Religare Finvest Limited v. Deputy Commissioner of Income-tax & Anr
[Citation -2019-LL-0828-209]

Citation 2019-LL-0828-209
Appellant Name Religare Finvest Limited
Respondent Name Deputy Commissioner of Income-tax & Anr
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 28/08/2019
Judgment View Judgment
Keyword Tags reasonable opportunity of being heard • sufficient opportunity • method of accounting • discretionary power • application of mind • loans and advances • show-cause notice • compulsory audit • interest income • related parties • value of shares • special audit • audit report • capital gain • satisfaction
Bot Summary: Despite Petitioner furnishing the details as directed, a notice dated 13.06.2019 was issued by Respondent No. 1 requiring it to show-cause as to why books of accounts of the Petitioner may not be referred for special audit under section 142 of the Act, considering the complexity and volume of the accounts and the specialized nature of the business activity of the Petitioner. In the said show-cause notice Respondent No. 1 primarily referred to and reproduced the contents of the notice dated 30.05.2019, and stated that, Due to complexity of transactions and voluminous books of account and details, specialized nature of business activity , the accounts of the Petitioner are proposed to be referred for special audit under section 142(2A) of the Act. The expanded, enlarged provisions of Section 142 would still require, as a condition precedent, the Assessing Officer to demonstrate the complexity of the accounts of the assessee, which an ordinary prudent person, reasonably informed about accounts and law, is not in a position to comprehend. Section 142 of the Act provides that the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee, volume of the accounts, doubts about the correctness of the accounts, multiplicity of the transactions in the accounts or specialized nature of the business activity of the assessee and the interests of the revenue, may at any stage of the proceedings before him, direct the assessee to get the accounts audited by special auditor after obtaining previous approval of the Chief Commissioner or Principal Commissioner. The reason behind the amendment can be inferred from the Memorandum Explaining provisions in the Finance Bill, 2013, which reads as follows: Direction for special audit under sub-section of section 142 The existing provisions contained in sub-section 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 Court noted: A bare perusal of the provisions of Sub-section 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: the nature and complexity of the accounts of the assessee; and the interests of the revenue. W.P.(C) 9358/2019 W.P.(C) 9359/2019 Page 13 of 28 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.


IN HIGH COURT OF DELHI AT NEW DELHI Date of decision: 28th August, 2019 + W.P.(C) 9358/2019 RELIGARE FINVEST LIMITED Petitioner Through: Mr. Ajay Vohra, Senior Advocate with Mr. Rohit Jain, Ms. Kavita Jha and Mr. VaibhavKulkarni, Advocates. versus DEPUTY COMMISSIONER OF INCOME TAX & ANR...... Respondent Through: Mr. Raghvendra Singh, Senior Standing Counsel with Mr. Vipul Agrawal, Junior Standing Counsel. + W.P.(C) 9359/2019 RELIGARE ENTERPRISES LIMITED Petitioner Through: Mr. Ajay Vohra, Senior Advocate, Mr. Rohit Jain, Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocates. versus DEPUTY COMMISSIONER OF INCOME TAX & ANR...... Respondents Through: Mr. Raghvendra Singh, Senior Standing Counsel with Mr. Vipul Agrawal, Junior Standing Counsel. CORAM: HON'BLE MR. JUSTICE VIPIN SANGHI HON'BLE MR. JUSTICE SANJEEV NARULA W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 1 of 28 SANJEEV NARULA, J. (Oral) : C.M. No 38598/2019 in W.P.(C) 9358/2019 & C.M. No 38600/2019 in W.P.(C) 9359/2019 1. Exemption allowed, subject to all just exceptions. 2. applications stands disposed of. W.P.(C) 9358/2019 & CM APPL. 38597/2019 & W.P.(C) 9359/2019 & CM APPL. 38599/2019 3. Both present petitions under Article 226 of Constitution of India challenge respective orders, both dated 06.08.2019, passed by Deputy Commissioner of Income Tax, Circle 21 (1), C.R. Building, I.P. Estate, New Delhi directing Petitioners to have their books of account for assessment year 2016-17 audited by Special Auditor under Section 142 (2A) of Income Tax Act, 1961 (hereinafter referred to as Act ). Brief Facts 4. facts and grounds urged in both petition are more or less similar and furthermore since identical arguments have been advanced, same are being decided by common judgment. However, facts narrated in WP (C) No. 9359/2019 are being noted and discussed for purpose of deciding petitions. 5. Petitioner contends that it is engaged in business of lending, W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 2 of 28 investment, financial advisory services and distribution of third-party financial products and has been consistently following same method of accounting for purpose of maintaining its books of account and filing its tax return. For assessment year 2016-17, year under consideration, Petitioner originally e-filed its return of income declaring total income of Rs. 44,64,06,770/-. return of income was revised declaring same total income. case of Petitioner was selected for scrutiny through CASS and notice was issued under section 143(2) of Act. During assessment proceedings, Respondent No.1 called for various information, details and data, which were duly furnished by Petitioner from time to time. Petitioner filed, before Revenue, copy of order dated 14.03.2019 passed by Securities & Exchange Board of India ( SEBI ). In said letter, Petitioner explained that SEBI, vide order dated 14.03.2019, directed Petitioner and M/s. Religare Finvest Ltd. ( RFL ), subsidiary of Petitioner, to initiate steps to recall all loans diverted to companies associated with former promoters. 6. Petitioner further represented that new professional management of Petitioner is taking all steps to recall loan and that transactions referred in SEBI order, in any case, had no effect on taxable income of Petitioner. 7. show-cause notice dated 30.05.2019 was issued by Respondent No.1 requiring Petitioner to furnish certain details/information by 06.06.2019. In said notice, Respondent No.1 referred to forensic audit report furnished by SEBI and its order dated 14.03.2019 alleging diversion/ W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 3 of 28 siphoning of funds of Petitioner to companies related to its erstwhile promoters. Petitioner was directed to give explanation and to show- cause why books of account may not be rejected. 