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Total Number of Subscribers: 425 |
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Date: 18 March 2008 |
Compiled by : M. Sathya Kumar |
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Special Audit Special
audit ordered only in proper circumstances Section 142(2A) of the Income-tax Act, 1961 empowers the
assessing officer to direct a tax payer to have his accounts subjected to
special audit. This power can be exercised if the assessing officer is of the
opinion that this is necessary having regard to the nature and complexity of
the accounts. It is important to note that the special audit can be directed
even if the accounts have already been audited under any other law. The fees of the auditor would be determined by the chief
commissioner or commissioner and if the tax payer does not pay such fees, he
would be considered to be in default and they would be recovered from him in
the manner provided under sections 220 to 232 of the Act. Such audit has to
be completed within the specific time or such extended time as may be decided
by the assessing officer. Where the tax payer does not co-operate with the
auditor, the period would be extended. In Peerless General Finance and Investment Co Ltd v Dy CIT (236
ITR 671), the Calcutta High Court held that the commissioner of income-tax
before granting approval must have before him the materials on the basis of
which an opinion has been formed. A prior approval can be granted only when
the materials for appointment of the extraordinary procedure are required to
be taken by the assessing officer. The assessing officer is required to place all materials before
the commissioner of income-tax to show that he intends to take recourse to
the said provision having regard to the nature and complexity of the accounts
of the assessee and the interests of the revenue. The high court further held that where the assessing officer
took into consideration several litigations between the assessee and the
Reserve Bank of India, which had nothing to do with the orders of assessment,
and that a lot of litigation was pending before the income-tax department by
way of appeals or writ petitions for almost every year, and on that basis a
special auditor was nominated by the commissioner of income-tax with
directions to verify the correctness of the claims for various allowances,
the aforesaid grounds could not be treated as valid to take recourse to the
provisions of section 142(2A). The Allahabad High Court in UP State Handloom Corporation Ltd v
CIT (245 ITR 192), held that the mere fact that the stocks could not be
reconciled by the auditors could not be a justification to order special
audit of the accounts of the assessee, which was a state public sector
undertaking and whose accounts had been audited by the statutory auditors. An audit places a heavy burden on the person whose accounts are
to be audited, particularly on an organisation like the assessee. Its
employees and officers have to assist the auditors who have to dig out the
old records for the purpose. Further, the expenses of the audit have to be
borne by the assessee, thereby placing substantial financial burden on the
assessee. In an earlier case of Swadeshi Cotton Mills Co Ltd v CIT (171
ITR 634), the Allahabad High Court held that special audit should not be
directed after a cursory look at the accounts. There should be an honest
attempt to understand the accounts of the assessee. In HP State Forest Corporation Ltd v Jt CIT (252 ITR 833), the
Himachal Pradesh High Court held that before adopting the procedure
prescribed under section 142(2A) of the Act, there must be an application of
mind on the part of the assessing officer. The Kerala High Court in Muthoottu Mini Kuries v Dy CIT (250 ITR
455) held that when the statute prescribes an audit by a third party, it
requires that the assessing officer should be satisfied that the accounts of
the assessee are complex in nature. This decision can be made only after seeing
the accounts. Under section 142 of the Act, which provides for enquiry before
assessment, the assessing officer is obliged to serve a notice on the
assessee to produce or cause to be produced such accounts or documents as he
may require and furnish in the prescribed manner information in such form and
on such points or matters as the assessing officer requires. This postulates that a hearing is essential at the
pre-assessment stage. Only if the records are produced and the accounts
examined, the complexity or otherwise of the accounts would become apparent,
and not before. Even if there are difficulties in appreciating the entries in
every case, it would not be appropriate to refer the matter to a chartered
accountant as an explanation could be obtained from the assessee or from his
authorised representative under section 142(1). The expressions used in
section 142(2A) show that there should be sufficient reasons and this itself
postulates a right of hearing. To sum up, the high courts are unanimous in their view that the
special audit can only be directed in exceptional circumstances. It cannot be
done in a flippant or cursory manner without application of mind, which is
the bedrock for invoking the provisions of section 142(2A). Special audit report needed in case of
EOUs This tax rule
deals with the Special Audit Report. |
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