Allahabad High Court
Swadeshi Cotton Mills Company Ltd. vs Commissioner Of Income-Tax And Anr. on 3 March, 1987
Equivalent citations: (1987)63CTR(ALL)335, [1988]171ITR634(ALL), [1987]32TAXMAN271(ALL)
Author: K.J. Shetty
Bench: K.J. Shetty
JUDGMENT K.J. Shetty, C.J.
1. Swadeshi Cotton Mills Company Limited (" the Company ") is the petitioner in this writ petition. The company has got branches at Kanpur, Naini, Pondicherry, Maunath Bhanjan, Rai Bareilly and Udaipur. Its registered office is at Kanpur. Each branch has been maintaining separate books of account. In December, 1975, the business premises and registered office of the company were searched by the Income-tax Department under Section 132(1) of the Income-tax Act (for short "the Act"). The authorities seized voluminous records and account books and removed them in five almirahs and two steel trunks.
2. The Inspecting Assistant Commissioner of Income-tax, D-Range, Kanpur, examined the account books seized. He found that the accounts were of a complicated nature. Accordingly, he submitted a report to the Commissioner of Income-tax, Kanpur, seeking approval for special audit as required under Section 142(2A) of the Act. He had suggested in his report that the chartered accountant appointed for that purpose may have to visit various units of the company and get the accounts verified there itself.
3. Accepting the aforesaid report, the Commissioner of Income-tax made an order as follows :
" On a careful consideration of the facts of the case, I agree with you that in view of the nature and complexity of accounts of the case and in the interests of the Revenue, the accounts of M/s. Swadeshi Cotton Mills Co. Ltd., Kanpur, including those of its branches for the assessment years 1974-75 and 1975-76 should be audited by an accountant as contemplated under Section 142(2A) of the Income-tax Act, 1961. I hereby accord statutory approval for the same.
Sd/- M. D. Verma, Commissioner of Income-tax, Kanpur. "
Thereafter, a special auditor was nominated fixing his remuneration.
4. The company, challenging the validity of the order appointing the special auditor, has preferred this petition raising several questions including that of the validity of Section 142(2A), (2B), (2C) and (2D) of the Act. But, at the time of hearing, learned counsel for the petitioner submitted that he is pressing only one question.
5. He urged that there was absolutely no material before the Inspecting Assistant Commissioner or before the Commissioner of Income-tax to hold that the accounts of the company are of such a nature and complexity which called for special audit. He also submitted that the accounts of the company had been regularly audited by qualified auditors and there was no reason at all to find fault with the system of auditing.
6. As a preliminary to the consideration of the contention urged, we may deal with the relevant provision of the Act. Section 142 of the Act has been amended by adding Sub-sections (2A), (2B), (2C) and (2D) by the Taxation Laws (Amendment) Act, 1975 (41 of 1975). It has come into force with effect from April 1, 1976. Under Sub-section (2A), the Income-tax Officer has been empowered to direct an assessee in a case where the nature and complexity of the accounts and the interests of the Revenue so require, to get his accounts audited by a chartered accountant and furnish a report of such audit in the prescribed manner. Such a direction can be issued only with the prior approval of the Commissioner. The chartered accountant for the purpose of conducting the special audit is also to be nominated by the Commissioner. The expenses of and incidental to, including the remuneration of the special auditor, must be paid by the assessee. The report of such audit has to be submitted in the prescribed form duly signed and verified by such auditor.
7. Sub-section (2B) provides that special audit could be directed even though the accounts of the assessee have been already audited in accordance with law.
8. Under Sub-section (3) of Section 142, the assessee is entitled to an opportunity of being heard in respect of any material collected under special audit, if it is to be relied upon for assessment.
9. The exercise of power to direct special audit depends upon the satisfaction of the Income-tax Officer with the added approval of the Commissioner. But he must be satisfied that the accounts of the assessee are of a complex nature, and, in the interests of the Revenue, the accounts should be audited by a special auditor. The special auditor is also an auditor like the company's auditor, but he has to be nominated by the Commissioner and not by the company. The accounts are again to be audited at the cost of the company.
