TMI Blog2021 (5) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... and after dule application of mind. The approval by the CIT should be granted after examining and after due application of mind to the proposal submitted by the Assessing Officer but in the present case it appears not to be so. The assessee filed objection to the show cause notice on 30.12.2020 and Assessing Officer after considering the reply of the assessee framed the proposal containing 16 issues in the draft order proposed under section 142(2A) of the Act and thereafter the same was sent to CIT through Addl. CIT and approval was accorded on the same day by the CIT. But as is apparent from the facts before us, the exercise of jurisdiction under section 142(2A) of the Act has been exercised in a mechanical, routine and perfunctory manner and so is the approval granted by the CIT as all the formalities were done on the same day. Therefore the assessment framed by the AO cannot be sustained as the same suffer from legal infirmities of improper exercise of jurisdiction on the part of the tax authorities u/s 142(2A) of the Act. We are not in agreement with the conclusion of ld. CIT(A) on the issue of upholding the assessment as the same is barred by limitation in view of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , DRs ORDER PER RAJESH KUMAR, AM: These cross appeals are arising out of the order of the Commissioner of Income Tax (Appeals)]-50, Mumbai, [in short CIT(A)], in Appeal No. CIT(A)-50/IT-222/2011-12 dated 12.09.2011. The assessment was framed by the Dy. Commissioner of Income Tax, Mumbai (in short DCIT/ITO/ AO) for the A.Y. 2008-09 vide order dated 12.08.2011 under section 143(3) of the Income-tax Act, 1961 (hereinafter the Act ). 2. We are taking up the assessee s appeal for adjudication first. The ground raised challenging the jurisdiction of the AO and also assessment being barred by limitation is as under: - 1. The learned Commissioner of Income-tax (Appeals) erred in upholding the validity of order passed under section 143(3) of the Act for the Assessment Year 2008-09 on 12th August 2011. The order passed under section 143(3) of the Act is barred by limitation and is bad in law and ought to be cancelled. 2.The learned assessing officer vide directions dated 30.12.2010 invoked the provisions of section 142(2A) to order Special Audit without bringing any material on record to demonstrate complexity of books of Account etc. The learned assessing office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ping in view the nature and complexity of the accounts of the assessee and keeping in view the interest of the Revenue, the Assessing Officer thought it fit to direct the special audit under section 142(2A) of the Act by referring the special audit to M/s Ray Ray Chartered Accountants under section 142(2A) of the Act after obtaining the prior approval of CIT Central-IV, Mumbai vide letter dated 30.12.2010. The Special Auditors M/s Ray Ray submitted the report on 24.06.2011. The Assessing Officer noted that the Special Auditors have pointed out several irregularities in the books of account and therefore, a show cause notice dated 11.07.2011 was issued to the assessee before framing the assessment. Finally, the assessment was completed by the Assessing Officer at ₹135,21,32,850/- as against the return of income of ₹44,21,06,679/-. 5. The assessee challenged the order of Assessing Officer before the CIT(A) on this jurisdictional issue as well as on merit. The learned CIT(A) while dismissing the jurisdictional ground raised by the assessee has observed and held as under: - 6. Para 5.3 I have considered the submissions of the Appellant. In this case, special audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 142(2A) were not fulfilled and hence, the said order was barred by limitation and is invalid. Further the Assessing Officer had taken recourse to the provisions of section 142(2A) of the Act only with a view to extend the period of limitation for completion of assessment which is not permissible under the Act without the conditions envisaged in section 142(2A) being satisfied. Therefore, the learned AR prayed before the Bench that it is of paramount importance to decide by this Bench whether the Assessing Officer was justified in directing the special audit under section 142(2A) of the Act. The ld AR submitted that the Assessee filed its return of income for the assessment year 2008-09 declaring a total income of ₹ 44,21,06,679. The return of income was accompanied by the Annual Accounts and the Audit Report etc. On 14.09.2009,the Assessee's return of income for assessment year 2008-09 was selected for scrutiny and a notice under section 143(2) of the Act was issued. On 17.09.2020 the AO effectively started the assessment from this date by asking the assessee to furnish information with respect to certain items. The case was then adjourned to 18.10.2010 (see pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irement relating to production of books of account. Naturally, there could not be any mention because the AO never asked for it. In fact, the order sheet noting of 16.12.2010 states that Case finally fixed for hearing on 23.12.2010 (see page 104 of Volume I of the Paper Book). On 24.12.2010 it has been observed written submission received were placed on records. (see page 104 of Volume I of the Paper Book). On that date, the hearing of the assessment was concluded as no further requirement existed and consequently no further date of hearing has been given. On 27.12.2010 the Assessee was shocked and surprised to receive a show cause notice dated 24.12.2010 issued under section 142(2A) of the Act (see pages 89 to 191 of Volume I of the Paper Book). The ld AR submits that this action has been taken in the present case only because the AO realised that he won't be able to pass the assessment order within the period of limitation which was to expire on 31.12.2010. This was done only with a view to extend the period of limitation. The said notice also does not make any reference to the Assessee's books of account let alone a failure to produce them. The show cause notice m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mind and not in a casual, routine or perfunctory manner. Further, before nominating a Chartered Accountant