SHRI ANIL KUMAR,GHAZIABAD vs. DCIT, GHAZIABAD

The captioned appeal has been filed by the assessee against the order of the CIT(A) dated 10.03.2016 arising from assessment order dated 23.10.2013 passed under Section 143(3) of the Act concerning Assessment Year 2010-11 in question.

2.1 Vide order sheet entry dated 21.02.2013, the assessee was called upon to file certain details and information as noted in paragraph no.2 of the assessment order. Vide order sheet entry dated 27.02.2013, certain further enquiries were made. After going through the details, information and audit report filed by the assessee, it was felt by the Assessing Officer that having regard to the nature, complexity of accounts etc, it would be difficult to deduce the correct income of the assessee chargeable to tax. Therefore, a show cause notice under Section 142(1) dated 26.03.2013 was issued by the AO giving an opportunity to the assessee to explain as to why his account should not be subjected to special audit contemplated under Section 142(2A) of the Act. The date of hearing for response on proposed special audit was fixed on 30.03.201. The aforesaid notice seeking response was served upon the assessee on 28.03.2013. On the appointed date i.e., 30.03.2013, the assessee filed his objection /reply and pleaded to drop the proceedings contemplated under Section 142(2A) on various grounds. The Assessing Officer found such objections to be unjustified and proceeded to seek approval from the CIT concerned on 30.03.2013 for referring the case for Special audit. The approval was stated to be granted by CIT Ghaziabad vide office letter F.No. Special audit/142(2A)/CIT-GZB/ITO(T)/2012-13/4022 dated 31.03.2013 and the auditor was appointed under Section 142(2A) of the Act. Intimation on appointment of auditor under S. 142(2A) was communicated by the AO to the Assessee vide its letter dated 31.03.2013.

2.2 Pertinently, the limitation period for framing assessment under S. 143(3) for AY 2010-11 in question was slated to expire on 31.03.2013 in ordinary course. The limitation period for completion of assessment however stood extended by operation of law on imposition of special audit albeit on the last date of expiry of limitation by virtue of S. 153 read with Explanation 1 clause (iii) thereto.

2.3 The Special Auditor submitted their audit report under S. 142(2A) on 29.08.2013 which was confronted to the assessee. A reply to the observations made in the special audit were provided by the assessee on 26.09.2013. Certain further queries were raised and the assessment was eventually framed within extended limitation period vide Ass. order dated 23.10.2013.

2.4 In this factual backdrop, certain additions were made to the returned income under Section 68 and Section 56(2)(vii) of the Act. Certain disallowances towards expenses were also carried out and the income was assessed at Rs.2,60,23,842/-.

3. Aggrieved by the assessment framed seeking to disturb the return income, the assessee preferred appeal before the CIT(A). On merits, the assessee challenged the additions made towards unproved loans under Section 68 of the Act aggregating to Rs.1,06,49,871 from various parties; the additions under Section 56(2) on account of transactions relating to purchase of shares of Era Infra Engineering Pvt. Ltd. amounting to Rs.1,26,82,500/- and disallowance of expenses Rs.57,653/-. Simultaneously, the assessee also challenged the action of the Assessing Officer in invocation of provisions of Section 142(2A) of the Act and alleged legal & factual impropriety in such action and consequent unauthorized extension of limitation period.

3.1 The contentions were raised before the CIT(A) on both counts; (a) the validity of extension of limitation for framing assessment by virtue of alleged unlawful exercise of powers conferred under Section 142(2A) and (b) additions/disallowances on merits.

3.2 In the first appeal, the CIT(A) however granted some cosmetic relief to challenge on merits of disallowances but upheld the action taken under Section 142(2A) and consequent extension of limitation as well as the additions made under Section 68 and Section 56(2) of the Act. As observed, a token relief towards lump sum disallowance of Rs.57,653/- out of expenses was given by the CIT(A) nonetheless.

4. Further aggrieved, the assessee knocked the door of the Tribunal under S. 253 of the Act.

5. The ld. counsel for the assessee, Mr. Akhilesh Kumar advocate, raised wide ranging objections to the action of the revenue authorities while framing assessment orders and the first appellate order.

