Dlf Commercial Projects Corporation & Another v. Assistant Commissioner of Income Tax & Ors

judgment in Rajesh Kumar (supra) to the effect that direction under Section 142(2A) entails civil consequences because the assessee has to pay substantial fee to the special auditor is knocked off. True it is that the payment of auditor's fee is a major civil consequence, but it cannot be said to be the sole civil or evil consequence flowing from directions under Section 142(2A). We are convinced that special audit has an altogether different connotation and implications from the audit under Section 44AB. Unlike the compulsory audit under Section 44AB, it is not limited to mere production of the books and vouchers before an auditor and verification thereof. It would involve submission of explanation and clarification which may be required by the special auditor on various issues with relevant data, document etc., which, in the normal course, an assessee is required to explain before the Assessing Officer. therefore, special audit is more or less in the nature of an investigation and in some cases may even turn out to be stigmatic. We are, therefore, of the view that even after the obligation to pay auditor's fees and incidental expenses has been taken over by the Central Government, civil consequences would still ensue on the passing of an order for special audit…."

¶21We must refer to the short affidavit filed by the first respondent as per the directions of this Court issued on 30.3.2012. The Court had directed the filing of an affidavit on oath whether the Assessing Officer had mooted the proposal for the special audit. The affidavit was directed to be filed on or before 10.04.2002. The direction was issued because it was one of the contentions of the petitioner that the Assessing Officer had not mooted any proposal for special audit, but on the contrary had actually dropped the proposal in his report dated 26.12.2011 and that the proposal actually moved from the CIT who had no authority to propose the special

audit. The petitioner had sought to support the allegation on the basis of the report of the Assessing Officer dated 26.12.2011 and the subsequent turn of events on 27.12.2011 when the Assessing Officer had taken a `U' turn and made a proposal for the special audit.

¶22In the short affidavit filed by the first respondent it has been stated in para 2 that the proposal for special audit was sent by the Assessing Officer through the JCIT who forwarded the same to the CIT on

27.12.2011. In para 3 of the affidavit it has been stated that the Assessing Officer submitted a proposal to the CIT on 27.12.2011 through the JCIT seeking proposal for referring the case of the petitioner to the special auditor and the CIT forwarded the proposal to the CCIT on the same date i.e. 27.12.2011 along with the copies of the report of the Assessing Officer dated 26.12.2011. What we gather from these two paragraphs in the affidavit is that the first respondent has treated his report dated

26.12.2011 as a proposal for special audit, whereas the contention of the petitioner is that it is not a proposal for conducting special audit but it is actually a report containing reasons why no special audit is necessary and also intimating the CIT of the intention to continue with the assessment proceedings. In fact, the petitioner went so far as to say that the enclosing of the draft assessment order, though denied by the first respondent, to the report clinched the issue in favour of the view that the Assessing Officer did drop the proposal for special audit.

¶23The provisions of sub-section (2A) of Section 142 require the Assessing Officer to form an opinion that having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, it is necessary to get the accounts audited by a special auditor nominated by the CIT or the CCIT. The proviso makes it incumbent upon the Assessing Officer to give the assessee a reasonable opportunity of being heard before special audit is directed. The direction to conduct special audit has to be, under the sub-section, given with the previous approval of the CIT or CCIT. It is thus the Assessing Officer who is to form the opinion and not for anyone else. The approval to be granted by the CIT or the CCIT, as held by the Supreme Court in the case of Sahara India (Firm) (supra) is an inbuilt protection against arbitrary or unjust exercise of power by the Assessing Officer and therefore a heavy duty is cast on the high ranking authority to see that the approval is not granted in a ritualistic manner; he is required to examine the material on the basis of which an opinion for conducting special audit was formed by the Assessing Officer. According to the judgment, the approval must reflect the application of mind to the facts of the case.

