M/S SUNDER MAL SAT PAL,MUKATSAR vs. DCIT, LUDHIANA

PER DR.B.R.R.KUMAR, A.M. :

All the above appeals have been filed by Assessee against the order of

the Ld. CIT(A)-I, Ludhiana dt. 29/11/2012.

Grounds of Appeal in ITA No. 154/Chd/2013 for the A.Y. 2005-06: 1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the assessment framed u/s 153C read with section 143(3) by the Ld. Deputy Commissioner of Income Tax, Central Circle-Ill, Ludhiana is against law and facts on the file in as much as the very initiation of proceedings u/s 153C is bad in law.

4 That he further not justified to uphold the disallowance of Rs. 35,539/- made by the Ld. Assessing Officer on account of non-payment of TDS.

Grounds of Appeal in ITA No. 155/Chd/2013 for the A.Y. 2006-07: 1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the assessment framed u/s 153C read with section 143(3) by the Ld. Deputy Commissioner of Income Tax, Central Circle-Ill, Ludhiana is against law and facts on the file in as much as the very initiation of proceedings u/s 153C is bad in law.

4 That he further not justified to arbitrarily uphold the action of the Ld. Assessing Officer in adding:- (a) a sum of Rs. 69,770/- on account of alleged difference in books of accounts. (b) a sum of Rs. 18,02,160/- on account of alleged payments made by the appellant to M/s Om Industries. (c) a sum of Rs. 3,00,946/- on account of alleged negative cash balance. (d) a sum of Rs. 10,70,000/- on account of alleged entries in katcha books.

5 The Ld. CIT(A) gravely erred in not adjudicating on the following grounds:- (a) disallowance of Rs. 8,732/- by resort to provisions of section 40A(3). (b) a sum of Rs. 5,315/- on account of alleged interest received by the appellant. (c) a sum of Rs. 8,585/- on account of payment of insurance of car

Grounds of Appeal in ITA No. 156/Chd/2013 for the A.Y. 2007-08: 1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the assessment framed u/s 153C read with section 143(3) by the Ld. Deputy Commissioner of Income Tax, Central Circle-Ill, Ludhiana is against law and facts on the file in as much as the very initiation of proceedings u/s 153C is bad in law.

(a) a sum of Rs. 19,123/- by resort to provisions of section 40A(3).

(b) a sum of Rs. 9,77,000/- out of alleged discrepancies in cash in hand / loans received and repaid in cash.

(c) a sum of Rs. 15,000/- on account of non deduction of TDS.

Grounds of Appeal in ITA No. 157/Chd/2013 for the A.Y. 2008-09: 1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the assessment framed u/s 153C read with section 143(3) by the Ld. Deputy Commissioner of Income Tax, Central Circle-Ill, Ludhiana is against law and facts on the file in as much as the very initiation of proceedings u/s 153C is bad in law.

4 That he was further not justified to arbitrarily uphold:-

(a) disallowance of Rs. 5,000/- on account of alleged cash payment by resort to provisions of section 40A(3)

(b) sum of Rs. 10,000/- and Rs. 3,00,598/- on account of alleged differences in books of accounts.

appeal regarding the getting the accounts audited by a special auditor under

section 142(2A).

section 132(1) of the Income Tax Act,1961 was carried out on 24/10/2007 at the

premises of Shri R.K. Bansal / M/s Chet Ram Ravi Kumar and the last Panchnama

was drawn on 28/11/2007. During the search based on the incriminating

document found and seized which belongs to the assessee who is a sister

concern of M/s Chet Ram Ravi Kumar proceedings under section 153(C) were

initiated and the assessment under section 153(C) has completed on

28/07/2010. The sequence of events are as under:

24/10/2007 : Action under section 132(1) initiated

11/11/2009 : Notice under section 143(2) was issued

08/12/2009 : Show cause was issued for conducting special

14/12/2009 Audit under section 142(2A)

