Cama Hotels Ltd. v. Samir Vakil Or His Successor Dy. CIT (OSD) & 1 other(s)
[Citation -2019-LL-0712-128]

Citation 2019-LL-0712-128
Appellant Name Cama Hotels Ltd.
Respondent Name Samir Vakil Or His Successor Dy. CIT (OSD) & 1 other(s)
Court HIGH COURT OF GUJARAT AT AHMEDABAD
Relevant Act Income-tax
Date of Order 12/07/2019
Assessment Year 2004-05
Judgment View Judgment
Keyword Tags application of mind • interest of revenue • books of accounts • investigation • special audit • satisfaction • audit report • complexity of account
Bot Summary: Further, in the case of flight catering division, the assessee did not furnish separate accounts and these are clubbed with accounts of H.O. However, on perusal of the PL Account of Cama Hotels, Khanpur, it can be seen that the assessee has not separately shown income received from Indian Air Lines to which it is providing catering services. A detailed review of the said provision was undertaken and elucidated by the Supreme Court in Sahara India v. CIT,300 ITR 403/169 Taxman 328 and it was observed that the said provision could be invoked if the Assessing Officer forms an opinion; on the nature and complexity of the accounts of the assessee and it was in the interest of the Revenue to get the accounts audited by an Accountant. The object being the special audit should be directed, if it assists and succours, the Assessing Officer in framing correct and proper assessment based on the accounts maintained by the assessee, i.e., the Assessing Officer must reach a finding that the accounts of the assessee were complex and in order to protect the interest of the Revenue, recourse to the said provision should be made. The question of complexity of accounts has to be judged applying the yardstick or test; whether the accounts would be complex and difficult to understand to a normal assessing officer who has basic understanding of accounts etc. The amended section has been widened to include volume of accounts, doubts about correctness of accounts, multiplicity of transactions in the accounts or specialised nature of business activity of an assessee. Even assessee has not shown separate purchase of Liquor, though he is running leading liquor shop in city of Ahmedabad. 8.4 As far as accounts of Flight Catering division of the assessee is concerned the assessee submitted that no separate accounts are mentioned and they are clubbed with the accounts of H.O. However, on perusal of the PL A/c. All the above facts shows that the assessee is not in a position to submit detailed Profit and Loss account as called for and the system of maintenance of accounts of the assessee is so complex that the assessee is not in a position Page 32 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT to submit details of various heads of income and expenditure in a understandable and satisfactory manner.


IN HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 13445 of 2007 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/- and HONOURABLE MR.JUSTICE A.C. RAO Sd/- 1 Whether Reporters of Local Papers may be allowed YES to see judgment ? 2 To be referred to Reporter or not ? YES 3 Whether their Lordships wish to see fair copy NO of judgment ? 4 Whether this case involves substantial question NO of law as to interpretation of Constitution of India or any order made thereunder ? CAMA HOTELS LTD. Versus SAMIR VAKIL OR HIS SUCCESSOR DY. CIT (OSD) & 1 other(s) Appearance: MR SN DIVATIA for Petitioner(s)No. 1 MRS MAUNA M BHATT for Respondent(s)No. 1,2 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO Date: 12/07/2019 ORAL JUDGMENT (PER: HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. By this writ-application under Article 226 of Constitution of India, writ-applicant has prayed for following reliefs : Page 1 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT (a) to issue writ of certiorari or in nature of certiorari or any other appropriate writ, orders or directions quashing and setting aside impugned order dated 11.5.2007 (Exhibit-A) passed by Respondent no.1. (b) to issue writ of certiorari or in nature of certiorari or any other appropriate writ, orders or directions restraining Respondents from requiring Petitioner to produce books of accounts and other documents to special auditor appointed under impugned order for purpose of carrying out special audit and any other action or order in pursuance to or in furtherance to impugned order and notice of demand. (c) to call for records of proceedings, look into them and be pleased to issue writ of certiorari or any other appropriate writ, order or direction quashing impugned order (Exhibit-A) as bad in law. (d) Pending hearing and final disposal of this Petition, to maintain status quo in matter and ask Respondents and its subordinates not to take any action or to do anything in furtherance and pursuance of impugned orders. (e) To allow this Petition with cost. (f) To pass any further or other orders as Hon'ble Court may deem proper in interest of justice and in circumstances of case. Page 2 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 2. On face of cause-title, this writ-application could be said to be not maintainable. This writ-application has been preferred by Cama Hotels Limited in its capacity as public limited company duly incorporated under Companies Act, 1956. However, without going into any other technicality, we thought fit to examine matter on merits. 3. Article 226 of Constitution of India confers extraordinary jurisdiction on High Court to issue high prerogative writs for enforcement of fundamental rights or for any other purpose. legal position is that juristic person such as company is not entitled to any of freedoms guaranteed by Constitution of India. company is sole petitioner before us. It is company incorporated under Companies Act. fundamental rights as enshrined under Constitution of India are guaranteed to citizen. writ- applicant, not being citizen, is not entitled to complain of breach or violation of any of its fundamental rights (see Divisional Forest Officer v. Bishwanath Tea Company Limited, AIR 1981 SC 1368) 4. writ-applicant is public limited company duly incorporated under Companies Act, 1956. company is running hotel in name 'Cama Hotels' at Khanpur, Ahmedabad, and resort in name 'Cama Rajputana Club Resorts' at Mount Abu. According to company, it is also serving flight catering in Indian Airlines at Ahmedabad Airport. Page 3 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 5. case of writ-applicant was selected for scrutiny, and in course of assessment proceedings, respondent no.1, vide questionnaire dated 7th June 2006, called upon writ-applicant to furnish separate profit & loss account and balance-sheet for Assessment Year 2004-05 in respect of aforesaid three business activities. 