¶24There is a good deal of force in the contention of the petitioner that there was no proposal initially by the Assessing Officer for special audit and that he did not form any opinion that the accounts of the assessee were complex and a special audit was required to protect the interests of the revenue. This is clear from the report dated 26.12.2011 submitted by

the Assessing Officer to the CIT, the relevant portions from which have been extracted earlier. The Assessing Officer did examine the accounts of the assessee on 18.11.2011. He issued a proposal for special audit under Section 142(2A) on 21.11.2011. The petitioner submitted a detailed reply to the same on 24.11.2011. After considering the reply, the Assessing Officer prepared a report on 16.12.2011. The penultimate paragraph to this report, which has also been extracted by us earlier, gives the impression that it was some kind of an interim report, informing the CIT that the submissions of the petitioner are being examined with regard to the issues raised in the show cause notice, the CBDT guidelines, the provisions of law and the judicial decisions relied upon. It also states that the issue of business advance received by the assessee from DLF Ltd. and in turn advanced to certain land owning companies was being examined in the assessment proceedings. The issue relating to reimbursement of expenses in respect of which the assessee had submitted a detailed note along with invoices for service charges amounting to `1.21 crores and reimbursement of expenses amounting to `24.19 crores were also stated to be examined during the assessment proceedings. The Assessing Officer also intimated the CIT that the assessee has been asked to file the necessary details which are being verified and examined in the course of the assessment proceedings. That the assessment proceedings were posted on 16.12.2011 is shown by the order sheet entry of that date which has also been extracted earlier. The proceedings were adjourned to

19.12.2011 on which day the assessee appeared through its representative

and submitted some details and the case was again adjourned to

26.12.2011. On 26.12.2011, as the order sheet entry would show, a reply to the show cause notice was filed by the assessee and it was required to submit details of unsecured loans and sundry creditors on 28.12.2011 to which date the proceedings were adjourned.

¶25On 26.12.2011, when the assessment proceedings had been adjourned further to 28.12.2011, and on which date certain details were submitted by the petitioner, the Assessing Officer prepared another report to be submitted to the CIT. In this report again the Assessing Officer narrated the reply submitted by the assessee to the show cause notice issued on 21.11.2011 under Section 142(2A) and after considering the same, expressed a clear opinion that "the apparent complexities noticed and confronted to the assessee have been answered to by the assessee". The sequitur of this statement is that the Assessing Officer did not form the opinion that the accounts of the assessee were complex and in order to protect the interests of the revenue, a special audit was required. The Assessing Officer further stated in this report, which is the final report, and which has been extracted by us earlier, that whatever details are required in respect of the issues raised in the show cause notice dated

21.11.2011 were being examined in the assessment proceedings and the assessee has been asked to furnish further details (which is an apparent reference to the hearing posted on 28.11.2011) and further that a draft order has been prepared which is enclosed with the final report for the

perusal of the CIT. It is very difficult to treat this report of the Assessing Officer as a proposal submitted by him to the CIT for special audit of the accounts of the petitioner. On the contrary it contains a clear statement that since the complexities in the accounts have been answered by the petitioner and since the details and material submitted by the petitioner would be examined in the course of the assessment proceedings which were pending on that date, no special audit was required. It is not necessary for us to pronounce finally on the question whether the draft assessment order was enclosed to the report dated 26.12.2011 or not; the preparation of the report itself would indicate the mind of the Assessing Officer and the decision taken by him on that date. There is of course the unanswered question whether the draft assessment order was enclosed to the report or not. Section 114(e) of the Evidence Act would perhaps be applicable to such a case and if it has been stated by the Assessing Officer that the draft order was enclosed to the final report, the presumption would be that it was enclosed and it would be for the revenue authorities to rebut the presumption with strong evidence to show that it was not. The burden was on them. They have merely stated in the reply to the RTI enquiry raised by the petitioner that the draft order was not enclosed with the final report dated 26.12.2011. This is a perfunctory manner of discharging the burden placed on them. If the draft assessment order had not been enclosed with the final report, we presume that there would be some correspondence on record from the office of the CIT drawing the attention of the Assessing Officer to the omission to enclose the draft

order and asking him to send the same forthwith. We were not referred to any such correspondence from the office of the CIT. Moreover, even the forwarding letter of the JCIT refers to draft assessment order being forwarded to CIT along with the report dated 26.12.2011 of the A.O. In these circumstances, we find it difficult to believe that the Assessing Officer would not have enclosed the draft assessment order with his final report. We hasten to clarify that the very contents of the report dated

26.12.2011 are sufficient to show that he had formed an opinion that no special audit was necessary in the petitioner's case. He had said so in as many words in the final report. The appending of the draft assessment order would only be an act in furtherance of that intention or opinion; the non-enclosing of the draft assessment order cannot be taken to mean that no opinion was formed by the Assessing Officer that the special audit was not required in the petitioner's case. The statement of the income tax authorities that the draft assessment order was not enclosed with the final report is, therefore, of no consequence.