5.1 To begin with, the ld. counsel took strong exceptions to the legitimacy of exercise of power under Section 142(2A) of the Act. The ld. counsel exhorted that the special audit was forced upon the assessee on the last day of expiry of limitation with a sole intent to unlawfully obtain extension the limitation period for framing the assessment. The Ld. Counsel alleged colourable exercise of power for doing so without meeting the pre-requisites of Section 142(2A). It was further contended that CIT also has readily granted a perfunctory approval on a spur of moment to such arbitrary act of AO.

5.2 To support such allegation of a contrived act, the ld. counsel submits that; (i) The assessee diligently attended and responded to all the notices of hearing by the Assessing Officer as and when called for, which can be vouched from the first paragraphs of the assessment order itself where AO himself asserts compliances on the part of the Assessee. (ii) On the basis of records produced and details furnished, the AO effectively closed the proceedings on 15-03-2013 for framing assessment observing ‘case discussed’. However, Hearing was re- fixed on 26-03-2013 i.e at a fag end of expiry of limitation of 31- 03-2013 and expressed ‘suspicion’ that the accounts maintained by assessee does not reflect true picture. A show cause notice to propose special audit was thus issued on the assessee for compliance on 30-03-2013. Noticiably, the books of account were neither in possession of the AO nor AO had any occasion to examine such books between 15-03-2013( when proceedings were effectively closed) and 26-03-2013 (where a totally different turn was taken to propose audit of such a simple account). The books of accounts were never called for any earlier point of time also. Thus, issuance of directions under Section 142(2A) of the Act was dictated by extraneous considerations without looking in to the books and without compliance of other prerequisites of S. 142(2A). The act of the AO was thus clearly motivated to gain unlawful extension of limitation period for completion of assessment. (iii) The assessment was getting time barred in ordinary course on 31.03.2013 as per Section 153(1) of the Act. On 21.02.2013 several queries were raised and it was also noted in the order-sheet that a lot of time was already lapsed in this case and is the undersigned (Assessing Officer) is extremely burdened with number of time barring cases and thus it will not be possible to grant any further adjournment and the undersigned (Assessing Officer) will be forced to complete the assessment based on material on record. The assessee filed reply on 25.02.2013. Next date of hearing was given on 27.02.2013. On 27.02.2013, the assessee appeared along with a CA and it was noted in the order sheet ‘case discussed’. Further some details such as bills in respect of lenders, property sold etc were called for and the hearing was adjourned to 01.03.2013. On 01.03.2013, as per the order sheet notings, the reply from assessee was received in dak with some details with a request for further time of seven days from the assessee. On 11.03.2013, the assessee appeared and filed other details. The matter was again fixed for 15.03.2013. As per the order sheet, the assessee appeared and filed pending bills on 15.03.2013. On that date, the Assessing Officer records ‘case discussed’ and quips that next date of hearing will be communicated as and when required. However, as per order sheet entry dated 26.03.2013, the Assessing Officer noted that the case has been gone through and it is ‘suspected’ that accounts maintained by assessee are not reflecting true picture of the income as he and his wife are director in many companies receiving loans and shares for many companies, money are jumped from one company to another and account statement also have a difference. As a sequel, a show cause notice dt. 26.03.2013 was issued on proposed action under Section 142(2A) for compliance on 30.03.2013 by the Assessee. On that date, the assessee appeared and filed its stance on the show-cause notice. On the same day however, reference was sent to CIT Ghaziabad by the Assessing Officer seeking directions for referring the case for special audit. As per order-sheet entry dated 31.03.2013, an approval was received for audit under Section 142(2A) and the special auditor was promptly appointed. The special audit report was received on 26.08.2013 and the assessment was completed on 23.10.2013 i.e beyond the ordinary time limit ending on 31-03-2013. In this factual background, the ld. counsel contends that the assessment had been practically finalized by mentioning ‘case discussed’ on 15.03.2013. The whole proceedings were revitalized without any mention whatsoever about the nature of accounts or reference to any account books/ledger – cash books account, etc. No plausible reason or basis about complexity of accounts were assigned either. Despite a complete absence of pre-requisites of Section 142(2A), onerous burden was sought to be placed on the assessee. The show cause notice dated 26.03.2013 was issued under Section 142(1) which was received on 28.03.2013 and compliance thereof was made on the appointed date, i.e., 30.03.2013 to defend the stance of the assessee. Notwithstanding, the matter was referred to the Commissioner vide letter dated 30.03.2023 by the Assessing Officer, i.e, a day before the last date of limitation period and the so called approval dated 31.03.2013 was purportedly received by AO on the last date of limitation of completion of assessment was secured. (iv) The drastic action of special audit was undertaken on petty and flimsy grounds such a difference in debit/credit in the bank account and general issues without any credible allegation of