6. order came to be passed by Deputy Commissioner of Income Tax, OSD Range-1, Ahmedabad, dated 18th December 2006 under Section 142(2A) of Income Tax Act, 1961. said order was made subject matter of challenge by writ- applicant by filing Special Civil Application No.2951 of 2007. said writ-application came to be disposed of by this Court vide order dated 17th April 2007 in following terms : In this petition, petitioner has challenged order dated 18.12.2006 passed by Dy. Commissioner of Income Tax (OSD) Range-1, Ahmedabad under Section 142(2A) of Income-Tax Act, 1961 (for short `the Act'). case of petitioner is that show cause notice for appointment of Special Auditor to audit books of accounts of assessee was issued on 12.12.2006 with direction to file reply to show cause notice by 15.12.2006. On 14.12.2006, assessee prayed that since it is too short time to file reply to show cause notice, reasonable time be given to assessee. Therefore, period was extended to 18.12.2006. On 18.12.2006, reply to show cause notice was filed by assessee. On same day, order under Section 142(2A) of Act was passed by Dy. Commissioner of Income Tax (OSD) Page 4 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT Range-1, Ahmedabad, directing for appointment of Special Auditor to audit books of accounts of assessee and on same day, order of Dy. Commissioner of Income Tax (OSD) Range-1, Ahmedabad has been approved by Commissioner of Income-Tax. case of petitioner is that neither reasonable opportunity was given to hear assessee before order was passed on 18.12.2006 nor reply of assessee has been considered. In order dated 18.12.2006 passed by Dy. Commissioner of Income Tax (OSD) Range-1, Ahmedabad under Section 142(2A) of Act, there was no reference of reply filed by assessee. Even it is not clear whether order was passed even before filing of reply on that date. These facts are not controverted by learned counsel for Revenue. Considering these facts, which are not in dispute, we set aside order dated 18.12.2006 passed by Dy. Commissioner of Income Tax (OSD) Range-1, Ahmedabad. However, liberty is given to Dy. Commissioner of Income Tax (OSD) Range-1, Ahmedabad, to pass fresh and reasoned order after considering reply filed by assessee and after giving reasonable opportunity of being heard to assessee. Page 5 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT Petition stands disposed of with aforesaid directions. 7. Later, writ-applicant was served with impugned order dated 11th May 2007 passed by respondent no.1, directing for special audit under Section 142(2A) of Act on or before 12th June 2007. In such circumstances, writ- applicant came before this Court with present writ- application with prayer that order of special audit is not justified. 8. On 24th May 2007, following order was passed : Heard, Mr.S.N.Divatia, learned advocate for petitioner. Notice returnable on 15th June, 2007. Ad-Interim relief in terms of para 10(d) till then. Direct service is permitted. 9. Later, petition came to be admitted and ad-interim relief which was earlier granted came to be confirmed. 10. Mr.Divatia, learned counsel appearing for writ- applicant, vehemently submitted that impugned order is patently illegal and erroneous in law. He submitted that respondent no.1 had issued show-cause notice dated 12th December 2006 proposing to refer case for special audit under Section 142(2A) of Act solely on ground that writ-applicant had failed to furnish separate profit & loss account and balance-sheet for Cama Rajputana Club Resorts at Mount Abu, Cama Hotels Limited at Ahmedabad and flight catering division. He submitted that in impugned order, Page 6 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT respondent no.1 has made altogether different case than one which was put up in show-cause notice dated 12th December 2006. 11. According to Mr.Divatia, respondent no.1 should have called upon writ-applicant to offer its explanation before reaching to conclusion that accounts maintained by writ-applicant were complex in nature. Mr.Divatia submitted that any direction issued under Section 142(2A) of Act for special audit of accounts of assessee is not administrative in nature, but it is quasi-judicial order and principles of natural justice are required to be complied with. 12. According to Mr.Divatia, impugned order of special audit passed by respondent no.1 in exercise of his powers under Section 142(2A) of Act could be termed as illegal inasmuch as conditions precedent laid under provisions of law are not fulfilled. Those conditions are as under : (a) Respondent no.1 has failed to establish that nature and complexity of accounts require Special Audit. (b) approving authority, i.e. Respondent no.2 is required to go through material on record and explanation given by assessee before granting approval. 13. Mr.Divatia submitted that for purpose of invoking provisions of Section 142(2A) of Act, following three conditions are required to be fulfilled : Page 7 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT (i) nature of accounts (ii) complexity of accounts, and (iii) interest of revenue. 