CAMA HOTELS LTD. V. SAMIR VAKIL OR HIS SUCCESSOR DY. CIT (OSD)

SCA/13445/2007

AI Insights

Cama Hotels Ltd., a public limited company operating hotels and catering services, challenged an order directing a special audit of its accounts under Section 142(2A) of the Income Tax Act, 1961. The company argued that the order was issued without a reasonable opportunity to respond and that the grounds for the audit were not substantiated. The Revenue defended the order, citing the complexity of the accounts and the need for a detailed audit to accurately assess the company's financial activities. The court examined the legal provisions and previous rulings on special audits, concluding that the order was justified and upheld it.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 756102 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 12-07-2019
• Assessment Year: misc
• Other Referred Cases: Divisional Forest Officer v. Bishwanath Tea Company Limited, DLF Ltd. v. Additional Commissioner of Income-Tax, Sahara India (Firm) v. CIT, Delhi Development Authority v. Union of India, Rajesh Kumar v. Dy. CIT, Asharam Thaumal Harplani (Asaram Bapu) v. Deputy Commissioner of Income-Tax
• Laws Referred To: Article 226 of the Constitution of India, Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAUNA BHATT
• Assessee Lawyers: S N DIVATIA
• Keywords: Natural Justice; Quasi-Judicial Order; Quasi-Judicial Order; Special Audit; Complexity of accounts
• Section: 142(2A)

Judgement Text

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