Court cannot go into sufficiency of reasons for special audit : High Court

By | March 26, 2018
(Last Updated On: March 26, 2018)


Habitat Shelters (P.) Ltd.


Principal Commissioner of Income Tax, Bangalore


WRIT PETITION NO. 2009 OF 2018 (T – RES)

FEBRUARY  12, 2018

Anirudha R.J. Nayak, Adv. for the Petitioner.



1. The petitioner-M/s.Habitat Shelters Private Limited has filed this Writ Petition aggrieved by the directions of holding a Special Audit by the respondent- Income Tax Department under Section 142(2A) of the Income Tax Act, 1961 (Act) vide impugned Communication Annexure-H dated 28.12.2017 for the Assessment Year 2015-2016 while undertaking the assessment proceedings of the petitioner assessee for the said assessment year.

2. The writ petitioner has contended before this Court through Mr.Anirudha R.J.Nayak, that the respondent Authority did not comply with the principles of natural justice in the present case and without considering the objections raised by the petitioner against such Special Audit under Section 142(2A) of the Act, vide Annexure-G dated 19.12.2017, which was submitted through an e-mail at 6.25 p.m. on 19.12.2017, the impugned order Annexure-H dated 28.12.2017, without mentioning any time thereon was sent to the petitioner communicating the reasons for directing the Special Audit of Books of Accounts of the petitioner assessee for the Assessment Year 2015 – 2016.

3. The learned counsel for the petitioner has also contended before the Court that the assessment in question for the Assessment Year 2015-2016 was getting time barred on 31.12.2017 and therefore, just to buy more time, the respondent Authority has taken recourse to directing the Special Audit under Section 142(2A) of the Act, which will unnecessarily further prolong the assessment proceedings. He has also submitted before the Court that the petitioner was paying the Presumptive Tax under the relevant provisions of the Act and therefore could not be subjected to this Special Audit.

4. Having heard the learned counsel for the petitioner, this Court is of the opinion that the reasons assigned by the respondent Authority in Annexure-H1 dated 19.12.2017, which are quoted below cannot be held to be irrelevant for the purpose of directing Special Audit under Section 142(2A) of the Act. The said reasons, prima facie, indicate that the petitioner assessee had adopted different accounting practices for different projects of real estate undertaken by it, viz., Indiranagar Project and Safari Quest Project. The reasons contained in paras-2 to 5 are quoted below for ready reference:—

“2.You have stated your objections to the proposed reference of your case for Special Audit stating that you have placed on record details/information/ documents in support of the numbers in the financials. Further, it is also stated that revenue recognised for the FY 2014- 15 has been made percentage completion method.
3.Your attention is invited to the hearing session on 7/12/2017 wherein, the Managing Director Mr.Deepak Lulla attended. In response to revenue recognised of Rs.2,15,60,000/- under percentage completion method, he stated it was actually closing stock and that the same was wrongly considered as revenue. Regarding the Indiranagar Project, it was seen that no agreements were entered (sic.) into, but only a sale deed was available and an amount of Rs.2,91,000 was shown as revenue under percentage completion method with no basis.
4.In the Safari Quest project, prima facie, the JDA was entered into only on 14/5/2015 (FY 2015-16) relevant to AY 2016-17, however an amount of Rs.60,00,000 has been shown as revenue. Advances have been received but no agreements to this effect were made.
5.There is a profit from sale of completed flats of Rs.21,00,000. A sale deed dated 4/2/2015 is submitted, but no purchase deed is furnished to compute the actual gains.”

In view of the above, it is seen that the Company has entered into multiple agreements some of which were oral agreements and some interpreted as agreements and a sale deed registered subsequently. Though the details pertained to three ventures, the accounting of the same is complex as also involving multiplicity of agreements and understanding. Hence, your objections are not acceptable.

5. Therefore, the aforesaid portions of the said communication, prima facie, indicates that to understand the complex treatment of multiplicity of agreements entered into by the petitioner for different projects, the Income Tax Authority directed a Special Audit for better clarity of the picture of Books of Accounts maintained by the petitioner during the said period, which are supposed to be consistent and on uniform method, so that a consistent view about the taxability of income arising or accruing to the petitioner assessee for the said year could be taken and income subjected to taxation. The relevant provisions of Section 142(2A) of the Act are quoted below for ready reference:—

“142. Inquiry before assessment.

(1) ******
(2) ******

(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity 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 Principal Chief Commissioner or Chief Commissioner or Principal 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 Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require:

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.”

6. This Court does not find any force in the contentions raised at the bar that there was a breach of principles of natural justice in the present case. Even though the objections to the Proposition Notice for Special Audit were submitted by the assessee on 19.12.2017 and on the same day, the Communication aforesaid, Annexure-H1 dated 19.12.2017 came to be issued, it cannot be said that the objections raised by the assessee were not considered by the respondent Authority. The petitioner assessee was heard before the said Authority during the course of assessment proceedings and a hearing on 7.12.2017 also took place in this regard before the said Assessing Authority, where the Managing Director of the petitioner Company Mr.Deepak Lulla attended the proceedings, which appears from the aforesaid quoted portion of the Communication Annexure-H1 dated 19.12.2017. The final directions for the said purpose Annexure-H dated 28.12.2017 also refers to the e-mail of the petitioner – assessee stated in its objections dated 19.12.2017.

7. Obviously, this Court cannot go into the sufficiency of reasons assigned by the Assessing Authority for directing such Special Audit. Only if there were no reasons assigned and objections of the petitioner assessee were not considered, perhaps, the breach of principles of natural justice, as required under Section 142(2A) of the Act and Proviso thereto could be so contended by the assessee, but from the record, it does not appear to be either absence of an opportunity of hearing altogether or the absence of any reasons at all.

8. Thus, this Court cannot draw any inference of breach of principles of natural justice or arbitrariness in the impugned order passed by the respondent Authority. Accordingly, the requirement of Section 142(2A) of the said Act cannot be said to have been not complied by the respondent Authority. The same requires no interference under Article 226 of the Constitution of India. Therefore, the Writ Petition is liable to be dismissed and is accordingly dismissed. No costs.

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