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2017 (6) TMI 784 - GUJRAT HIGH COURT

2017 (6) TMI 784 - GUJRAT HIGH COURT - TMI - Validity of Special audit u/s 142(2A) - multiplicity of transactions in the account or specialized nature of the business activities of the assessee - introduction of land and revaluation of the same - successions/ conversion of firms to a company, treatment of capital account of partners as loan - Held that:- After giving fullest opportunity to the petitioner and after dealing with the objections raised by the petitioner and thereafter having obtaine .....

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port, considering section 142(2B) of the IT Act, the order of Special Audit under Section 142(2A) of the IT Act cannot be said to be invalid. - Thus considering the scope and ambit of Section 142(2A) of the IT Act, it cannot be said that in the facts and circumstances of the case, the respondent has committed any error and/or any illegality while passing the order under Section 142(2A) of the IT Act. - Decided against assessee. - SPECIAL CIVIL APPLICATION NO. 4691 of 2017 - Dated:- 9-6-2017 .....

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direction and order to quash and set aside the impugned order dated 28.12.2016 passed by the Assessing Officer under Section 142(2A) of the Income Tax Act, 1961 (hereinafter referred to as IT Act ), by which in exercise of powers under Section 142(2A) of the IT Act, the Assessing Officer has directed the assessee to get the accounts for AY 2014-15 audited through Special Auditor. [2.0] The facts leading to the present Special Civil Applications, in nutshell, are as under : .....

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kya Infracon Private Limited; M/s. Takshashila Properties Private Limited; M/s. Takshashila Realities Limited and M/s. Youngstar Infracon Private Limited came to be amalgamated with Takshashila Gruh Nirman Private Limited. Messrs. Takshashila Gruh Nirman Private Limited is subsequently named as M/s. Takshashila Realities Limited. It appears that in case of transferee companies viz., M/s. Takshashila Gruh Nirman Private Limited; M/s. Chanakya Buildcon Private Limited; M/s. Chanakya Infracon Priva .....

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ed judgment and order dated 5th December 2016, Division Bench of this Court, dismissed the said Special Civil Applications. [2.2] That thereafter, the petitioner hereinTakshashila Realities Private Limited has been served with a Notice under Section 142(2A) of the IT Act and the petitioner, as the successor of firms viz., M/s. Chanakya Buildcon Private Limited; M/s. Chanakya Infracon Private Limited; M/s. Takshashila Properties Private Limited and M/s. Youngstar Infracon Private Limit .....

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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 firms into companies which merged with existing Company; valuation of share by discounted cash flow method and allotment of shares against the amounts outstanding as unsecured loans at unreasonable premium, clubbed with multiple revaluation or properties .....

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n 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 stockintrade at each stage of transfer so that there is no loss to the Revenue out of the complex web of transactions involved. At this stage it is required to be noted that similar notices were issued for AY 2010-11 and after considering the objections submitted by the very pe .....

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e special audit for AY 2014-15. [2.3] That, the petitionerassessee filed its objections, which came to be disposed of by the Assessing Officer. That thereafter, the Assessing Officer sent a proposal to the Principal Commissioner of Incometax, Ahmedabad IV for its approval. That the said Principal Commissioner of Incometax granted his approval and appointed respondent no. 3 as a Special Auditor. Thereafter, by two communications, the petitioner has been called upon to get the accounts .....

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P. Shah, learned Senior Advocate appearing on behalf of the petitioner has vehemently submitted that the impugned order passed in exercise of powers under Section 142(2A) of the IT Act appointing Special Auditor is absolutely bad, illegal and contrary to the provisions of section 142(2A) of the IT Act. [4.1] It is further submitted by Shri Shah, learned Senior Advocate appearing on behalf of the petitioner that in the present case the petitioner submitted return of income for AY 2014- .....

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ng Officer issued a notice under Section 142(2A) of the IT Act dated 21.12.2016. It is submitted that the showcause notice dated 21.12.2016 was in respect of account for AY 2014-15, the assessment of which was getting time barred on 31.12.2016. It is submitted that thereafter by a letter dated 27.12.2016, the petitioner objected to the proposal of Special Audit under Section 142(2A) of the IT Act. That the Assessing Officer rejected the objections vide communication dated 28.12.2016. It is submi .....

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calling for the record and before examining the account that the accounts are complex and correctness thereof is doubtful and thus interest of the Revenue is compromised if the special audit is not ordered. It is submitted that therefore, the impugned order under Section 142(2A) of the IT Act is absolutely illegal and bad in law which requires to be quashed and set aside. [4.2] It is vehemently submitted by Shri Shah, learned Senior Advocate for the petitioner that the language used .....

