TMI Blog2018 (12) TMI 831X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not fall back upon the provision of special audit in all routine cases. However, when the AO does feel that information is not forthcoming in a timely manner (as appears to have occurred in this case) her choices are limited – to let go of the stage of inquiry, and complete the assessment, or, disallow what is considered appropriate. The AO quite correctly felt that the latter course would not be appropriate; he therefore, ordered special audit, which was quite reasonable, especially in regard to the imprest account for which details of expenses incurred had not been furnished. That amount was sizeable. Also, with respect to the benefit of Section 80IC and the revision of returns, was an aspect which could not have been given a light treatment, but needed inquiry, if the AO felt it to be so. This court is of the opinion that far from the case showing non-application of mind, the AO has carefully outlined what were the salient aspects in the accounts and returns of the assessee that needed to be looked into and made the impugned order directing special audit. The assessee has not alleged any mala fides - writ petition has no merit. Consequently, the interim orders which operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce or net realizable value whichever -is less. From the perusal of the above it may be observed that the assessee company is following AS-2 in respect of valuation of Raw material and Finished goods (traded). However, in case of Work in progress and Finished goods (manufactured) the assessee is not following AS -2. As such the method of valuation of the inventory valuation is not in accordance with statutory guidelines. As such income shown by the assessee as per profit and loss account is not in accordance with section 145 and 145A of the Income Tax Act. As such special audit is required to determine the correct taxable income as per profit and gains from business and profession. 9.2 The assessee company valued Work in progress at selling price of equivalent productions units calculated on the basis on % of completion reduced by gross profit margin and packing material cost. The determination of equivalent production units as well as percentage of completion of work in progress for valuation involves complexity. 9.3 As per Para no 16 of the notes to the accounts Debtors and creditors Balances are as per books of accounts and as such the transaction entered into the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment submitted. In this connection assessee submitted that with regard to the view of the assessing officer regarding the treatment of dividend paid in the cash flow statement the assessee/ auditor changed the cash flow statement and furnished revised cash flow statement. As such it is clear {hat the assessee admitted the discrepancy in the cash flow statement forming part of the audit report and its impact on the truth of the accounts as well as the audit report and its reliability. 9.7 The assessee company has claimed deduction under section 801C of the Income Tax Act, 1961 for the first time for assessment year 2010-11. It has been perused from computation of income that the amount of exemption claimed under section 801C differs in both original and revised return. It is beyond imagination of understanding that as to how the assessee company computed two different amount of deduction for claiming deduction under section 801C when there as audited books of accounts. This shows that the books of account are not completed and correctly maintained in normal course of business activities of the assessee company and financial results cannot be relied upon. In this connection asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced along with balance sheet and profit and loss account separately for each unit. From available details the same cannot be computed correctly. 9.11 The assessee company is also involved in trading activity through trading concerns. In view of voluminous trading activities and manufacturing operations the accounting system is complex and it is not easy to ascertain from trading and manufacturing activities and also to compute amount of deduction available to the assessee company under section 801C of the Act. The transactions of trading and manufacturing activities are Intricate. and are not easy to conclude in view of deduction allowable under section 80IC to assessee with the records produced before this office. 9.12 Funds raised on account of various secured loans and subscription by way of share capital have been utilized in acquiring fixed assets and installation of other units of the company. Nexus of investments in fixed assets is not correlated with receipt of funds. Pre-operative expenses during the period of installation of these units on account of interest, administrative and other expenses are not quantified for capitalization of during the financial yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were time to time attended and the questionnaires were properly replied. The books of accounts were also produced in the course of hearing along with supporting vouchers. The accounts were duly audited by a qualified Chartered Accountant, tax audit report along with all annexures were also filed in the course of hearing, the profit loss account, balance sheet was properly drawn and were in agreement with the books of accounts on the basis of which true profit can be ascertained, the balance sheet can be perused in respect of share capital and loans and advances received, short term and long term investments made on the basis of which a fair assessment order can be passed. The assessee s authorized representative were cooperative in the course of hearing and were