By TIOL News Service

NEW DELHI, MAY 12, 2017: THE ISSUE BEFORE THE COURT IS - Whether 'suo motu' extension of time period by AO for submission of audit report, without having any such authority as per existing provisions of Section 142(2C), is invalid. YES is the verdict.

Facts of the case:

The assessee, a subsidiary of M/s. Jindal Export and Import Private Limited, is dealing primarily in Bullion (gold and silver) having operation in various states. For the AY in question, the Assessee filed its return showing total income at Rs. 2,04,84,373 from 'business and profession' and 'income from house property'. The return was picked up for scrutiny and notice was issued u/s 143(2). By an order, the AO directed the Assessee to get its accounts audited u/s 142(2A) within a period of 35 days. Thereafter, several extensions were granted by the AO, as a result of which, the special audit report was required to be furnished to the AO. However the AO framed the assessment ignoring the recommendations in the report of the Special Auditor and certain additions were made to the taxable income. On appeal, the CIT(A) held the assessment to be barred by limitation in terms of Section 153(1). On further appeal, the ITAT concluded that CIT(A) was justified in holding that the assessment was barred by limitation. The ITAT also held that the proviso to sub-section 2C to Section 142 was prospective. There was no application by the Assessee for extension of time for submission of the audit report. Therefore, the order of the AO purportedly u/s 142(2C) granting extension, was not valid.

On appeal, the HC held that,

++ it is seen that Section 142 (2A) anticipates timely submission of the report of the Special Auditor. The Auditor who is to conduct special audit in terms of Section 142 (2) is not an auditor of the choice of the Assessee. The auditor is nominated by the Revenue and his work is not controlled by the Assessee. Where the special audit report is unable to be furnished within the time stipulated by the AO, extension of time can be granted by the AO on an application made by the Assessee. The extension has to be for good and sufficient reasons. From 1st April 2008 a proviso to Section 142 (2C) of the Act was inserted to provide that the AO may 'suo motu' extend the period provided that the aggregate period originally fixed and extended period would not exceed 180 days from the date on which a direction was first issued to the Assessee for submission of report of the Special Auditor. It is an admitted position that in the present case all the extensions granted, except the last one, were on the application of the Assessee. The last date for submission of the report in terms of these extensions was 7th July 2006. There was no application by the Assessee after 7th July 2006 for extension of time. On the letter dated 12th July 2006 of the Auditor, the AO made an endorsement dated 13th July 2006 extending the time for submission upto the date on which the auditor's report was actually received i.e. 17th July 2006. It was explained by this Court in Commissioner of Income Tax v. Bishan Saroop Ram Kishan Agro (P) Limited., that insertion of the expression 'suo motu' in the proviso to Section 142 (2C) was only with effect 1st April 2008. Therefore, in the present case, when the AO on his own extended the period of submission of audit report to 17th July 2006, he had no power to do so u/s 142(2C) of the Act. Consequently, the Court finds no error in the orders of both the CIT (A) as well as the ITAT holding that the submission of audit report on 17th July 2006 was barred by limitation;

++ it was contended by Revenue's counsel that the time taken in submission of the audit report i.e., the period between 7th July 2006 and 17th July 2006 should stand excluded. The counsel referred to the decision of the Madhya Pradesh High Court in CIT v. Dhariwal Sales Enterprises and the decision of this Court in VLS Finance Limited v. Commissioner of Income Tax - 2016-TIOL-56-SC-IT. It is pointed out that u/s 153(1) of the Act, the period of limitation for making an order of assessment to be extended during which the said proceeding stands excluded for the purpose of computing the period of limitation for making an assessment order. The Court is unable to accept any of the above submissions. The Explanation-1 to clause (iii) of Section 153 (1) as it stood at the relevant point in time, reads as: the period of commencing from the date on which the Assessing Officer directs the Assessee to get his accounts audited under sub-section (2A) of Section 142 and (a) ending with the last date on which the Assessee is required to furnish a report of such audit under that sub-section, or (b) where such direction is challenged before a court, ending with the date on which the order setting aside such direction is received by the Principal Commissioner or Commissioner, or" shall stand excluded. In the present case, the last date on which the Assessee was required to furnish the report was 7th July 2006 in terms of Section 153 (1). The time for passing the assessment order expired on 6th September 2006 whereas it was passed only on 14th September 2006. The decision in Dhariwal Sales Enterprises concerns the execution of time spent "for obtaining a copy of the report". Here there was no such occasion for granting of extension of time by the AO. In fact, the AO had no such power to do so. There was no question of excluding the time taken for obtaining a report. On the other hand the decision of this Court in CIT v. Bishan Saroop Ram Kishan Agro (P) Limited squarely covers the issue and is in favour of the Assessee. In the said decision, the Court took note of the Circular dated 27th March 2009 of the CBDT regarding prospective application for amendment to the proviso to Section 142 (2C) of the Act which gave the AO 'suo motu' power to extend time for furnishing the audit report. For all the aforementioned reasons, the Court finds no error having been committed by the CIT (A) or the ITAT in holding that the assessment order in the present is barred by limitation.

(See 2017-TIOL-889-HC-DEL-IT)