14. According to Mr.Divatia, none of aforesaid three conditions could be said to have been fulfilled in present case. Mr.Divatia submitted that expression 'complexity' would mean, state or quality of being integrate or complex or that it is difficult to understand. Mere difficulty in understanding is not sufficient to come to conclusion that accounts are complex in nature. According to Mr.Divatia, such special audit causes lot of inconvenience to assessees. According to Mr.Divatia, respondent no.1 has tried to justify special audit on following grounds : (a) Head-wise income earned from room rent and food, beverages served in restaurant were not furnished. (b) In absence of detailed break-up of purchases it was not possible to verify purchases made for different requirements of hotel. (c) Neither separate account maintained for flight catering division nor income received from Indian Airlines shown. (d) perusal of P&L Account of Cama Rajputhana, Mt. Abu and Cama Hotels, Khanpur, shows that basic expenses like telephone, building repairs etc., not shown in Cama Hotels, Khanpur and thereby mixed up accounts and made complicated. Page 8 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT (e) Improper maintenance of books of account is indicated by failure to get books of account in time for last couple of years and penalty levied. 15. Mr.Divatia submitted that grounds assigned as referred to above are just surmises and conjectures without referring to any concrete material on record. 16. In such circumstances referred to above, Mr.Divatia prays that there being merit in this writ-application, same be allowed and original order under Section 142(2A) of Act be quashed. 17. On other hand, this writ-application has been vehemently opposed by Mr.M.R.Bhatt, learned senior standing counsel appearing for Revenue. According to Mr.Bhatt, no error, not to speak of any error of law, could be said to have been committed by respondent no.1 in passing impugned order. Mr.Bhatt submitted that impugned order under Section 142(2A) of Act has been passed after complying with principles of natural justice and after forming opinion about complexity involved in assessment of writ-applicant. Mr.Bhatt submitted that before taking decision to direct special audit in case of writ- applicant, ample opportunities were given to writ-applicant to prepare and submit separate profit & loss account and balance-sheet for his three units. 18. Mr.Bhatt pointed out from affidavit-in-reply filed on behalf of Revenue that almost six months were granted to Page 9 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT assessee to furnish separate account as required. Mr.Bhatt, learned standing counsel appearing for Revenue, seeks to rely on following averments made in reply on oath : (a) Separate P&L Accounts do not show clear picture of business income and expenditure unit wise but presents complex accounts which cannot be analysed logically. It is admitted fact that for any hotel principal head of income is room rent and food & beverages sold in restaurant. It is noticed that assessee has not furnished headwise income earned by it from room rent and food & beverages served in restaurant. In absence of this break up in P&L Account, Assessing Officer is not able to ascertain true picture of business of assessee. (b) assessee did not furnish clear picture of purchases in case of Cama Hotels, Khanpur. In its P&L Account, assessee has mixed up all purchases under head of purchases . In absence of specific details of purchases of each item, it is not possible for Assessing Officer to verify facts and to arrive at logical conclusion. Further, in case of flight catering division, assessee did not furnish separate accounts and these are clubbed with accounts of H.O. However, on perusal of P&L Account of Cama Hotels, Khanpur, it can be seen that assessee has not separately shown income received from Indian Air Lines to which it is providing catering services. At same time, assessee has submitted that raw material is supplied by H.O. to flight catering division. Since assessee has clubbed all purchases under one head, it is not possible to verify as to which purchases are for Page 10 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT flight catering division and what is amount of raw materials supplied to Flight Catering Division. (c) In case of Cama Hotels, Khanpur, assessee has not shown basic expenses in its P&L Account, like telephone expenses, building repairs & maintenance, conveyance expenses, swimming pool expenses, security expenses, garden expenses, bank charges, postage etc. It is possible that assessee might have clubbed all these expenses in some of heads appearing in P&L Account. Therefore, these accounts have clearly become complex and Assessing Officer is not in position to ascertain these facts to arrive at true and logical profit/loss of Unit. Bases on these facts on opinion was formed that assessee has failed to furnish clear picture of business of this unit. (d) In view of above facts and in circumstances, interest of revenue will be adversely affected if special audit is not done. (e) Moreover, it is noticed that for last couple of years, assessee had failed to submit audit report in time. This fact indicates improper maintenance of books of account of assessee company. 19. Mr.Bhatt further submitted that approval was also granted under letter dated 11th May 2007 by Commissioner of Income Tax-I for special audit under Section 142(2A) of Act. Mr.Bhatt invited attention of this Court to permission granted by Commissioner for special audit, which is at page-237 of paper-book. Page 11 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 20. Mr.Bhatt submitted that Assessing Officer, after due application of mind to various aspects like nature of accounts, method of maintaining accounts, entries recorded, etc., reached to conclusion that accounts were complex and it was in interest of Revenue that special audit under Section 142(2A) of Act should be directed. According to Mr.Bhatt, such decision may not be disturbed by this Court in exercise of its extraordinary jurisdiction under Article 226 of Constitution of India. 21. In aforesaid circumstances, Mr.Bhatt prays that there being no merit in present writ-application, same be rejected. 22. Having heard learned counsel appearing for parties and having gone through materials on record, only question that falls for our consideration is, whether impugned order of special audit deserves to be quashed and set- aside. 