C.N.RAMACHANDRAN NAIR & P.S.GOPINATHAN, JJ.------------------------------I.T.A.No.136 OF 2010------------------------------- Dated this the 2[nd] day of June, 2011 J U D G M E N T ~~~~~~~~~~~ C.N.Ramachandran Nair, J. This appeal is filed by the assessee challenging the orderof the Tribunal reversing the 1[st] appellate order that was infavour of the assessee. The assessee is a private limitedcompany engaged in chit business and assessment involved isone for the block period commencing from 1.4.1995 to18.10.2001. After search and seizure of the books of accountsand other documents the Assessing Officer issued notice underSection 158BC to which the assessee filed return declaring Nilundisclosed income. The Assessing Officer noticed that theaccounts were neither correct, complete nor written properlyfor him to find out the exact undisclosed income suppressed bythe assessee. He, therefore, proceeded to appoint an auditorunder Section 142 (2A) of the Act after getting prior approval fromthe CIT. When the proposal was communicated to the assessee, the assessee agreed with the Officer by stating that the accounts arecomplex and has mistakes and therefore they have no objectionin appointing an auditor under Section 142(2A). In fact, in thereply sent to the officer, the assessee even requested the Officerto authorise the auditor to be appointed by the Officer underSection 142(2A) to audit the accounts of the two Directors of theassesse-Company also. After obtaining consent from theassessee, the Officer appointed a special auditor under Section142(2A), who filed a report after verifying the accounts anddetermining undisclosed income, which is over 1.49 crores fromchit business and Rs.3 lakhs towards undisclosed income frominterest. When the assessee contested the assessment in appeal,the CIT(A) held that block assessment cannot be made on thereport of the auditor appointed under Section 142(2A) and onthis ground he set aside the assessment. Eventhough theassessee contested the findings of the special auditor based onwhich assessment is made, the CIT (A) did not go into thereasonableness of the income estimated based on whichassessment is made. In other words, he allowed the appeal onlyon the technical objection raised by the assessee. On further I.T.A.No.136/2010 appeal filed by the department before the Tribunal, the Tribunalreversed the order of the CIT(A) and restored the blockassessment completed under Section 158BC of the Act. It isagainst this order of the Tribunal, the assessee has come up withthis appeal. 2.We have heard Adv.Sri.P. Balakrishnan appearing forthe appellant/assessee and the standing counsel appearing forthe department. 3.The learned counsel for the assessee submitted thatblock assessment has to be based on evidence and materialscollected during search and so much so, the Assessing Officercannot rely on the audit report prepared by the special auditorappointed under Section 142(2A) of the Act. The learnedstanding counsel, on the other hand, submitted that the blockassessment is not based on special auditor's report but based onaccounts and materials seized during search conducted underSection 132 of the Act and all what the officer has done is to seekthe assistance of a special auditor to assess the undisclosed I.T.A.No.136/2010 income revealed by books of accounts and other materialsseized. 4.After hearing both sides and after going through theorders of the authorities below, we are of the view that theappointment of an auditor under Section 142(2A) does notinvalidate a block assessment completed under Section 158BC ofthe Act. Section 142(2A) authorises the Assessing Officer toappoint an auditor nominated by the Chief Commissioner if atany stage of the proceedings before him, he needs the assistanceof an independent auditor to be appointed by the department.Nothing in this Section bars the Assessing Officer to get audit ofaccounts seized by him in search proceedings. Of course,Section 158BC read with Section 158BB authorises blockassessment of undisclosed income found as a result of search orrequisition of books of accounts or other documents and suchother materials or information that are available with theAssessing Officer and relatable to such evidence. Admittedly, inthis case, the books of accounts and other materials have beenseized from the assessee in the course of search under Section I.T.A.No.136/2010 I.T.A.No.136/2010 132 and therefore, the Officer is entitled to find out from thesematerials as to what is the undisclosed income. If the seizedrecords disclose concealed income, the same obviously can beassessed in block assessment under Section 