TMI Blog2004 (2) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri P.K. Agarwala as a special auditor under section 142(2A) of the Income-tax Act, 1961 (hereinafter referred to as "the said Act"), and also incidentally the vires of section 142(2A) of the said Act in so far as it covers the same field as section 44AB of the said Act as regards its constitutionality. However, at the time of arguments the question of vires was not pressed by learned senior counsel Dr. Pal. The direction for filing, of affidavits was given on two occasions, to understand the case of the Revenue, however, no affidavit was filed, so it was decided the matter should be heard without any affidavit-in-opposition. The short facts of the case are that the petitioner is carrying on banking business after having been formed under the Co-operative Societies Act, 1912. The members and/or shareholders of the petitioner are the Government of West Bengal, holding about 38 per cent. shares and balance are being held by the different District Central Co-operative Banks and other co-operative societies. The petitioner is also a scheduled bank within the relevant provisions of the Banking Regulation Act and is being directly controlled by Reserve Bank of India and also by Natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the same. Dr. Pal, senior advocate, appearing for the petitioner, contends that the impugned order of the Commissioner is bad in law for two broad reasons, No. (i) the Commissioner in fact under the law has no material to approve the proposal of the Assessing Officer for appointment of the special auditor, No. (ii) the said impugned order is passed on non-compliance with the principles of natural justice. He submits that the power under section 142(2A) of the said Act cannot be exercised by the Assessing Officer without the conditions as mentioned hereunder being satisfied: Firstly, he must form an opinion having regard to the nature and complexity of the accounts of the assessee and, secondly, in the interest of the Revenue that it is necessary to appoint a special auditor, thereafter he must have a previous approval of the Chief Commissioner/Commissioner of Income-tax. Before he comes to the conclusion, as to the nature and complexity of the accounts, he shall make a genuine and honest attempt to understand the accounts of the assessee and appreciate the entries therein and in case of doubt, he should seek explanation from the assessee or his representative. A cursory loo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner had received a proposal from the Assessing Officer dated March 28, 2003, for the appointment of a special auditor for all the assessment years 1996-97 to 2001. Significantly, no hearing was given, before making the proposal, nothing was divulged. Therefore, at no point of time did the petitioner have any opportunity to place its case against the proposal of the Assessing Officer for appointment of a special auditor. The Commissioner mechanically approved the proposal of the Assessing Officer without giving any opportunity of being heard and only a notice was served upon the petitioner for settling the remuneration of the special auditor and not on the question of the appointment. He contends that discarding, without reasons, the audit reports both under the co-operative law and the aforesaid provision of section 44AB of the said Act the decision for appointment of special auditor has been taken ignoring enormous cost factor of the petitioner in a casual manner. Therefore, on that score also the aforesaid impugned order is invalid. Mr. S.K. Kapoor, learned Additional Solicitor General of India, while opposing the writ petition submits that in this case there is no chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the accounts. In support of his contention he has relied on the following decisions. Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634 (All); Indo Asahi Glass Co. v. ITO [1996] 222 ITR 534 (Cal); Abhay Kumar and Co. v. Union of India [1987] 164 ITR 148 (Raj); Joint CIT v. I.T.C. Ltd. [1999] 239 ITR 921 (Cal); Pani Devi v. Union of India [2000] 245 ITR 798 (Raj); Living Media Ltd. v. CIT [2002] 255 ITR 268 (SC); Gurunanak Enterprises v. CIT [2003] 259 ITR 637 (Delhi); M.P. Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438 (SC) and CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC). Having considered the respective contentions and submission of learned counsel it appears to me that the only point that needs to be decided before I hold the aforesaid impugned order of approval followed by direction for special audit under section 142(2A) of the said Act, being bad in law is whether the Commissioner of Income-tax as well as the Assessing Officer have exercised their jurisdiction as per the mandate of the aforesaid section or not. The said section is quoted hereunder; "142. (2A) If, at any stage of the proceedings before him, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scope and purport of section 142(2A) of the said Act has been pleased to hold that: "Section 142(2A) of the Income-tax Act, 1961, enables the assessing authority to direct the accounts to be audited in the event of complexity of the accounts. This power can be exercised in respect of all assessees. A bare perusal of sub-section (2A) of section 142 leaves no manner of doubt that an opinion has to be formed having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue. The word 'and' signifies conjunction. Thus both nature and complexity of the accounts as also the interests of the Revenue are necessary ingredients for exercise of the said power. The word 'complexity' means the state or quality of being intricate or complex or that it is difficult to understand. The expression 'having regard to' indicates that in exercising the power, regard must be had to the factors enumerated in the provision. Where an authority is conferred with a power to exercise its discretion in a particular manner, such discretion has to be exercised bona fide and with a view to achieve the object laid down under the statute. No discretion is beyond the scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. There should be an