¶26We must refer to one aspect here. It is perhaps possible to contend that even assuming that in the final report dated 26.12.2011 the first respondent had expressed an opinion that no special audit was necessary, the same not having been communicated to the petitioner, the petitioner cannot rely upon the same. The relevant statutory provisions do not contemplate the communication of the negative opinion formed by the Assessing Officer (that special audit was not required) to the assessee.

However, we are not herein concerned with the question whether such communication was statutorily or even administratively required. The relevant enquiry to be made is only whether the Assessing Officer did form an opinion one way or the other regarding the need for special audit. Once that opinion has been formed and it is part of the record, it binds the Assessing Officer. It is not open to him to deny the fact. Thus the first question posed by us is answered in the affirmative.

¶27If our conclusion that the Assessing Officer on 26.12.2011 did form an opinion that no special audit was required in the petitioner's case is correct, there is an end of the matter and the approval granted by the CCIT on 27.12.2011 and communicated to the Assessing Officer through the CIT on 28.12.2011 is without any effect. It is a nullity. However, it is necessary to examine the question whether it is open to the Assessing Officer, having already formed an opinion that no special audit was necessary, and not having communicated the same to the petitioner, to change his mind and form an opinion subsequently that a special audit is necessary having regard to the complexities of the accounts and the protection of the interests of the revenue. We will proceed on the assumption that it is permissible to the Assessing Officer to do so as prospector or guardian of the revenue since protection of the interests of the revenue is one of the two criteria for reference to the special auditor. Even if we assume so in favour of the revenue, in the present case it would be difficult to justify the change of opinion. There are

impediments to accepting the claim that the change of opinion was justified. Firstly, the earlier opinion that no special audit was required was expressed by the Assessing Officer on 26.12.2011. It was by a reasoned report in which the reply of the petitioner to the show cause notice was discussed in detail and an unambiguous opinion was expressed by the Assessing Officer. He had also expressed his view that he would continue with the assessment proceedings and obtain details and clarifications from the assessee pursuant to the notices and queries raised by him earlier. He had expressed very confidently that he is capable of taking care of the interests of the revenue, by examining the issues raised in the show cause notice in the course of the assessment proceedings themselves. In this background, if the revenue wishes to put forth a contention to the effect that there was a change of opinion on the part of the Assessing Officer, that should naturally be supported by very strong evidence or drastic change in the factual or legal position. What we however find is that when on 27.12.2011 the first respondent herein sent a report to the concerned CIT stating that there were complexities in the accounts and the interests of the revenue needed protection and therefore he was submitting a proposal for special audit, he ought to have pointed out to the material or evidence or the compelling circumstances under which he had changed his mind, that too, overnight. The fact that the earlier opinion was changed overnight is a clear pointer to the position that there could have been no such new facts or change in the legal position which could have compelled a change of mind. Moreover, the

Assessing Officer was under a duty to overcome his own reasons given just a day before as to why there was no need for a special audit, which duty he has not been able to discharge. A perusal of the letter dated

27.12.2011 written by the Assessing Officer to the CIT shows that the reasons given by him for a change of mind are very vague and unconvincing. He has merely stated that on going through the books of accounts, the audited financial results and the balance sheet and profit and loss account "certain complexities have been noted in the accounts of the assessee". He has thereafter referred to the four issues on which special audit was required. In the second paragraph of the letter he has referred to the reply submitted by the petitioner on 26.12.2011. Thereafter, it has been stated that "the submissions of the reply needs detailed examination in view of the complexity of the accounts". Apparently, the Assessing Officer was referring to the reply submitted by the petitioner on

26.12.2011 in the course of the assessment proceedings fixed on that date. In this reply the petitioner has submitted its response to the four issues raised by the AO in the course of the assessment proceedings on