8. In meanwhile, despite Petitioner furnishing details as directed, notice dated 13.06.2019 was issued by Respondent No. 1 requiring it to show-cause as to why books of accounts of Petitioner may not be referred for special audit under section 142 (2A) of Act, considering complexity and volume of accounts and specialized nature of business activity of Petitioner. In said show-cause notice Respondent No. 1 primarily referred to and reproduced contents of notice dated 30.05.2019, and stated that, Due to complexity of transactions and voluminous books of account and details, specialized nature of business activity , accounts of Petitioner are proposed to be referred for special audit under section 142(2A) of Act. Petitioner was directed to furnish its response within 4 days, i.e. by 17.06.2019. 9. In response to aforesaid notice, Petitioner gave elaborate reply dated 17.06.2019, rebutting allegations and inter alia contending that reference for special audit was unwarranted. Petitioner referred to several decisions dealing with subject, and in particular judgment of Supreme Court in Sahara India (Firm) v. CIT(2008) 14 SCC 151 and also decision of this Court in Sahara India Financial Corporation Ltd. v. CIT (2017) 399 ITR 81 (DEL). It was urged that considering that there was no change in nature of business of Petitioner, its W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 4 of 28 business could not be categorized as specialized nature of business activities . Petitioner had undertaken transactions by way of giving loans and advances in normal course of business of financing and each and every transaction is fully and appropriately recorded in books of accounts and this is apparent on face of financial statement. Petitioner controverted that it has several subsidiaries, and explained that all transactions entered into by Petitioner with its sole subsidiary viz Religare Housing Development Finance Corporation are duly disclosed in related party transaction schedule of audited financial statement. Regarding SEBI order dated 14.03.2019, it was argued that vide earlier letter dated 06.05.2019 filed before principal CIT, Petitioner had elaborately explained background of aforesaid order, and that there was no revenue loss to Income Tax Department. Thus, essentially contention of Petitioner was that there was no complexity in books of account which would warrant Respondent No. 1 to direct special audit. 10. Respondent No. 1 considered reply furnished by Petitioner and after seeking approval of Principal Commissioner of Income Tax, passed order dated 06.08.2019 and directed M/s Das Gupta and Associates, Chartered Accountants to audit accounts of Petitioner as per terms of reference within period of ninety days. WP (C) NO. 9358/2019 11. In present case, Petitioner, Religare Finvest Limited (RFL) is subsidiary of Petitioner in WP(C) No. 9359/2019. As challenge is to similar order dated 06.08.2019 passed by Deputy Commissioner of W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 5 of 28 Income Tax, after seeking approval of Principal Commissioner of Income Tax, directing M/s Das Gupta and Associates, Chartered Accountants to audit accounts of Petitioner. grounds challenging impugned order are identical to those which have been raised in W.P.(C) 9359/2019 and therefore our findings and reasons are applicable to both parties. 12. However, it may be noted that return of income e-filed by Petitioner in W.P. (C) No. 9358/2019, Religare Finvest Limited (RFL), declared total income of Rs.506,61,50,010/- . return of income was revised declaring total income of Rs. 504,21,26,280/-. Contentions of Petitioner 13. Petitioner has impugned aforesaid order, alleging that there is gross violation of principles of natural justice and order has been passed without affording Petitioner any opportunity of being heard. Mr. Ajay Vohra, learned Senior counsel for Petitioners argued that order under Section 141 (2A) leads to serious civil consequences and such order cannot be passed as matter of routine, but only if circumstances so warrant. Petitioner was not afforded with reasonable opportunity of being heard prior to directing special audit and, thus, order is vitiated on account of violation of principles of natural justice. order suffers from vice of lack of fulfilment of jurisdictional conditions for directing special audit. He further submitted that Section 142 (2A) was amended pursuant to Finance Act, 2013 with effect from 01.06.2013. Prior to amendment, special audit under aforesaid provision could have been directed only in cases where accounts of assessee were complex in nature, and W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 6 of 28 having regard to interests of Revenue. After amendment of said provision, scope, of provision has been expanded. However, exercise of power under amended provision has to be guarded and exercised with circumspection. expanded, enlarged provisions of Section 142 (2A) would still require, as condition precedent, Assessing Officer to demonstrate complexity of accounts of assessee, which ordinary prudent person, reasonably informed about accounts and law, is not in position to comprehend. provision of Section 142 (2A) cannot be construed to mean that in every case where there is large volume of accounts and multiplicity of transactions, Assessing Officer can direct conduct of special audit under aforesaid provision. Such interpretation would be highly irrational and illogical in as much as, in case of every assessee having substantial turnover and reported taxable income, it would become possible to order conduct of special audit in routine merely on ground that volume of accounts and multiplicity of transactions is large. nature of business of Petitioner which involves dealing with lakhs of people, would necessarily result into high turnover, which is more than Rs. 2000 crores. This does not mean that in case of assessee having turnover in excess of Rs. 2000 crores, special audit has to be directed as matter of rule or mechanically. He relied upon decision of Supreme Court in case of Sahara India (Firm) (supra) to contend that impugned order is wholly without jurisdiction, illegal and bad in law. Mr. Vohra rebutted all comments/findings of Respondent No. 1 in impugned order, and stressed that Respondent No. 1 has not made any attempt to understand accounts of Petitioner, and has proceeded with premeditated mind to make reference for special audit. Lastly, he argued W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 7 of 28 that order of reference is not appropriate and has been passed on surmises and conjectures and by virtue of said order, AO bypassed burden of undertaking assessment to special auditor who has been given responsibility to verify books of accounts of Petitioner, to complete assessment. 