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TAKSHASHILA REALTIES PVT. LTD Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4 (1) (2) AND 2

Special audit under Section 142 [2A] - proper material on record and reasons recorded - Held that:- As per amended Section 142 [2A] of the Act, apart from the nature and complexity of the accounts, etc., even in case of multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and the interests of the Revenue, the Assessing Officer can pass an order for special audit in exercise of powers conferred under Section 142 [2A] of the Act. Therefore, while .....

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ssues relating to issuance of equity shares against the balances of revaluation credits at an unreasonable premium, and after having been satisfied that considering the specialized nature of business activities of the assessee, the Assessing Officer has passed an order of special audit in exercise of powers under Section 142 [2A] of the Act. - We see that the decision for audit of the assessees' account is backed by proper material on record and reasons recorded by the Assessing Officer. His .....

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AL CIVIL APPLICATION No. 4619 of 2017 With SPECIAL CIVIL APPLICATION No. 4620 of 2017 - Dated:- 21-3-2017 - MR. M.R. SHAH AND MR. B.N. KARIA, JJ. For The Petitioner : Mr JP SHAH, Sr. Advocate with Mr MANISH J SHAH, Advocate Fo rThe Respondent : Mr NITIN K MEHTA, Advocate CAV JUDGMENT (PER : HONOURABLE Mr. JUSTICE M.R. SHAH) 1. Rule in each case, returnable forthwith. Learned counsel Shri Nitin K Mehta waives service of notice on behalf of the respondent-Revenue. 2. With the consent of the learne .....

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nt no. 1-Assessing Officer by which, in exercise of power under Section 142 [2A] of the Income-tax Act, 1961 [hereinafter referred to as, the Act ], the Assessing Officer has directed the petitioner to get its accounts audited for Assessment Year 2009- 2010, as a successor of erstwhile firm-Chanakya Infracon Private Limited [Special Civil Application No. 4619 of 2017]; for Assessment Year 2009-2010, as successor of erstwhile firm-Youngstar Infracon Private Limited [Special Civil Application No. .....

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nakya Buildcon Private Limited and Takshashila Properties Private Limited, the assessment proceedings for Assessment Year 2009-2010 were completed. That, pursuant to an order dated 22nd March 2011 passed by the High Court of Gujarat in Company Application No. 263 of 2011, five companies viz., Chanakya Buildcon Private Limited; Chanakya Infracon Private Limited; Takshashila Properties Private Limited; Takshashila Realities Limited and Youngstar Infracon Private Limited came to be amalgamated with .....

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ective assessees. The aforesaid transferee companies-original assessees preferred Special Civil Applications No. 13971 of 2016; 14018 of 2016; 14071 of 2016 and 14794 of 2016 before this Court challenging Notices under Section 148 of the Act and the reassessment proceedings. That, by a detailed judgment and order dated 5th December 2016, Division Bench of this Court, dismissed the said Special Civil Applications. 5.2 That thereafter, the petitioner herein-Takshashila Realities Private Limited ha .....

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f five companies with Takshashila Gruh Nirman Private Limited; later with issue of equity shares against the balance of revaluation credits at a premium; valuation of shares as Discounted Cash Flow method by estimating cash flows and adopting a random discounted rate for valuation, there is a complex web of transactions in the group of firms namely introduction of land by some of the partners; revaluation of lands and crediting of amounts in the current accounts of all partners; conversion of fi .....

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directors is involved, and therefore, 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 transaction in the cases which finally of the assessee, and the interest of the Revenue, the accounts are required to be got audited by a Special Auditor from the point of view of taxation of capital gains and accounting of stock-in-trade at each stage of trans .....

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etitioner has been called upon to get the accounts audited for A.Y 2009-2010, as the successor of viz., Chanakya Infracon Private Limited; Youngstar Infracon Private Limited; Chanakya Buildcon Private Limited and Takshashila Properties Private Limited by the Special Auditor. 6. Feeling aggrieved and dissatisfied by the impugned order passed by the respondent no. 1- Assessing Officer passed under Section 142 [2A] of the Act, the assessee has preferred by the present Special Civil Applications. 7. .....

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P Shah, learned counsel for the petitioner that the Division Bench of this Court by its judgment and order dated 5th December 2010 had dismissed the writ petitions preferred by the transferee companies in which reassessment proceedings for A.Y 2009-2010 were challenged and thereafter immediately, the Assessing Officer, without even return being filed by the petitioner pursuant to the Notice under Section 148 of the Act and without there being any accounts available before him and/or even verific .....

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resaid language of the Section, the Assessing Officer cannot direct special audit under Section 142 [2A] before calling for the accounts from the petitioner in the assessment proceedings. 8.1 It is further submitted that even otherwise, the Assessing Officer cannot form an opinion without calling for the record and before examining the accounts that the accounts are complex and correctness thereof is doubtful, and thus, interest of the Revenue is compromised, if special audit is not called for. .....