10. This is the substance of the statutory provisions. The power thereunder cannot, in our opinion, be lightly exercised. The satisfaction of the authorities should not be subjective satisfaction. It should be based on objective assessment regard being had to the nature of the accounts. The nature of the accounts must indeed be of a complex nature. That is the primary requirement for directing a special audit. But the word " complexity " used in Sub-section (2A) is a nebulous word. Its dictionary meaning is :
" The state or quality of being intricate or complex ' or ' that is difficult to understand."
11. However, all that are difficult to understand should not be regarded as complex What is complex to one may be simple to another. It depends upon one's level of understanding or comprehension. Sometimes, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully. Therefore, special audit should not be directed on a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee.
12. Of course, the Central Board of Direct Taxes has issued instructions regulating the discretion conferred by Sub-section (2A) of Section 142.
13. Instruction No. 1076 dated July 12, 1977, so far as it is relevant for this case, provides:
"Subject.--Guidelines for selection of cases for audit under Section 142(2A).
The Board have laid down the following guidelines for selection of cases for audit under Section 142(2A) of the Income-tax Act, 1961.
2. As regards companies, only those cases are to be referred for special audit where :
(i) there are reports of misfeasance, gross neglect or breach of duty on the part of the principal officer or director in relation to the affairs of the company, or
(ii) the company's affairs have been the subject of a search or seizure under the Income-tax Act or been the subject of a probe under the Foreign Exchange Regulations Act, or
(iii) the company has foreign collaboration arrangements, or
(iv) where the company's principal is a foreign company and deduction of head office expenses, etc., have been claimed, or
(v) where the company has import/export business with a yearly turnover of more than a crore of rupees, or
(vi) where there are allegations of substantial tax evasion, or
(vii) where the Income-tax Officer has any other information necessitating special audit.
3. As regards non-company assessees, the following cases should be referred for a special audit:--......
4. While the above guidelines give a broad spectrum of the area of selection, the actual selection should be confined to a few carefully selected cases needing special probe. Further, when a case is referred for special audit for any particular assessment year, it would be desirable if the other intervening years as well as the latest assessment years are also covered. While submitting such cases for approval to the Commissioner of Income-tax, the reasons for selecting the case/cases should be stated......"
14. These guidelines are no doubt binding on the income-tax authorities. But they should not be construed as a mandate to the authorities for directing special audit in every case falling under those guidelines. If that were the object, then, we must say that they would run counter to the provisions of Sub-section (2A) of Section 142. It is, therefore, necessary to observe that the requirements of Sub-section (2A) must first be satisfied in every case with an objective assessment of the accounts of the assessee as to its nature and complexity. Without there being any such finding, special audit ought not to be directed.
15. In the present case, it is not disputed that there was a search in the business premises of the company leading to the seizure of voluminous records. The accounts of the company have been scrutinised by the Inspecting Assistant Commissioner and he has formed an opinion as follows :
" The accounts pertaining to the purchase of raw material from various cotton purchase centres maintained by the company, the despatch of cotton to various branches and units of the company, issue of cotton at the receiving centres for manufacturing process, yarn produced and various shortages and wastage in manufacturing process and final coming out of finished products for sale, are most complicated and they require special audit by a qualified chartered accountant."
16. The report has been accepted upon consideration by the Commissioner of Income-tax. Special audit has been directed only in respect of two years, i.e., 1974-75 and 1975-76. The Inspecting Assistant Commissioner and the Commissioner of Income-tax with due regard to the nature of the account books have been satisfied that the accounts of the company are of a complex nature and that it is necessary in the interests of the Revenue that a special audit should be conducted. We do not think that there is any arbitrary exercise of the powers. The contention urged for the petitioner is, therefore, rejected.
17. In the result, the petition fails and is dismissed. The petitioner must pay costs of this petition. Advocate's fee is assessed at Rs. 500.