Nickunj Eximp. Enterprises Pvt. Ltd.… Petitioners(In All Petitions v. Assistant Commissioner Of Income Taxrange 1(2) & Ors.… Respondents(In All Petitions

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1277 OF 2012ALONG WITHWRIT PETITION NO. 1278 OF 2012AND WRIT PETITION NO. 2867 OF 2012 Nickunj Eximp. Enterprises Pvt. Ltd.… Petitioners(in all petitions) v/s Assistant Commissioner of Income TaxRange 1(2) & ors.… Respondents(in all petitions) Mr.J.D. Mistry, Senior Advocate along with Mr.Jitendra Singh, Advocate along with Miss Neha Paranjape, Advocate for the petitioners in all petitions. Mr.Suresh Kumar, Advocate for the respondents in all petitions. CORAM: M.S. SANKLECHA & N.M.JAMDAR, JJ. DATED : 26 AUGUST 2014 ORAL ORDER (M.S.Sanklecha, J.) : These three writ petitions challenge the three impugned orders dated 22 December 2012 passed under Section 142(2A) of the Income Tax Act 1961 (the Act). By the three impugned orders the Assessing Officer has appointed a Special Auditor for the Assessment Years 2005-2006, 2006-2007 and 2007-2008 (one impugned order for each Assessment Year). 2.The petitioner is a Company engaged in the business of imports, exports, indenting agency and suppliers of high tech industrial products, such as, pneumatic tools, etc. The Assessing Officer has for the Assessment Year 2005-2006 completed the assessment on 23 March 2007, for the Assessment Year 2006-2007 completed the assessment on 24 December 2008 and for the Assessment Year 2007-2008 completed the assessment on 30 December 2009. All the above assessments were completed under Section 143(3) of the Act. 3.On 7 December 2010, the Assessing Officer issued three notices under Section 148 of the Act seeking to reopen the assessment for the Assessment Years 2005-2006, 2006-2007 and 2007-2008. All the three aforementioned notices for reopening the Assessments for Assessment Years 2005-06, 2006-07 and 2007-08 were challenged before this Court. By an order dated 18 June 2014 this Court did not entertain the challenge to the three notices dated 7 December 2010 leaving the issues open to be urged before the Assessing Officer during the reassessment proceedings for Assessment Years 2005-06, 2006-07 and 2007-08. 4.In the meantime, consequent to the reopening of the assessment for Assessment Years 2005-06, 2006-07 and 2007-08 and pending the challenge to the same before this Court, the Assessing Officer on 27 May 2011 issued three show cause notices to the petitioner to show cause why special audit under Section 142(2A) of the Act should not be conducted for the Assessment Years 2005-2006, 2006-2007 and 2007-2008. The show cause notices inter alia refers to the fact that during the course of bsb 3 WP1277.12+.doc survey proceedings, evidence was found which indicate that the purchases made by the petitioner did not appear to be genuine. On 14 June 2011, the petitioner filed its reply to the show cause notice and inter alia submitted that, in terms of Section 142(2A) of the Act, the jurisdictional requirement to order a special audit is that the accounts should be complex. It was pointed out that, as no complexity of accounts was shown in the show cause notice, the proposal to appoint a Special Auditor was not justified and, therefore, the same be withdrawn. The Assessing Officer by three separate orders dated 17 November 2011 (one for each Assessment Year) directed the appointment of a Special Auditor to audit the petitioner's books of accounts and also directed the Auditor to report on specific aspects of the petitioner's accounts as indicated in each of the orders dated 17 November 2011. 5.The petitioner has in the earlier three petitions challenged the three orders dated 17 November 2011 by which the Assessing Officer had directed appointment of a Special Auditor in respect of the petitioner's books of accounts for the Assessment Years 2005-2006, 2006-2007 and 2007-2008 in this Court. 5.The petitioner has in the earlier three petitions challenged the three orders dated 17 November 2011 by which the Assessing Officer had directed appointment of a Special Auditor in respect of the petitioner's books of accounts for the Assessment Years 2005-2006, 2006-2007 and 2007-2008 in this Court. 