21/12/2009 : Reply to the show cause by the assessee

23/12/2009 : Approval for special audit u/s 142(2A) obtained

29/12/2009 : Letter was issued to the assessee

30/12/2009 : Due date for completion of assessment

31/05/2010 : Report of the Special Auditor

28/07/2010 : Assessment completed

a) To translate the books found from Mahajani to English b) To bifurcate the transactions recorded in the kacha cash book. So as to clarify whether they pertain to M/s Chet Ram Ravi Kumar or Sunder Mal Sat Pal. c) To bifurcate the accounted transactions from unaccounted transactions to arrive at a definite conclusion and also reconcile the regular books of accounts with these seized books. d) Reconciliation of the promotes with the regular books of accounts to bifurcate the accounted for promotes from the unaccounted ones and to work out the interest income earned on these advances and also to check the source of investment made in these advances, on yearly basis from Asstt. Year 2002-03 to Asstt. Year 2008-09. e) To redraw the balance sheet, P&L account from A.Y. 2002-03 to 2008-09, so as to arrive at a true and correct income. f) To check the loose papers found and reconcile them with your regular books of account. 6. In reply to the show cause the assessee submitted before the Assessing

Officer that the assessee has fully cooperated with the department and

attended all the proceedings in complied with all requirements. It was submitted

that so far as Kacchi books in Mahajani language are concerned, the translated

version has already been submitted and also the regular books of accounts

have been translated into computerized accounts and they are available for

verification.

appraisal report clearly states that the assessee did not attend the post search

proceedings to explain the nature of the seized material, the assessee has not

complied to the notice issued from January 2009 to November 2009 and since

no compliance to the questionnaire issued was made by the assessee and

keeping in view the intricate nature of the seized material and since a true

picture of the undisclosed income cannot be worked out within a short span of

a week and therefore in view of the complexity of accounts and the interest of

the Revenue special audit was necessary.

reference of special audit which are in toto as per the points raised from a) to f)

mentioned in the show cause notice (refer para 1 of this order).

Special Auditor was submitted on 31/05/2010.

Special Audit which are as under:

a) The Auditor was not provided the required information and explanation necessary for the purpose of the audit. b) The assessee did not care to reply to various letters issued by the auditor during the course of the audit. c) No proper books of accounts maintained and kept by the assessee. d) The examination by the auditor further revealed that evidences like proper bills/vouchers for items debited/credited in the Profit and Loss accounts not produced, suggesting the non availability of the same. e) The auditor, therefore, based his report on the books of account produced and documents seized during the course of the search. 11. During the hearing before us the Ld. AR argued that the Special Audit

conducted was only to extend the time to complete the assessment inspite of

all compliances required by the Assessing Officer are met. It was further argued

that at the outset the notice was issued not to the assessee who is a partnership

firm. The address mentioned in the show cause was Ravi Kumar Bansal C/o Chet

Ram Ravi Kumar, 2, New Grain Market, Muktsar whereas the assessee firm name

is M/s Sundar Mal Sat Pal. He argued that the point no. 1 of the reasons given by

the assessee that the assessee did not attend the post search proceedings to

explain the nature of the seized material cannot be a reason for ordering

Special Audit. Similarly the AO's observation that the special audit is being

referred keeping in view the intricate nature of the seized material and true

picture of undisclosed income cannot be worked out within a short span of a

week at this juncture belays all the statutory provisions enshrined for referring the

matter to the special audit.

Further on core issues of references, it was argued that translation from Mahajani

language to English language cannot be a function of the Special Audit as

translated versions have already been given to the Assessing Officer. It was

argued that the person who writes or translates the books of accounts cannot

be authority to conduct the Special Audit in any case. Taking objection to the

point no. b) of the show cause “To bifurcate the transactions recorded in the

kacha cash book. So as to clarify whether they pertain to M/S Chet Ram Ravi

Kumar or Sunder Mai Sat Pal ” cannot be a purpose of Special Audit as

bifurcation of transactions in one cash book no way, involves auditing of

accounts.

“c) To bifurcate the accounted transactions from unaccounted transactions to

arrive at a definite conclusion and also reconcile the regular books of account

with these seized books”.

“d) Reconciliation of the pronotes with the regular books of accounts to

bifurcate the accounted for pronotes from the unaccounted ones and to work

out the interest income earned on these advances and also to check the

source of investment made in these advances, on yearly basis from Asstt. Year

2002-03 to Asstt. Year 2008-09.”

