Delhi High Court
Sahara India Financial Corporation ... vs Cit And Ors. on 23 August, 2017
Bench: S. Ravindra Bhat, Deepa Sharma
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 05.09.2016
Pronounced on: 23.08.2017
+ W.P.(C) 3222/2008
SAHARA INDIA FINANCIAL CORPORATION LTD. LUCKNOW
.........Petitioner
Versus
COMMISSIONER OF INCOME TAX DELHI AND ORS.
........Respondents
+ W.P.(C) 8157/2009
SAHARA INDIA FINANCIAL CORPORATION LTD.
.........Petitioner
Versus
COMMISSIONER OF INCOME TAX NEW DELHI AND ANR..
........Respondents
+ W.P.(C) 8160/2009
SAHARA INDIA, LUCKNOW .........Petitioner
Versus
COMMISSIONER OF INCOME TAX NEW DELHI AND ANR.
........Respondents
+ W.P.(C) 14123/2009
SAHARA INDIA (FIRM) LUCKNOW THROUGH J.B. ROY
PARTNER .........Petitioner
Versus
COMMISSIONER OF INCOME TAX DELHI CENTRAL-I NEW
DELHI AND ANOTHER. ........Respondents
+ W.P.(C) 14141/2009
SAHARA INDIA FINANCIAL CORPORATION LTD. LUCKNOW
.........Petitioner
Versus
COMMISSIONER OF INCOME TAX, DELHI (CENTRAL)-I, NEW
DELHI AND ANOTHER ........Respondents
W.P.(C) 3222/2008 & connected matters Page 1 of 52
+ W.P.(C) 886/2011
SAHARA INDIA FINANCIAL CORPORATION LTD. LUCKNOW
.........Petitioner
Versus
COMMISSIONER OF INCOME TAX, NEW DELHI AND ORS.
........Respondents
+ W.P.(C) 1009/2011
SAHARA INDIA COMMERCIAL CORPORATION LTD.
KOLKATTA .........Petitioner
Versus
COMMISSIONER OF INCOME TAX-I NEW DELHI AND ORS.
........Respondents
+ W.P.(C) 1010/2011
SAHARA INDIA COMMERCIAL CORPORATION LTD.
KOLKATTA .........Petitioner
Versus
CIT-I NEW DELHI AND ORS. ........Respondents
+ W.P.(C) 1011/2011
SAHARA INDIA COMMERCIAL CORPORATION LTD.
KOLKATTA .........Petitioner
Versus
CIT-I NEW DELHI AND ORS. ........Respondents
+ W.P.(C) 1012/2011
SAHARA INDIA COMMERCIAL CORPORATION LTD.
KOLKATTA .........Petitioner
Versus
CIT-I NEW DELHI AND ORS. ........Respondents
+ W.P.(C) 1013/2011
SAHARA INDIA COMMERCIAL CORPORATION KOLKATTA
.........Petitioner
Versus
CIT-I NEW DELHI AND ORS. ........Respondents
W.P.(C) 3222/2008 & connected matters Page 2 of 52
+ W.P.(C) 1014/2011
SAHARA INDIA COMMERCIAL CORPORATION LTD.
KOLKATTA .........Petitioner
Versus
CIT-I NEW DELHI AND ORS. ........Respondents
+ W.P.(C) 888/2011
SAHARA INDIA FIRM LUCKNOW .........Petitioner
Versus
COMMISSIONER OF INCOME TAX AND ORS.........Respondents
+ W.P.(C) 3272/2013
SAHARA INDIA FINANCIAL CORPORATION LTD. LUCKNOW
.........Petitioner
Versus
COMMISSIONER OF INCOME TAX, DELHI (CENTRAL)-I NEW
DELHI AND ORS. ........Respondents
+ W.P.(C) 2591/2013
PATANJALI AYURVEDA LTD. .........Petitioner
Versus
DEPUTY COMMISSIONER OF INCOME TAX AND ANR.
........Respondents
+ W.P.(C) 2879/2014
PATANJALI AYURVEDA LTD. .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 4408/2015
PATANJALI AYURVEDA LTD. .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 8841/2015
SMT. VINAY SHARMA .........Petitioner
Versus
W.P.(C) 3222/2008 & connected matters Page 3 of 52
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 8877/2015
SMT. VINAY SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 8878/2015
SMT. VINAY SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9138/2015
SHRI DHIR CHAND SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9139/2015
SHRI DHIR CHAND SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9140/2015
SHRI DHIR CHAND SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9141/2015
GEETA SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9142/2015
GEETA SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9143/2015
W.P.(C) 3222/2008 & connected matters Page 4 of 52
GURU PRASAD SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9144/2015
GURU PRASAD SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9145/2015
GURU PRASAD SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9146/2015
SHRI DHIR CHAND SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9147/2015
SHRI DHIR CHAND SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9148/2015
GURU PRASAD SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9149/2015
GEETA SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9150/2015
GURU PRASAD SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
W.P.(C) 3222/2008 & connected matters Page 5 of 52
+ W.P.(C) 9151/2015
GEETA SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9152/2015
GEETA SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
+ W.P.(C) 9464/2015
SMT. VINAY SHARMA .........Petitioner
Versus
UNION OF INDIA AND ORS ........Respondents
Through: Mr. Satyen Sethi, Advocate along with Mr.
Arta Trana Panda, Advocates for the petitioners in Item
Nos. 1 to 13 & 14 to 19.
Mr. Ajay Vohra, Sr. Advocate along with Ms. Kavita Jha
and Mr. Vaibhav Kulkarni, Advocates for the petitioners
in Item Nos. 20 to 22.
Mr. M.S. Syali, Sr. Advocate along with Mr. Satyen
Sethi, Mr. Arta Trana Panda, Mr. Mayank Nagi and Mr.
Tarun Singh, Advocates for petitioners in Item Nos. 15 to
19.
Ms. Rashmi Chopra along with Mr. Ruchesh Sinha and
Ms. Ariya, Advocates for Petitioners in Item Nos. 23 to
41.
Mr. Dileep Shivpuri along with Mr. Sanjay Kumar,
Advocates for respondent/Income Tax in Item Nos. 1 to
13 & 14 to 22.
Mr. Rajesh Gogna, CGSC for respondent no. 1 in Item
No. 18.
W.P.(C) 3222/2008 & connected matters Page 6 of 52
Mr. Kirtiman Singh, CGSC along with Mr. Pranav
Agarwal, Mr. Waize Ali Noor and Mr. Prateek Dhanda,
Advocates for R-1 (UOI) in Item No. 21.
Ms. Kailash Golani, Advocate for respondent no. 1 in
Item No. 19.
Ms. Shraddha Bhargava, Advocate for respondents in
Item nos. 31 to 33, 36 & 38.
Mr. Arun Bhardwaj, Advocate along with Mr. Sriram,
Advocate for the respondent in Item nos. 1, 16 to 19.
Mr. Harish Kumar Garg, Advocate for respondent no. 1
in Item No.22.
Mr. Ashok K. Manchanda, Advocate along with Ms.
Lakshmi Gurung, Advocate for Revenue in Item Nos. 23
to 41.
Mr. Vivek Goyal, CGSC for respondent/UOI in Item No.
17.
Ms. Mrinalini Sen, Advocate along with Ms. Kritika
Gupta, Advocate for respondent no.1 in Item Nos. 31 to
33, 36 & 38.
Ms. Saroj Bidawat, Advocate for respondent/UOI in Item
Nos. 23 to 25 & 41.
Ms. Manisha Aggarwal, Advocate along with Ms. Mansi
Gupta, Advocate for respondent/UOI in Item Nos. 29, 30,
37, 39 & 40.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MS. JUSTICE DEEPA SHARMA
MR. JUSTICE S. RAVINDRA BHAT
%
Facts
W.P.(C) 3222/2008 & connected matters Page 7 of 52
1. The present batch of Writ Petitions challenges the constitutionality of the amendment to Section 142(2A) of the Income Tax Act, 1961 (hereafter "the Act"). Since the question raised for the Court's consideration is the same in all of these writ petitions, the facts in W.P.(C) 9138/2015 are taken as reference and are described below.