6.On 12 January 2012, this Court by a common order in the earlier three petitions set aside the three orders dated 17 November 2011 and directed the Assessing Officer to reconsider the petitioner's submissions opposing the proposal to appoint a Special Auditor under Section 142(2A) of the Act. While remitting the issue to the Assessing Officer for reconsideration, the High Court made the following observations :- bsb 4 “6. For the purposes of these proceedings and at the present stage, we are not inclined to enquire into the submissions which have been urged on behalf of the assessee. The order which has been passed by the Assessing Officer, neither deals with the submissions which were urged on behalf of the assessee in response to the notice to show cause dated 27 May 2011, nor for thatmatter does the order contain reasons of the nature thatare sought to be elucidated in the affidavit in reply. There is therefore substance in the grievance of the Petitioner that there has been a violation of the principles of natural justice on the part of the Assessing Officer in issuing a direction for a special audit under Section 142(2A) without considering the objections of the assessee. The primary requirement of Section 142(2A) is a recording of an opinion by the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interest of the Revenue that it is necessary to get the accounts audited, in terms of the statutory provision. The Assessing Officer must do so before he orders a special audit under Section 142(2A). A recourse cannot be taken to the provisions contained there lightly and without due fulfillment of the statutory requirements. In these circumstances, we are of the view that it would be appropriate to set aside the impugned order dated 17 November 2011 and to direct a fresh consideration by the Assessing Officer of the objections which have been raised by the assessee. We may also note that as a result of the proviso which was inserted into the provisions of Section 142(2A) by the Finance Act of 2007, with effect from 1 June 2007 it has been 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. Parliament has in its legislative wisdom specifically incorporated a requirement of a reasonable opportunity of being heard. This requirement cannot be a meaningless formality and the whole object and purpose of such an opportunity is to enable the assessee to demonstrate before the Assessing Officer that ingredients of Section 142(2A) are not fulfilled. In the present case, we are of the view that the bsb 5 submissions which have been urged on behalf of the assessee would warrant some application of mind by the Assessing Officer. Consequently in order to enable the Assessing Officer to reconsider the issue and without this Court expressing an opinion on the merits of the submissions, we quash and set aside the impugned order dated 17 November 2011. (emphasis supplied) 7. We direct that the Assessing Officer shall reconsider the issue as to whether a direction should be issued under Section 142(2A) after considering the objections which the assessee has raised and upon affording to the assessee a reasonable opportunity of being heard in terms of Section 142(2A).” bsb 5 submissions which have been urged on behalf of the assessee would warrant some application of mind by the Assessing Officer. Consequently in order to enable the Assessing Officer to reconsider the issue and without this Court expressing an opinion on the merits of the submissions, we quash and set aside the impugned order dated 17 November 2011. (emphasis supplied) 7. We direct that the Assessing Officer shall reconsider the issue as to whether a direction should be issued under Section 142(2A) after considering the objections which the assessee has raised and upon affording to the assessee a reasonable opportunity of being heard in terms of Section 142(2A).” 7.Consequent to above, the Assessing Officer issued a communication to the petitioner dated 1 February 2012 wherein it was indicated that the petitioners were given an opportunity to explain the nature and complexity of accounts in respect of data found in the impounded hard disk maintained in the computer and annual accounts filed with the Returns of Income. It was mentioned since the verification of the data impounded during the survey proceedings indicated that some of the purchases claimed to have been made during the Assessment Years 2005-2006 to 2010-2011 did not appear to be genuine. Further, in the above context the petitioner was called upon to explain various aspects of accounts, such as, quantitative details of items purchased, sale and closing stock, quantitative analysis of cuttings, genuineness of wastage, etc. 8.On 9 February 2012 the petitioner filed independent reply to each of the notices and inter alia submitted that the information sought for relating to the purchases was available with the Assessing Officer. It was submitted that the direction of the High Court order dated 12 January 2012 was not followed. Thereafter a hearing was given to the petitioner where purchase register was called for were also submitted. 