Ludhiana Improvement Trust v. The Commissioner Of Income Tax-Iii, Ludhiana And Another

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH CWP No. 4763 of 2009 DATE OF DECISION: March 26, 2009 Ludhiana Improvement Trust …Petitioner Versus The Commissioner of Income tax-III, Ludhiana and another …Respondents CORAM:HON’BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE H.S. BHALLA Present:Ms. Radhika Suri, Advocate,for the petitioner. 1.Whether Reporters of local papers may beYesallowed to see the judgment?2.To be referred to the Reporters or not?Yes3.Whether the judgment should be reported inYesthe Digest? M.M. KUMAR, J. Ludhiana Improvement Trust (for brevity, ‘thepetitioner-Trust’) has approached this Court under Article 226 of theConstitution with a prayer for quashing show cause notices dated5.12.2008 and 19.12.2008 (P-1 & P-3) proposing to hold special auditunder Section 142(2A) of the Income Tax Act, 1961 (for brevity, ‘theAct’). The petitioner-Trust has also challenged the order dated30.12.2008 (P-6) being totally arbitrary and contrary to Article 14 ofthe Constitution. The petitioner-Trust filed its return in respect ofassessment year 2006-07 on 29.10.2006 and the case was selected for scrutiny on 27.10.2007. A notice under Section 143(3) of the Actwas issued. The assessment was required to be completed on orbefore 31.12.2008 as per the provisions of Section 143(3) of the Act.On 5.12.2008 (P-1), a show cause notice was issued proposing tohold special audit under Section 142(2A) of the Act. The petitioner-Trust has alleged that the aforesaid course was adopted in order toextend the period of limitation provided by Section 143(3) of the Act,which was to expire on 31.12.2008. It has been submitted that specialaudit under Section 142(2A) of the Act could be ordered only whenthe Assessing Officer is satisfied that the nature of the accounts iscomplex. According to the learned counsel in the present case thebooks of account were not even inspected on or before the date ofissuance of notice proposing to hold special audit. The petitioner-Trust filed detailed objections on 12.12.2008 to the show cause noticeby pleading that there was no cause to refer the matter to special auditand it was actuated by mala fide so as to extend the period oflimitation (P-2). The petitioner-Trust has claimed that books ofaccount were produced on 18.12.2008 for tendering its explanation tothe queries raised in the show cause notice. The books of accountwere impounded under Section 131(3)(b) of the Act. On 19.12.2008,another notice was issued by the Deputy Commissioner of Income-tax, Ludhiana, to the petitioner-Trust proposing special audit and thematter was posted for hearing on 26.12.2008. The petitioner-Trustfiled objections to the second show cause notice and asserted that itwas registered under Section 12AA of the Act and the AssessingOfficer was required to determine whether its income had beenapplied to its objects. It is claimed that there was no necessity to order special audit. On 30.12.2008, the respondents dismissed theobjections and passed an order referring the matter to Special AuditorShri P.C. Goyal (P-6). Ms. Radhika Suri, learned counsel for the petitioner- Trust has argued that once books of account were produced for thefirst time on 18.12.2008 and there could not be any application ofmind for recording the conclusion about the complex nature of theaccounts and so many other discrepancies. In support of hersubmission learned counsel has placed reliance on a judgment ofHon’ble the Supreme Court rendered in the case of Sahara India(Firm)v. Commissioner of Income-Tax, [2008] 300 ITR 403. According to the learned counsel the real import of the judgment ofHon’ble the Supreme Court is that special audit under Section 142(2A) of the Act should be resorted to in rarest cases where there was agenuine and honest attempt on the part of the Assessing Officer tounderstand the accountancy measure by the assessee. We have thoughtfully considered the submissions made According to the learned counsel the real import of the judgment ofHon’ble the Supreme Court is that special audit under Section 142(2A) of the Act should be resorted to in rarest cases where there was agenuine and honest attempt on the part of the Assessing Officer tounderstand the accountancy measure by the assessee. We have thoughtfully considered the submissions made by the learned counsel. It would first be appropriate to read the showcause notices. A perusal of the show cause notice dated 5.12.2008(P-1) shows that the matter concerning completion of assessmentunder Section 143(3) of the Act was pending and on 26.11.2008 anumber of queries were raised by the respondent department forfurnishing details/supporting evidence on various points. However,the petitioner-Trust failed to appear nor it filed any reply nor anyrequest for adjournment was made. The respondent department