23. At outset, it is required to be noted that impugned order of special audit has been passed by Assessing Officer in exercise of powers under Section 142(2A) of Income Tax Act and, therefore, while considering legality and validity of impugned order passed under Section 142(2A) of Act, Section 142 of Act (including Section 142(2A) of Act) is required to be referred to and considered, which reads as under : 142. Inquiry before assessment. - (1) For purpose of making assessment under this Act, Assessing Officer Page 12 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT may serve on any person who has made return under section 115WD or section 139 or in whose case time allowed under sub-section (1) of section 139 for furnishing return has expired notice requiring him, on date to be therein specified, (i) where such person has not made return within time allowed under sub-section (1) of section 139 or before end of relevant assessment year], to furnish return of his income or income of any other person in respect of which he is assessable under this Act, in prescribed form and verified in prescribed manner and setting forth such other particulars as may be prescribed, or : Provided that where any notice has been served under this sub-section for purposes of this clause after end of relevant assessment year commencing on or after 1st day of April, 1990 to person who has not made return within time allowed under sub-section (1) of section 139 or before end of relevant assessment year, any such notice issued to him shall be deemed to have been served in accordance with provisions of this sub-section, (ii) to produce, or cause to be produced, such accounts or documents as Assessing Officer may require, or (iii) to furnish in writing and verified in prescribed manner information in such form and on such points or matters (including statement of all assets and liabilities Page 13 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT of assessee, whether included in accounts or not) as Assessing Officer may require : Provided that (a) previous approval of Joint Commissioner shall be obtained before requiring assessee to furnish statement of all assets and liabilities not included in accounts ; (b) Assessing Officer shall not require production of any accounts relating to period more than three years prior to previous year. (2) For purpose of obtaining full information in respect of income or loss of any person, Assessing Officer may make such inquiry as he considers necessary. (2A) If, at any stage of proceedings before him, Assessing Officer, having regard to nature and complexity of accounts, volume of accounts, doubts about correctness of accounts, multiplicity of transactions in accounts or specialised nature of business activity of assessee, and interests of revenue, is of opinion that it is necessary so to do, he may, with previous approval of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct assessee to get accounts audited by accountant, as defined in Explanation below sub-section (2) of section 288, nominated by Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner Page 14 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT in this behalf and to furnish report of such audit in prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as Assessing Officer may require : Provided that Assessing Officer shall not direct assessee to get accounts so audited unless assessee has been given reasonable opportunity of being heard. (2B) provisions of sub-section (2A) shall have effect notwithstanding that accounts of assessee have been audited under any other law for time being in force or otherwise. (2C) Every report under sub-section (2A) shall be furnished by assessee to Assessing Officer within such period as may be specified by Assessing Officer : Provided that Assessing Officer may, suo motu, or on application made in this behalf by assessee and for any good and sufficient reason, extend said period by such further period or periods as he thinks fit ; so, however, that aggregate of period originally fixed and period or periods so extended shall not, in any case, exceed one hundred and eighty days from date on which direction under sub-section (2A) is received by assessee. (2D) expenses of, and incidental to, any audit under sub-section (2A) (including remuneration of Page 15 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT accountant) shall be determined by Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner (which determination shall be final) and paid by assessee and in default of such payment, shall be recoverable from assessee in manner provided in Chapter XVII-D for recovery of arrears of tax : Provided that where any direction for audit under sub- section (2A) is issued by Assessing Officer on or after 1st day of June, 2007, expenses of, and incidental to, such audit (including remuneration of Accountant) shall be determined by Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with such guidelines as may be prescribed and expenses so determined shall be paid by Central Government. (3) assessee shall, except where assessment is made under section 144, be given opportunity of being heard in respect of any material gathered on basis of any inquiry under sub-section (2) or any audit under sub- section (2A) and proposed to be utilised for purposes of assessment. (4) provisions of this section as they stood immediately before their amendment by Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for assessment year commencing on 1st day of April, 1988, or any earlier assessment year and references in this section to Page 16 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT other provisions of this Act shall be construed as references to those provisions as for time being in force and applicable to relevant assessment year." 24. Section 142 has been amended by adding sub-sections (2A), (2B), (20) and (2D) by Taxation Laws (Amendment) Act, 1975. It has come into force with effect from 1.4.1976. Under sub-section (2A), IT0 has been empowered to direct assessee in case where nature and complexity of accounts and interests of revenue so require, to get his accounts audited by Chartered Accountant and furnish report of such audit in prescribed manner. Such direction can be issued only with prior approval of Commissioner. Chartered Accountant, for purposes of conducting special audit, is also to be nominated by Commissioner. expenses of and incidental to, including remuneration of special auditor, must be paid, by assessee. report of such audit has to be submitted in prescribed form duly signed and verified by such auditor. 