TMI Blog2014 (4) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... hed the conclusion that the accounts were complex and it was in the interest of the Revenue that special audit u/s 142 (2A) of the Act, should be directed - in the past also special audit was directed but the AO has not directed special audit in the assessment year without examining the accounts for the year, the entries made, peculiarity involved etc. Special audit has not been directed for getting over the limitation or in routine. The business transactions have become more complicated and accounting entries more complex than ever before - This may be one of the causes why possibly the frauds could not be detected in some cases - Indeed such cases have made the audit work more comprehensive, intrusive and investigative - Ethical managements may at times regard such enquiries as an unwarranted intrusion or a hounding approach - Section 142(2A) does not permit fishing or roving inquiry approach or a witch hunt but is a regulated provision which accepts the need and necessity of the Assessing Officer to take help of an expert accountant i.e. a Chartered Accountant, a person who is academically qualified and has practical experience to understand accounts and unearth tax evasion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 2012 was issued to the petitioner fixing the case for scrutiny assessment on 8th November, 2012, on which date the case was adjourned to 23rd November, 2012. On the said date, part details were filed but in the meanwhile another questionnaire dated 6th December, 2012 was issued. The assessee claims that it complied with the details, information and clarifications requisitioned. However, show cause notice dated 26th February, 2013 under Section 142(2A) was issued for referring the accounts for special audit and the petitioner was asked to respond. The petitioner objected by their letter dated 8th March, 2013 and protested against reference to special audit on the ground that it was unwarranted and contrary to law (the details of the objections raised and the merits of the same have been considered below). The Assessing Officer-Additional Commissioner of Income Tax, Range 10, New Delhi by the impugned order dated 25th March, 2013 directed the petitioner to get their accounts for the Financial Year 2009-10 relevant to the Assessment Year 2010-11 audited from a Chartered Accountant, who was nominated as per the provisions relating to conduct of special audit under Section 142(2A) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contrary to the recommendation of the Special Auditor and in the Assessment Year 2009-10 again disallowance was made without aid of the special audit report. Commissioner (Appeals) has completely deleted the disallowance made for Assessment Year 2008-09 and first appeal for Assessment Year 2009-10 was pending. Thus special audit for the said reason was unwarranted. (vi) Reasonable interest @ 6.5% was charged in respect of loans and advances to subsidiaries, cannot and should not be made subject matter of special audit. The petitioner had mixed pool funds, self-generated or borrowed and the average cost of which was 6.5% and, therefore, interest @ 6.5% was charged from the subsidiaries. Issues and contentions raised on the said aspect relate to interpretation of law and application of legal principles. These aspects fall exclusively within the domain of the Assessing Officer and the special auditor cannot render assistance. (vii) Presumption that mixed pool funds had been used for assessee s business, whereas self-generated funds used for lending and non-business investments, applied. Reliance was placed on East India Pharmaceutical Works Limited versus Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The provision did not entitle the Assessing Officer to pass the buck to the Special Auditor as it was the Assessing Officer s responsibility to scrutinise the accounts. However, the Supreme Court rejected the contention that special audit need not be directed because audit had been conducted under Section 44AB, inter alia, observing that the two provisions had altogether different connotations and implications. Unlike compulsory audit under Section 44AB, special audit was not limited to mere production of books or vouchers and verification thereof by the auditor but involved submission of explanations and clarifications, which might be required by the Special Auditor on various issues with relevant data, documents etc. Special audit was more or less in the nature of investigation and in some cases might even turn out to be stigmatic. 8. In Delhi Development Authority and Another versus Union of India and Another, (2013) 350 ITR 432 (Delhi) it was observed that detailed scrutiny of large number of entries by itself on standalone basis might not amount to or reflect complexity of accounts. Every Assessing Officer was required to scrutinise the entries and verify them but this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts. He was supposed to be acquainted with the method of accounting and with comprehensive knowledge with regard to matters required to be examined. 10. Aforesaid rulings when appraised and reflected, state that while examining the question of complexity in accounts, we have to apply the test of reasonable man by replacing the word and qualities of a reasonable man, with the word and qualities of a reasonably competent Assessing Officer. The question of complexity of accounts has to be judged applying the yardstick or test; whether the accounts would be complex and difficult to understand to a normal assessing officer who has basic understanding of accounts etc., without the aid, assistance and help of a special auditor. Thus due regard has to be given to nature and character of transactions, method of accounting, whether actuarial were adopted for making entries, basis and effect thereof, etc., though mere volume of entries might not be a justification by themself as volume and complexity are somewhat different. Accounts should be intricate and difficult to understand. Every scrutiny assessment entails investigation and verification of the books of accounts, genuineness o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the special audit report for the A. Yrs. 2006-07, 2007-08, 2008-09 2009-10 contain findings that the revenue recognized from various projects under construction had not been correctly determined by you mainly on account of following discrepancies: (i) Increase in budgeted cost or a decrease in actual cost results in decrease in the quantum of revenue recognition. (ii) Variance in Budgeted IDC cost and actual IDC cost incurred during the year (iii) Variation in budgeted construction cost and actual construction cost incurred during the year (iv) Variance in actual cost of