at all times available to AO for clarifying, explaining the queries and to file necessary information and documents. In such a situation, a proposal for Special Audit u/s 142(2A) is unwarranted; the AO therefore took scrutiny through special auditor as an easy route to escape his primary duty to examine the books and the returns and complete the assessments, in time. 5. As regards the question of inquiry into the impre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken note of and a revised statement was issued on 11.03.2013; this did not mean that the documents it had did not so reflect the correct state of accounts. As long as the Profit and Loss statement, Balance sheet and other documents are correctly shown, the mere detail of alleged inaccurate reflection in the cash flow statement could not have impelled the revenue to issue an order calling for special audit. 7. On the issue of Section 80IC, it is argued that the assessee has claimed deduction under that provision for the first time for AY 201011. After discovering that there are some errors of omission/wrong statement in the original return, the assessee has filed the valid revised return within the time limit. Out of the errors in the original return, one of the errors was the amount of deduction to be claimed under Section 80 IC. Hence, the same was rectified while revising the return. The amount of deduction claimed u/s 80 IC in the original return and the revised return was `25,67,39,812 and `25,70,76,380 respectively and the same was corrected through revised return. The complexity of accounts cannot be equated with the doubts which have merely been created without making hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was maintaining accounts of imprest with various persons. Accordingly, on 28.01.2013 assessee was specifically asked to furnish details of such imprest accounts and also to show cause that while maintaining the accounts on the mercantile basis, why for the imprest accounting, cash basis was followed. In response, the assessee submitted details of imprest accounts in the names of various persons. However, it failed to justify the maintenance of such a large number of accounts, accordingly it was observed that in the return of income the assessee company had mentioned the system of accounting followed as cash whereas the Tax Audit Report mentioned it to be mercantile. It was argued that the cash flow statement filed with reply dated 24.09.2012 was considered and it was discerned not to be commensurate with Accounting Standard-3 (revised) issued by ICAI. When confronted the assessee company filed its revised Cash Flow Statement on 11.02.2013, made as per Accounting Standard 3 (revised) issued by ICAl. The auditors in their report mentioned that the balance sheet, profit and loss account and cash flow statement dealt with this report are in agreement with the books which are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer, having regard to the nature and complexity of the accounts 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 Chief 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 Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form7 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.] (2B) The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. (2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer that it is necessary to get the accounts of assessee audited by an Accountant has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessee; and (ii) the interests of the revenue. The word and signifies conjunction and not disjunction. In other words, the twin conditions of nature and complexity of the accounts and the interests of the revenue are the prerequisites for exercise of power under Section 142 (2A) of the Act. Undoubtedly, the object behind enacting the said provision is to assist the Assessing Officer in framing a correct and proper assessment based on the accounts maintained by the assessee and when he finds the accounts of the assessee to be complex, in order to protect the interests of the revenue, recourse to the said provision can be had. The word complexity used in Section 142 (2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. v. C.I.T. [1988] 171 ITR 634 (All) it is a nebulous word. Its dictionary meaning is: The state or quality of being intricate or complex or that is difficult to understand. However, all that is difficult to understand sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be granted by the CIT or the CCIT, as held by the Supreme Court in the case of Sahara India (Firm) (supra) is a safeguard against arbitrary or unjust exercise of power by the AO and therefore a heavy duty is cast on the high ranking authority to see that the approval is not granted mechanically; he has to examine the material on the basis of which an opinion for conducting special audit was formed by the Assessing Officer. 16. In the case before us, the A.O. has taken the view that there is complexity in the accounts of the assessee. He has referred to the three segments or sources of revenue of the petitioner and has held that it is required to identify the method and the relevant accounting standard applicable for recognition of income from these revenues and also to ascertain the correctness of the income recognized. The order passed under Section 142 (2A) on 28.03.2013 contains a detailed discussion as to the complexity of the accounts. The profit and loss account, balance sheet and the computation of the income were before the A.O. It cannot be disputed that the profit and loss account and the balance sheet fit the description of accounts . The complexity arising out of su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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