14. Learned counsel for Revenue on other hand, relied upon judgment of this Court in AT &T Communication Services India (P.) Ltd. Commissioner of Income Tax and Anr. [2014] 362 ITR 1997 (DELHI) to contend that under Article 226, Court ordinarily does not interfere with order passed by Assessing Officer under section 142(2A) of Act. He urged that order suffers from no infirmity and AO has duly applied his mind and has after due consideration of facts, in his discretion held that he requires assistance of special auditor. Analysis and Findings 15. We have given our thoughtful consideration to contentions raised by parties. Section 142 (2A) of Act provides that Assessing Officer, having regard to nature and complexity of accounts of assessee, volume of accounts, doubts about correctness of accounts, multiplicity of transactions in accounts or specialized nature of business activity of assessee and interests of revenue, may at any stage of proceedings before him, direct assessee to get accounts audited by special auditor after obtaining previous approval of Chief Commissioner or Principal Commissioner. plain language of provision indicates that in order to make reference for special audit under W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 8 of 28 Section 142 (2A) of Act, certain essential jurisdictional conditions are required to be satisfied and in absence thereof, direction for special audit may not be warranted. This provision was amended by Finance Act, 2013 whereby words volume of accounts, doubts about correctness of accounts, multiplicity of transactions in accounts or specialized nature of business activities of theAssessee have been inserted after expression nature and complexity of accounts , w.e.f. 1.6.2013. Prior to amendment, special audit under Section 142(2A) of Act could have been directed only in case accounts of Assessee were complex in nature and having regard to interests of revenue. reason behind amendment can be inferred from Memorandum Explaining provisions in Finance Bill, 2013, which reads as follows: Direction for special audit under sub-section (2A) of section 142 existing provisions contained in sub-section (2A) of section 142 of Income-tax Act, inter alia, provide that if at any stage of proceeding, Assessing Officer having regard to nature and complexity of accounts of assessee and interests of revenue, is of opinion that it is necessary so to do, he may, with approval of Chief Commissioner or Commissioner, direct assessee to get his accounts audited by accountant and to furnish report of such audit. expression nature and complexity of accounts has been interpreted in very restrictive manner by various courts. It is, therefore, proposed to amend aforesaid subsection so as to provide that if at any stage of proceedings before him, Assessing Officer, having regard nature and complexity of accounts, volume of accounts, doubts about correctness of accounts, multiplicity of transactions in accounts or specialized nature of business W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 9 of 28 activity of assessee, and interests of revenue, is of opinion that it is necessary so to do, he may, with previous approval of Chief Commissioner of Commissioner, direct assessee to get his accounts audited by accountant and to furnish report of such audit. 16. Mr. Vohra has argued that notwithstanding amendment, said provision must be read in proper context and perspective. He argued that said expression would apply in situations where volume of accounts or multiplicity of transactions in accounts are disproportionate to size, volume and reportable taxable income of assessee. 17. There cannot be any dispute regarding proposition advanced by Mr. Vohra that Section 142 (2A) of Act cannot be resorted by Assessing Officer on his mere ipse dixit. expanded/enlarged provisions of Section 142 (2A) of Act would still require fulfilment of conditions precedent for Assessing Officer to exercise his jurisdiction for ordering special audit .While upholding constitutional validity of amendment made by Finance Act, 2013, this Court in Sahara India Finance Corporation Ltd. v. CIT (supra), has held that even after amendment, it is imperative for Assessing Officer to make genuine attempt to understand accounts before making reference under said section. relevant passage of said decision is para 36, wherein principles emerging from decision of Supreme Court in case of Sahara India (Firm) v. CIT(supra)have been discussed. Further applicability of ratio of Supreme Court decisions, even to amended Section 142 (2A) of Act is evident from following paras: W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 10 of 28 28. rationale for amendment, therefore, is that erstwhile expression nature and complexity of accounts had been interpreted in restrictive manner by courts. petitioner submits that such amendment runs afoul of guarantee under Article 14 of Constitution. Before dealing with constitutionality of aforesaid amendment, it would be fitting to recollect basic principles that must be kept in mind by Courts while dealing with challenge to constitutionality of legislative enactment. These principles were succinctly stated by Supreme Court in Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar, AIR 1958 SC 538: 14. principle enunciated above has been consistently adopted and applied in subsequent cases. decisions of this Court further establish- (a) that law may be constitutional even though it relates to 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 class by himself; (b) that there is always presumption in favour of constitutionality of enactment and burden is upon him who attacks it to show that there has