hadalready intimated to the petitioner-Trust that time barring assessmentis involved and compliance to the queries made were required to be ensured. In the second para of the show cause notice it has beenmentioned that according to the past history of the case a number ofdiscrepancies/complexities in maintenance of accounts were noticed,which had resulted in reference made to the Special Auditor forconducting special audit as per the provisions of Section 142(2A) ofthe Act in the preceding assessment year. The show cause notice alsodisclosed the following three issues:- “1.You have claimed exemption which on the facts ofthe case was not eligible to you.the case was not eligible to you. 2.Physical verification of the fixed assets was notconducted, which means valuation of theproperties was not done properly.conducted, which means valuation of theproperties was not done properly. 3.Complete books of accounts were not produced.” It was pointed out that the discrepancies which existed inthe earlier year were also found to be existing in the return for theassessment year 2006-07. The reply to the queries was not furnished.The respondents clarified that it was not possible to examine thebooks of account with reference to the vouchers forpurchases/expenditure of different nature to find out the exact natureof such expenses. Some expenses were found to be capital in natureand needed to be capitalised as part of the closing stock. It quoted anexample of the expenses on account of development and other worksamounting to Rs. 7,66,92,810/-, which were debited in the TradingAccount instead of capitalising the same part of closing stock.Likewise, genuineness of entries in the balance sheet concerningcurrent liabilities was also required to be ascertained particularly howthe same has been treated in the Profit and Loss account for the assessment year under consideration. The department also disclosedthat in the preceding assessment year 2005-06 books of account weremaintained on cash system basis and as a result of examination ofbooks of account by the Special Auditor, the income of the petitioner-Trust was assessed at Rs. 8.6 crores as against the income returned bythe petitioner-Trust at Rs. 40.54 lacs. The gap between two incomeswas, thus, evident. Therefore, the department thought it fit to issueshow cause notice by recording the opinion that complexities of theaccount of the petitioner-Trust and the interest of the revenue requiresthat the accounts be audited by a Special Auditor and to get a reportof such audit on prescribed form. assessment year under consideration. The department also disclosedthat in the preceding assessment year 2005-06 books of account weremaintained on cash system basis and as a result of examination ofbooks of account by the Special Auditor, the income of the petitioner-Trust was assessed at Rs. 8.6 crores as against the income returned bythe petitioner-Trust at Rs. 40.54 lacs. The gap between two incomeswas, thus, evident. Therefore, the department thought it fit to issueshow cause notice by recording the opinion that complexities of theaccount of the petitioner-Trust and the interest of the revenue requiresthat the accounts be audited by a Special Auditor and to get a reportof such audit on prescribed form. The petitioner-Trust tendered detailed reply on12.12.2008 (P-2) and the department again on 19.12.2008 (P-3) wroteto the petitioner-Trust. A perusal of para 4 of the letter shows that adetailed questionnaire was issued on 26.11.2008, which was dulyserved on the petitioner-Trust on 27.11.2008. It was required tofurnish reply to the queries as well as to produce complete books ofaccount alongwith vouchers for examination on 5.12.2008. However,neither the details were furnished nor books of account wereproduced for examination. However, on 8.12.2008 few details werefurnished, vide letter dated 5.12.2008, yet books of account were notproduced. The books of account, which have been produced on18.12.2008 are quite voluminous, which were impounded and upontest checking of the impounded books, the following discrepancieswere found:- The entries in the ledger did not match with the entriesmade in the cash book. The aforesaid letter also disclosed a numberof other things which led to the conclusion that the cash book andledger were neither kept on ‘mercantile basis’ nor on ‘cash basis’ andthat a number of adjustments are carried out at the close of the month,in the cash book, in respect of the entries pertaining to the earlieryears as back as May 1999 and subsequent period (even up toFebruary 2006). Such system goes to show that the books of accountwere maintained on mixed system of accountancy and DeputyCommissioner of Income Tax recorded the satisfaction thatmaintenance of mixed books of account by the petitioner-Trust hasbeen so complex that profits of the business carried by it relating toacquisition, development and sale of