19.12.2011. This reply was not in response to the show-cause notice issued under Section 142(2A) on 21.11.2011; in fact it could not have been, because in the said show-cause notice, the AO did not raise the issue of sundry credits and unsecured loans appearing in the balance-sheet. There, he had raised issues which were different, except one issue, which was common to the notice issued on 19.12.2011, which is the issue relating to reimbursement of the expenses amounting to `25.40 crores. This consists of the two

amounts of `24,19,70,094/- and the service charges of `1,20,98,508/-. So far as these amounts were concerned, though they were included in the show-cause notice issued under Section 142(2A) and also in the letter dated 19.12.2011, the show-cause notice stood terminated by the final report submitted by the AO on 26.12.2011. The four issues raised in the letter dated 19.12.2011 were the reimbursement of the expenses of `24.19 crores, reimbursement of service charges of `1.20 crores, the sundry credits of `2.14 crores and unsecured loans of `1.11 crores. The letter dated 19.12.2011 was only a letter seeking clarifications from the petitioner on these four points in the course of the assessment proceedings, and cannot be read as, nor was it purported to be, a show-cause notice under Section 142(2A). The result is that in respect of these four points raised in the letter of 19.12.2011, which was replied to by the petitioner on 26.12.2011, there was no opportunity given to the petitioner to show cause as to why special audit shall not be directed. The proviso to Section 142(2A) envisages a show-cause notice wherein it is necessary for the AO to make out a case of complexity of accounts and protection of the interests of the revenue and it should be open to the assessee to show that none of the two criteria is satisfied. That opportunity was not afforded to the petitioner because the AO proceeded to send the proposal for special audit on 27.12.2011 to the CCIT through the CIT concerned, just one day after the petitioner wrote the letter to him in the course of the assessment proceedings. The proposal thus suffers from, and is vitiated by, the lack of opportunity to the petitioner which is statutorily mandated.

¶28Further, we are afraid that there are circumstances to indicate that the opinion formed by the Assessing Officer on 27.12.2011 was not his own. Apart from the fact that the opinion was changed overnight, the reasons given for the change of opinion are unconvincing and vague. It merely says that there is complexity in the accounts without demonstrating how. It is also noticed that there was a flurry of activity on

27.12.2011. The Assessing Officer gave reasons as to why he changed his mind; his communication was forwarded to the JCIT who in turn forwarded it to the concerned CIT on the same day i.e. 27.12.2011. On the very same day, the CIT forwarded the proposal to the CCIT. Per se, this may not be a suspicious situation and having regard to the urgency of the matter, it was perhaps expected of the revenue authorities to expedite. However, the CCIT took no time to give his approval to the special audit. He overlooked that no notice had been given by the AO to the petitioner under Section 142(2A) before forwarding the proposal on 27.12.2011. This shows non-application of mind on his part. He approved the proposal on the same day, namely, 27.12.2011. The fact that the CCIT has also approved the proposal on 27.12.2011 itself is borne out by the endorsement made by him on the note put up by the ACIT (Headquarters, CCIT-XI). The signature of the ACIT who put up the note bears the date

27.11.2011 and immediately below the same is the endorsement of the CCIT reading as follows:

"ACIT Circle 31(1) note & other facts are perused carefully. Note is initialled. This is a fit case for complete audit as per provisions of Section 142(2A) of the IT Act".

Sd/-

27.12.2011"

We are also aware that the assessment proceedings were getting barred by time on 31.12.2011. The Assessing Officer had fixed the hearing on

28.12.2011. It was on that day i.e. 28.12.2011 that the approval of the CCIT to the special audit proposal was communicated to him. This extended the period of limitation for completing the assessment. This is an aspect which has to be kept in view.

¶29Having regard to the above circumstances, we find it difficult to accede to the proposition that the CCIT could have applied his mind in such a short period of time to the proposal put forward by the Assessing Officer on 27.12.2011; both the proposal and the approval bear the same date. In these circumstances, there could not have been a serious application of mind on the part of the CCIT. It was merely a ritualistic or mechanical approval given by the CCIT. That is contrary to the law laid down by the Supreme Court in Sahara India (Firm) (supra).

¶30The petitioner attempted to discredit and impeach the proceedings before the first respondent and the correspondence between the first respondent and the CIT/CCIT on the ground that the records/correspondence had been tampered with to cover up the lapses,

both procedural and substantive, in complying with the strict requirements of Section 142(2A). For instance, the petitioner contends that the initial proposal on 26.12.2011 vide letter No.CIT-XI/Spl. Audit/2011-12/2333, for special audit, had been moved by the CIT and not by the first respondent and does not bear reference to any assessee. In the view we have taken regarding the validity of the direction for special audit for the reasons given earlier, we do not consider it necessary to examine those issues and record our conclusions.