such account being incorrect. The Ld. Counsel adverted to the reply dated 30/03/2013 in response to show cause dated 26/03/2013 and submitted that all allegations were objectively addressed for clarifications. A reconciliation was also submitted for alleged differences etc. (v) The Assessing Officer never himself examined the accounts and entries but wanted an expert to examine the accounts and compile fresh financial statements which are already audited under law. No heed was given to the explanations and clarifications given by the assessee in response to show cause notice. The whole action of imposition of special audit was clearly pre-ordained and thus reply filed was summarily disregarded. A proposal for imposition of special audit was sent to CIT on 30/03/2013 wherein the contents of show cause notice to the assessee were merely reiterated with a single word inexplicable observation that reply of the assessee to the show cause is ‘not acceptable’. The ITO in the office of CIT, in turn, forwarded the summary approval on the sole basis of request from AO on the very next day and without considering any material etc. The perfunctory approval was communicated to the AO by the ITO and no approval showing application of mind to the facts from CIT himself was made available despite repeated requests and signature of the CIT on the approval memo is not available till today. (vi) The Ld. Counsel reiterated that no reasons/basis is stated in the proposal dated 30.03.2013 for not accepting the defense placed by the assessee. The only tangible reason as per the Assessing Officer is that he suspected that the accounts are not reflecting the true picture of income. The Assessing Officer has merely annexed the reply of the assessee for consideration of the CIT without himself giving any comment on the correctness of the defense for non applicability of special audit. (vii) The approving authority, namely, CIT has also not stated why reply of the assessee against the imposition of special audit was not accepted by him where apparently no other material was placed before him. Besides, in approval dated 31.03.2013, there is not even a single reason cited for accepting proposal of the Assessing Officer. The CIT has not made any averments on the reply of the assessee, material perused by him etc. No opportunity was given by the CIT to the assessee before fixing such onerous burden either. The CIT has merrily granted approval in a high handed manner by merely showing displeasure for sending proposal by the Assessing Officer at the eleventh hour, i.e., a date before the completion of the limitation period. Interestingly, the audit of all branches were directed by the CIT whereas the assessee does not have any branch office. Apparenlty, the approval was given as an inevitable consequence to the proposal from AO without any independent application of mind to underlying facts or circumstances and without there being any material before him to judge the existence of pre-requisties. (viii) The approval has been signed by the ITO Hqtr and there is no formal approval on record under the signature of CIT. Therefore, the approval communicated by ITO without the backing of approval from CIT is no approval in the eyes of law for initiating action under Section 142(2A). Letter dated 31.03.2013 issued by ITO Hqtr sent to the AO for enabling action 142(2A) is only intimation of so called approval by CIT. Coupled with this, the intimation of ITO does not reflect any reason for taking such a drastic action. The so called approval does not even communicate the expected timeline for completion of audit in terms of Section 142(2C) of the Act. The AO, in turn, has also not specified the time limit for completion of special audit in the letter dated 31-03- 2013 addressed to Assessee. The AO has not communicated the approval memo of CIT but has merely intimated to the Assessee vide letter dated 31-03-2013 that approval has been received from CIT. (ix) The auditor has not found any specific defect in the accounts except making general observations about supporting of evidences and about applicability of Section 56(2) on the basis not related to books of account per se. The auditor has also not compiled any balance-sheet and Profit & Loss account afresh as expected in terms of letter addressed to CIT for approval by AO. (x) The Assessing Officer in the remand proceedings before CIT(A) has not contradicted any of the facts like non production of accounts in the course of assessment proceedings, no reason in the letter or order under Section 142(2A), wrong facts in show cause notice, not addressing the objections of the assessee, non-application of mind by the Assessing Officer as well as CIT etc. 5.3 The ld. counsel thus contends that it is demonstrable from the order sheet entries that upto 15.03.2013 no material were available on record which could attract the pre-requisites, viz., nature and complexity of books etc. contemplated under Section 142(2A) of the Act. Rather, the Assessing Officer had effectively closed the proceedings observing ‘case discussed’ on that date and also noted that further hearing will be communicated if so considered necessary. Suddenly, on 26.03.2013 the Assessing Officer felt suspicion without possession of accounts in his custody. The assessee has done everything possible within his means and diligently attended to all the proceedings with a lightening speed and a compliance in gap of one/two days and also filed his defense. The Assessing Officer and CIT however acted in undue haste grossly overlooking the salutary prerequisites for imposing special audit merely to gain extension of limitation period as provided in Explanation 1 appended to Section 153 of the Act in the event of special audit.