158BC read withSection 158BB of the Act. The assistance of an auditor to beappointed by the department can therefore be utilised toestimate undisclosed income borne out in the seized records andaccounts. On receipt of the special auditor's report, if theAssessing Officer finds that income returned by the assessee forthe relevant period was less than the income disclosed from theseized records and found out by the special auditor, then suchincome is certainly assessable as the undisclosed income basedon seized records. Therefore, what the special auditorappointed under Section 142(2A) does is only to assist theAssessing Officer to find out the undisclosed income availablefrom the seized records. So much so, in our view, theappointment of an auditor by the department under Section142(2A) is permissible for auditing the accounts seized from theassessee and such audit report and findings by the auditor couldbe relied on by the Assessing Officer for making block I.T.A.No.136/2010 assessment under Section 158 BC of the Act. 5.It is seen from the orders that the assessee on receiptof the notice from the Officer proposing appointment of anauditor under Section 142(2A) agreed with the officer that theaccounts contained mistakes and it is maintained in a complexmanner justifying audit under Section 142(2A). In fact, theassessee volunteered to offer audit of accounts of the Directorsof the assessee also by the auditor appointed by the departmentunder Section 142(2A) of the Act. In view of the consent givenby the assessee for the appointment of an auditor by thedepartment, we do not think the assessee can at a later stageobject against the appointment of the auditor or reliance ofauditor's report in the assessment. The challenge against theTribunal's order on this ground cannot therefore be accepted.We therefore confirm the order of the Tribunal upholding thevalidity of appointment of Auditor under Section 142(2A) andreliance of his report in assessment. I.T.A.No.136/2010 6.The learned counsel for the appellant raised acontention that neither the 1[st] appellate authority nor theTribunal considered on merits the contest made by the assesseeagainst the income assessed and the basis thereof. It is seenthat the Assessing Officer has largely relied on the specialauditor's report, which was contested by the assessee before allthe authorities. The Tribunal has noted that the assessee did notwant a cross examination for the auditor to be appointed underSection 142(2A) of the Act and therefore, the assessee cannotobject against the auditor's report. We do not think any crossexamination is required to sustain the challenge against thefindings of the auditor, if the same is otherwise tenable.Eventhough the assessee has not filed separate objection toauditor's report, the counsel for the assessee submitted thatassessee filed serious objection before the Officer for makingassessment based on the report submitted by the auditorappointed under Section 142(2A) of the Act. We find force in thiscontention because, neither the 1[st] appellate authority nor theTribunal has considered the assessee's challenge against theestimation of undisclosed income assessed by the Officer based I.T.A.No.136/2010 I.T.A.No.136/2010 on the auditor's report. In our view, it was the duty of the CIT(A)to closely examine the auditor's report based on which theassessment is made and if required, the 1[st] appellate authoritycould get clarification from the auditor as well as from theofficer. Since the correctness of the undisclosed income ofestimate is not considered by the 1[st] appellate authority as wellas the Tribunal, we think the assessee should be given one moreopportunity to contest the assessment on quantum addition. 7.We, therefore, allow the appeal by partly setting asidethe orders of the Tribunal and direct the 1[st] appellate authorityto restore the appeal to his file only for deciding on thecorrectness of the undisclosed income assessed after issuingnotice to the assessee and the Assessing Officer. The appealshould be disposed of on merits, within a period of three monthsfrom the date of receipt of a copy of this judgment. However, inview of the findings above, the assessee shall not be entitled toraise the legality of the appointment of the auditor and thereliance by the officer of the special auditor's report for thepurpose of assessment. In other words, the contest in appeal I.T.A.No.136/2010 should be limited to the estimation of undisclosed income made by the auditor that was accepted by the officer. Appeal is allowed in part as above. (C.N.RAMACHANDRAN NAIR, JUDGE) ps (P.S.GOPINATHAN, JUDGE)