the least that would be expected of the CIT will be identifying the person/ firm who would be able to perform the audit and ascertain its availability. This will be important because there would be certain peculiar features of a particular trade, size of operation of the assessee etc. The nomination of a particular Chartered Accountant would be meaningless if he is going to be preoccupied with other engagements and would not be able to take up this assignment. The Assessee submits that it was humanly impossible for the CIT to apply his mind to all the aspects referred to in the proposed order and also carry out the necessary steps before nominating the Chartered Accountant. The Assessee therefore submits that this condition has also not been fulfilled in the present case. On 12.08.2011, the AO passed his assessment order under section 143(3) of the Act determining its total income at ₹ 135,21,32,850. A bare perusal of the additions/ disallowances made in the said order shows that out of eight issues referred to in the show cause notice dated 24.12.20 10 issued under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure specified in the said section. He has however allowed substantial relief on the merits of the case. After giving effect to the appellate order passed by the CIT(A) the total income as determined for assessment year stood at ₹ 46,13,90,736 as against the returned income of ₹ 44,21,06,679. 8. As stated hereinabove, as per section 153(1) of the Act, the limitation for passing of the assessment order, in the present case i.e., for assessment year 2008-09, stood expired on 31.12.2010 while, the assessment order has been passed on 12.08.2011, rendering the same barred by limitation. The Revenue is placing reliance on clause (iv) of Explanation 1 below section 153(9) of the Act to contend that the limitation stood extended as the Assessee had been directed to get its accounts audited under section 142(2A) of the Act. It is in this context i.e., to ascertain the validity of the assessment order that the Tribunal has to adjudicate on the following issues a) Whether it is a pre-requisite that the AO should examine the books of account before forming his opinion with respect to the nature and complexity thereof, as referred to in section 142(2A) of the Act. In the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Peerless General Finance Investment Co. Ltd. v. DCIT 236 ITR 671, has observed that unless the Assessing Officer examines the books of account, he cannot have any understanding as to the nature and complexity of the same, consequently is not possible for him to come the conclusion for necessity of special audit. Therefore, 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 28th March, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stood adjourned. The Assessee therefore submits that, the entry which the AO is relying upon has been subsequently inserted and did not form part of the original record; ii) The endorsement as made by the Assessee's Authorized Representative acknowledging the next date of hearing has also been made immediately below the text representing adjournment of the case. Otherwise, the said endorsement would have been made after the entry relating to direction to produce the accounts; iii) The Assessee has never produced its books of account before the AO. No reference thereto has been made either in the order sheet noting of any other date, or in the show cause notice dated 24.12.2010 issued under section 142(2A) of the Act, or the order dated 30.12.20 10 passed under the said section or the assessment order dated 12.08.2011 passed under section 143(3) of the Act alleging that the Assessee has failed to produce the accounts after being called upon to do so. In the absence of any observation/objection/comment about the examination of the books of account by the AO in the proceedings, it cannot be presumed that any books of account were examined by him before directing audit to be cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval as granted by the CIT is in a casual and routine manner, without application of mind, rendering the order under section 142(2A) of the Act to be illegal and bad in law. The counsel of the assessee finally submits that Ground No.1 in the assessee s appeal may be allowed which would render the other grounds to be academic. However, if for any reason, the ground is not to be allowed, then, the appeal may be refixed for adjudication of the other grounds. 14. The ld DR per contra submitted at the outset, that the provisions of section 142(2A) are applied in a case having regard to nature and complexity of the account , volume of accounts, doubts regarding correctness of account, multiplicity in transactions in accounts, or specialized nature of business activity and in the interest of revenue. The ld Dr referred to reasons recorded by the AO as noted in the para 3.2 of the assessment order. The ld DR argued that the submissions made and the objections raised by the assessee in its reply are not convincing. Full information and details with regard to transactions of purchase, valuation of stock, fund transactions with various bank accounts, utilization of borrowed funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 he submitted that upon perusal of documents submitted by the assessee company during the course of assessment proceedings before the AO reveals that the AO had held multiple hearings with the authorised representative of the assessee company viz; on 22.09.2009, 09.10.2009, 10.11.2009, 17.09.2010, 24.11.2010, 02.12.2010,13.12.2010, 16.12.2010 and 24.12.2010. During the course of these hearings, the AO thoroughly examined the books of accounts and other details submitted by the assessee company. Hence, the allegation that 'the conclusion of the AO that the nature and complexity of books of account require Special Audit is based on presumptions and conjectures in as much as the AO never called for an examined the books of account before issuing such directions' is incorrect. Based on this remand report the Ld CIT(A) dismissed the ground of appeal taken by the assessee in this respect as noted by him in para 5.3 of the appellate order. This goes to show that the Ld CIT(A) was fully satisfied with the correctness of reference for Special Audit