2. Shri Dhir Chand Sharma, (hereafter, the "petitioner" or the "assessee") is a contractor and during the assessment year in question it was engaged in the business of supplying earth materials. Search and seizure operations were carried out under Section 132 of the Income Tax Act, 1961 (hereafter "the Act") in M/s. NKG and the petitioner who at the time was undertaking contract work for M/s. NKG was also subject to search and seizure operations under Section 132. A notice under Section 153A was issued to the petitioner and in response, the petitioner filed return for the assessment year (AY) 2010-11 declaring income of ₹ 8,56,148/-. Notices were issued to the petitioner under sections 143(2) and 142(1) of the Act.
3. In response to the aforesaid statutory notices, the petitioner filed replies alongwith the copy of the audited statement of accounts etc. In the said replies, the petitioner submitted that the main source of its income for the AY under consideration was that the petitioner was engaged in contract work for M/s. NKG in the nature of supplying of supplying earth materials, (i.e. mitti/grits) and was not engaged in any other business activities in any nature whatsoever. Notice under Section 142(2A) was then issued to the petitioner by the Assessing Officer (AO), requiring the petitioner to show cause as to why special audit of its accounts for the AYs 2007-08 to 2013-14 should not be directed. The AO was of the view that the W.P.(C) 3222/2008 & connected matters Page 8 of 52 accounts of the assessee were complex and voluminous and the same were of specialized nature. In response to this notice, the petitioner submitted its objections to the proposed special audit and submitted that it had maintained regular books of account and further, that there was no complexity in its books of accounts or any multiple or complex transactions.
4. Thereafter, the AO proceeded to pass the order under Section 142(2A) of the Act after seeking the approval of the Principal Commissioner of Income Tax, for AYs 2010-11 to 2012-13, leaving out AYs 2007-08 and 2013-14, which were originally also sought for special audit. The AO directed the petitioner to furnish report of special audit within period of 90 days from the receipt of the impugned order.
Contentions
5. OSC contends that Section 142(2A), as amended by the Finance Act, 2013, violates Article 14 of the Constitution of India. The petitioner contends that by the said amendment, the scope of Section 142(2A) was substantially widened with effect from 01.06.2013. It is contended that from a bare reading of the amended Section 142(2A) it is clear that the Legislature intends to remove the restrictions inherent in the said provision and expand its scope far beyond what it was earlier. The only ground that was earlier present in Section 142(2A), on which special audit could be directed, was "nature and complexity of the accounts of the assessee". It is urged by the petitioner that after the amendment the grounds that have been added to Section 142(2A), have no relation to the erstwhile complexity of accounts and rather is completely generic and all encompassing going beyond the object of enacting Section 142(2A) in the first place.
W.P.(C) 3222/2008 & connected matters Page 9 of 526. By widening the scope of Section 142(2A), submits the petitioner, arbitrary powers having no relation to the object of Section 142(2A) are conferred on the officers to administer the section. Such unguided discretion, having no nexus to the object of Section 142(2A), submits the petitioner, is contrary to the principles of equality enshrined in Article 14.
7. The petitioner contends that the criteria inserted in Section 142(2A), by the amendment, are all essentially subjective and provide unbridled power to the AO. For instance, in relation to the criteria "volume of accounts", it is contended that what is volume of accounts may differ from one AO to another and in the absence of any definition provided in the section, the discretion provided to an AO is excessively wide. This may also lead to the situation where even two similarly placed assessees may be discriminated at the sole discretion of the AO. Similarly, in relation to "doubts about the correctness of accounts", it is contended that doubts by itself are insufficient unless backed by specific defects for having recourse to the drastic action of a special audit. Again what would constitute "doubt" would differ from one AO to another. Hence, it is contended that the power provided to the AO is totally subjective and unchecked. In relation to the ground of "multiplicity of transactions in the accounts", the petitioner contends that the said expression is also without qualification or benchmark. The scope of the criteria is so wide that no examination or verification of the transactions would be required. Similarly, in relation to the criteria of "specialized nature of business activity of the assessee", it is contended that the criteria are manifestly unreasonable and arbitrary.
8. It is contended by the petitioner that with the amendments in Section 142(2A), the AO can easily shirk her or his responsibility of scrutinizing W.P.(C) 3222/2008 & connected matters Page 10 of 52 accounts and pass on the responsibility to the Special Auditor. The net effect of the amendments would be that special audit would be directed at the drop of a hat and it would be tantamount to outsourcing the assessment. The five parameters enshrined in Section 142(2A), it was contended, are between them wide enough to encompass every case within the reach of the mechanism of special audit. It was contended that the present provision clubs equal and unequal in the same class and hence is patently violative of Article
14. The petitioner also submits that under various legislations, including the Companies Act, the Income Tax Act, as well as Service Tax and State VAT regulations, it is required to go through the audit process. It is contended that these audits serve as proper checks and balances on the conduct of the assessee's business and as such there is no requirement of resorting to Special Audit under Section 142(2A).
9. Mr. Ajay Vohra, learned senior counsel relied on the Statement of Object and Reasons of the original provision, when introduced by amendment, [Clause 39 (1)] in 1973, by a Bill, which was ultimately enacted, that to protect the interests of the revenue, the accounts of the assessee, in certain cases, which indicated complexity, power should be conferred to conduct special audit; yet the Committee which recommended the original amendment was conscious of possible harassment of the assessee, by such process and, therefore, proposed that such exercise should be conducted after the highest authority is satisfied.
10. It was submitted that though certain amendments were made before the impugned amendment in 2013, those are not in dispute. However, the observations and conclusions of previous judgments, submitted senior counsel, shed light on how the power under Section 142 (2A) is to be W.P.(C) 3222/2008 & connected matters Page 11 of 52 exercised. In this regard, counsel submitted that whilst "complexity" involves a substantial element of subjectivity (in the approach of the AO, who decides whether the case and accounts of an assessee require appointment of a special auditor) nevertheless, there is unanimity in judicial thought that the decision to appoint special auditor cannot be taken lightly, upon a "cursory" look of the accounts or their casual examination. In this regard, the decision in Swadeshi Cotton Mills Co v Commissioner of Income Tax 1988 (171) ITR 634 was cited; that judgment observed as follows:
"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."
11. Similarly, it has been held that a mechanical and perfunctory order directing special audit cannot be upheld, and would not withstand scrutiny of courts (Ref U.P. State Handloom Corporation Ltd. v. CIT [2000] 245 ITR 192 (All). It was stressed that equally, given the concern expressed by Parliament that such wide powers, unless regulated through proper procedure by way of a safeguard of prior informed approval, courts have also interfered with orders directing special audit, if the senior officer (Commissioner) mechanically, and without due application of mind, approves the proposal- the judgment in West Bengal State Co-operative Bank Ltd. v. CIT (2004) 267 ITR 0345 was cited in this regard.
W.P.(C) 3222/2008 & connected matters Page 12 of 5212. Learned senior counsel submits that the nature of power conferred under the amended Section 142 (2A) is wide and unguided. As between two assessees, what constitutes greater "volume" of transactions, to determine if the accounts are complex, or what are "multiplicity of transactions in the accounts", or specialized nature of the assessee's business, or the widest phrase "doubts as to the correctness" of the accounts is incapable of definition. Necessarily, therefore, every AO is left to his or her own devices to decide - in an entirely subjective manner. Since the assessee would have to reply to show cause notice, before a final decision is taken, the nature of these notices would be wide and sweeping; the AOs would be launching roving and fishing enquiries. It is submitted that arming a quasi-judicial authority with wide discretion would impair the rights of the assessees, who can be subject to whims and vagaries. The decisions in Harakchand Ratanchand Banthia v Union of India 1969 (2) SCC 166; Krishna Mohan v Municipal Corporation of Delhi 2003 (7) SCC 151 and State of Punjab v Khan Chand 1974 (1) SCC 549 were relied upon.
13. It was also argued by learned senior counsel that the lack of any specificity and guidance in the statute, with respect to the new terms introduced, means that Parliament never heeded to decisions by various courts, which had frowned upon the revenue's resort to such vague expressions or excuses for special audits. In case Parliament wished to override judicial view on this, the method known to law was to cure the defect, by defining the expression, with some precision. Without doing so, the remedy through the impugned amendment, merely enacted the wide phraseology that armed the revenue authorities with great powers, and the discretion to pick and choose whomsoever they wished to target, for the W.P.(C) 3222/2008 & connected matters Page 13 of 52 purpose of carrying on special audit. Learned counsel relied on Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar, AIR 1958 SC 538 and State of West Bengal v. Anwar Ali Sarkar, AIR 1952 SC 75, for the argument that without precise guidelines regarding exercise of powers, the statute would operate in a harsh manner. The following observations from Anwar Ali Sarkar (supra), were relied on:
"Legislature would be guilty of an unconstitutional delegation of its legislative function and power if, instead of laying down the policy of a law or some other standard or objective criteria for the application of the law, it leaves the matter of selection of the persons or objects for directing the law against them, according to the uncontrolled discretion of the administrative authority."