9.On 22 February 2012, the Assessing Officer passed three impugned orders identically worded for the Assessment Years 2005-06, 2006-07 and 2007-08. In the three impugned orders, the Assessing Officer concluded that there is complexity involved in the accounts. In the orders, reference was also made to certain items of purchase being found to be bogus in view of the survey conducted in 2010. The impugned orders inter-alia held as under and as an illustration we reproduce the following extract from the order for Assessment year 2005-06 :- “Gist of the complexities can be narrated as under : a. The assessee claims that without purchases, sales to public sector undertakings/Govt. Agencies could not have been made was not found correct as item-wise purchases and sales do not correlate with each other, neither closing stock statement match with intem-wise stock as per impounded Books of Accounts. b. Certain items of purchases were subjected to cutting as per specifications and requirements of the customers but the assessee had not maintained any item-wise, quantity-wise details leading to non-correlation between the specific items of purchases to the items of sales. c.Only a very small percentage of sales to PSUs/Govt. Agencies could be linked to the purchases from bogus suppliers. This issue needed further verification from an independent auditor. d.As per impounded Books of Accounts in the bsb 7 computerized data, the issues of bogus supplies pertaining to the A.Yrs.2005-06, 2006-07 and 2007-08 were prima facie identified and in view of the complexities mentioned above, the true and correct taxable income is not shown. 4.Apart from the above, in A.Y.2005-06, the assessee company has made purchases worth Rs.50,42,852/- from seven entities as under. It is worthwhile to mention here that in the course of assessment proceedings for A.Y. 2005-06, total purchases from supplies were Rs.0.50 crore. c.Only a very small percentage of sales to PSUs/Govt. Agencies could be linked to the purchases from bogus suppliers. This issue needed further verification from an independent auditor. d.As per impounded Books of Accounts in the bsb 7 computerized data, the issues of bogus supplies pertaining to the A.Yrs.2005-06, 2006-07 and 2007-08 were prima facie identified and in view of the complexities mentioned above, the true and correct taxable income is not shown. 4.Apart from the above, in A.Y.2005-06, the assessee company has made purchases worth Rs.50,42,852/- from seven entities as under. It is worthwhile to mention here that in the course of assessment proceedings for A.Y. 2005-06, total purchases from supplies were Rs.0.50 crore. 4.1Another discrepancy in the stock statement found during the proceedings was that the high precision items imported or purchased from genuine suppliers, were subject to cuttings as per the requirement of the customers. However, no quantitative details were maintained and this suited very well to the assessee company for taking plea that sales could not be made without purchases.” Besides, the Special Auditor was directed to examine and furnish a report on investigation and specific particulars are indicated in the three impugned orders. 10.To complete the chronology of events, it is relevant to note that Section 142(2A) of the Act which empowers the Assessing Officer to direct the special audit was amended w.e.f. 1 June 2013. The earlier jurisdiction of the Assessing Officer to direct a special audit was “nature and complexity of accounts of the Assessee” was substituted by “the nature and complexity of the accounts, volume of the accounts, doubts bsb 8 about the correctness of the accounts, multiplicity of the transactions in the accounts or specialized nature of the business activity of the assessee. 11.In support of the petition, Mr.Mistry, learned counsel appearing for the petitioner submitted as under : (i) The Assessing Officer had not even examined the books of accounts for the subject Assessment Years 2005-06, 2006-07 and 2007-08 before issuing the show cause notice for a special audit under Section 142(2A) of the Act. In view of the above, it was submitted that in the absence of examination of the books of accounts it would not be open to the Assessing Officer to allege that the accounts are complex; (ii) The impugned orders dated 22 February 2012 are in breach of principles of natural justice. As the Assessing Officer had at no point of time put to the petitioner what part of the accounts did he find complex. It is the submission of the petitioner that in case this was put to the petitioner, the same would have been explained; and (iii) The direction given by the Assessing Officer to the independent auditor to examine and verify the various aspects of the petitioner's business relating to purchases, sales and closing stock, item-wise purchases from genuine suppliers, quantitative analysis of item-wise purchases, etc. amounts to abdication of responsibility/work by the Assessing Officer. It would, according to the petitioner, amount to outsourcing the Assessing Officer's job to another party. 