honest attempt to understand the books of account of the assessee. There has to be an application of mind on the part of the assessing authority. Complexity of the accounts cannot be equated with doubts being entertained by the assessing authority either with regard to the correctness thereof or the need for obtaining certain vital information not ascertainable from the accounts. The satisfaction is to be based upon objective considerations." In the case of Joint CIT v. I.T.C. Ltd. [1999] 239 ITR 921, the Division Bench of this court while dealing with an appeal from an interlocutory order has been pleased to observe that: "In cases where the 'nature and complexity' of accounts is such that it is not possible for the Assessing Officer to justify the correct assessment of the income and to examine the correctness of the accounts the Assessing Officer has power to appoint a special auditor with the approval of the Commissioner or Chief Commissioner. The power conferred on the Assessing Officer and the approval of the Commissioner and Chief Commissioner is not confined to any turnover, in business or profession. There is no limit or any bar on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person to form an opinion in any manner without the same being examined? Moreover, this issue is no longer res integra, as the same contention and plea have already been decided by the aforesaid decisions of several courts as quoted above. So I reject this contention. Therefore, I conclude that the Assessing Officer without examining the books of account has formed their opinion regarding the nature and complexity and the Commissioner overlooking this serious legal lapse has mechanically approved. It is true they have material, but with these materials no one can reasonably and rationally form an opinion. I have examined the proposal dated March 28, 2003, of the Assessing Officer, namely, the Assistant Commissioner of Income-tax. It appears that he sought. for various information to complete assessment correctly and such information could not be supplied by the petitioner, as the accounts are not maintained in such fashion. Moreover, the business transactions of the petitioner are huge and conducted through 48 branches in West Bengal. Because of this failure he has presumed the accounts of the assessee (petitioner) are very complex and the desired information cannot be collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to him under the statute reasonably demands such skill and knowledge of examining accounts. I quite understand the whole object of the reassessment, is to find out whether any taxable income has escaped assessment or rather in the guise of co-operative income any other income has slipped out from the assessment or not. The petitioner is a body corporate, and formed under the statute and they are required to audit their accounts compulsorily under section 44AB of the said Act which has been incorporated in the Act on and from April 1, 1985, by the Finance Act, 1984, whereas section 142(2A), (2B) was incorporated much earlier than the aforesaid section with effect from April 1, 1976, by the Taxation Laws (Amendment) Act, 1975. The difference between the aforesaid two sections is distinctly discernable. The provisions of section 44AB of the said Act are applicable in the case of the classified assessee as mentioned therein having regard to the limit of the turnover in a particular year. But section 142, sub-section (2A) can be resorted to, irrespective of the limit of the turnover and in case, as mentioned in the said section. Therefore, it is clear that before the insertion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting in that case action under section 142(2A) of the Act may be resorted to. Upon a careful reading of the section 142(2A) it appears to me that the power conferred thereunder is discretionary. This provision in my view can be applied only in case of absolute necessity and when other alternative method is not effective. The learned single judge of this court in the case of Peerless [1999] 236 ITR 671 has observed that the exercise of special audit can only be resorted to sparingly and not in a whimsical and capricious marmer. This observation is also supported by the judgment rendered by the Allahabad High Court in the case of Swadeshi Cotton Mills [1988] 171 ITR 634. In my view, while respectfully agreeing with the views of the Allahabad High Court, two learned judges of this court and the learned single judge of the Madras High Court, the Assessing Officer before sending the proposal ought to have recorded reasons in the order after having examined the accounts by himself or getting the accounts examined by his subordinate officials, in support of his findings that the nature and complexity of the accounts is such that without special audit proper assessment is not pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . His duty is to examine whether the Assessing Officer has done properly or not and thereafter he will apply his independent mind as to whether on the facts and circumstances as indicated by the Assessing Officer exercise of power for special audit is necessary or not. In this case, I find, he has not made any attempt in doing so, rather he has come to his own findings different from the Assessing Officer. Accordingly, the approval is not in consonance with the requirement of law, as such this impugned order is set aside. If any action has been taken, then the respondent authority shall restore the writ petition in position, as if there was no special audit. However, this judgment and order will not prevent and prejudice the respondents if they are advised to proceed afresh but then this has to be done complying with the aforesaid observation. Thus the petition succeeds. There will be no order as to costs. In view of the earlier order, the Department will be entitled to have extension from March 31, 2004, for the period during which this writ petition being W.P. No. 1897 of 2003 was pending till today. Original file which was submitted to the court and kept on record is r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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