14. Learned counsel also relies on Subramaniam Swamy v. CBI, (2014) 8 SCC 682 where the Supreme Court made the following observations:
"Where there is challenge to the constitutional validity of a law enacted by the legislature, the Court must keep in view that there is always a presumption of constitutionality of an enactment, and a clear transgression of constitutional principles must be shown. The fundamental nature and importance of the legislative process needs to be recognised by the Court and due regard and deference must be accorded to the legislative process. Where the legislation is sought to be challenged as being unconstitutional and violative of Article 14 of the Constitution, the Court must remind itself to the principles relating to the applicability of Article 14 in relation to invalidation of legislation. The two dimensions of Article 14 in its application to legislation and rendering legislation invalid are now well recognised and these are: (i) discrimination, based on an impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by W.P.(C) 3222/2008 & connected matters Page 14 of 52 way of conferment of authority to pass administrative orders-if such conferment is without any guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy is."
15. Learned senior counsel also submits that the Supreme Court has recognized in Rajesh Kumar and Ors. v. Deputy CIT and Ors. [2007] 2 SCC 181 that a special audit under Section 142 (2A) has adverse consequences, because of the intrusion into the accounts of an assessee; the Court, therefore, required that principles of natural justice should be followed before an order under the provision was to be made. It was also stated that in the said decision, the Supreme Court had ruled that Section 142 (2A) cannot become a delegated power by the AO; the task of the special auditor should be specific, in order for a valid order. Counsel also relied on Sahara India (Firm), Lucknow v. Commissioner of Income Tax, [2008] 300 ITR 403 (SC) where the Supreme Court had the occasion to interpret Section 142(2A) of the Act, as it stood prior to the amendments in question. The Court was faced with the question as to whether Section 142(2A) required giving the assessee a pre-decisional hearing before proceeding to order a special audit under the provision.The Court noted:
"A bare perusal of the provisions of Sub-section (2A) of the Act would show that the opinion of 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 W.P.(C) 3222/2008 & connected matters Page 15 of 52 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 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." Thus, before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the Assessing Officer for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the Section is not turned W.P.(C) 3222/2008 & connected matters Page 16 of 52 into an empty ritual. Needless to emphasise that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case."
16. On the question of whether Section 142(2A) involves giving a pre- decisional hearing to the assessee, the Court held:
"The upshot of the entire discussion is that the exercise of power under Section 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in Section 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision."
17. It was argued that the amended provision, impugned in these proceedings, has expanded discretion to the extent that at the whims of the AOs, essential quasi-judicial functions can potentially be outsourced, to be performed by special auditors. Reliance is placed on the decision of the Calcutta High Court in Peerless General Finance & Investment Co Ltd & Anr v Dy. Commissioner of Income Tax 1999 (236) ITR 671 (Cal). It was highlighted that the said judgment is also an authority for the proposition that a roving or fishing inquiry is impermissible, in the guise of an order of special audit. It was submitted that mere doubts about correctness or the need to obtain vital information, per se cannot constitute "complexity" in an assessee's accounts, to warrant a special audit. Furthermore, the petitioner assessees relied on the judgment of this court, reported as DLF Ltd. & Anr. v.
W.P.(C) 3222/2008 & connected matters Page 17 of 52Additional Commissioner of Income Tax,[2014] 366 ITR 390 (Del) to urge that though powers conferred upon the revenue have wide import, they are to be used with judicious discretion. It was emphasized that the court stressed that using the pretext of complexity of accounts, AOs cannot delete their responsibilities to outside auditors, who have no legal authority to decide contentious issues which come up during assessment proceedings. Counsel also cited Muthoottu Mini Kuries v. Deputy Commissioner of Income Tax & Anr, (2001) 250 ITR 455 to say that every AO is expected to have working skill of accounts, sufficient to apply her or his mind, to the facts of assessment cases that are to be adjudicated. For these routine cases, the power under Section 142 (2A) should not be lightly resorted to.
18. The Revenue contended that in economic matters, the Legislature enjoys greater leeway in classification of individuals and it is best left to the Legislature to decide matters of taxation policy and how to achieve such policy aims. Learned counsel urged that Section 142(2A) of the Act plays a crucial role in the protection of the interests of the revenue inasmuch as it assists the AO in arriving at the computation of taxable income of those assessees whose accounts are of such nature that there is likelihood of income escaping the normal assessment procedure. It is also contended by the Revenue that in some cases, special audit may result in benefit to the assessee as well. Moreover, it is urged that Section 142(2A) already contains adequate safeguards and checks to govern the discretion vested in the AO and as such, cannot be said to suffer from the vice of arbitrariness.
19. It was argued that Parliament, after deliberation, felt that the judgments that had circumscribed the exercise of power to order special audit, in cases, which involved voluminous materials, or where there were W.P.(C) 3222/2008 & connected matters Page 18 of 52 multiple transactions, involving a complicated web of corporate or related entities, or where the assessment involves specialized nature of the assessee's business activities, for which detailed and careful scrutiny was necessary, needed reconsideration. In such cases, the special auditor merely assisted the AO in the statutory task, but did not actually perform it. It was emphasized that the AO had to perforce, furnish a copy of the special auditor's report, and adjudicate upon all comments and objections. This acted as a safeguard to the so called wide power, and checked the propensity to refer wide areas of assessments, or to blindly accept recommendations given by such special auditors, in their reports. Learned counsel relied on the decision reported as Living Media v Commissioner of Income Tax and Anr [2002] 255 ITR 268 (SC) where it was held that voluminous details filed by the assessee prima facie supported assessing authority's opinion for conducting special audit and the High Court's order of directing special audit for no reason other than complexity of appellant's accounts, was affirmed.
20. It was urged that volume of accounts was ipso facto, a relevant element for an AO to say that the accounts are complex, in any given case. Therefore, its statutory incorporation cannot be characterized as arbitrary or clothing the authorities with uncanalized power. The scope of amended provision, it was stated, is explained in the Circular No. 3 of 2014 dated 24.01.2014. Para 35 of the said circular provides that "Sub-section (2A) of section 142 of the Income-tax Act, before its amendment by the Act, inter-alia, provided that if at any stage of the proceedings, the 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 approval of the Chief Commissioner or Commissioner, direct the assessee to get his W.P.(C) 3222/2008 & connected matters Page 19 of 52 accounts audited by an accountant and to furnish a report of such audit in the prescribed form. The expression - nature and complexity of the accounts has been interpreted in a very restrictive manner by various courts.
35.2 Sub-section (2A) of section 142 has been amended to provide that if at any stage of the proceedings before him, the Assessing Officer, 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 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 Chief Commissioner or the Commissioner, direct the assessee to get his accounts audited by an accountant and to furnish a report of such audit in the prescribed form.
35.3 Applicability: - This amendment takes effect from 1st June, 2013."
21. From the aforesaid, it is clear that the amended provisions of section 142(2A) provide that an AO may refer a case for special audit having regard to the nature and complexity of accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of the business activity of the assessee, and the interests of the Revenue. The order for special audit can be made by the AO only with approval of the Chief Commissioner or the Commissioner of Income-tax. Since, an order for special audit in the modified provisions of Section 142(2A) of the Act can be made by the AO only with the approval of the Chief Commissioner or the Commissioner of Income tax, hence, such order cannot be called arbitrary as it provides an in-built protection to the assessee against any unjust exercise of power by the AO; reliance is placed W.P.(C) 3222/2008 & connected matters Page 20 of 52 on Ramesh Chand Industries Ltd. v Union of India, (1998) 100 Taxman 570, 572 (Delhi).