25. Sub-section (2B) of Section 142 provides that special audit could be directed even though accounts of assessee have already been audited in accordance with law. 26. Under sub-section (3) of Section 142, assessee is entitled to opportunity of being heard in respect of material collected under special audit, if it is to be relied upon for assessment. Page 17 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 27. exercise of power to direct special audit depends upon satisfaction of Income Tax Officer with added approval of Commissioner. Both must be satisfied that accounts of assessee are of complex nature and in interests of revenue accounts should be audited by Special Auditor. Special Auditor is also auditor like company's auditor, but he has to be nominated by Commissioner but not by company. accounts are again to be audited at cost of company. 28. This is substance of statutory provisions. It is true that power thereunder cannot be lightly exercised. satisfaction of authorities should not be subjective satisfaction. It would be based on objective assessment regard being had to nature of accounts. nature of accounts must indeed be of complex nature. That is primary requirement for directing special audit. But word 'complexity' used in sub-section (2A) is nebulous word. Its dictionary meaning is: state of quality of being intricate or complex 'or' that is difficult to understand. It is equally true that, 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. Sometime, what appears to be complex on face of it, may not be really so if one tries to understand it carefully. Therefore, special audit should not be directed at cursory look at accounts. There should be honest attempt to understand accounts of assessee. Page 18 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 29. Section 142(2A) has been examined in several decisions of Supreme Court and this Court. true purport and scope of Section 142(2A) of Act has been succinctly explained by Justice Sanjiv Khanna (as His Lordship then was) in case of DLF Ltd. v. Additional Commissioner of Income-Tax, (2014)47 taxmann.com 159 (Delhi). detailed review of said provision was undertaken and elucidated by Supreme Court in Sahara India (Firm) v. CIT, (2008)300 ITR 403/169 Taxman 328 and it was observed that said provision could be invoked if Assessing Officer forms opinion; (i) on nature and complexity of accounts of assessee and (ii) it was in interest of Revenue to get accounts audited by Accountant. two requirements were conjunct and not disjunct and these were essential pre-requisites. object being special audit should be directed, if it assists and succours, Assessing Officer in framing correct and proper assessment based on accounts maintained by assessee, i.e., Assessing Officer must reach finding that accounts of assessee were complex and in order to protect interest of Revenue, recourse to said provision should be made. expression or word 'complexity' it was observed refers to state of quality of being intricate or difficult to understand but Supreme Court observed that what would be complex to one, might be simple to another and, therefore, Assessing Officer must make genuine attempt to understand accounts, appreciate entries, in event of doubt, seek explanation and then form required opinion based upon objective criteria and not purely on basis of subjective satisfaction. provision did not entitle Assessing Officer to pass buck to Special Auditor as it was Assessing Page 19 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT Officer's responsibility to scrutinise accounts. However, Supreme Court rejected contention that special audit need not be directed because audit had been conducted under Section 44AB, inter alia, observing that two provisions had altogether different connotations and implications. Unlike compulsory audit under Section 44AB, special audit was not limited to mere production of books or vouchers and verification thereof by Auditor but involved submission of explanations and clarifications, which might be required by Special Auditor on various issues with relevant data, documents etc. Special audit was more or less in nature of investigation and in some cases might even turn out to be stigmatic. 30. In Delhi Development Authority v. Union of India, (2013) 350 ITR 432/214 Taxman 130/(2012) 25 taxmann.com 234 (Delhi), it was observed that detailed scrutiny of large number of entries by itself on standalone basis might not amount to or reflect complexity of accounts. Every Assessing Officer was required to scrutinise entries and verify them but this does not require services of Special Auditor to undertake said exercise. Section 142(2A) was not provision which enabled Assessing Officer to delegate his powers and functions which he could perform, to Special Auditor. provision had been enacted to enable Assessing Officer to take help of specialist, who understood accounts and accountancy practices when accounts were complex and Assessing Officer affirms that he could not understand and comprehend them fully till he took said help and assistance. Interest of Revenue was another aspect, which had to be taken into account. genuine attempt to understand accounts and Page 20 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT entries must be made and only when questions were raised with regard to accounts and entries and when explanation offered was unsatisfactory or verification was not possible without help and assistance of Special Auditor, action under Section 142(2A) was required. 