¶31In the light of the foregoing, our answer to the other questions posed by us in paragraph 17 (supra) are as follows: - Question No.2: There is nothing on record to show that there was any fresh development between 26th December and 27th December, 2011 compelling the AO to change his mind and come to the conclusion that "certain complexities have been noted in the accounts of the assessee" and therefore special audit was required to be carried out. Question No.3: In any event, it was incumbent on the AO to issue another show-cause notice to the petitioner u/s 142 (2A), after he changed his mind and proposed special audit on

27.12.2011, and invite the petitioner's objections. Question No.4: The record demonstrates no application of mind by the CCIT before granting approval to the proposal for special audit sent by the first respondent to him on 27.12.2011.

Question No.5: The impact of the answer to the above four questions would be that the approval granted by the CCIT on

27.12.2011 for special audit is of no effect and is a nullity.

¶32For the above reasons, the direction for special audit issued by the first respondent on 28.12.2011 and the order dated 29.12.2011 containing the terms of reference to the special auditors are hereby quashed as also all further proceedings consequent thereto.

¶33The writ petition is accordingly allowed with no order as to costs.

(R.V. EASWAR) JUDGE

(S. RAVINDRA BHAT) JUDGE

OCTOBER 15, 2012 Bisht/mm

WP(C) 1868/2012 * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 8th August , 2012. % Date of Decision : 15th October, 2012. + W P(C) No.1868/2012 DLF COMMERCIAL PROJECTS CORPORATION & ANR. .... Appellant Through: Dr.Abhishek Manu Singhvi, Sr.Advocate with Mr.Ajay Vohra, Ms.Kavita Jha, Mr.Amit Sachdeva and Mr.Jaiveer Shergil, Advocates VERSUS ASSISTANT COMMISSIONER OF INCOME TAX & ORS. …..Respondent Through: Ms.Suruchi Aggarwal, Advocate CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR R.V. EASWAR, J.: This is a writ petition filed by DLF Commercial Projects Corporation under Article 226/227 of the Constitution of India in the following circumstances. The petitioner is a partnership firm engaged in the business of construction and sale of real estate. In respect of the assessment year 2009-10, it filed a return of income on 25th September, 2009 declaring a loss of Rs.20,12,82,857/-. A notice under Section 143(2) of the Income Tax Act, 1961 ("Act", for short) was issued by the ACIT, Circle-31(1), New Delhi, who is the first respondent in this petition and in response thereto the petitioner, between 7th September, 2011 and 4th November, 2011, explained its business model, the method of revenue recognition and the arrangement with DLF Land Limited, WP(C) 1868/2012 another company, for rendering various services in connection with obtaining approvals and licences relating to land development rights. On 21st November, 2011 the first respondent issued a show cause notice under Section 142(2A) of the Act, proposing to refer the accounts of the petitioner for special audit. In this show cause notice, a copy of which has been annexed as Annexure H to the writ petition, the first respondent observed that he noticed certain complexities in the accounts of the petitioner on going through the books of accounts and the audited financial statements which necessitated the reference of the accounts of the petitioner to a special auditor in terms of Section 142(2A) of the Act. In particular, it was stated that the following complexities in the accounts were noted:- (a) The petitioner had received business advances of Rs.3717.42 crores from one of its partners, that is, M/s DLF Limited on which no interest was paid. This amount was invested in more than hundred companies which were part of the DLF Group of Companies. The petitioner has been used as a conduit to make huge advances to companies of the same group with a view to avoiding the applicability of the provisions of Section 2(22)(e) relating to deemed dividend and Section 40A(2)(b) of the Act. (b) The petitioner was showing various payments made to companies on account of development rights under the head "stock". No details were available with regard to the quantum of the rights, basis of purchase and sale price or recognition of revenue. This has made the accounts highly complex. WP(C) 1868/2012 (c) No details were available in the accounts with regard to the deduction of Rs.25.40 crores claimed in the profit and loss account under the head "reimbursement of expenses". (d) The petitioner in the relevant accounting year was dealing only in the purchase and sale of development rights on behalf of DLF Ltd. However, no revenue is recognized on receipt of the sale consideration, which is given a colour of advances by the petitioner. This is contrary to the significant accounting policy stated to be followed by the petitioner for revenue recognition-i.e., that revenue would be recognized in the financial year in which the agreements of sale are executed. In view of the above four issues, the Assessing Officer was of the view that the accounts of the petitioner were complex. He, therefore, called upon the petitioner to show cause why the accounts should not be got audited by special auditor under Section 142(2A), as it would be necessary to determine the taxable income for the year. 2. Annexure I to the writ petition is a copy of the petitioner's reply to the show cause notice