“f) To check the loose papers found and reconcile them with your regular books

of account”.

it was argued that the Assessing Officer is trying to delegate the job of the

Assessing Officer to the Special Auditor which cannot be accepted. Further

referring to point no. e) wherein it was mentioned to redraw the balance sheet,

P&L Account to arrive at a correct picture cannot be said to be a function

under audit or special audit as per the Income Tax Act,1961.

Act,1961, the Ld. AR argued that there was no reference to the nature and

complexity of the accounts which is the pre-requirement for ordering Special

Audit. To conclude he argues that the entire reasons given by the Assessing

Officer revolve around non cooperation on the part of the assessee, difficulty in

working out the undisclosed income within a short span of a week time and no

complexity of accounts was brought about.

argued that the assessee has not complied to the notices issued and the

contumacious conduct of the assessee in non cooperation to provide any

details, in the absence of correct books of accounts, the ordering of special

audit is the only action which is available to the Assessing Officer in determining

the undisclosed income. He argued that since the books are non decipherable

language i.e; Mahajani the accounts in all reasons have to be re-audited and

accordingly reference to the special audit is highly valid.

the case of DLF Ltd And Another vs Additional Commissioner Of Income Tax dt.

28 March, 2014 wherein it was held that the managements may at times regard

such enquiries as an unwarranted intrusion or a hounding approach 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. 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.

case of Sahara India Financial ... vs CIT And Ors. Dt. 23 August, 2017 wherein the

earlier judgment was quoted argued that the powers under Section

142(2A) were exercised in terms of the legislative provisions only. 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. Accounts should be accurate and

provide real time record of the financial transactions of 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 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 accounts have to be audited by a qualified Chartered

Accountant. Chartered Accountants are not ordinary accountants but

specialists who have successfully undergone academic study and have

extensive practical experience and trained for the said work. 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.

16.1 He further argued that the entire events shows a high degree of non

cooperation on the part of the assessee in extending statutory compliance and

keeping in view the nature and complexity of the accounts the Special audit

under section 142(2A) was rightly ordered to be conducted.

16.2 Rebutting the arguments of the Ld. DR, Ld. AR argued that no case was

made by the Assessing Officer regarding the nature and complexity of the

accounts while ordering the Special Audit.

material available on record.

“"(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 Commission 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] 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] 18.1 The above provisions were applicable w.e.f 01/06/2013 and prior to that

definition was only for the nature and complexity of the accounts of the

assessee and all other conditions have been inserted by Finance Act, 2013 w.e.f

01/06/2013.

18.2 The provisions provides for certain conditional requirements for Special

Audit which are as under:

• Nature and complexity of accounts • Volume of the accounts • Doubts about correctness • Multiplicity of transactions • Specialized nature of business • Interest of Revenue

accounts. The reasons given by the Assessing Officer while ordering the special

audit are being examined in the context of the requirements laid down by the

statute. No doubt the services of the expert in the field of accounts cannot be

denied to the Assessing Officer at the same time the Assessing Officer should

have reasonable satisfaction to be brought out on record about the nature and

complexity of the accounts. In the instant case the Assessing Officer has not

given any finding about the nature and complexity of accounts, volume of

accounts, multiplicity of transactions, specialized nature of business activity. We

find from the record the assessee has submitted books of accounts translated in

English and the reasons given by the Assessing Officer viz details have not been

given, intricate nature of the seized material, true picture of undisclosed income

could not be worked out within a span of a week cannot make any valid

ground for referring a case to Special Audit.