22. Learned counsel submits that provisions of section 142(2A) as amended by Finance Act, 2013 is neither arbitrary nor unreasonable. It does not violate the provisions of Article 14. In this context, it may be mentioned that the courts assert that in view of the intrinsic complexity of fiscal adjustments of diverse elements, Legislature ought to be permitted a larger discretion and latitude in the matters of classification for taxing purposes. The reason for greater judicial tolerance shown towards a tax law is that taxation is not merely a source of raising money to defray government expenses but it is also a tool to reduce inequalities in society. Accordingly, while applying the doctrine of classification, the Legislature is allowed much more freedom of choice in the matter of taxation vis-à-vis other types of laws. As no scheme of taxation is free of all discriminatory impact, a tax measure is struck down on the ground of discrimination under Article 14, only on the ground of palpable arbitrariness - which is tested in the context of the felt needs of the times and societal exigencies informed by experience. The tests of the vice of discrimination in tax law are thus less rigorous. It is submitted that the Supreme Court in Vivian Joseph Ferreira v Municipal Corp. of Greater Bombay, (1972) 1 SCC 70 held that the question of validity of taxing statutes has arisen before this Court in a number of cases. The principle emerging from them is that in order that a tax may be valid, it should be first within the competence of the Legislature imposing it, second, it should be for a public purpose, and third, it should not violate the fundamental rights guaranteed by Part III of the Constitution. Reliance is placed on Khandige Sham Bhat v. Agricultural ITO, (1963) 3 SCR 809, W.P.(C) 3222/2008 & connected matters Page 21 of 52 which held that though a law ex facie appears to treat all that fall within a class alike, if in effect it operates unevenly on persons or property similarly situated, it may be said that the law offends the equality clause. It will then be the duty of the court to scrutinize the effect of the law carefully to ascertain its real impact on the persons or property similarly situated.
23. It is next urged that conversely, a law may treat persons who appear to be similarly situated, differently; but on investigation they may be found not to be similarly situated. To state it differently, it is not the phraseology of a statute that governs the situation but the effect of the law that is decisive. If there is equality and uniformity within each group, the law will not be condemned as discriminative, even if due to some fortuitous circumstance arising out of a peculiar situation, some included in a class get an advantage over others, so long as they are not singled out for special treatment. Taxation law is not an exception to this doctrine as recognized in Purshottam Govindji Halai v. Shree B.M Desai AIR 1956 SC 20 and Kunnathat Thathuni Moopil Nair v. State of Kerala AIR 1961 SC 552. But in the application of these principles, the courts, in view of the inherent complexity of fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification; so long as it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways.
24. It is also stressed that the AO can order for special audit only with the previous approval of the Chief Commissioner or the Commissioner. Therefore, it can also not be termed as unreasonable. The amendment to Section 142(2A) by the Finance Act, 2013 is aimed at achieving the object of W.P.(C) 3222/2008 & connected matters Page 22 of 52 the section, that is, to make judicious assessment. Accordingly, the section provides that the AO may, 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 the specialized nature of business activity of the assessee, and the interest of revenue, order for special audit with the approval of the Chief Commissioner or the Commissioner. The amendment is in consonance with sound exercise of statutory discretion. The provisions of section 142(2A) are objective and it does not deviate from the basic purpose of the said section to assist the AO in framing an assessment by taking the services of a special auditor to protect the interests of revenue. The approval by the Chief Commissioner or the Commissioner of the action of the AO is an in-built protection to the assessee against any arbitrary or unjust exercise of power by the AO. Counsel also submits that the amended provisions do not bring in any subjectivity. The criteria for special audit has been clearly spelt out in the section itself and it aligns with the main object of the provision i.e. proper assessment of the income of the taxpayer. Further, the special audit does not lead to any financial burden on the taxpayer as the proviso to sub-section (2D) of section 142 provides that the expenses of such audit shall be borne by the Central Government. Moreover, the amendment in section 142(2A) does not infringe upon any fundamental rights of the assessee. The contention of the assessee that the amendment to Section 142(2A) is arbitrary and violates Article 14 of the Constitution of India is, therefore, wrong and untenable.
Analysis and Conclusions W.P.(C) 3222/2008 & connected matters Page 23 of 52
25. In these writ petitions, the constitutionality of the amendments to Section 142(2A) of the Act, have been challenged. At the outset, it would be beneficial to reproduce Section 142(2A) as it stood before and after the amendment:
Before the amendment "(2A) If, at any stage of the proceedings before him, the 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 section288, nominated by the Chief 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 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."
After the amendment If, at any stage of the proceedings before him, the Assessing Officer, 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 specialised 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 Chief Commissioner or Chief Commissioner or Principal 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 Principal Chief Commissioner or Chief Commissioner W.P.(C) 3222/2008 & connected matters Page 24 of 52 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 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.
26. It becomes clear, therefore, that after the impugned amendment, four new grounds were added to Section 142(2A), on which Special Audit may be ordered. These are: (i) volume of accounts, (ii) doubts about the correctness of accounts, (iii) multiplicity of transactions in the accounts and
(iv) specialized nature of business activity of the assessee. The objective of this amendment has been explained in the Memorandum explaining the Finance Bill, 2013 as:
"The existing provisions contained in sub-section (2A) of section 142 of the Income-tax Act, inter alia, provide that if at any stage of the proceeding, the 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 approval of the Chief Commissioner or Commissioner, direct the assessee to get his accounts audited by an accountant and to furnish a report of such audit.
The expression "nature and complexity of the accounts" has been interpreted in a very restrictive manner by various courts.
It is, therefore, proposed to amend the aforesaid sub-section so as to provide that if at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of W.P.(C) 3222/2008 & connected matters Page 25 of 52 transactions in the accounts or specialized 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 Chief Commissioner or the Commissioner, direct the assessee to get his accounts audited by an accountant and to furnish a report of such audit. This amendment will take effect from 1st June, 2013."
27. The court notices, at the outset, that the constitutional validity of the amended provision was challenged in some writ petitions and the validity of the orders, made under Section 142 (2A) was challenged in others. The following tabular statement describes the particulars of the petitions, where the constitutional validity of the provision is challenged:
S.No Party Names W.P. (C) Date of Page No. Grounds for making of reference Impugned Order
1. Patanjali Ayurved 2879/2014 25.03.201 55-93 1. From the replies and Ltd. vs. Union of 4 Annexure submissions, the assessee has India & Anr. A made the status of UNIT-III very complicated and has used it interchangeably with PFHPL in many instances.
2. Assessee holds 77% shares of PFHPL instead of the 49% provided for in the shareholders‟ agreement, making the entire transaction quite complex.
3. Assessee entered into Joint Venture Agreement with PFHPL for setting up Bio Gas Power Plant. This investment needs a detailed scrutiny as utilization of invested fund has tax implications.
4. There are numerous debit and credit transactions between the assessee and PFHPL. These transactions are very voluminous and need to be thoroughly audited.
5. Transactions with related party have not been done at fair market value, thereby raising doubt about multiple such W.P.(C) 3222/2008 & connected matters Page 26 of 52 transactions entered into by the assessee which may be detrimental to the interest of revenue.
6. Assessee has international transactions as well which need verification with respect to whether they come under definition of International Transaction u/s 92B.
7. The valuation of stock is not as per accepted Accounting Standards which requires due investigation.
8. Corporate guarantees have been given by assessee to unknown parties and it is very complex to understand the money value of such corporate guarantees to unrelated parties and the fair value of transactions with them.
9. Sale price to related and unrelated party is a complex and voluminous affair which needs a detailed audit.
10. Consolidated Financial Statement of the assessee is inconsistent with the UNIT wise Financial Statements in terms of segregation of different headings meaning thereby an intentional complexity created by the Assessee to misguide.
2. Patanjali Ayurved 4408/2015 30.03.20 51- 1. Assessee adopted composite Ltd. vs. Union of 15 95 method to calculate deductions India & Anr. Ann u/s 80-IC which not only makes exur it difficult to arrive at sales eA figures but also actual details of the stock. Now it is difficult to bifurcate & arrive at actual movement in stock & closing stock of items as manufactured & sold by the assessee along with trading goods.
2. The methodology for valuation of closing stock adopted by the assessee is incorrect and is not as per accounting standard-2 issued by ICAI.
3. The assessee has reported incorrect gross profit obtained by it as per the facts of the case W.P.(C) 3222/2008 & connected matters Page 27 of 52 on record.
4. The assessee has vast investments in its group concerns and it needs to be examined whether these transactions have been done at a fair market value of shares or not.
5. With respect to claim of additional depreciation u/s 32(1)(iia), the assessee failed to submit the details that justify its allowability under the Act.