been clear transgression of constitutional principles; (c) that it must be presumed that legislature understands and correctly appreciates 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 legislature is free to recognise degrees of harm and may confine its restrictions to those cases where need is deemed to be clearest; (e) that in order to sustain presumption of constitutionality court may take into consideration matters of common knowledge, matters of common report, history of times and may assume every state of facts which can be conceived existing at time of legislation; and (f) that while good faith and knowledge of existing W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 11 of 28 conditions on part of legislature are to be presumed, if there is nothing on face of law or surrounding circumstances brought to notice of court on which classification may reasonably be regarded as based, presumption of constitutionality cannot be carried to 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. above principles will have to be constantly borne in mind by court when it is called upon to adjudge constitutionality of any particular law attacked as discriminatory and violative of equal protection of laws. 29. above principles have been consistently followed by courts in India and law in relation to challenge on constitutionality of enactment on touchstone of Article 14 was reiterated by Supreme Court in Subramaniam Swamy v. CBI, (2014) 8 SCC 682 in following terms: Where there is challenge to constitutional validity of law enacted by legislature, Court must keep in view that there is always presumption of constitutionality of enactment, and clear transgression of constitutional principles must be shown. fundamental nature and importance of legislative process needs to be recognised by Court and due regard and deference must be accorded to legislative process. Where legislation is sought to be challenged as being unconstitutional and violative of Article 14 of Constitution, Court must remind itself to principles relating to applicability of Article 14 in relation to invalidation of legislation. 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 impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 12 of 28 on executive, whether in 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 Constitution. Court also needs to be mindful that 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 courts do not substitute their views on what policy is. xxxxxxxxx 34. task that this Court is, therefore, faced with is to determine whether grounds added by amendment to Section 142(2A) of Act, are of such nature that they violate Article 14 of Constitution. In this regard, mere possibility that AO may abuse discretion that provision vests in him would be insufficient to declare provision as unconstitutional. Supreme Court in Sahara India (Firm), Lucknow v. Commissioner of Income Tax, [2008] 300 ITR 403 (SC), had occasion to interpret Section 142(2A) of Act, as it stood prior to amendments in question. Court was faced with question as to whether Section 142(2A) required giving assessee pre-decisional hearing before proceeding to order special audit under provision. Court noted: bare perusal of provisions of Sub-section (2A) of Act would show that opinion of Assessing Officer that it is necessary to get accounts of assessee audited by Accountant has to be formed only by having regard to: (i) nature and complexity of accounts of assessee; and (ii) interests of revenue. word and signifies conjunction and not disjunction. In other words, twin conditions of nature and complexity of accounts and interests of revenue are prerequisites for exercise of power under Section 142(2A) of Act. W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 13 of 28 Undoubtedly, object behind enacting said provision is to assist Assessing Officer in framing correct and proper assessment based on accounts maintained by assessee and when he finds accounts of assessee to be complex, in order to protect interests of revenue, recourse to said provision can be had. word complexity used in Section 142(2A) is not defined or explained in Act. As observed in Swadeshi Cotton Mills Co. Ltd. v. C.I.T., [1988] 171 ITR 634 (All) it is nebulous word. Its dictionary meaning is: 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 face of it, may not be really so if one tries to understand it carefully. Thus, before dubbing accounts to be complex or difficult to understand, there has to be genuine and honest attempt on part of Assessing Officer to understand accounts maintained by assessee; appreciate entries made therein and in event of any doubt, seek explanation from assessee. But opinion required to be formed by Assessing Officer for exercise of power under said provision must be based on objective criteria and not on basis of subjective satisfaction. There is no gainsaying that recourse to said provision cannot be had by Assessing Officer merely to shift his responsibility of scrutinizing accounts of assessee and pass on buck to special auditor. Similarly, requirement of previous approval of Chief Commissioner or Commissioner in terms of said provision being inbuilt protection against any arbitrary or unjust exercise of power by Assessing Officer, casts very heavy duty on said high ranking authority to see to it that requirement of previous approval, envisaged in Section is not turned into W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 14 of 28 empty ritual. Needless to emphasise that before granting approval, Chief Commissioner or Commissioner, as case may be, must have before him material on basis whereof opinion in this behalf has been formed by Assessing Officer. approval must reflect application of mind to facts of case. 35. On question of whether Section 142(2A) involves giving predecisional hearing to assessee, Court held: upshot of entire discussion is that exercise of power under Section 142(2A) of Act leads to serious civil consequences and, therefore, even in absence of express provision for affording opportunity of pre- decisional hearing to assessee and in absence of any express provision in Section 142(2A) barring giving of reasonable opportunity to assessee, requirement of observance of principles of natural justice is to be read into said provision. 