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ed 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. It is submitted that therefore, before calling for the accounts from the petitioner in the assessment proceedings, the Assessing Officer without even doubting correctness of the accounts could not have passed an order for special audit under Section 142(2A) of the IT .....

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ni Kuries v. Deputy Commissioner of Incometax & Anr. [2001] 250 ITR 455 [Kerala]; [iv] West Bengal State Cooperative Bank Ltd. v. Joint Commissioner of Incometax & Ors. [2004] 267 ITR 345. [4.4] It is further submitted by Shri Shah, learned Senior Advocate appearing for the petitioner that as such the original assessment was subjected to scrutiny assessment under Section 143(3) of the IT Act, and .....

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by Shri Shah, learned Senior Advocate that even the Principal Commissioner of Incometax 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 Shah, learned Senior Advocate for the petitioner has relied upon de .....

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nly 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 order under Section 142(2A) of the IT Act deserve to be quashed and setaside. [4.5] It is further submitted by Shri Shah, learned Senior Advocate appearing on behalf of the petitioner that in the present case as the conditions mentioned in section 142(2A) of the .....

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201415, there were only 4 to 5 entries and transactions with respect to booking of the flats and therefore, for AY 2014-15, there is no necessity of special audit. Making above submissions and relying upon above decisions it is requested to allow the present petition. [5.0] Present petition is vehemently opposed by Shri Nitin Mehta, learned Advocate appearing on behalf of the Revenue. [5.1] An affidavitinreply is filed on behalf of the Assessing Officer in the p .....

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ipal Commissioner of Incometax, Ahmedabad IV. [5.3] It is further submitted by Shri Mehta, learned Advocate appearing for the Revenue that the impugned order for special audit under Section 142(2A) of the IT Act is absolutely in consonance with the provisions of Section 142(2A) of the IT Act. It is submitted that at the time when the notice was issued by the Assessing Officer calling upon the assessee to show cause why the accounts for AY 2014-2015 may not be got audited through the S .....

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submitted that therefore during the reassessment proceeding, the Assessing Officer has thought it fit and having satisfied that it is necessary to so to do, has passed the Order under Section 142(2A) of the IT Act, and therefore, the same is absolutely in consonance with the provisions of the Act. [5.4] It is further submitted by Shri Mehta, learned counsel for the Revenue that as per Section 142(2A) of the IT Act, apart from the nature and complexity of the accounts, volume of the ac .....

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icity 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 passed an order under Sec.142(2A) of the IT Act. [5.5] It is further submitted by Shri Mehta, learned Advocate for the Revenue that in the present case, the complex issues involved in the erstwhile firms and the companies before conversion and .....

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[5.6] 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; Chanakya Buildcon Private Limited; Youngstar Infracon Private Limited and Takshishila Properties Private Limited and later merger of one more company Takshshila Realities Private Limited with four above mentioned companies into the Tran .....

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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 with multiple revaluation of properties over the years, starting from 2008 to 2013 and also includes the fact of valuation of shares by discounted cash flow method and allotment of shares against the amounts outstanding as unsecured .....

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e Principal Commissioner of Incometax 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 Incometax with other materials and only thereafter, after considering the above material, the Principal Commissioner has accorded the approval. [6.0] Now, so far as reliance placed upon a decision of Kerala High Court in the case of Muthoottu M .....

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rned counsel for the Revenue that the said decision has been rendered prior to amendment in Section 142(2A) of the IT Act. It is submitted that after the amendment in Section 142(2A) of the IT Act, apart from the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the account, if the Assessing Officer is of the opinion that having regard to the specialized nature of business activities of the assessee and in .....

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years i.e. 2010-11 onwards and with respect to the very transactions / conversions, the Assessing Officer passed the orders under Section 142(2A) of the IT Act which were the subject matter of Special Civil Application No.2920/2017 and other allied petitions and by a detailed judgment and order the Division Bench of this Court had dismissed the said petitions. It is submitted that the present year under consideration i.e. AY 2014-15 is the subsequent year and the consequential effect of earlier .....

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ivision Bench of this Court has considered the amended Section 142([2A) of the IT Act, it is requested to dismiss the present petition. [7.0] In reply to the above, Shri Shah, learned Senior Advocate for the petitioner has submitted that the decision of Division Bench of this Court in case of Ulhas Securities Private Limited [Supra] shall not be applicable to the facts of the case on hand. It is submitted that in the case before the Division Bench, it was a case wherein requisitioned .....