3 & Smt. Vinay Sharma 8841/2015 30.03.20 62- 1. The assessee failed to submit
4. vs. Union of India 9464/2015 15 68 details regarding purchases and & Ors. Ann sales made by him and has also exur failed to show any substantial e P- documentary evidence in 1 support of turnover and cost of 5 & Smt. Vinay Sharma 8877/2015 30.03.20 60- goods.
6. vs. Union of India 8878/2015 15 66K 2. Despite being given repeated & Ors. Ann opportunities to do so, the exur assessee failed to produce e P- books of accounts for perusal of 1 the AO.
7- Shri Dhir Chand 9138/2015 30.03.20 60- 3. The assessee hasn't revealed
11. Sharma vs. Union 9139/2015 15 66J complete details of all the bank of India & Ors. 9140/2015 Ann accounts held by him. The 9146/2015 exur assessee has also not given the 9147/2015 e P- bank statements of the accounts 1 he submitted for consideration.
12- Smt. Gita Sharma 9141/2015 30.03.20 60- 4. There have been a great number
16. vs. Union of India 9142/2015 15 67K of cheque and cash credits in 9149/2015 (pg. Ann the bank accounts of the
58) exur assessee during the assessment 9151/2015 e P- year in question, which need to 9152/2015 1 be examined properly.
17- Shri Guru Prasad 9143/2015 30.03.20 60-
21. Sharma vs. Union 9144/2015 15 67L of India & Ors. 9145/2015 Ann 9148/2015 exur 9150/2015 e P-
128. The rationale for the amendment, therefore, is that the erstwhile expression "nature and complexity of the accounts" had been interpreted in a restrictive manner by courts. The petitioner submits that such an W.P.(C) 3222/2008 & connected matters Page 28 of 52 amendment runs afoul of the guarantee under Article 14 of the Constitution. Before dealing with the constitutionality of the aforesaid amendment, it would be fitting to recollect the basic principles that must be kept in mind by the Courts while dealing with the challenge to the constitutionality of a legislative enactment. These principles were succinctly stated by the Supreme Court in Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar, AIR 1958 SC 538:
"14. The principle enunciated above has been consistently adopted and applied in subsequent cases. The decisions of this Court further establish -
(a) that a law may be constitutional even though it relates to a single individual if, on account of some special circumstances or reasons applicable to him and not applicable to others, that single individual may be treated as a class by himself;
(b) that there is always a presumption in favour of the constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles;
(c) that it must be presumed that the legislature understands and correctly appreciates the need of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based on adequate grounds;
(d) that the legislature is free to recognise degrees of harm and may confine its restrictions to those cases where the need is deemed to be the clearest;
(e) that in order to sustain the presumption of constitutionality the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation; and
(f) that while good faith and knowledge of the existing conditions on the part of a legislature are to be presumed, if W.P.(C) 3222/2008 & connected matters Page 29 of 52 there is nothing on the face of the law or the surrounding circumstances brought to the notice of the court on which the classification may reasonably be regarded as based, the presumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain individuals or corporations to hostile or discriminating legislation.
15. The above principles will have to be constantly borne in mind by the court when it is called upon to adjudge the constitutionality of any particular law attacked as discriminatory and violative of the equal protection of the laws."
29. The above principles have been consistently followed by the courts in India and the law in relation to challenge on the constitutionality of an enactment on the touchstone of Article 14 was reiterated by the Supreme Court in Subramaniam Swamy v. CBI, (2014) 8 SCC 682 in the following terms:
"Where there is challenge to the constitutional validity of a law enacted by the legislature, the Court must keep in view that there is always a presumption of constitutionality of an enactment, and a clear transgression of constitutional principles must be shown. The fundamental nature and importance of the legislative process needs to be recognised by the Court and due regard and deference must be accorded to the legislative process. Where the legislation is sought to be challenged as being unconstitutional and violative of Article 14 of the Constitution, the Court must remind itself to the principles relating to the applicability of Article 14 in relation to invalidation of legislation. The two dimensions of Article 14 in its application to legislation and rendering legislation invalid are now well recognised and these are: (i) discrimination, based on an impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the W.P.(C) 3222/2008 & connected matters Page 30 of 52 executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders-if such conferment is without any guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy is."
30. Here, the petitioners challenge the constitutionality of the amendments to Section 142(2A), on the basis that the amendments confer un-canalized, arbitrary and unguided powers on the AO and, therefore, suffer from the vice of excessive delegation of powers. While delegation of powers to the executive to implement legislative policy is a concept well-recognized, a statute would run contrary to Article 14 of the Constitution if it delegates unbridled power and discretion to the executive. In this context, the Supreme Court held in the case of Moti Ram Deka v. GM North East Frontier Railway, AIR 1964 SC 600:
"It was held that if in the scheme of the rules, a clear policy relating to the circumstances in which the power is to be exercised is discernible, the conferment of power must be regarded as made in furtherance of the scheme and it is not open to attack as infringing equality merely because there is possibility of abuse."
31. Similarly, in the case of State of West Bengal v. Anwar Ali Sarkar, AIR 1952 SC 75, it was held:
"Legislature would be guilty of an unconstitutional delegation of its legislative function and power if, instead of laying down the policy of a law or some other standard or objective criteria for the application of the law, it leaves the matter of selection of W.P.(C) 3222/2008 & connected matters Page 31 of 52 the persons or objects for directing the law against them, according to the uncontrolled discretion of the administrative authority."
32. What must similarly be borne in mind is that while delegation of uncontrolled or unguided discretion would undermine principles of equality and non-arbitrariness enshrined in Article 14, the mere possibility that the executive authority may abuse its discretion would not be a ground for declaring the legislation unconstitutional. In this context, the Supreme Court in Special Courts Bill, In Re, (1979) 1 SCC 380held:
"Whether a law conferring discretionary powers on an administrative authority is constitutionally valid or not should not be determined on the assumption that such authority will act in an arbitrary manner in exercising the discretion committed to it. Abuse of power given by law does occur; but the validity of the law cannot be contested because of such an apprehension. Discretionary power is not necessarily a discriminatory power."
33. Similarly in Naraindas Indurkhya v. State of MP, (1974) 4 SCC 788, the Supreme Court noted:
"Mere possibility that power may be misused or abused cannot per se induce the Court to hold the statute unconstitutional."
34. The task that this Court is, therefore, faced with is to determine whether the grounds added by amendment to Section 142(2A) of the Act, are of such nature that they violate Article 14 of the Constitution. In this regard, the mere possibility that the AO may abuse the discretion that the provision vests in him would be insufficient to declare the provision as unconstitutional. The Supreme Court in Sahara India (Firm), Lucknow v. Commissioner of Income Tax, [2008] 300 ITR 403 (SC), had the occasion to W.P.(C) 3222/2008 & connected matters Page 32 of 52 interpret Section 142(2A) of the Act, as it stood prior to the amendments in question. The Court was faced with the question as to whether Section 142(2A) required giving the assessee a pre-decisional hearing before proceeding to order a special audit under the provision. The Court noted:
"A bare perusal of the provisions of Sub-section (2A) of the Act would show that the opinion of 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 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." Thus, before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the Assessing W.P.(C) 3222/2008 & connected matters Page 33 of 52 Officer for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the Section is not turned into an empty ritual. Needless to emphasise that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case."
35. On the question of whether Section 142(2A) involves giving a pre- decisional hearing to the assessee, the Court held:
"The upshot of the entire discussion is that the exercise of power under Section 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in Section 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision."
36. Thus, what emerges from the Sahara (supra) decision of the Supreme Court in relation to Section 142(2A), can be summarized as under:
(i) The Assessing Officer must make a genuine and honest attempt to understand the accounts maintained by the assessee.W.P.(C) 3222/2008 & connected matters Page 34 of 52
(ii) The opinion required to be formed by the Assessing Officer under Section 142(2A) must be based on objective criteria and not merely subjective satisfaction. The powers under the provision cannot be used by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts to the special auditor.
(iii) The requirement of previous approval of the Chief Commissioner or Commissioner, casts a heavy duty on these authorities to ensure that this requirement is not reduced to an empty formality. Before granting the approval, the Commissioner or the Chief Commissioner, must have before him the materials on the basis of which the opinion has been formed by the Assessing Officer. The approval granted by the Commissioner or the Chief Commissioner must reflect application of mind to the facts of the case. This requirement was elaborated by the Calcutta High Court in West Bengal State Co-operative Bank Ltd. v.