36. Thus, what emerges from Sahara (supra) decision of Supreme Court in relation to Section 142(2A), can be summarized as under: (i) Assessing Officer must make genuine and honest attempt to understand accounts maintained by assessee. (ii) opinion required to be formed by Assessing Officer under Section 142(2A) must be based on objective criteria and not merely subjective satisfaction. powers under provision cannot be used by Assessing Officer merely to shift his responsibility of scrutinizing accounts to special auditor. (iii) requirement of previous approval of Chief Commissioner or Commissioner, casts heavy duty on these authorities to ensure that this requirement is not reduced to empty formality. Before granting approval, Commissioner or Chief Commissioner, must have before him materials on basis of which opinion has been formed by Assessing Officer. approval granted by Commissioner or Chief Commissioner must reflect application of mind to W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 15 of 28 facts of case. This requirement was elaborated by 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- Commissioner of Income Tax should not give any approval mechanically and if he finds that there is no examination of books of account by Assessing Officer before sending proposal, he will not certainly give any approval. Under this section, Commissioner of Income Tax does not exercise jurisdiction of appellate authority rather approving authority. Approval means and connotes supporting and accepting of act and conduct done by another person. Therefore, it would be his duty to examine on receipt of his proposal, whether Assessing Officer has correctly done it or not, if he finds that this requirement has not been fulfilled then he must not approve of same. (iv) In accordance with principles of natural justice, assessee must be given opportunity of pre-decisional hearing before action is taken under Section 142(2A). 37. While this decision of Supreme Court was prior to amendments inserted by Finance Act, 2013, this Court sees no reason as to why these holdings of Supreme Court in Sahara (supra) would not be applicable to amended Section 142(2A). fact that AO's determination under this provision must be based on objective material and not subjective satisfaction, that he must make honest attempt at understanding accounts of assessee, that grant of approval by higher authority must not be mechanical, that principles of natural justice must be followed by giving assessee pre-decisional hearing, would all be equally applicable even under amended Section 142(2A). It would still be impermissible for AO to shift responsibility of auditing accounts mechanically to special auditor. In these circumstances, we fail to understand petitioner's contention as to how amendments would in effect nullify these procedural safeguards that Supreme Court has read into Section W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 16 of 28 142(2A). (Emphasis supplied) 18. While there can be no quarrel with proportion that Assessing Officer while exercising jurisdiction under Section 142 of Act should ensure compliance with aforesaid view of this Court in Sahara India Finance Corporation Ltd. (supra), we are, however, not convinced with submission of Mr. Vohra that notwithstanding amendment, scope of said provision should be limited and restricted to only those categories of cases, where volume of account, or multiplicity of transactions are disproportionate to size and volume of business and reported taxable income of assessee. Since legislative intent while amending Section 142 was to expand and enlarge scope of jurisdiction of Competent Authority to order special audit, by laying down guideline for exercise of said jurisdiction, it cannot be interpreted to give it restrictive meaning. If legislature has added new words in grounds for ordering special audit under section 142(2A), it would be contrary to all rules of construction to ignore impact of newly added words and to so construe definition as if newly added words were either not there or were intended to be otiose and redundant. Such interpretation would neutralize effect of amendment and run counter to legislative intent. From bare reading of amended provision, we are unable to discern restrictive scope, as sought to be interpreted by Mr. Vohra. AO can resort to aforesaid provision under any of circumstances, mentioned in section. If subjective satisfaction of Assessing Officer is based on objective assessment, for any of reasons specified in amended provision, court would not ordinarily interfere W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 17 of 28 with exercise of discretionary power vested with AO under said provision. Of course, expanded provisions are not without fetters and safeguards. power under Section 142 (2A) of Act cannot be exercised lightly, and Assessing Officer must exercise his discretion in reasonable manner by taking into account all relevant and germane aspects. exercise of power would be subject to guiding principles laid down by Supreme Court in Sahara India (Firm) (supra), as notice by this Court in Sahara India Finance Corporation Ltd.(supra). 19. Now let s examine reasons assigned by Respondent No. 1 in impugned order dated 06.018.2019 directing special audit. While testing reasoning on touchstone of principles enunciated by Supreme Court in Sahara India (Firm) (supra), we would like to underscore that while exercising jurisdiction under Article 226 of Constitution of India, Court does not be sit in appeal over order passed by Assessing Officer. subjective satisfaction is subject matter which falls exclusively within domain of Assessing Officer. In Article 226, we would not like to tread or invade into jurisdiction of AO. As long as exercise of jurisdiction is based on cogent reasons, Court would certainly have jurisdiction to examine whether discretion to refer account for special audit was exercised objectively, or not. However whether material produced before AO was sufficient for him to conclude complexity would essentially remain matter falling in his discretion. In fact, view expressed by this Court, in AT &T Communication Services India (P.) Ltd. (supra), lays down scope of interference of Court in such matters in following words: W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 18 of 28 16. question whether accounts and related documents and records available with A.O. present