12.As against the above, Mr.Suresh Kumar, learned counsel for the revenue submits in support of the impugned orders as under : bsb 9 WP1277.12+.doc (iii) The direction given by the Assessing Officer to the independent auditor to examine and verify the various aspects of the petitioner's business relating to purchases, sales and closing stock, item-wise purchases from genuine suppliers, quantitative analysis of item-wise purchases, etc. amounts to abdication of responsibility/work by the Assessing Officer. It would, according to the petitioner, amount to outsourcing the Assessing Officer's job to another party. 12.As against the above, Mr.Suresh Kumar, learned counsel for the revenue submits in support of the impugned orders as under : bsb 9 WP1277.12+.doc (i)There has been no breach of principles of natural justice, inasmuch as, the petitioners were aware of the case made out by the revenue not only by virtue of the impugned order which was set aside as breach of natural justice but also on account of an affidavit in reply filed in the earlier writ petition. In fact, it is submitted that while passing the order dated 12 January 2012 while remitting the matter to the Assessing Officer for reconsideration, the Court in paragraph 6 makes a reference to the points sought to be elucidated by the respondent revenue by an affidavit in reply. In view of the above, it is submitted that, in substance, the principles of natural justice were complied with; (ii) The result of the investigation, consequent to a survey in 2010 did reveal that many of the purchases were not genuine during the period covered by the subject Assessment Years 2005-06 to 2007-08. Thus, this resulted in also reopening the assessment for the subject assessment years even when the accounts had been audited by a independent Statutory Auditor; and ( iii) By directing the Special Audit under Section 142(2A) of the Act, there is no outsourcing of the Assessing Officer's job. This is so as the Assessing Officer himself would be determining the income which would be chargeable to tax. The special audit is merely being carried out so as to obtain an independent view of a true and correct determination of the profits/income earned by the petitioner. It is submitted that no prejudice would be caused to the petitioner, if the petitioner subject itself to the special audit as the payment for the same would be made by the revenue and it would be of assistance in determining the correct quantum bsb 10 13.We are exercising an extraordinary writ jurisdiction under Article 226 of the Constitution of India. The writ remedy is not a remedy as a matter of right like an appeal. It is a discretionary remedy. The grant or refusal of it is with the object of achieving justice. Therefore, in this case, we would have to keep in mind not only the grievance of the petitioner with regard to its rights examined on the touch stone of overall justice involved in the matter. Besides, while exercising our writ jurisdiction in respect of the Assessing Officer's discretion to order a special audit under Section 142(2A) of the Act we would not ordinarily interfere with the same provided the same satisfies the jurisdictional requirements of the statutory provisions. 13.We are exercising an extraordinary writ jurisdiction under Article 226 of the Constitution of India. The writ remedy is not a remedy as a matter of right like an appeal. It is a discretionary remedy. The grant or refusal of it is with the object of achieving justice. Therefore, in this case, we would have to keep in mind not only the grievance of the petitioner with regard to its rights examined on the touch stone of overall justice involved in the matter. Besides, while exercising our writ jurisdiction in respect of the Assessing Officer's discretion to order a special audit under Section 142(2A) of the Act we would not ordinarily interfere with the same provided the same satisfies the jurisdictional requirements of the statutory provisions. 14.The petitioner's basic grievance is that, at the time when the show cause notice was issued for appointment of Special Auditor under Section 142(2A) of the Act, the jurisdiction to issue the same could only arise if the Assessing Officer is satisfied that the nature and complexity of the accounts needs a Special Auditor to be appointed. This complexity of the accounts, according to the petitioner, can be decided only on examination of the accounts. In this particular case, it is submitted that the accounts have not at all been examined. Thus, there would be no occasion for the Assessing Officer to reach the conclusion that the accounts were complex. The Delhi High Court in the case of AT &T Communication Pvt. Ltd.v/s Commissioner of Income Tax, reported in362 ITR 97, an issue similar to that raised before us was examined i.e. whether Special Audit can be ordered without examining the Accounts. The Delhi High Court considered the submission and came to the view that the expression bsb 11 “accounts” cannot be confined only to the books of accounts as such an interpretation would completely defeat the very object of the section. For