31. At this stage, it would be important to notice earlier decision of Supreme Court, Rajesh Kumar v. Dy. CIT, (2006) 287 ITR 91/157 Taxman 168, wherein it has been observed that order under Section 142(2A) does entail civil consequences and not administrative, view which was again reiterated in Sahara India (Firm) (supra). three factors to be kept in mind by authorities were, (i) nature of accounts, (ii) complexity of accounts, and (iii) interest of revenue and opinion on said aspects must be formed. Special audit should not be ordered for underlined purpose which was not bonafide. It should not be ordered and approved mechanically and certainly not for unauthorised purpose of extension of limitation to complete assessment. petitioner in support of their contentions have referred to decisions of Calcutta High Court in Bata India Ltd. v. CIT, (2002) 257 ITR 622/125 Taxman 808, West Bengal State Co-operative Bank Ltd. v. Jt. CIT, (2004) 267 ITR 345/138 Taxman 238 (Cal.) and decision of Kerala High Court in Muthoottu Mini Kuries v. Dy. CIT, (2001) 250 ITR 455/115 Taxman 216 (Ker.). In these decisions, it was held that Assessing Officer should normally have workable skill and idea of accounting because of nature of duty entrusted to them. Assessing Officer was not layman or one with no experience in dealing with accounts. He was supposed to be acquainted with method of accounting and with comprehensive Page 21 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT knowledge with regard to matters required to be examined. 32. Aforesaid rulings, when appraised and reflected, state that while examining question of complexity in accounts, we have to apply test of 'reasonable man' by replacing word and qualities of reasonable man, with word and qualities of reasonably competent Assessing Officer. question of complexity of accounts has to be judged applying yardstick or test; whether accounts would be complex and difficult to understand to normal assessing officer who has basic understanding of accounts etc., without aid, assistance and help of Special Auditor. Thus due regard has to be given to nature and character of transactions, method of accounting, whether actuarial were adopted for making entries, basis and effect thereof, etc., though mere volume of entries might not be justification by themselves as volume and complexity are somewhat different. Accounts should be intricate and difficult to understand. Every scrutiny assessment entails investigation and verification of books of accounts, genuineness of transactions or entries reflected in books, computation of income etc. It is exercise which demands expertise and degree of skill to understand accounts and decipher whether true and full income has been disclosed; whether there has been jugglery in accounts or camouflage has been adopted. No undesirable assumptions should be made and return filed is presumed to be correct, but deep and in-depth scrutiny depending upon facts may be warranted. Section 142(2A) is enabling provision to help and assist Assessing Officer to complete scrutiny assessment with help of assistance of accountant. Page 22 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 33. There has been substantial expansion of scope and ambit of Special Audit under Section 142(2A) of Act with effect from 1st June 2013. amended section has been widened to include volume of accounts, doubts about correctness of accounts, multiplicity of transactions in accounts or specialised nature of business activity of assessee. These amendments by Finance Act, 2013, with effect from 1st June 2013, substitute words 'nature and complexity of accounts of assessee'. We are not concerned with said amendment in present case as impugned order in question directing special audit was passed on 11th May 2007 i.e. before amendments became effective. We are, therefore, primarily concerned with whether or not keeping in view nature and complexity of accounts and interest of Revenue direction for special audit is justified for reasons set out in order dated 11th May 2007. 34. powers under Section 142(2A) of Act have to be exercised in terms of legislative provisions. object and purpose behind legislation is to facilitate investigation and proper determination of tax liability. importance and relevancy of legislation cannot be underestimated and it is power available with Assessing Officer to aid and assist him. accounts should be accurate and provide real time record of financial transactions of assessee. preparation of accounts is work of Accountant on payrolls or employed by assessee. In order to ensure reliability and accuracy, enterprises resort to internal audit and external audit which can be statutory audit. Internal audits are Page 23 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT normally conducted in-house generally by acquainted or qualified Accountants. Statutory audit is compulsory under Companies Act, 1956, or when stipulated by Act and accounts have to be audited by qualified Chartered Accountant. Chartered Accountants are not ordinary accountants but specialists who have successfully undergone academic study and have extensive practical experience and trained for said work. curriculum requires articleship under mentor who himself is Chartered Accountant with some years of experience. As opposed to ordinary accountant, Chartered Accountant with his experience and academic background is in better position to investigate, examine and scrutinize entries and records of financial transactions. Calibre and competence of Chartered Accountants is of high degree and should not and cannot be equated with capability of ordinary accountant or 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 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. Chartered Accountant is financial investigator and prober, is required to be curious, tenacious and well conversant to identify and unearth frauds, misreporting and wrong claims in accounts. Page 24 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 35. aforesaid observations should not be construed as general expression or opinion that every account or statement of income must be viewed with suspicion, distrust and skepticism. past instances are mere warnings, for closer and more in- depth scrutiny. It is also fact that business transactions have become more complicated and accounting entries more complex than ever before. This may be one of causes why possibly frauds could not be detected in some cases. Indeed such cases have made audit work more comprehensive, intrusive and investigative. Ethical managements may at times regard such enquiries as unwarranted intrusion or hounding approach. Section 142(2A) of Act does not permit fishing or roving inquiry approach or witch-hunt but is regulated provision which accepts need and necessity of Assessing Officer to take help of expert accountant, i.e. Chartered Accountant, person who is academically qualified and has practical experience to understand accounts and unearth tax evasion