complexity is essentially to be decided by A.O. and in this area power of court to intrude should necessarily be used sparingly. It is A.O. who has to complete assessment. It is he who has to understand and appreciate accounts. If he finds that accounts are complex, court normally will not interfere under Article 226. power of court to control discretion of A.O. in this field is limited only to examine whether his discretion to refer accounts for special audit was exercised objectively, as far as accounts, records, documents and other material present before A.O. would permit. There must be valid material before A.O. from which he apprehends that there is complexity. As to what material would make accounts complex is essentially for A.O. to determine and unless his decision can be attacked on ground of perversity or absolute arbitrariness or mala fide, it should not be interfered with. In present case we are satisfied that accounts including documents, records and other material before A.O. did make issues for his decision complex requiring special audit. We are accordingly not inclined to accept contention of assessee to contrary. (Emphasis supplied) 20. Though above decision was rendered in context of unamended provisions, views expressed concerning scope of jurisdiction of Court under Article 226 are still relevant and would be applicable. In view of limited and guarded scope of judicial review, we now proceed to evaluate impugned order. Assessing Officer has taken view that there is complexity in accounts of assessee. He is also of view that interests of revenue are adversely affected. relevant portion of impugned order reads as under: 15. Anomalies and complexities noted in books of W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 19 of 28 accounts of assessee: During course of assessment proceedings various anomalies and complexities were noted in books of accounts of Assessee company. These were communicated to assessee company vide show cause notice dated 30.05.2019 and subsequently vide show cause notice issued under section 142(2A) of Act. reply of assessee company filed on 06.06.2019, 12.06.2019, 17.06.2019 and 28.06.2019, in this regard, have been considered and same has been disposed of issue wise as under: a. assessee company is Non-banking Finance Company (NBFC) engaged in business of financing. assessee borrowed loans from Various Banks, Financial Institutions and others on which interest was paid. said loans were given to various parties and interest received from them was declared as income. Total loans of Rs. 682 Crores borrowed by assessee company and total amount of Rs. 232 Crores lent by assessee were outstanding as on 31/03/2016. assessee declared interest income of Rs. 125.40 Crores during year and has claimed interest expense of Rs. 110 Crores. assessee has also claimed professional / litigation expenses of Rs. 3,53,45,032/-. (a.i) Further, amount of Rs. 432.92 Crores was invested by company in its subsidiaries / associated concerns / group companies and amount of Rs. 218.84 Crores was given as loans and advances to them. amount of Rs. 24,17,69,927/- has been shared as expenses with its associated concerns during year without any stated reasons/ basis. Thus, transactions with associated concerns / related parties involved huge amounts. (a.ii) Enquiries were conducted and action taken against assessee company by various Government agencies like Enforcement Directorate (ED), Serious Fraud Investigation (SFIO), Delhi Police (EOW) etc. In said enquiries, it comes out that assessee has diverted funds for benefit of promoter and promoter group companies and was involved in siphoning of funds borrowed by it by way of advancing money or paying expenses paid to its associated concerns or making investment in them in form of shares. W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 20 of 28 (a.iii) assessee was specifically raised query regarding fact of misappropriation and siphoning of funds vide notice dated 30/05/2019 vide point no. 13.In this connection, report of forensic audit of assessee company got conducted by SEBI which bears testimony to said diversion/siphoning of funds, was also confronted to assessee company. (a.iv) assessee categorically denied that some of transactions mentioned therein were related to assessee or entered into by it and further stated that observations made by SEBI and Forensic Auditor in respect of transaction were not applicable. However, no such evidence was placed on record to show that these transactions were not entered into by assessee or same were not related to assessee. Thus, in-depth verification of books of account is required to ascertain and establish fact about these transactions. b. assessee company has recorded huge losses on account of investment made in subsidiary / associated companies/ partnership firms etc. Capital gain / loss of Rs. 371,47,42,141/- has been claimed on sale of such investments during year. assessee was raised specific query regarding said claim vide point no. 1 of notice dated 30/05/2019. In reply assessee company placed voluminous information in form of agreement; balance sheets etc. on record which needs in depth verification for allowability of said claim. said information runs into 9 bulky volumes of more than 1000 pages. Justification regarding investment into subsidiary / associated companies/ partnership firms and resultant gain/loss has also not been provided. c. assessee has made provision of Rs. 279.25 crores for diminution in value of investment made in subsidiary company during year. Each year such provisions are made for diminution in value of shares of subsidiary company which creates suspicion as to how value of investment in subsidiaries can diminish at such level. Despite being confronted on this issue no satisfactory reply with help of relevant supporting evidencescould be furnished by assessee. In fact reply needs indepth W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 21 of 28 backward integration and verification of reasons/business expediency/sources having revenue implication that ultimately lead to such diminution. d. assessee claimed legal and professional fees of Rs. 3,53,45,032/- in its profit and loss account. assessee was asked to substantiate same vide point no. 3 of notice dated 30/05/2019. assessee submitted copies of invoices / bills of said expenses. On perusal