construction (v) Revenue recognition under the POCM method is understated. Further observations were made by the Special Auditor for the A. Y. 2009-10 with reference to the POCM method adopted by the assessee, in the Special Audit Report. (vi) You have changed the basis of apportionment of actual internal development Charges during the financial year under consideration and the ITC incurred up to 31.3.2009 have been charged to various projects on the basis of total saleable area of Phase-V which also includes the area of the projects which are yet to be launched, (vii) You have shown sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that on the basis of the entries, there was difficulty in understanding the accounts. These were multiple transactions in relation to sale of plots and development cost with sister concerns. Transactions relating to land purchases were routed through various related group concerns which were very intricate and complex. Project at Indore, Kakanad and Begur were referred to. Assessing Officer noted that it appeared that different revenue recognition methods had been adopted. Lastly, reference was made to the special audit reports for the earlier years and detailed working of each project undertaken in the earlier years had resulted in additions. Books of accounts and related bills and vouchers were not only complex but voluminous as there were large numbers of ongoing projects. 15. In response, the petitioner assessee has submitted that consistently the petitioner was following the policy of accounting construction costs only when bills were approved and verified and thereupon final liability became crystalised or due for payment. Entry with regard to purchases of stocks was made not upon receipt of material but after the inspection and when the material was accepted. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007-08 and 2008-09, but further appeals were pending. With regard to Assessment year 2006-07, addition of more than Rs.120 crores stands sustained in the first appeal. The Petitioner has made inquisitive observations with regard to assessment year 2009-10 as it was indicated that the Petitioner had made addition of Rs. 120.62 crores on the lines of the Special Auditor s working for the assessment year 2008-09. 17. We have referred to the aforesaid reply to show cause that the POCM working itself was examined in the special audits in the earlier years and was subject to scrutiny by the special auditor. At another place, in the said reply the petitioner has made the following statement: It is rather misleading that the observations of the Special Auditors, on POCM in AN. 2006-07 to A.Y. 2009-10 have been referred to without mentioning the fate of their findings before the CIT(A) i.e. first Appellate Authority. The table below bears testimony to this: F.Y. Addition proposed by Special Auditor (Rs./Crores) Addition made by Assessing Officer (Rs./Crores) Addition deleted by Commissioner of Income Tax (Appeals) (Rs./Crores) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple applicable depends upon facts which have to be verified and ascertained. The petitioner in response to the show cause notice had stated that the petitioner had own funds to the extent of Rs.12,830 crores and had borrowed funds to the extent of Rs.12,638 crores during the year in question. The petitioner has granted loans and advances to the extent of Rs.10,14,344.97 lacs to the subsidiary companies @ 6.5% per annum which as per the petitioner was the borrowing costs. It was claimed that in view of the aforesaid position, the petitioner was not evading tax as the transactions were tax and revenue neutral. The Assessing Officer has observed that it has to be shown and established that the charging of interest @ 6.5% was a revenue neutral exercise. This could be only ascertained after all entries were examined by the special auditor. On the question of commercial expediency, it has been observed in the impugned order that it would come into play when the actual picture was ascertained i.e. extending of loan to the subsidiary and charging of interest was thoroughly examined. 21. With regard to the profit from SEZ and non-SEZ projects it was noted that profit of Rs.1,78,63.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery, hence this objection cannot be entertained. 18.8 Assessee has raised use of word Transparent'. In this regard it is stated that non transparency in the maintenance of books of accounts leads to complexity both in terms of examination and determination of revenue realization. Without prejudice it is further stated that the Income Tax Act does not prevent the Assessing Officer from examining the form No lOCC13. 24. We do not find any merit in the contention raised by the petitioner that related party transactions or reasonableness of interest paid to the petitioner on loans and advances by its subsidiary was an issue which was never raised in the show cause notice and therefore, there was violation of principles of natural justice. This question was specifically raised in the show cause notice and answer or reply was called for. Even if the said aspect was not independently examined by raising a written question in the assessment proceedings, it is apparent that the Assessing Officer had applied his mind to the said aspect. On the question of related parties transaction, we have quoted the observations made by the Assessing Officer to the effect that there were numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be audited by a qualified Chartered Accountant. Chartered Accountants are not ordinary accountants but specialists who have successfully undergone academic study and have extensive practical experience and trained for the said work. Curriculum requires articleship under a mentor who is himself a Chartered Accountant with some years of experience. As opposed to an ordinary accountant, a Chartered Accountant with his experience and academic background is in a better position to investigate, examine and scrutinize entries and records of financial transactions. Calibre and competence of Chartered Accountants is of a high degree and should not and cannot be equated with the capability of an ordinary accountant or a normal person having knowledge or acquainted with accounts. Off late there has been demand for increased public scrutiny of accounts, inspite of statutory audit. Enron and other cases abroad and Satyam s case in India have highlighted the need and necessity to have controls and system of checks, perhaps even beyond scope of traditional audit. Financial statements and accounts are being increasingly exiguously examined to rule out possibility of wrong doings, cover up or evasi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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