or furnishing of inaccurate particulars etc. provision balances right of Revenue with inconvenience which assessee may face. Assessing Officers are not Chartered Accountants and when required and permissible, therefore, can take help and assistance from qualified specialists to complete assessment and determine taxable income of assessee. (see DLF Ltd. v. Additional Commissioner of Income-Tax) 36. Division Bench of this Court, in case of Asharam Thaumal Harplani (Asaram Bapu) v. Deputy Commissioner of Income-Tax, reported in (2017)82 taxmann.com 265 (Gujarat), explained in details scope of Section 142(2A) of Act. Page 25 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT Justice M.R.Shah (as His Lordship then was) speaking for bench, observed as under : 6.1 At this stage, it is required to be noted that Section 142(2A) of IT Act has been amended w.e.f. 01.06.2013 and it provides that if at any stage of proceedings before him, Assessing Officer, having regard to nature and complexity of accounts, volume of accounts, doubts about correctness of accounts, multiplicity of transactions in accounts or specialised business activity of assessee, and interests of revenue, is of opinion that it is necessary so to do, he may, with previous approval of Principal Chief Commissioner or Chief Commissioner...., direct assessee to get accounts audited by accountant, nominated by Principal Chief Commissioner or Chief Commissioner... in this behalf. It also further provides that Assessing Officer shall not direct assessee to get accounts so audited unless assessee has been given reasonable opportunity of being heard. As per Section 142(2A) of IT Act, provisions of sub-section (2A) shall have effect notwithstanding that accounts of assessee have been audited under any other law for time being in force or otherwise. Section 142(2C) of IT Act provides that every report under sub-section (2A) shall be furnished by assessee to Assessing Officer within such period as may be specified by Assessing Officer. Section 142(2D) of IT Act (as amended) also provide that expenses of, and incidental to, such audit shall be paid by Central Government. As per sub-section (3) of Section 142, Page 26 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT assessee shall be given opportunity of being heard in respect of any material gathered on basis of any inquiry under sub-section (2) or any audit under sub-section (2A) and proposed to be utilised for purposes of assessment. Thus, from aforesaid provision, it appears that object and purpose of special audit is as such to facilitate Assessing Officer to arrive at correct taxable income and for which Assessing Officer is authorized to direct assessee to get books of account audited by accountant authorized by Assessing Officer, in case, Assessing Officer is of opinion that books of accounts are complex in nature and there are multiplicity of transactions, for which, accounts are required to be audited through Special Auditor. As observed herein above and even as per sub-section (3) of Section 142 ample opportunity shall be available to assessee to make submission/ comments on report of Special Auditor and therefore, there shall not be any prejudice caused to assessee if accounts are ordered to be audited through Special Auditor under Section 142(2A) of IT Act. With this, challenge to impugned order is required to be considered. 6.4 Now, so far as contention on behalf of petitioner - assessee that one of requirement for exercising powers under Section 142(2A) of IT Act that Assessing Officer must be satisfied in interest of revenue, account is required to be audited by Special Auditor is concerned, it is required to be noted that considering amended provision of Section 142(2A) of IT Act which has come into force w.e.f. 01.06.2013, Page 27 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT Special Auditor can be appointed if at any stage of proceedings before him, Assessing Officer having regard to nature and complexity of account of assessee and interest of revenue, is of opinion that it is necessary so to do, he may direct account to be verified by Special Auditor. Therefore, having regard to nature and complexity of account, if Assessing Officer is satisfied and / or is of opinion that accounts are required to be verified by Special Auditor, he may pass such order. Therefore, on aforesaid ground that Assessing Officer has not stated that accounts are required to be audited by Special Auditor in interest of Revenue, impugned order is not required to be quashed and set aside, more particularly, when it is stated in order that looking to complexity and multiplicity of transactions, accounts are required to be verified by Special Auditor. Considering object and purpose of Section 142(2A) of IT Act, it appears that accounts are required to be audited by Special Auditor under Section 142(2A) of IT Act with view to facilitate Assessing Officer in passing Assessment order and with view to arrive at right conclusion. 37. Deputy Commissioner of Income-Tax, while arriving at satisfaction that having regard to complexity of accounts special audit is necessary, took into consideration following aspects : 7. As far as question of non objection and acceptance of books of assessee by department in earlier Page 28 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT years is concerned, it is mentioned that if during current assessment year keeping in mind facts and circumstances of case if it is felt that case of assessee requires special audit u/s. 142(2A), past record of assessee can not prevent department from taking particular decision for year under consideration. It is fact that assessee's hotels are situated at different locations and their business requirements are different and strategy of business is also different. It is also fact that result of two are not comparable. It is mentioned that purpose of referring case for special audit is not making comparison between results of two hotels. purpose of special audit is to exactly know business results of two hotels and to know which unit is contributing what percentage of revenue and expenditure to overall business result of assessee company. As far as reporting of loss by assessee is concerned assessee has submitted detailed and logical reasons for loss incurred by assessee year after year. However, explanations given by assessee needs thorough verification. 