5.4 To support its case that special audit could not have been imposed in circumvention of pre-requisites as set-out in the preceding paragraphs, the ld. counsel placed reliance upon the judgment rendered in the case of Sahara India Firm vs. Commissioner of Income Tax (2008) 300 ITR 403 (SC); Rajesh Kumar vs. PCIT (2006) 287 ITR 491 (SC); Delhi Development Authority vs. Union of India (2013) 350 ITR 432 (Del); Kaka Carpets vs. CIT (2014) 43 taxmann.com 198 (Alld); Prateek Resorts and Builders Pvt. Ltd. vs. ACIT (2011) 9 taxmann.com 144 (All.); Gauri Pati Udyog vs. ITO order dated 29.05.2015 (All.); Smt. Srilekha Damani vs. DCIT in order dated 19.08.2015.

5.5 The Ld. Counsel thus submitted in conclusion that the limitation period for framing assessment could not have been extended on the basis of illegal directions towards special audit in the context of the case. It was thus urged that assessment order passed beyond the ordinary limitation period is a nullity in law and cannot be acted upon against the assessee.

6. The ld. counsel thereafter addressed the Bench on merits of the additions made under Section 68, Section 56(2) and other disallowances which we shall deal with in succeeding paragraph, if considered necessary and expedient.

7.1 The ld. DR contends that having regard to nature and complexity of the accounts, the Assessing Officer was left with no option but to impose special audit. Frequent inter transfer of funds with group entities etc. called for closer examination of records and thus warranted help from the expert. It was contended that it was very difficult for the Assessing Officer discharging quasi judicial function to frame proper assessment order without the support of the expert auditor to gauge the extent of escapement of taxable income. It was contended that it is self-evident from the order sheet that the Assessing Officer called for various details & accounts from the assessee from time to time and the details/accounts were provided to him by the Assessing Officer on different dates. The Assessing Officer thus had the occasion to examine the accounts before issuing the directions under Section 142(2A) with the prior approval of the competent authority, i.e, CIT concerned. The ld. DR pointed out that the assessee did not fully co-operate with the Assessing Officer and submitted accounts after several non compliances. The Assessing Officer has directed special audit having regard to the nature and complexity of the accounts, doubts about correctness of accounts, combined with the interest of the Revenue. These facts emerges from the order sheet entry dated 26.03.2013. The ld. DR thus contended that allegation about imposition of special audit to get extended limitation time is bald one and wholly without basis. The ld. DR also pointed out that the Assessing Officer on 26.03.2012 issued show cause notice to the assessee and granted opportunity before issuing directions under Section 142(2A) and it does not lie in the mouth assessee to allege violation of principles of natural justice. The assessee file reply and explanation to such show cause notice on 30.03.2013 and after due examination thereof, a proposal was submitted to the CIT Ghaziabad on the same date, i.e., 30.03.2013 seeking his approval as mandated. The approval of the CIT was duly communicated to the Assessing Officer on 31.03.2013 and based on such approval, the special audit under Section 142(2A) was directed and communicated.