Joint Commissioner of Income Tax, [2004] 267 ITR 345 (Cal), where it noted that-
"The Commissioner of Income Tax should not give any approval mechanically and if he finds that there is no examination of the books of account by the Assessing Officer before sending the proposal, he will not certainly give any approval. Under this section, the Commissioner of Income Tax does not exercise the jurisdiction of the appellate authority rather the approving authority. Approval means and connotes supporting and accepting of an act and conduct done by another person. Therefore, it would be his duty to examine on receipt of his proposal, whether the Assessing Officer has correctly done it or not, if he finds that this requirement has not been fulfilled then he must not approve of the same."W.P.(C) 3222/2008 & connected matters Page 35 of 52
(iv) In accordance with the principles of natural justice, the assessee must be given the opportunity of a pre-decisional hearing before action is taken under Section 142(2A).
37. While this decision of the Supreme Court was prior to the amendments inserted by the Finance Act, 2013, this Court sees no reason as to why these holdings of the Supreme Court in Sahara (supra) would not be applicable to the amended Section 142(2A). The fact that the AO's determination under this provision must be based on objective material and not subjective satisfaction, that he must make an honest attempt at understanding the accounts of the assessee, that the grant of approval by the higher authority must not be mechanical, that principles of natural justice must be followed by giving the assessee a pre-decisional hearing, would all be equally applicable even under the amended Section 142(2A). It would still be impermissible for the AO to shift the responsibility of auditing the accounts mechanically to the special auditor. In these circumstances, we fail to understand the petitioner's contention as to how the amendments would in effect nullify these procedural safeguards that the Supreme Court has read into Section 142(2A).
38. The presence of procedural safeguards in a provision, it has been repeated emphasized, saves the provision from being used in an arbitrary manner. In other words, while dealing with the challenge to constitutionality of a provision on the basis of Article 14, it would be a relevant factor to see whether the said provision has adequate safeguards to prevent the possibility of wanton abuse. In this regard, the Supreme Court in State of Mysore v. M.L. Nagade and Gadag, (1983) 3 SCC 253 held:
W.P.(C) 3222/2008 & connected matters Page 36 of 52"The High Court in our opinion unfortunately fell into an error in holding that Rule 71 allowed a wide margin to the revenue officers in the matter of determining the special assessment to be levied on land used for non-agricultural purposes. The High Court failed to notice that area within which the discretion of the revenue officer can operate is circumscribed both by the floor and ceiling fixed and while determining the quantum of assessment, the revenue officer has to bear in mind the use to which land is put as also the profit derived from the use of the land. The order made by the revenue officer is appealable. Now when a demand is raised, it can always be controverted under the various provisions of the relevant rules and the concerned assessee will have full opportunity to vindicate his stand. It should not be over-looked that the land revenue is a tax and the validity of the taxing statute has to be determined keeping in view the fact that in the matter of taxation, the Court allows wide area of picking and choosing and the slab system. We are therefore, of the opinion that there was sufficient guideline to govern the discretion of the revenue officer and the rule could not be struck down on the ground that it confers wide arbitrary, uncanalised discretionary power uncontrolled by any guidelines. "
39. What emerges from the aforesaid holding of the Supreme Court is that where statutory discretion conferred upon an executive authority is circumscribed by adequate safeguards and that there are sufficient guidelines to govern such discretion, then the provision cannot be said to be arbitrary.
40. In relation to the amended Section 142(2A), this court notices that the exercise of discretion of the AO is adequately circumscribed by fetters and safeguards. Section 142(2A) already contains a safeguard in the form of requiring the prior approval of the Commissioner or the Chief Commissioner before the AO can order special audit under this provision. Moreover, the Supreme Court's ruling in Sahara (supra) insists that approval by the W.P.(C) 3222/2008 & connected matters Page 37 of 52 Commissioner or the Chief Commissioner must not be mechanical and must show application of mind. Additionally, after the Sahara (supra) decision, a pre-decisional hearing must also be mandatorily given to the assessee and the AO himself must arrive at the decision to order a special audit based on objective material and not just subjective satisfaction. Thus, it becomes clear that through the procedural safeguards already envisaged in the plain text of the statute, as well as those read into the statute by the Supreme Court in Sahara (supra), the impugned provision, even with the amendments, cannot be classified as arbitrary or conferring un-canalized discretion on the AO.
41. In relation to the amendments, the primary contention of the petitioners is that the amendments radically alter the scheme of the provision and confer excessive and wide discretion on the AO. It is contended by the petitioners that the criteria inserted by way of amendment to Section 142(2A) are such that they are inherently subjective and can be interpreted very differently by each AO, resulting in situations where equals are treated unequally and vice-versa. It is further urged that the terms "volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee" are not defined or described in the statute and are, therefore, prone to wide and differing interpretations. However, what the Court fails to see is how the nature of these criteria are radically different from the erstwhile requirement of "nature and complexity of accounts", considering that the aforesaid term was also open-ended, subjective and not defined in the statute. In fact, on this point, the Court in Sahara (supra) noted-
"The word "complexity" used in Section 142(2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills W.P.(C) 3222/2008 & connected matters Page 38 of 52 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 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."
42. It is thus, clear that even the term "nature and complexity of accounts"
is also capable of different interpretations at the hands of different AOs and in that sense, equally open-ended. However, merely because a particular term is capable of different interpretations or is open-ended, would not be sufficient to hold that it is arbitrary and against the requirements of Article
14. In fact, as held by the Supreme Court in Sahara (supra), the requirements of the provision must be met on the basis of objective material and not subjective satisfaction and, therefore, even though the requirements themselves are open-ended or capable of different interpretations, the AO would still have to act prudently and on the basis of the material on record. Thus, this Court does not see any reason as to why the criteria inserted after the amendment are arbitrary and unreasonable.
43. The petitioner contends that the legislature has sought to widen the ambit of Section 142(2A) so as to negate judicial pronouncements on this particular provision and travel beyond the limits set forth by judicial interpretation. That the purpose of introducing the said criteria in Section 142(2A) by way of amendment, was to widen the ambit of the impugned provision from that which had been set by judicial pronouncements, is evident from the Memorandum accompanying the Finance Bill, 2013 itself-
W.P.(C) 3222/2008 & connected matters Page 39 of 52which states that the term "nature and complexity of accounts" had been interpreted in a very restrictive manner by courts and, therefore, the provision was being amended to insert new criteria. Aside from the fact that it would be well within the Legislature's prerogative to do so, in taxation matters especially, the law has been settled by the Supreme Court's decision in Indian Aluminium Ltd. v. State of Kerala, (1996) 7 SCC 537 in the following terms:
"In exercising legislative power, the Legislature by mere declaration, without anything more, cannot directly overrule, revise or override a judicial decision. It can render judicial decision ineffective by enacting valid law on the topic within its legislative field fundamentally altering or changing its character retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the Court, if those conditions had existed at the time of declaring the law as invalid. It is also empowered to give effect to retrospective, legislation with a deeming date or with effect from a particular date. The Legislature can change the character of the tax or duty from impermissible to permissible tax but the tax or levy should answer such character and the Legislature is competent to recover the invalid tax validating such a tax or removing the invalid base for recovery from the subject or render the recovery from the State ineffectual. It is competent for the Legislature to enact the law with retrospective effect and authorise its agencies to levy and collect the tax on that basis, make the imposition of levy collected and recovery of the tax made valid, notwithstanding the declaration by the Court of the direction given for recovery thereof."
44. The Legislature- in this case, Parliament, in fiscal matters, enjoys greater latitude and a wider margin of appreciation. On this point, the law W.P.(C) 3222/2008 & connected matters Page 40 of 52 was explained by the recent Supreme Court decision in Jindal Stainless Ltd. v. State of Haryana, (2016) SCC Online SC 1260 in the following words:
"The legal position as to the approach that courts adopt towards fiscal measures while examining their constitutional validity is fairly well settled by a long line of decisions of this Court. The law on the subject is so well settled that it calls for no elaborate discussion of the same. Courts have almost universally accepted the principle that keeping in view the inherent complexities of fiscal adjustments and the diverse elements and inputs that go into such exercise a greater latitude is due to the legislature in taxation related legislations."