8. Apart from above mentioned grounds main ground on which Special Audit in case of assessee was directed was submission of separate Profit & Loss accounts of different units by assessee. assessee has produced separate profit & loss accounts of different units as called for. Minute scrutiny of Page 29 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT P&L accounts submitted by assessee reveals following facts : 8.1 In P&L A/s. of Cama Rajputana Club Resorts, Mt. Abu assessee has shown Room Income of Rs.1,23,27,597/- similarly in P&L A/s. of Cama Hotels, Khanpur assessee has shown Lodging Income of Rs.6,14,98,575/-. It is fact that for any hotel principal head of income is Room rent and food and beverages sold in restaurant apart from income of other services provided by hotel. It can be seen that assessee has not furnished head wise income earned by it from room rent and food and beverages served in restaurant. basic purpose of referring case to special audit as mentioned in show-cause issued by this office on 12/12/06 was to prepare detailed P&L account of each of unit considering them as separate profit center and then ascertain profit or otherwise of particular unit and then group as whole. Instead of furnishing details of principal head of income separately, assessee has mixed them up and presented complex accounts which cannot be analyzed logically. 8.2 In its letter dated 18/12/06, assessee has submitted that assessee books certain expenditure related to Mt.Abu at Ahmedabad HO and same are not passed on to Mt.Abu. However, on perusal of P&L account of Cama Hotels, Khanpur no such expenses related to Mt.Abu Hotel are found nor assessee has marked which expenses are pertaining to Mt.Abu. Page 30 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT 8.3 assessee was asked to furnish detailed annexure wise P&L account of its different unit. As far as P&L Account of Cama Rajputana Mt.Abu is concerned assessee has shown various purchases like Liquor purchase, Cutlery purchase, Stores & Provision, Kitchen Expenses, Kitchen Utensil, Provision etc. However, in P&L A/c. of Cama Hotels, Khanpur assessee has mixed up all purchases under head of 'Purchases'. Apart from these purchases assessee has shown purchase of only Linen & Crockery. In absence of detailed break up it is not possible to verify purchases made for different requirements of Hotel. Even assessee has not shown separate purchase of Liquor, though he is running leading liquor shop in city of Ahmedabad. 8.4 As far as accounts of Flight Catering division of assessee is concerned assessee submitted that no separate accounts are mentioned and they are clubbed with accounts of H.O. However, on perusal of P&L A/c. of Cama Hotels, Khanpur it can be seen that assessee has not shown income received from Indian Airlines to whom it is providing catering services. At same time assessee submitted that raw material is supplied by H.O. to flight catering division. However, as discussed above since assessee has clubbed all purchases under one head it is not possible to verify what are purchases for flight catering division and what is amounts of raw material supplied to Flight catering division. 8.5 As far as P&L A/c. of Cama Rajputana Club Resort, Mt.Abu is concerned it can be seen that assessee Page 31 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT has claimed number of expenses under different heads in P&L A/c. However, on perusal of P&L A/c. of Cama Hotels, Khanpur assessee has shown very few expenses. Even basic expenses like Telephone Expenses, Building Repairs and Maintenance, Conveyance Expenses, Swimming Pool Expenses, Commission to Travel Agents, Security Expenses, Garden Expenses, Bank Charges, Postage etc. are not shown in P&L A/c. furnished by assessee. It is needless to say that assessee has claimed all these expenses in P&L A/c. of Cama Rajputana, Mt.Abu. It is very surprising that without incurring all these expenses how assessee is able to run its hotel at Ahmedabad. It is possible that assessee might have clubbed all these expenses in some of head appearing in P&L A/c. submitted by it due to mixing up of accounts, accounts have become very complex and we are not in position to ascertain these expenditure separately. 8.6 It will not be out of place to mention that for last couple of year assessee failed to get its books of accounts audited and submit audit report to department in time. Accordingly department levied penalty also for late submission of audit report. This fact also indicates towards improper maintenance of books of accounts by assessee. 9. All above facts shows that assessee is not in position to submit detailed Profit and Loss account as called for and system of maintenance of accounts of assessee is so complex that assessee is not in position Page 32 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 C/SCA/13445/2007 JUDGMENT to submit details of various heads of income and expenditure in understandable and satisfactory manner. case of assessee is fit case for conducting Special Audit as per provisions of Sec.142(2A) of I.T.Act. 38. satisfaction recorded by Assessing Officer as reflected from above would indicate that same is not just eyewash. We are convinced that in case on hand, Assessing Officer had applied his mind to various aspects like nature of accounts, method of maintaining accounts, entries recorded etc. and reached to conclusion that accounts were complex and it was in interest of Revenue that special audit under Section 142(2A) of Act should be directed. 39. It will be too much for this Court to try and understand complexity for and on behalf of Assessing Officer. 40. We are of view that we should not disturb order passed by Assessing Officer in exercise of his powers under Section 142(2A) of Act. 41. In result, this writ-application fails and is hereby rejected. interim order earlier granted stands vacated forthwith. (J. B. PARDIWALA,J.) (A. C. RAO,J.) /MOINUDDIN Page 33 of 33 Downloaded on : Fri Aug 16 17:14:59 IST 2019 Cama Hotels Ltd. v. Samir Vakil Or His Successor Dy. CIT (OSD) & 1 other(s)
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