In the case of AT&T Communication Services India Pvt. Ltd. the Hon’ble High

Court of Delhi upheld the validity of Special Audit even though books of

accounts were not called for examination by the Assessing Officer because the

Assessing Officer has given a reasoned satisfaction regarding the method of

accounting showing the complexity of accounts and referring the terms of

identifying the accounting standard applied for recognition of income. Thus we

hold that even when books of account have not been called for satisfaction as

to the nature and complexity of accounts of the assessee is a sine-qua-non for

directing the assessee to get the accounts audited by an accountant as

defined in the explanation below Sub Section (2) of Section 288.

we find that the Assessing Officer has nowhere mentioned about method of

accounting or nature of complexity of accounts. It was relied only on non

cooperation during the post search proceedings, during the assessment

proceedings reconciliation of loose papers redrawing of balance sheet and

P&L Account, and reconciliation of promotes. Not only that, no comments on

nature of complexity of accounts year wise has been attempted by the

Assessing Officer. Relying on the facts and circumstances of the case and

following the judgment of Punjab and Haryana High Court in the case of Hind

Samachar Ltd. Vs. Assistant Commissioner of Income Tax and

Another (335 ITR 277) where in it was observed that though grant of approval by

the Commissioner has been mentioned, it has not been mentioned as to why it

was considered necessary having regard to nature and complexity of accounts

and interest of the Revenue that special audit was necessary. The fact remains

that these reasons are conspicuous by their absence in the impugned order. The

impugned order under section 142(2A) of the Act thus does not meet the

requirement of law and based on the judgment of Hon’ble High Court of Delhi

in the case of Delhi Development Authority and Another Vs. Union of India and

Another (350 ITR 432) wherein it was held that an Assessing Officer is required to

scrutinize the entries and verify them, but this does not require services of a

special auditor or a Chartered Accountant to undertake the said exercise.

Section 142(2A) is not a provision by which the Assessing Officer delegates his

powers and functions, which he can perform to the special auditor, it can be

said that the Assessing Officer is not right in getting the accounts audited. We

also hereby place reliance in the case of Sahara India (Firm) Vs. Commissioner

of Income Tax, Central-1 300 ITR 403 (SC) wherein it was observed that "Before

dubbing the accounts to be complex or difficult to understand, there has to be

a genuine and honest attempt on the part of the Assessing Officer to

understand accounts maintained by the assessee; to appreciate the entries

made herein and in the even of any doubt, to seek explanation from the

assessee. But opinion required to be formed by the Assessing Officer for exercise

of power under the said provision must be based on an objective criteria and

not on the basis of an objective satisfaction. There is no gainsaying that recourse

to the said provision cannot be had by the Assessing Officer merely to shift his

responsibility of scrutinizing the accounts of an assessee and to pass on the buck

to the special auditor”.

Taxman 121) the Hon’ble High Court of Delhi held that examining the impugned

order in the present case, it is apparent that the order is non speaking order and

gives no reasons for arriving at the conclusion that having regard to the nature

and complexity of assessee's accounts and interest of the revenue, the AO was

of the opinion that accounts are to be audited u/s 142(2A) of the Act. The order

is silent as to on what basis and on what grounds, the accounts proposed to

audit under section 142(2A) were considered complex and on what

considerations it was arrived that it is in the interest of revenue to direct audit of

accounts. Mere reference to a prior approval of CIT does not satisfy the

precondition of a "Speaking order" containing reasons for invoking the provision

of section 142(2A) of the Act. There is no reference to detailed replied furnished

by the assessee during the proceedings.

clearly invisible and conspicuous by their absence. In other words, order is bereft

of any reason. It is stated here that reasons are heart and soul of an order, as

they facilitate the process of judicial review and therefore in absence of any

reason much less cogent, clear and succinct reasons order u/s 142(2A) of the

Act is held to be bad in law and without proper jurisdiction.

there was no speaking order, and gives no reason for arriving at the conclusion

having regard to the nature and complexity of the accounts and the reasons

are clearly invisible and inconspicuous and hence the order under section

142(2A) of the Act is held to be bad in law.

which is held without proper jurisdiction, the time so taken cannot be counted

and the period does not get extended. Since the order was passed on

28/07/2010, the same has to considered, as time barred. Therefore, we are of

the opinion that the order passed by AO suffers from legal jurisdiction and is

therefore, bad in law.

As a result, all the appeals of the assessee are allowed. 25.

Order pronounced in the open Court.

Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 15/06/2018 AG Copy to: 1.The Appellant, 2. The Respondent, 3. The CIT(A), 4. The CIT, 5. The DR