7.2 The ld. DR submitted that the nature and scope of duty which the Assessing Officer is required to discharge in terms of provisions of Section 142(2A) are evidently of limited nature and such act is a part and parcel of ongoing assessment proceedings which the Assessing Officer is required to complete under the provisions of Chapter-XIV of the Act. A reference was made to the decision of the Hon’ble Delhi High Court in the Yum! Restaurants India Pvt. Ltd. vs. CIT (2005) 196 CTR 435(Del.) and it was contended that an order under Section 142(2A) is not a final order and does not finally determine the obligations and liability of the assessee. Such action is merely a step towards completion of the assessment proceedings which is taken by the Assessing Officer in order to completely and fully understand the accounts of the assessee. Even otherwise, the assessee is under legal obligation to provide complete assistance to the Assessing Officer in finalization of the assessment proceedings. The ld. DR submitted that the object of Section 142(2A) is more to facilitate completion of assessment proceedings effectively by the Assessing Officer and upon gathering proper understanding of the financial affairs of the assessee. It was thus contended that no fault can be found in the process adopted by the AO for imposition of special audit in the context of the case.

8.1 The assessee has inter alia raised a substantive question regarding the legality, validity and judicial propriety of exercise of power conferred under Section 142(2A) mainly on the ground that (a) reasons for directing special audit does not meet the prerequisites of Section 142(2A) but is based on hollow suspicion and flimsy grounds (b) the special audit has been ordered in violation of principle of natural justice and without consideration of reply to the show cause notice (c) without examination of accounts (d) the special audit was imposed only to unlawfully gain extended time limit for passing the assessment order and (e) the approval for special audit was granted loosely and perfunctorily by the CIT in extreme haste and without any application of mind and without ensuring the compliance of conditions stipulated under Section 142(2A) of the Act. As a corollary to the question, assessment order passed during the extended time with the aid of such nonest special audit is a nullity being time barred.

8.2 The issue raised to contest invocation of S. 142(2A) is fundamental and is determinative of limitation period of assessment order in question. While some doubts have been raised on the appealability of the order directing imposition of special audit under S. 142(2A) per se, one can not however simultaneously loose sight of the fact that subsequent proceedings and consequential aspects viz. extension of limitation period are inextricably linked to the very existence and validity of assessment order under challenge, propriety of such aspects are capable of being examined for determination of issues emanating from such assessment order having regard to wide spectrum of powers conferred upon ITAT under S. 254(1) of the Act. Thus, where it is found as a matter of fact that the imposition of special audit under S. 142(2A) does not pass the test of conditions stipulated therein, the benefit of extension of time limit under Explanation 1(iii) to S. 153 would be ousted to the AO. Noticeably, the CIT(A) in the instant case has adjudicated the objections of the Assessee on validity of special audit and found albeit justification in such action of AO. The revenue has not put forth any challenge to scope of powers of CIT(A) on this aspect.

8.3 As per the pre-amended law existing prior to 1-6-2013, S. 142(2A) of the Act empowered the AO to direct the assessee to get its accounts audited by a Chartered Accountant nominated by the Chief Commissioner/Commissioner of Income-tax having regard to the interest of revenue. This power could be exercised if the assessing officer is of the opinion that this is necessary having regard to the nature and complexity of the accounts. Pertinent to observe, the enlargement of powers of AO carried out by the amendment in S. 142(2A) by Finance Act, 2013 post 1-6-2013 has not been reckoned in the present appeal.

8.4 Extensive reliance has been placed on the sequence of events emanating from order-sheet entries recorded by the AO in the course of assessment proceedings. It would therefore be prudent to reproduce the order sheet entries in verbatim for easy understanding of events chronologically.

27.08.2011 Case is selected for scrutiny through CASS . Notice u/s 143(2) issued and fixed for 9.9.2011 26.09.2011 Notice u/s 143(2) issued and fixed for 30.09.2011 06.08.2012 Notice u/s 142(1) issued fixed for 23.8.12 13.09.2012 Notice u/s 142(1) a/w questionnaire issued and fixed for compliance on 24.9.12. Notice u/s 271(l)(b) also issued for non compliance. 21.09.2012 CA Anil Kumar appeared and filed some details of questionnaire dt. 13.9.12. 03.12.2012 Notice u/s 142(1) issued and fixed for 10.12.12 12.12.2012 Anil Kumar FCA appeared filed part details.

