By TIOL News Service

NEW DELHI, DECEMBER 12, 2018: The issue before the High Court was whether special audit is warranted in cases involving massive tax amount & issues such as eligibility for benefit u/s 80IC & revision of returns, which cannot be treated lightly without in-depth analysis. YES is the answer. The High Court also held that special audit is sustainable where the AO successfully highlights features in the assessee's books of account & returns, which warrant special audit.

Facts of the case

The assessee is a leading manufacturer and seller of Ayurvedic and herbal products as well as food items. During the relevant AY, the Revenue proposed to conduct special audit u/s 142(2A). The assessee contested such proposal on grounds that there were no infirmities in its accounts & that the reasons for conducting special audit had already been explained during original assessment. Nonetheless, the Revenue issued a second notice proposing special audit, citing reasons identical to those in the first notice. The second notice was followed by an order directing special audit. Hence the present writ by the assessee.

In writ, the High Court held that,

++ in the present case, the AO opined that there is complexity in the accounts of the assessee. Reference was amde to three segments or sources of revenue of the assessee and it was held that it is required to identify the method and the relevant accounting standard applicable for recognition of income from these revenues and also to ascertain the correctness of the income recognized. The order passed u/s 142 (2A) on 28.03.2013 contains a detailed discussion as to the complexity of the accounts. The profit and loss account, balance sheet and the computation of the income were before the AO. It cannot be disputed that the profit and loss account and the balance sheet fit the description of "accounts". The complexity arising out of such accounts is the difficulty in allocating the expenses incurred by the assessee given the manner in which it chose to supply information to the AO, during the inquiry, in a piece-meal fashion. Nor is the court persuaded to agree with the Revenue that AS-3 did not apply and that the accounting practise adopted was correct or that it foreclosed inquiry. The linchpin of the assessee's argument is that the AO's indolence or inability to exert himself to inquire diligently cannot result in a special audit. Undoubtedly, the AO has a duty to apply mind and not fall back upon the provision of special audit in all routine cases. However, when the AO does feel that information is not forthcoming in a timely manner (as appears to have occurred in this case) the AO's choices are limited – to let go of the stage of inquiry, and complete the assessment, or, disallow what is considered appropriate. The AO quite correctly felt that the latter course would not be appropriate and therefore, ordered special audit, which was quite reasonable, especially in regard to the imprest account for which details of expenses incurred had not been furnished. That amount was sizeable. Also, with respect to the benefit of Section 80IC and the revision of returns, was an aspect which could not have been given a light treatment, but needed inquiry, if the AO felt it to be so;

++ therefore, far from the case showing non-application of mind, the AO has carefully outlined what were the salient aspects in the accounts and returns of the assessee that needed to be looked into and made the order directing special audit. The assessee has not alleged any mala fide . In view of these reasons, the court is of the opinion that the writ petition has no merit. Consequently, the interim orders which operated for these last 5 years are vacated. The assessee is directed to co-operate with the Special Auditor.

(See 2018-TIOL-2581-HC-DEL-IT)