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i]; [ii] Peerless General Finance & Investment Co. Ltd. v. Deputy Commissioner of Income-tax & Ors. [1999] 236 ITR 671 [Calcutta]; [iii] Muthoottu Mini Kuries v. Deputy Commissioner of Income-tax & Anr. [2001] 250 ITR 455 [Kerala]; [iv] West Bengal State Cooperative Bank Ltd. v. Joint Commissioner of Income-tax & Ors. [2004] 267 ITR 345. 8.2 It is further submitted by learned counsel Shri JP Shah appearing for the petitioner that as such the original assessment subjected to scrut .....

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d approval bad in law. It is further submitted by learned counsel Shri JP Shah that even the respondent no. 2 - Principal Commissioner of Income-tax has accorded approval in mechanical manner and it does not reflect any proper application of mind by the said Commissioner in according the approval. It is submitted that the Principal Commissioner, while granting the approval, is required to apply his mind and he is not required to act mechanically. In support of his above submissions, Shri J.P Sha .....

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irections for which special audit is ordered are mainly questions of law, which are required to be considered by the Assessing Officer, and therefore, for such accounts are not required to be got audited through Special Auditor. It is submitted that therefore also, the impugned orders under Section 142 [2A] of the Act deserve to be quashed and set-aside. 8.3 Making the above submissions and relying upon the above decisions, it is requested to allow the present petitions. 9. All these petitions a .....

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the Assessing Officer has passed the impugned orders of special audit under Section 142 [2A] of the Act and that too after getting the approval from the respondent no. 2 herein ie., Principal Commissioner of Income-tax, Ahmedabad IV. 11.1 It is further submitted by Shri Nitin Mehta, learned counsel for the Revenue that the orders for special audit under Section 142 [2A] of the Act in the present case have been made after giving opportunity to the petitioner, and therefore, before passing of the .....

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necessary so to do, he may, with the previous approval of the Principal Commissioner, direct the assessee to get the accounts audited by an Accountant [Special Auditor]. It is submitted that in the present case, having found that looking to the multiplicity of transactions in the accounts and specialized nature of business activities of the assessee and in the interest of Revenue, it is necessary to get the accounts of the assessee audited by Special Auditor, the Assessing Officer has rightly pa .....

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s to a company, treatment of capital account of partners as loan, valuation of land at unreasonable premium and other issues, and therefore, accounts of the assessee are required to be audited by special auditor in the interest of the Revenue. 11.3 It is further submitted that there was conversion of four firms viz., [i] Chanakya Infrastructure; [ii] Chanakya Buildcon; [iii] Takshshila Gruh Nirman; [iv] Yongstar Infrastructure into the four companies ie., Chanakya Infracon Private Limited; Chana .....

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is a complex web of transactions in the group of firms and the conversion of firms into companies and their amalgamation/merger thereafter. The issues relate to introduction of land by partners into the firms, revaluation of land, credit of partners capital account equal to the revalued amount of land, conversion of capital account to loan account of shareholders and issue relating to issue of equity shares against the balances of revaluation credits at a premium. The above issues are clubbed wi .....

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el for the Revenue that in the facts and circumstances of the case, it cannot be said that the respondent no. 2-Principal Commissioner of Income-tax has not applied his mind and/or that there is non application of mind on the part of the Principal Commissioner of Income-tax in granting approval. It is submitted that against the show cause notice, objections were raised by the petitioners and the order disposing of the objections were placed before the Principal Commissioner of Income-tax with ot .....

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plexity in the account and/or he doubts the correctness of the accounts and then and then only the Assessing Officer can pass an order under Section 142 [2A] is concerned, it is submitted by Shri Nitin Mehta, learned counsel for the Revenue that the said decision has been rendered prior to amendment in Section 142 [2A] of the Act. It is submitted that after the amendment in Section 142 [2A] of the Act, apart from the nature and complexity of the accounts, volume of the accounts, doubts about the .....

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the order under Section 142 [2A] of the Act. 12.1 Making the above submissions and relying upon recent decision of Division Bench of this Court in the case of Ulhas Securities Private Limited v. Deputy Commissioner of Income-Tax [Special Civil Application No. 1266 of 2017] in which the Division Bench of this Court has considered the amended Section 142 [2A] of the Act, it is requested to dismiss the present petitions. 13. In reply to the above, Shri JP Shah, learned counsel for the petitioner ha .....

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ion 142 [2A] of the Act. It is submitted that therefore, the decision in the case of Ulhas Securities Private Limited [Supra] shall not be applicable to the facts of the case on hand. 14. Heard respective counsels appearing for the petitioner as well as Revenue at length. 15. At the outset, it is required to be noted that the impugned orders have been passed by the Assessing Officer of Special Audit in exercise of powers under Section 142 [2A] of the Act. Therefore, while considering the legalit .....

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nterests 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 .....

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r, having regard to [a] the nature and complexity of the accounts; [b] volume of the accounts; [c] doubts about the correctness of the accounts; [iv] multiplicity of transactions in the accounts; or [v] 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 Commissioner of Income-tax, direct the assessee to get the accounts audited by an accountant [Special Audi .....