45. In this context, it is necessary to examine the purpose of enacting a provision as Section 142(2A) in the Income Tax Act, 1961. While examining the purpose of the unamended Section 142(2A), a Division Bench of this Court in DLF Ltd. & Anr (supra) held:
"25. Powers under Section 142(2A) have to be exercised in terms of the legislative provisions. The object and purpose behind the legislation is to facilitate investigation and proper determination of the tax liability. The importance and relevancy of the legislation cannot be underestimated and it is a power available with the Assessing Officer to aid and assist him. Accounts should be accurate and provide real time record of the financial transactions of the assessee. Preparation of accounts is the work of the accountant 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 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 ordinary accountants but specialists who have successfully undergone academic study and have extensive practical experience and W.P.(C) 3222/2008 & connected matters Page 41 of 52 trained for the said work. Curriculum requires article ship under a mentor who is himself a Chartered Accountant with some years of experience. As opposed to an ordinary accountant, a Chartered Accountant with his experience and academic background is in a better position to investigate, examine and scrutinize entries and records of financial transactions. Calibre and competence 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 Satyam's case in India have highlighted the need and necessity to have controls and system of checks, perhaps even beyond scope of traditional audit. Financial statements and accounts are being increasingly exiguously examined to rule out possibility of wrong doings, cover up or evasion of taxes. Financial statements and accounts are coming under increasing scrutiny and investigation. A Chartered Accountant is a financial investigator and proper, is required to be curious, tenacious and well conversant to identify and unearth frauds, misreporting and wrong claims in the accounts.
26. The aforesaid observations should not be construed as a general expression or opinion, that every account or statement of income must be viewed with suspicion, distrust and skepticism. The past instances are mere warnings, for closer and more in depth scrutiny. It is also a fact that 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 comprehensive, intrusive and investigative. Ethical managements may at times regard such enquiries as an unwarranted intrusion or a hounding approach. Section 142(2A) does not permit fishing or roving inquiry approach or a witch hunt but is a regulated provision which accepts the need and necessity of the Assessing Officer to take help of an expert accountant i.e. a Chartered Accountant, a W.P.(C) 3222/2008 & connected matters Page 42 of 52 person who is academically qualified and has practical experience to understand accounts and unearth tax evasion 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."
46. Thus, it is clear that Section 142(2A) was enacted to facilitate investigation into the accounts of an assessee for the proper determination of tax liability. It deals with cases where the AO needs to take the assistance of a Chartered Accountant in order to be able to understand the assessee's accounts and determine the correct tax liability. It is, therefore, abundantly clear from the aforesaid dictum, that Section 142(2A) confers an important power on the Revenue to curb tax evasion and balances it with the inconvenience that an assessee may face. The impugned amendments to Section 142(2A) also have to be viewed in that light and hence must be considered to be reasonable.
47. The petitioners had urged that since it is already subjected to statutory audit under other provisions of the Income Tax Act as well as other legislations, the need to have recourse to Section 142(2A) does not arise. A similar argument was considered and rejected earlier, by the Madhya Pradesh High Court, which this court is in agreement with. Dealing with the argument in the context of Section 142(2A), a Division Bench of the Madhya Pradesh High Court in Mohan Trading Company and Hari Shankar Shrivastava v. Union of India, [1985] 156 ITR 134 (MP) held:
W.P.(C) 3222/2008 & connected matters Page 43 of 52"Section 142(2A) enables the ITO with the previous approval of the Commissioner to get the accounts audited by an "accountant" in case of complexity of the accounts of the assessee. Provision is also made requiring the Commissioner to determine the expenses as well as the remuneration of the accountant when such a direction is made. Simply because these provisions exist in the Act, it does not mean that the further requirement of compulsory audit in the case of the bigger assessees is an unreasonable restriction on their right under Article 19(1)(g)-The existing provisions are to be resorted to during the course of the assessment, if in the opinion of the assessing authority, a situation arises for making such an order. The result of the compulsory audit is that the audit report is available to the assessing authority along with the return to enable the assessing authority to proceed on that basis. The existing provisions would be available even now in such cases, if any further scrutiny is considered necessary by the assessing authority. The existing provisions and the impugned provisions are not mutually exclusive and they can co-exist."
48. The petitioners had further stated that in any event, the amendments to Section 142(2A) could not be introduced retrospectively and, therefore, could not be applied to assessment years prior to 2014-15. In respect of retrospective application of taxation statutes, the Supreme Court in S.S. Bola v. B.D. Sardana, AIR 1997 SC 3127, held:
"In suitable, cases, giving retrospective effect to such validating law was permissible by legislative exercise of the power; this Court accepted the retrospective validation in fiscal statutes and rarely in other laws relating to procedural facets in the respective legislative Entries in Lists I, II and III of the Seventh Schedule to the Constitution and rarely in areas of divesting vested rights had under the judgment."W.P.(C) 3222/2008 & connected matters Page 44 of 52
49. Therefore, it is clear that in fiscal matters, the Legislature has the ability to amend the law retrospectively. Moreover, Section 142(2A) of the Act does not confer any vested right on the petitioner, which could not be taken away by retrospective amendment. Therefore, even if the amendments to Section 142(2A) were given retrospective effect, the same would be within the powers of the Legislature, as per the law laid down in the aforesaid ruling of the Supreme Court.
The second batch
50. These batch of cases, also included petitions, where the assessees challenge the orders, made under Section 142 (2A) as untenable. The grounds for such orders are varied. A tabular chart, disclosing particulars relating to each such petition, is shown below:
S.No. Party Names W.P. (C) Date of Page No. Grounds for making of reference Impugned u/s 142(2A) Order
1. M/s Sahara 3222/2008 28.12.2007 137-138 1. Many expenses pertaining to India Annexure previous years were included Financial P-10 in the year under review and Corporation no item wise list of Fixed Ltd. Lucknow Assets particulars was vs. submitted. Difficult to thus Commissioner verify quantum of of Income depreciation claimed in tax Tax. Delhi returns.
(Central-I) & 2. Expenses incurred by
Ors. assessee company seemed to
be relating to a sister
concern, or in the nature of
personal/non-business
expenses or prior period
expenses.
3. Expenses under different
heads were transferred to the
company‟s sister concern and
vice versa and no basis of
these transactions could be
traced.
4. Many transactions of the
sister concern were
undertaken by the assessee. It
also maintained the accounts
W.P.(C) 3222/2008 & connected matters Page 45 of 52
of such sister concern but no
proper documentation of said
transactions could be traced.
There seemed to be
substantial intermingling of
accounts.
5. Despite repeated requests,
deposit ledgers were not
produced, and it could not be
ascertained whether full
amount of interest for
relevant year had been
accounted for.
6. It was uncertain that interest
relating to current financial
year has been duly accounted
for in respect of FDR‟s
transferred to sister concern.
7. Details of whether TDS was
deducted and deposited in
respect of interest on deposit
were missing, and assessee
failed to reconcile TDS
claimed in return of income
with corresponding income in
which such TDS was
deducted.
8. In the absence of availability
of depositor ledger, it was not
possible to verify the
company‟s compliance to
provisions under Chapter
XVII-B of IT Act.
2. Sahara India 8157/2009 26.12.2008 228-229 1. Methods of accounting
Financial Annexure followed in respect of broken
Corporation P-16 period interest on securities.
Ltd. Lucknow 2. Application of variable rates (Through Mr. as interest on deposits.
Sushil Gupta, 3. Booking of expenditure
Gen. amount to sister concerns
Manager) vs. through JV‟s making it
Commissioner difficult to decide its
of Income allowability u/s 37 of IT Act.
Tax, Central - 4. Lack of transparency &
I, New Delhi consistency in deduction of
& Anr. TDS on payment of interest
3. M/s Sahara 8160/2009 26.12.2008 244-245 on depositors‟s accounts.
India (Firm), Annexure 5. Booking of expenditure not Lucknow P-13 relating to the previous year.
(Through Mr. 6. Intermingling of accounts J.B. Roy, amount within various sister partner) vs. concerns making it difficult to Commissioner separate mere cash W.P.(C) 3222/2008 & connected matters Page 46 of 52 of Income transactions.
Tax, Central -
I, New Delhi & Anr.
4. M/s. Sahara 14123/2009 24.11.2009 32-33 1. Method of accounting India (Firm), Annexure followed in respect of broken Lucknow P-1 period interest on securities.