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Revenue at length. [8.1] 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 IT Act. Therefore, while considering the legality and validity of the impugned orders passed under Section 142(2A) of the IT Act, 142(2A) of the IT Act is required to be referred to and considered, which read as under : 142(2A) If, at any stage of the proceedings before him, .....

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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 Assessi .....

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cialized 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 Incometax, direct the assessee to get the accounts audited by an accountant [Special Auditor]. As per the proviso to Section 142(2A) of the IT Act, before passing an order of Special Audit and prior to directing the assessee to get the accounts so audited, the Assessing Officer is required to gi .....

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how 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 approval from the Principal Commissioner of Incometax; as required under the Act, the Assessing Officer passed the impugned orders under Section 142(2A) of the IT Act. Therefore, as such, the proc .....

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is bad in law, as no opportunity has been given as per the decision of Hon'ble Supreme Court in the case of GKN Driveshafts [India] Limited [Supra] is concerned, it is required to be noted that the objections raised against the reassessment proceedings/notice under Section 148 of the IT Act is altogether a different proceeding. The notice under Section 148 of the IT Act and the objections to be raised against the reassessment are altogether a different and distinct proceedings then the Orde .....

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, the Assessing Officer, having regard to the multiplicity of transactions in the account or specialized nature of the business activities of the assessee and the interest of the Revenue, is of the opinion that it is necessary to so to do, he may pass an order under Section 142(2A) of the IT Act; subject to compliance with the procedure, as required under Section 142(2A) of the IT Act. Therefore, in the facts and circumstances of the case, it cannot be said that the impugned order is contrary to .....

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accounts, etc., even in case of multiplicity of transactions in the accounts or specialized nature of business activity of the assessee and in 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 IT Act. Therefore, while forming an opinion to get the accounts audited by special auditor; considering the specialized nature of business activities of the assessee, there need not be any books of account be .....

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ture 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 IT Act. [8.6] 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 formation of belief that looking to the multiplicity of the transactions in the accounts and specialized nature of business activities of the assessee, a special aud .....

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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, later by Chanakya Buildcon Pvt. Ltd. and now after amalgamation the present Takshshila Gruh Nirman Pvt. Ltd. has completed project and entered into sale agreement. Chanakya Infrastructure commenced construction of Takshshila Habitat and in th .....

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nd stockintrade/ 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 firms as their capital contribution. Before conversation to companies,the firms got the lands available in the books revalued and the amounts were credited in the current capital accounts of the partners. Consequent to amalgamation, the .....

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rger 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 valuation. There is 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 firms in .....

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rections 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 assessee, and the interests of the revenue, am of the opinion that it is necessary to get the accounts audited by a Special Auditor from the point of view of taxation of capital gains and accounting of stockintrade at each stage of .....

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in the case of DLF Limited & Anr. vs. Additional Commissioner of Incometax & 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 Section 142 of the IT Act. In the said decision, it is observed that Section 142(2A) of the IT Act is an enabling provision to help and assist the Assessing Officer to complete the scrutiny assessmen .....

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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 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 .....

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ouflage 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 the help of assistance of an accountant. 11. There has been substantial expansion of scope and ambit of Special Audit under Section 142 [2A] of the Act with effect from 1st June, .....

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assed 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 25th March, 2013. (We have not examined the constitutional validity of the amended provisions and we express no opinion on the said aspect). 26. Powers under Section 142 .....

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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 19 of 21 the Companies Act, 1956 or when stipulated by the Act and accounts have to be audited by a qualified Chartered Accountant. Chartered Accountants are not ordi .....

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ence 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 Satyams case in India have highlighted the need and necessity to have controls and system of checks, perhaps even beyond scope of traditional audit. Financial statemen .....

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xpression 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 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 compr .....

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n or furnishing of inaccurate particulars etc. The provision balances the right of the Revenue with the inconvenience which the assessee may face. Assessing Officers are not Chartered Accountants and when required and permissible, therefore, can take help and assistance from the qualified specialists to complete the assessment and determine the taxable income of an assessee. At this stage it is required to be noted that whatever the objections were raised by the petitioner vide objec .....

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vious transactions in the year under consideration. It is the case on behalf of the Revenue / Department that effect of earlier transactions / conversions in the earlier years would have a direct bearing for AY 2014-15 also. Under the circumstances, after giving fullest opportunity to the petitioner and after dealing with the objections raised by the petitioner and thereafter having obtained the approval from the Principal Commissioner who has granted the approval after considering the material .....

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