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n the petitioner to show cause why, for the reasons stated in the said notice, the books of account may not be subject to audit by a special auditor. It is required to be noted that in the show cause notice, reasons were specifically mentioned pointing out the necessity to get accounts audited by the Special Auditor. That thereafter, the petitionerassessee raised objections in detail, which have been disposed of by the Assessing Officer by speaking order and only thereafter, after seeking approv .....

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ng for the accounts from the petitioner in the assessment proceedings and without doubting the accounts and/or considering the complexity in the accounts is concerned, it is required to be noted that as per amended Section 142 [2A] of the Act, apart from the nature and complexity of the accounts, etc., even in case of multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and the interests of the Revenue, the Assessing Officer can pass an order fo .....

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qual to revalued amount of land; conversion of capital account to loan account of shareholders and issues relating to issuance of equity shares against the balances of revaluation credits at an unreasonable premium, and after having been satisfied that considering the specialized nature of business activities of the assessee, the Assessing Officer has passed an order of special audit in exercise of powers under Section 142 [2A] of the Act. 18. We see that the decision for audit of the assessees& .....

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e assessee audited by special auditor. That, the 5 Companies, which have amalgamated with Takshashila Gruh Nirman Pvt. Ltd., have their beginning as partnership firms, which were already doing the real estate and construction business and were executing various projects like Takshashila Residency at Naroda Dehgam Road, Takshshila Colonials at Maninagar and Takshshila Habitat at Vastral, apart from hotel and commercial projects. Hotel projects with shops were earlier executed by Chanakya Buildcon .....

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kshshila Gruh Nirman, a firm converted into company Takshshila Properties Pvt Ltd and amalgamated with Takshshila Gruh Nirman Pvt. Ltd. The 80IB project Takshshila Colonials, for which approval was granted by Local Authority to erstwhile firm and stock-in-trade/CWIP has changed hands and the 80IB deduction is being claimed in the present Takshshila Gruh Nirman Pvt. Ltd. (Takshshila Realities Ltd.) That, at the time of formation or at the later date some of the partners brought land into the firm .....

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shares has been arrived by the company on 'Discounted Cash Flow (DCF) method. The basis for free cash flow to equity is randomly taken by the company. Conversation of 5 firms into companies, after revaluation of lands, merger of 5 companies with Takshshila Gruh Nirman Pvt. Ltd. Later with issue of equity shares against the balances of revaluation credits at a premium. Valuation of shares as Discounted Cash Flow method by estimating cash flows and adopting a random discounted rate for valuati .....

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from 2008 to 2013 in various entities involves application of provisions of the Companies Act, application of Accounting Standards and examination of provisions of capital gains in the hands of various partners, firms and directions is involved. 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 transaction in the cases which finally of the assesse .....

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venue, when the Assessing Officer has passed the impugned orders of special audit under Section 142 [2A] of the Act, the same cannot be faulted with. 21. At this stage, decision of Delhi High Court in the case of DLF Limited & Anr. vs. Additional Commissioner of Income-tax & Anr., reported in [366] ITR 390 [Delhi] is required to be referred to and considered. In the said decision, Delhi High Court has considered scope, ambit and powers of the Assessing Officer, while passing order under .....

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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 WPC 2363/2013 Page 8 of 21 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 o .....

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e which demands expertise and a degree of skill to understand the accounts and decipher whether true and full income has been disclosed; whether there has been jugglery in the accounts or camouflage has been adopted. No undesirable assumptions should be made and a return filed is presumed to be correct, but a deep and in depth scrutiny depending upon the facts may be warranted. Section 142 [2A] is an enabling provision to help and assist the Assessing Officer to complete scrutiny assessment with .....

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and complexity of accounts of the assessee". We are not concerned with the said amendment in the present case as the impugned order in question directing special audit was passed on 25th March, 2013, before the amendments became WPC 2363/2013 Page 9 of 21 effective. We are, therefore, primarily concerned with whether or not keeping in view the nature and complexity of accounts and the interest of Revenue direction for special audit is justified for the reasons set out in the order dated 25 .....

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ist him. Accounts should be accurate and provide real time record of the financial transactions of the assessee. Preparation of accounts is the work of the accountant on the payrolls or employed by the assessee. In order to ensure reliability and accuracy, enterprises resort to internal audit and an external audit which can be a statutory audit. Internal audits are normally conducted in house generally by acquainted or qualified accountants. Statutory audit is compulsory under WPC 2363/2013 Page .....

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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 .....

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versant to identify and unearth frauds, misreporting and wrong claims in the accounts. 27. The aforesaid observations should not be construed as a general expression or opinion, that every account or statement of income must be viewed with suspicion, distrust and scepticism. The past instances are mere warnings, for closer and more indepth scrutiny. It is also a fact that WPC 2363/2013 Page 20 of 21 the business transactions have become more complicated and accounting entries more complex than e .....

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