in accordance to section 142(2A). During the hearing held on 16.09.2019 before the bench, the assessee produced copy of order sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also contented in its grounds of appeal that since reference for Special Audit was not correct therefore, the assessment made was barred by limitation. In this respect, the Ld Counsel of the assessee made reference to certain decisions. The perusal of all the above judgements shows that various Hon'ble courts had held assessment as time barred because either books of accounts were not seen by the AO before making reference for the Special Audit, or the assessee was not given an opportunity before the audit or other due procedure of law was not followed, which is not the case here. Here in the case of the assessee, the reference was made after examination of books of accounts and other documents, after affording opportunity to the assessee and after taking due approval from the jurisdictional CIT. Therefore, all the judgements (supra) do not apply in the facts of the case of the assessee. In view of this, the ground of appeal raised by the assessee as assessment being time barred needs to be rejected. 15. We have heard rival submissions and perused the materials on record including the written submissions filed by both the parties. The jurisdictional issue raised before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment proceedings as is clear from the perusal of the order sheet entries, assessment orders and various replies and submissions of the assessee. On all these occasions when the AR attended the proceedings before the Assessing Officer, the Assessing Officer called for various details, explanation/ information from the assessee from time to time. We also find merits in the submissions and contentions of the assessee that the necessary pre-conditions for directing the special audit under section 142(2A) of the Act have not been fulfilled as Assessing Officer has not pointed out any specific complexity in the books of account of the assessee due to which the Assessing Officer was not in a position to assess the income of the assessee correctly. The assessee filed its objections to its show cause notice on 30.12.2010 copy of the same is filed at page No. 92-99 of the assessee s paper book and the case was finally adjourned to 31.12.2010. Thus, the Assessing Officer prepared the proposal for Special audit under section 142(2A) of the Act and submitted the same to the learned Commissioner of Income Tax through Addl. CIT for approval thereof. We also note that in the show cause notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utta). The Hon'ble High Court in the said decision following the earlier year decision in the case of Peerless General Finance And Investment Ltd. vs. DCIT(1999) 236 ITR 671 has observed as under:- 20. If an assessee files a return the same is not presumed to be incorrect. When the Assessing Officer, however, intends to pass an order of assessment, he may take recourse to such steps including the one of asking the assessee to disclose documents which are in his power or possession. He may also ask third parties to produce documents. Section 136 of the Act by reason of a legal fiction makes an assessment proceeding, a judicial proceeding. The assessment proceeding, therefore, is a part of judicial process. When a statutory power is exercised by the assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature. It stricto sensu is also not quasi-judicial. By way of example, although it may not be very apposite, we may state that orders passed under Order XII of the Code of Civil Procedure by a Court cannot be held to be administrative in nature. They are judicial orders and subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the reference for conduct of audit under section 142(2A) of the Act was not justified in the present case and also the special audit has been ordered without specifying the necessary conditions envisaged therein. Therefore, the audit has been directed only to extend the limitation and thus, the order passed by the Assessing Officer is barred by limitation. 17. The special audit under section 142(2A) of the Act has to be directed by the Assessing Officer only in the genuine cases where the Assessing Officer finds that he is not in a position to assessee the income of the assessee having regard to the complexities in the books of accounts. For the exercise of this power u/s 142(2A), it has been provided that the prior approval has been taken from the CIT which is a statutory safeguard provided in the Act against any unreasonable or arbitrary exercise of power by the Assessing Officer which has to be granted by the CIT after following the due process and after dule application of mind. Thus, the approval by the CIT should be granted after examining and after due application of mind to the proposal submitted by the Assessing Officer but in the present case it appears not to be so. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with mandatory accounting standard AS-2 issued by ICAI. The method of valuation of stocks is accepted by the department right from the beginning in all the years. We have also examined the financial statements of various listed companies which are into the diamond manufacturing business besides experts opinions on valuation. Moreover any addition in closing stock is tax neutral as the closing stock of the current year will become the opening stock of the following year. Even the Hon ble Apex Court in the case of Chainswarup Sampatram as reported in 24 ITR 481(SC) has held that it is wrong to think that any profit rises out of valuation of stocks. Therefore even stock addition appears to wrong and fallacious and rightly been deleted by the ld CIT(A). 19. The other grounds raised are not being adjudicated as the jurisdictional and time barring issue have been in favour of the assessee. 20. Since, we have quashed the assessment on the issue of jurisdiction, appeal file by the Revenue becomes infructuous and is dismissed. 21. In the Result, the appeal of assessee is partly allowed and the appeal of Revenue is dismissed. Order pronounced in the open court on 31.12.2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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