of bills, it was observed that same pertained to litigation expenses related to various cases against company, Managing director, key personnel etc. Since number of criminal cases have been launched against company and its key personnel, so each and every bill along with litigation status of each case needed in depth verification to examine allowability of such expenses have been factually incurred solely & exclusively for purpose of business of assessee. assessee company though queried on issue calling for specific details and supporting evidence, did not file complete details as required. Thus, prima facie it can not be denied that personal expenses of directors have been claimed as legal expenses of assessee company. e. There is multiplicity of transactions of borrowing, lending and investing with same parties or same nature of transactions with various parties. As already stated, that assessee has borrowed funds of Rs. 682 crores and lent funds of Rs. 232 crore during year under consideration. assessee has lent money to various parties from whom interest has been earned. funds have been borrowed and lent on different terms and conditions. However, assessee has only provided lists in support without going into detail as to how revenue has been recognised on all transactions of such nature and also amongst parties to whom money has been lent or obtained including associated and group concerns. f. Further, this is NBFC company which is governed by RBI and is engaged in specialized nature of business activity and not regular business involving manufacturing or trading. Various rules and regulations are applicable on such entities. This NBFC has undertaken transactions with its associated companies as chain or series of transactions. money has been rotated W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 22 of 28 through various companies through layering. Further, there are allegations of misappropriation of funds. Thus, accounts are not only voluminous but are complex and need in depth verification for ascertaining actual nature of transactions. (f.i) assessee was asked to produce books of account. However, assessee stated in para 11.1 of its submissions as under: With reference to same, it is submitted that assessee has already submitted ledger accounts, party-wise details and relevant information with respect to points raised vide subject mentioned SCN. relevant extracts of documents relating to anomalies as mentioned in SEBI report have been enclosed as per reply in preceding paras. However, of your goodself required any other information in respect of books of accounts, then please let us know specific requirement, assessee shall submit same .. (f.ii) This shows that assessee is reluctant to produce books of account, as it will reveal true nature of transactions undertaken by assessee. It must be appreciated that ledgers of particular expenses helps to understand nature of said expense but books of account need to be verified in detail to understand overall scenario of business of assessee and transactions undertaken by it. Non-production of books of account further strengthens view about correctness of same. g. As of now, enquiries were conducted and action was taken against assessee company by various Government agencies like Enforcement Directorate (ED), Special Fraud Investigation (SFIO), Delhi Police (EOW) etc. In said enquiries, it comes out that assessee has diverted funds for benefit of promoter and promoter group companies and was involved in siphoning of funds borrowed by it, by way of advancing money or paying expenses paid to its associated concerns or making investment in them in form of shares. In fact Promoter director vide his complaint to Delhi Police(EOW) has himself alleged that accused(s) as mentioned in complaint have carried out and orchestrated serious financial fraud in two companies namely Religare Enterprise Limited and W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 23 of 28 ReligareFinvest Limited in addition to RHC Holdings (P) Ltd and such fraud has been undertaken by accused(s) in pre- planned manner through various dubious transaction(s). This fact has also been amply illustrated, as already mentioned, in Forensic audit report of SEBI dated 12.12.2018 shared with department and also confronted to assessee company by Assessing officer. (g.i) assessee has no satisfactory answer to said report and issues related to it. It is pertinent to mention that this is when assessee company itself in series of complaints/petitions before various regulatory authorities including EOW wing of Delhi Police have since been alleging that diversion of funds has been made and thus been claiming its retrieval through suitable Statutory order from competent authorities. Thus, fact of diversion/ siphoning of finds remaining un-refuted, stands as established and revenue implication involved in it can only be investigated through special audit by technical expert like special auditor. h. Further it is held by judicial authorities all over country that assessing officer is duty bound to determine correct income/loss of each assessment year of assessee. purpose of direction for special audit is to ensure that correct assessment order is passed so that revenue is not deprived of its dues. direction to Assessee for compulsory audit of accounts u/s 142(2A) of Income Tax Act does not affect Assessee s right especially in view of fact that cost of audit is not payable by Assessee but by department and therefore, assessee s interest are not affected in any way except to extent of correct determination of taxable income. i. In view of above discussed facts statutory provisions with regard to ordering of special audit is satisfied in this case in view of basic two ingredients i) Nature and complexity of accounts, its voluminous, doubts about correctness of accounts, multiplicity of transactions, specialized nature of business activity of assessee, and ii) Interest of revenue for forming opinion for purpose of special audit u/s 142(2A) is satisfied in this case. j. Therefore, I am of considered opinion in view of foregoing W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 24 of 28 discussion and complexity involved in information submitted and in interest of revenue, that this is fit case for invoking provisions of section 142(2A) of Income Tax Act, 1961 so as to determine correct