the purpose of special audit the Court observed that, in addition to the books of accounts the Assessing Officer may take into account such other documents which can be the part of assessment proceedings. Even if one assumes that the books of accounts were not examined, if the Assessing Officer on the basis of other material before him reaches a conclusion that the accounts required special audit, then, it is within its discretion to so direct. The only requirement is that there must be a valid material before the Assessing Officer from which a view could be founded that the accounts are complex. We are in respectful agreement with above view of the Hon'ble Delhi High Court. In this case the result of survey in 2010 led to a prima facie view that some of the purchases were not genuine even though they were admittedly reflected in the Accounts Books of the petitioner for the subject assessment years. These Account Books were subject to an audit by an independent Statutory Auditor, who did not detect the same. The possible non-detection of the same could lead to a view that the accounts are complex as otherwise the same could have been detected by the Auditor. These accounts had been audited by an independent auditor and the same were not commented upon by the auditor. Therefore the examination of the account books is not a sine qua non in every case to come to the conclusion that the books of accounts need an appointment of a Special Auditor. In the peculiar facts of this case where the result of the survey in 2010 led to a prima facie view that some of the purchases admittedly reflected in the Account Books were not genuine coupled with non-detection by the Auditor is reason enough to direct an appointment of Special Auditor. bsb 12 bsb 12 15.It was next contended by the petitioner that the impugned orders passed are in breach of principles of natural justice, inasmuch as, no notice was given to the petitioner of what and/or why the books of accounts were found complex by the Assessing Officer. The affidavit in reply filed on behalf of the respondent revenue in earlier Writ Petition No.2717 of 2011 which was even adverted to in the order dated 12 January 2012, itself indicated broadly the reason why the Assessing Officer finds the accounts of the petitioner complex and desires to have a special audit done of the same. Besides the communication dated 1 February 2012 by the Assessing Officer to the petitioner consequent to order of this Court dated 12 January 2012 calling the petitioner for hearing, reads as under : “2. ...... an opportunity of being heard is given to you to explain the nature and complexity of accounts is in respect of data found in the impounded hard disk maintained in the computer and annual accounts filed with the return of income. 3. In your case survey u/s 133A of the I.T. Act was conducted on 19.10.2010. During the survey proceedings hard disk maintained in the computer was impounded and the analysis of the data contained to have purchased goods from several parties, the entries relating to which were deleted but retrieved during the survey. On verification of the data impounded during the survey proceedings on 19.10.2010 pertaining to A.Yrs. 2005-06 to 2010-11 has shown that the purchases from many suppliers were suspected to be bogus as such parties/persons were non-existent at the address given and their bank accounts were not operative after transaction with the assessee company. Therefore, you are requested to furnish your explanation and documentary evidences as under : bsb 13 (a) In the course of the survey and post survey proceedings, some parties are found to be non-genuines/ bogus proving accommodating entries.” In view thereof, the petitioners were put to notice of the revenue's case. Therefore, the plea that there has been violation of principles of natural justice, cannot be accepted. 16.It was also submitted that the impugned order in effect outsources the activity which is to be carried out by the Assessing Officer to the Special Auditor. In particular, our attention was invited to the paragraph 6 of the impugned order wherein the Assessing Officer has directed the Special Auditor under Section 142(2A) of the Act to examine and incorporate in his report various aspects of the petitioner's accounts including giving quantitative details of items purchased, sold, as well as analysis of the wastage, loss claimed by the petitioner, among other items. One must not loose sight of the fact that the scope of special audit is different from a normal Audit done under Section 44AB of the Act as observed by the Supreme Court in Sahara India (Firm) v/s Commissioner of Income Tax & anr., reported in C.I.T. 300 ITR 403, as under :- “21. …..... We are convinced that special audit has an altogether different connotation and implications from the audit under Sec.44AB. Unlike the compulsory audit