(Through Mr. 2. Application of variable rates J.B. Roy, on commission etc. payment.
partner) vs. 3. Lack of transparency and
Commissioner deductions of TDS on
of Income payment of commission etc.
Tax, Delhi 4. Booking of expenditure not
Central - I, relating to previous year.
New Delhi & 5. Lot of intermingling of
Anr. accounts among various
sister concerns. Booking of
transactions through journal
vouchers especially at the
year-end renders the
accounting quite complex as
it is not easy to establish
whether income and
expenditure have been
recognised/ booked as per
accounting norms or as per
convenience.
5. Sahara India 14141/2009 24.11.2009 35-36 1. Method of accounting
Financial Annexure P followed in respect of broken
Corporation -1 period interest on securities.
Ltd. Lucknow 2. Application of variable rates vs. as interest on deposits.
Commissioner 3. Booking of expenditure of
of Income sister concerns through JVs
Tax, Delhi making it difficult to decide
(Central -I), its allowability u/s 37 of IT
New Delhi & Act.
Anr. 4. Lack of transparency &
6. M/s Sahara 886/2011 10.12.2010 36-37 consistency in deduction of
India Annexure TDS on payment of interest
Financial P-1 on depositor‟s account.
Corporation 5. Booking of expenditure not
Ltd. Lucknow relating to previous year.
vs. 6. Intermingling of accounts
Commissioner among various sister
of Income concerns making it difficult to
Tax, (Central separate mere cash
- I) New transactions.
Delhi & ors. 7. Leisure and personal
expenditure deducted in the
books of assessee.
W.P.(C) 3222/2008 & connected matters Page 47 of 52
7-11 M/s Sahara 1009/2011 24.12.2010 35-36 1. Booking of expenditure of India 1010/2011 Annexure sister concerns through JVs Commercial 1011/2011 P-1 making it difficult to decide Corporation 1012/2011 its allowability u/s 37 of the Ltd. Kolkata 1013/2011 IT Act.
vs. 2. Lack of transparency &
Commissioner consistency in the matter of
of Income collection of OFCDs and
Tax, (Central) repayment of principle and
- I, New Delhi interest on OFCDs.
& Ors. 3. Booking of expenditure not
relating to previous years.
4. Intermingling of accounts
among various sister
concerns or other units of the
assessee company making it
difficult to verify the same
separately.
5. Personal and leisure
expenditure debited in the
books of assessee.
12. M/s Sahara 1014/2011 24.12.2010 31-32 1. Booking of expenditure of
India Annexure sister concerns through JVs
Commercial P-1 making it difficult to decide
Corporation its allowability u/s 37 of the
Ltd., Kolkata IT Act.
vs. 2. Lack of transparency &
Commissioner consistency in the matter of
of Income collection of OFCDs and
Tax, (Central) repayment of principle and
- I New Delhi interest on OFCDs.
& Ors. 3. Booking of expenditure not
relating to previous years.
4. Intermingling of accounts
among various sister
concerns or other units of the
assessee company making it
difficult to verify the same
separately.
5. Huge cash expenditure
debited in the books of the
assessee.
13. M/s Sahara 888/2011 06.12.2010/ 33-34 1. Payment of commission by
India (Firm) 07.12.2010 Annexure the Principal on your behalf
Lucknow vs. P-1 without any detail in this
Commissioner regard and in excess of
of Income commission/brokerage
Tax, (Central) payable to the assessee but
- I New Delhi out of receivables o/a
& Ors. reimbursement of expenses.
2. The assessee firm does not
W.P.(C) 3222/2008 & connected matters Page 48 of 52
have any detail in respect of
the so called commission of
payment directly by M/s
SICCL out of reimbursement
accrued to the assessee and
assessee has admittedly
denied of its huge onus in this
regards whereas huge
expenses have been booked
under the „Business
Promotion Expenses‟ on
purchase of T-shirt, suit
lengths, sarees, bags, shawls,
other gift items and payment
by way of prize money etc. to
the commission agents.
3. Lack of transparency &
consistency in deduction on
payment of commission etc.
4. Booking of expenditure not
relating to the previous year.
5. There is a lot of
intermingling of accounts
among various sister
concerns. Booking of
transactions through journal
vouchers especially at the
year-end renders the
accounting quite complex as
it is not easy to establish
whether income and
expenditure have been
recognised/ booked as per
accounting norms or as per
the convenience.
14. Sahara India 3272/2011 21.03.2010/ 46-107 1. Accounts are audited under
Financial 22.03.2010 Annexure various schemes bearing
Corporation P-1 same name and same address
Ltd., Lucknow under different schemes
vs. leading to the conclusion that
Commissioner large amounts of money has
of Income been repaid to the same
Tax, Delhi persons.. No PAN numbers or
(Central) - I depositor ledgers for 1508
New Delhi & branches have been produced
Ors. for examination.
2. There was lack of
transparency & consistency
in deduction of TDS on
payment of interest in
depositor‟s account.
3. Special details with respect to
lapsed deposit accounts, both
W.P.(C) 3222/2008 & connected matters Page 49 of 52
regular and irregular, were
not furnished by the assessee
despite repeated requests for
the same.
4. Needs to be examined
whether the assessee
company has claimed income
from JVs it has entered into
with sister concerns as
exempt from tax.
5. There seems to be
discrepancy in interest
income of the assessee
company which needs to be
examined properly.
6. Expenses for personal and
leisure trips, and gifts made
to staff of assessee company
are deducted from the books
of accounts which needs to be
examined.
7. Proper accounting of rebate
expenses claimed by the
assessee is necessary to
check whether they have been
correctly accounted for in the
books of the assessee
company.
8. Assessee company is debiting
a 3/4th proportionate
expenditure on advertisement
to other Group concerns and
only 10% of expenditure on
advertisement is booked in
assessee‟s books. Thus, the
veracity of these transactions
need to be examined.
9. Assessee has leased out its
various assets to its sister
concern and these
agreements need to be
properly examined to check
income has been properly
accounted for in the books of
the assessee.
15. Patanjali 2591/2013 30.03.2013 51 1. The assessee submitted
Ayurved Ltd. Annexure A details of imprest accounts in
vs. Deputy the names of various persons,
Commissioner but could not justify
of Income Tax maintenance of such
accounts. It is to be noticed
that in the return of income
assessee company has
W.P.(C) 3222/2008 & connected matters Page 50 of 52
mentioned system of
accounting followed as cash
whereas in the Tax Audit
Report it is deemed to be
mercantile.
2. In light of the filing of revised
statement of cash flow certain
discrepancies arose in the
whole of the transactions of
cash and need to be
examined.
3. 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.
4. The assessee failed to
produce books of accounts
and other ledger accounts to
the satisfaction of the
authority concerned so as to
determine true income of
assessee company for AT
2010-11.
5. To examine genuineness of
claim under S. 80IC for the
first time during AY 2010-11,
it is imperative to examine all
facts relating to
manufacturing activities of
the assessee since its
inception.
51. In all the above 15 writ petitions, detailed hearing and arguments were not addressed by parties about the individual merits of the challenge to the orders. In the circumstances, the court is of the view that it would not be appropriate or fair to pronounce finally on the validity of the reference to the special auditors, in these cases. Accordingly, these matters are to be heard and decided separately. They are directed to be listed before the concerned roster bench, dealing with income tax matters, for the purpose, on 11.09.2017.
W.P.(C) 3222/2008 & connected matters Page 51 of 5252. So far as the other petitions are concerned, i.e those which challenge the validity of Section 142 (2A) of the Act, the court is of the opinion that there is no merit in the challenge. The challenge to the individual orders (of reference to the special auditors) is based essentially on the ground that they are premised on the new grounds brought in by the impugned amendments. To that extent, the challenge to the impugned orders in these petitions in turn was dependent on the challenge to the constitutionality of the amendment. The writ petitions [W.P.(C) 2879/2014, , 4408/2015, 8841/2015, 9464/2015, 8877/2015, 8878/2015, 9138/2015, 9139/2015 and 9140-9152/2015], therefore, have to fail and are dismissed as unmerited.
S. RAVINDRA BHAT (JUDGE) DEEPA SHARMA (JUDGE) AUGUST 23, 2017 W.P.(C) 3222/2008 & connected matters Page 52 of 52