immovable properties cannot beascertained correctly. The Deputy Commissioner of Income Tax feltthat there were chances that some income chargeable to tax could beerroneously left to be computed. Accordingly, he proceeded toconclude as under:- “I am, therefore, of the opinion that keeping in viewthe complexity of the accounts involved, in themaintenance of books of account and other documents,by the Improvement Trust, Ludhiana and in the interestof revenue, it is necessary to issue directions in your casefor getting the accounts audited by an accountant afterseeing prior approval of the Commissioner of IncomeTax-III, Ludhiana. Before doing so you are hereby givenan opportunity of being heard, which is fixed for26.12.2008 at 11.00 A.M. in my office at Ludhiana. Furnishing reply to this office letter you mayconduct inspection of impounded books of account on23.12.2008 at 1.00 A.M. Formal notices u/s. 142(1) &143(2) are enclosed.” It is further pertinent to notice that vide order dated 30.12.2008, special audit has been ordered after obtaining priorapproval of the Commissioner of Income Tax-III, Ludhiana, videorder dated 30.12.2008 and have requisitioned the audit report withina period of 90 days from the receipt of the letter. In the backdrop of the aforesaid factual position we are Furnishing reply to this office letter you mayconduct inspection of impounded books of account on23.12.2008 at 1.00 A.M. Formal notices u/s. 142(1) &143(2) are enclosed.” It is further pertinent to notice that vide order dated 30.12.2008, special audit has been ordered after obtaining priorapproval of the Commissioner of Income Tax-III, Ludhiana, videorder dated 30.12.2008 and have requisitioned the audit report withina period of 90 days from the receipt of the letter. In the backdrop of the aforesaid factual position we are of the considered view that the instant petition lacks merit and is,thus, liable to be dismissed. The decision to undertake special auditfor the assessment year 2006-07 does not emanate from the casual orin-serious approach of the respondents. It has come on record that thedepartment has issued a letter dated 26.11.2008 to the petitioner-Trust, which posed a number of queries calling for details/supportingevidence on various issues. The petitioner-Trust was to appear before the Assessing Officer on 5.12.2008 when it failed to appear nor anyinformation was sent despite the fact that it was duly informed thattime barring assessment is involved and as such compliance to theabove queries was to be ensured by 5.12.2008. Referring to the pasthistory of a number of discrepancies and complexities in maintainingof books of account, respondent No. 2 had highlighted that in thepreceding years also special audit has to be ordered, which involvedvarious issues, some of which have already been adverted to in thepreceding paras. Likewise, a number of other things have beenrecorded in the show cause notice, dated 19.12.2008 (P-3), which hasproduced the past checking result from the impounded books ofaccount. The respondents reached the conclusion about thecomplexity of the accounts involved in maintenance of books ofaccount and other documents relating to the petitioner-Trust byrecording the satisfaction regarding such discrepancies and thevoluminous books of account. Keeping in view the possibility ofignoring any income from the assessment and ensuring the interest ofthe revenue, a show cause notice was issued on 19.12.2008 (P-3) andhearing was granted on 23.12.2008 to which the petitioner-Trust hadfiled detailed reply on 26.12.2008 (P-4). It was thereafter that on30.12.2008, respondent No. 2 has passed the order. There is neitherany procedural lapse because the prior approval of the Commissionerof Income Tax-III, Ludhiana, was obtained before issuance of showcause notice on 19.12.2008. The principles of natural justice as laiddown by their Lordships’ of Hon’ble the Supreme Court in the case ofSahara India (supra) and the principles requiring proper applicationof mind have been followed and applied. Moreover, even in respect of the last assessment year 2005-06, such a course was adopted and,therefore, there is no room to interfere in exercise of jurisdictionunder Article 226 of the Constitution. The argument that specialaudit has been ordered to gain more time by avoiding the applicationof limitation period which in normal course was to expire on31.12.2008, does not impress us because the petitioner-Trust itself isdelaying the proceedings before the respondents by their failure toattend and produce books of account. It does not lie in their mouth tomake such a complaint. By delay the petitioner-Trust was to bebenefited. There is, thus, nothing unwarranted nor any lack of bonafide. Even in last assessment special audit was ordered. The writpetition is wholly misconceived and the same is dismissed. (M.M. KUMAR)JUDGE March 26, 2009Pkapoor (H.S. BHALLA) JUDGE