under Sec.44AB, it is not limited to mere production of the books and vouchers before an auditor and verification thereof. It would involve submission of explanation and clarification which may be required by the special auditor on various issues with relevant data, document etc., which, in the normal course, an assessee is required to explain before the AO. Therefore, special audit is more or less in thenature of an investigation and in some cases may even turn out to be bsb 14 WP1277.12+.doc “21. …..... We are convinced that special audit has an altogether different connotation and implications from the audit under Sec.44AB. Unlike the compulsory audit under Sec.44AB, it is not limited to mere production of the books and vouchers before an auditor and verification thereof. It would involve submission of explanation and clarification which may be required by the special auditor on various issues with relevant data, document etc., which, in the normal course, an assessee is required to explain before the AO. Therefore, special audit is more or less in thenature of an investigation and in some cases may even turn out to be bsb 14 WP1277.12+.doc stigmatic. We are, therefore, of the view that even after the obligation to pay auditor's fees and incidental expenses has been taken over by the Central Government, civil consequences would still ensue on the passing of an order for special audit.” Besides, as pointed out by Mr.Suresh Kumar on behalf of the revenue that on receipt of the special audit, the Assessee does have liberty to demonstrate before the Assessing Officer that the comments made by the Special Auditor are not justified. There is statutory recognition for the same. Under Section 142(3) of the Act any material gathered on the basis of an audit under Section 142(2A) of the Act and proposed to be utilized for the purpose of assessment, the Assessing Officer is obliged to grant an assessee an opportunity of being heard in respect of the material so gathered before it is used for purposes of assessment. The material so obtained in Special Audit would be considered by the Assessing Officer while passing the assessment order. It is not that the Assessing Officer has divested himself of responsibility by directing a Special Audit and investigation into certain aspects. This information obtained during the course of Special Audit is to be considered by the Assessing Officer. It is open to him to discard the result of the verification. 17. One more factor which is relevant in the present case is that, the assessments for the subject assessment years have been reopened under Section 148 of the Act. The basis for reopening is that some of the purchases are alleged to be not genuine. In these circumstances, a direction of the special audit cannot be said to be completely arbitrary. In the present facts one cannot loose sight of the fact that the challenge of the petitioner to reopening of assessments for all the three years was also not entertained by this Court, while deciding not to exercise our writ bsb 15 WP1277.12+.doc jurisdiction in these petitions. Moreover, we do not find that any grave prejudice would be caused to the petitioners if the books of accounts are subject to a special audit as directed by the Assessing Officer. The submission of the petitioner with regard to prejudice is that having put themselves already through an audit, another audit by a Special Auditor would require the petitioner to satisfy the Special Auditor with regard to the various issues which have been settled and answered to the satisfaction of the statutory auditor. This, to our mind, is not prejudice enough to stall/prohibit the Assessing Officer from directing the special audit in the peculiar facts of this case. This prejudice complained of by the petitioner is a prejudice inherent in case of every direction to appoint a Special Auditor as this is done after accounts have already been audited by the Statutory Auditor. 18.Taking into account all the above factors, we are of the view that no real prejudice and/or injustice is caused by the petitioners' books of accounts being subjected to Special Audit. Therefore, we see no reason to exercise our extraordinary jurisdiction under Article 226 of the Constitution of India and prohibit the carrying on of special audit as directed by the impugned orders dated 22 December 2012. 18.Taking into account all the above factors, we are of the view that no real prejudice and/or injustice is caused by the petitioners' books of accounts being subjected to Special Audit. Therefore, we see no reason to exercise our extraordinary jurisdiction under Article 226 of the Constitution of India and prohibit the carrying on of special audit as directed by the impugned orders dated 22 December 2012. 19. Accordingly, the writ petitions are dismissed with no order as to costs. (N.M.JAMDAR, J.) (M.S. SANKLECHA, J.)