and true income of Assessee company for A.Y. 2013-14. (Emphasis supplied) 21. Assessing Officer deduced that queries raised by questionnaire dated 30.05.2019 remain conclusively unanswered. Assessing Officer has held that Petitioner company was unable to cull out requisite details from books of accounts to be furnished during course of assessment proceedings, and held that accounts were not only voluminous but were also complex for him to handle deftly. He therefore, felt need to have assistance of expert. Further, fact of diversion/siphoning of funds has also come out in forensic audit report of SEBI dated 12.12.2018 and, therefore, in order to protect interest of Revenue, in-depth verification is required. It is also not in dispute that direction to assessee for compulsory audit of accounts under Section 142 (2A) of Income Tax Act does not have any financial impact on assessee, as cost of audit is not payable by assessee, but department. special audit would only assist department to correctly determine taxable income. Thus, having regard to nature and complexity of accounts being voluminous and doubts about correctness which are evident from material before Assessing Officer, we cannot say findings of Assessing Officer are without application of mind. 22. There is no quarrel regarding proposition advanced by Mr. Vohra W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 25 of 28 that Assessing Officer has duty to apply his mind and not to resort to provisions of special audit, as matter of routine. discretion that Assessing Officer exercised for ordering special audit, cannot be said to be arbitrary or mala fide or routine or casual exercise. In these circumstances, on basis of reasons recorded in impugned order, it cannot be said that there was no genuine attempt on part of Assessing Officer to understand nature of his business, its method of accounting, or to understand nuances of books of accounts or documents. impugned order clearly reflects reasons for ordering special audit. Assessing Officer initially issued notice under Section 142(1) on 03.08.2018 along with detailed questionnaire including reason for selection of case for scrutiny under Section 143 (3). Thereafter, fresh notice under Section 142 (1) was issued on 30.10.2018 along with pending and fresh queries. Since there was continued non compliance, show cause notice in respect of specific queries raised therein was issued on 30.05.2019. Another notice dated 03.06.2019 in form of corrigendum to show cause notice was issued, calling upon Petitioner to produce books of accounts. questionnaire raised by Assessing Officer was not specifically answered, and if same had been satisfactorily answered, he would have found same to be useful for verification of various claims made by assessing companies in its return of income for assessment year under consideration [AY 2016-17]. Petitioner also placed reliance on judgment of Kerala High Court in Muthoottu Mini Kuries v Deputy Commissioner of Income Tax 250 ITR 455 (Kerala) to contend that direction to assessee to get accounts audited without hearing assessee would be unjustified. However, ratio of said judgment is not W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 26 of 28 applicable to facts of present case. Each case turns on its own facts and present case is distinguishable from said judgment keeping in view facts and circumstances in both cases. For foregoing reasons it is, thus, evident that Petitioner was given sufficient opportunity of being heard. Thus, contention of violation of principles of natural justice is also without merit. 23. Sections 142 (2A) (2D), 142 (3) and 142 (4) are relevant provisions dealing with considerations that are to be weighed while directing special audit. Supreme Court has also laid down guiding principles relating to conduct of special audit. In essence, Supreme Court has underlined that opinion required to be formed must be based on objective criteria, and not subjective satisfaction. On reading of impugned order, it is demonstrated that Assessing Officer has examined objections raised by Petitioner and has exercised his jurisdiction objectively on due consideration of records, documents and other material before him for ordering special audit. There is no perversity or arbitrariness in order of Assessing Officer. On careful perusal of afore-noted reasons spelt out in impugned order, we are of considered opinion that Assessing Officer has carefully scrutinized objections raised by Petitioner and has fairly and objectively arrived at conclusion that special audit is required. 24. Before parting, we would also like to deal with objections raised qua terms of reference. We are unable to agree with Mr. Vohra that Assessing Officer has directed special audit to undertake entire work W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 27 of 28 of assessment. We do not find any reason to hold that Assessing Officer has shifted responsibility of scrutinizing accounts and passed buck to special auditor, as has been contended by Petitioner. special auditor who has been appointed, has been asked to give comments on several issues. Of course, while carrying out audit, special auditor would have to verify books of accounts of Petitioner so that report furnished by him, is of assistance to Assessing Officer to determine taxable income. We have perused terms of reference and do not find same to be inappropriate, especially having regard to fact that despite honest attempt made by Assessing Officer in understanding accounts of assessee, it has not yielded desired results, thereby warranting appointment of special auditor. At this stage, we cannot hold that there is no co-relation between aspects which require scrutiny and terms of reference for special auditor under law. Petitioner can raise such objections at appropriate stage. 25. In view of afore-going observations, Court is of opinion that there is no infirmity in order directing special audit. writ petitions have no merit, and consequently same are dismissed. assessee(s) in both petitions are directed to cooperate with special auditor. There shall be no order as to costs. SANJEEV NARULA, J VIPIN SANGHI, J AUGUST 28, 2019/nk W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 28 of 28 Religare Finvest Limited v. Deputy Commissioner of Income-tax & Anr
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