24.01.2013 Notice u/s 142(1) issued 29.1.13 15.02.2013 Penalty Notice u/s 271(l)(b) issued for compliance on 19.02.2013 19.02.2013 Non attended. Penalty u/s 271(l)(b) imposed 19.02.2013 Notice u/s 142(1) issued for compliance on 21.02.2013 21.02.2013 Miss Kanika Goel, AR, appeared & filed her power of attorney on behalf of the assessee. The Ld. AR is requested to file following details by next dt. Of hearing:-

1. Details of unsecured loan with confirmation i.e. name, address & PAN, copy of ITR & Bank A/c statement of the lenders for the entire year.

2. Details of complete Bank A/c statement of all account in the name of assessee or his proprietor concern for last 3 years.

3. Complete details of share investment in last 3 years in a chart form explaining each year opening stock, closing stock, & purchases & sales along with profit / loss of each share. Also required is the name & address of the company.

4. Details of the companies/firm/Prop concern where the assessee is a director / partner / prop along with copy of ITR of the company / firm etc. 8i computation of income for 2 years.

Next date is 25/2/2013 at 4.30 PM

/The assessee may come any time of the day. Please note that a lot of time was already lapsed in this case and as the undersigned is extremely burdened with a no. of time barring cases, it will not be possible to grant any further adjournment and the undersigned will be forced to complete assessment based on material on record.

25.02.2013 Reply received next date 27.02.2013 27.02.2013 Shri Anil Kumar assessee and CA appeared in his own case. Case discussed. The Ld. AR is required to file following details without fail by next date of hearing.

1. Copy of Bank account statement of lender not provided yet.

2. Details of property sold as provided in AIR information.

Next date is 01/03/2013 01.03.2013 Reply received in dak with few details asking for adjournment of 7 days.

13.03.2013 Shri Anil Kumar, assessee appeared & filed paper regarding sale & purchase of property. The assessee is required to file following details by next date .

2. Current status of unsecured loans and sundry creditors

Next date is fixed at 15/3/13 15.03.2013 Shri Anil Kumar assessee appeared & filed pending details. Case discussed. Next date of hearing will be communicated as & when required.

26.03.2013 The case has been thoroughly gone through. It is suspected that accounts maintain by the assessee are not reflecting the true picture of the income as he & his wife is director in many companies receiving loans & shares for many companies, moneys are jumping from one company to another & account statements also have a difference.

30.03.2013 As per Show cause u/sJ42(2A) proposal is being sent for compliance on 30.03.2013.

30.03.2013 Shri Anil Kumar, assessee & A.R. appeared & filed reply to the show cause of 26/3/2013 regarding special audit to be proposed by the undersigned u/s 142(2A). Reply received.

30.03.2013 Letter sent to Hon'ble CIT, Ghaziabad Seeking directions for referring the case for special audit.

31.03.2013 Approval received for 142(2A) special audit by O/o CIT, Ghaziabad. Letter sent to the assessee informing him about the same. Also letter sent to Shri Mridual Pathak , C.A. L- appointed to carry out special audit.”

8.5 The show cause notice issued by the AO addressed to the Assessee for the proposed action under section 142(2A) is reproduced hereunder for ready reference; 8.6 Communication by the AO addressed to the CIT seeking approval for directions under S. 142(2A) is reproduced hereunder; 8.7 Communication from the ITO (Hqtr) of the CIT to the AO granting approval to issue directions under 142(2A) is noted hereunder:

8.8: Communication addressed to the Assessee by the AO towards directions for special audit is reproduced hereunder:

8.9 It is predominantly the case of the assessee that the pre- requisites for invocation of powers under S. 142(2A) were not existing at all. The assessee filed all details and particulars called for and made umpteen visits to the deptt. for the sake of all compliance. The special audit of rapacious nature with ensuing civil consequences was however imposed on the assessee on the last day of expiry of assessment only to gain the additional time limit for completion of assessment in a cavalier exercise of power. The AO has never examined the accounts but merely called for certain details as considered expedient. No complexity in the accounts were demonstrated at any stage of the proceedings nor could have been, without calling for books. The Assessee is an ordinary tax payer and maintains accounts which are quite simple to understand. Whereas, the AO was satisfied with the details filed on various issues in the ongoing proceedings and recorded ‘case discussed’; a completely contrary stand was taken as an ipse dixit, a few days later on 26-03-2013 by expressing ‘doubt’ on accounts and make general & extraneous comments as a witch- hunt without any sound basis. The Assessee further asserts that the approval from the CIT was never communicated to the Assessee. The approval present on record does not bear the signature of the CIT concerned. It is thus the case of the assessee that action of the AO is without the approval of the CIT per se but based on the communication of some headquarter ITO. The Scheme of Act does not permit such course of action. Besides, the reply of the assessee to the show cause notice was also not examined or rebutted. The Assessee had answered to each and every point raised in the show cause notice. While addressing letter dated 30.03.2013 to the CIT; the AO has merely expressed his opinion in the realm of suspicion about the correctness of accounts. The show cause notice issued to Assessee has been merely reproduced in the communication by AO to CIT to seek directions and the reply of the Assessee was brushed aside as ‘not acceptable’ but without a whisper as to how such adverse opinion has been formed. As per communication issued by the ITO (Hqtrs), the CIT on its part has also simply endorsed the action of AO without any enquiry and without being privy to any material except the allegation of the AO in the show cause notice. The approval of CIT, if any, is thus based on some farfetched and unsupported contemplations and conjectures entertained by AO in the last days of the assessment getting time barred. The so called approval has dispensed with application of mind on the very need to permit imposition of special audit and is thus singularly perverse.

8.10 We do find substantial merits in the plea of the Assessee. The chronology of events do smack of arbitrariness in negation of rule of law. Admittedly, the AO recorded ‘case discussed’ on 15-03-2013 without any embellishment or any hint of error on the details filed. Thereafter, a show cause notice was issued to Assessee for hearing on 26-03-2013 primarily based on suspicions and doubts on the correctness of accounts in an abrupt exercise of powers. Nowhere from the records, it appears that books were examined prior thereto. Custody of accounts is also not claimed anywhere. Furthermore, It is not known how the reply of the assessee lacks in satisfying the queries raised. A summary rejection of reply without any deliberation thereon whatsoever, can not bracketed in the league of discharge of quasi judicial function. The superior authority viz CIT also endorsed the directions for special audit (with significant costs to exchequer) in a most casual and nonchalant manner based on trappings of doubts and suspicion without taking note of reply to the show cause. Such subversion of judicial process has rendered the very purpose of giving opportunity to the assessee [as explicit in the provision] and seeking reply thereon, a wholly un-comprehensible exercise to say the least. The whole action of imposition of special audit in an unnatural haste lacks in bonafide and is overtly in derogation of salutary objects of such provision.

8.11 To sum up, the directions for special audit in the factual matrix cannot, in our opinion, be countenanced in law for more than one reasons namely; (a) the AO himself conceded that details and information called for, were provided from time to time (b) the AO had no occasion to have even a glimpse of accounts maintained by the Assessee nor claims to have looks into such accounts (c) the show cause does appear to embody any complexity in the accounts per se (d) in the absence of any comments on reply by the assessee, opportunity provided is merely an empty formality resulting in non-compliance of S. 142(2A) in effect (e) the so called approval of CIT (as communicated by ITO[Hqtr] to the AO does not show any independent application of mind and is weeded to tokenism (f) the approval of CIT per se not made available to the Assessee or even to the tribunal and a communication by ITO Hqtr is no substitute for approval of CIT (f) the order of approval by CIT seeking to saddle special audit was never communicated to the assessee.

8.12 Having concluded that the invocation of S. 142(2A) in the circumstances is outside the sanction of law and thus can not be approved, the assessment order passed would be clearly beyond the limitation period provided under S. 153(1) of the Act and hence time barred.

Order pronounced in the open Court on 27/01/2023.