Referred Sections:
Section 142 (2A) of the Income Tax Act, 1961
Section 143(2) of the Act.
Section 141 (2A)
Sections 142 (2A) (2D), 142 (3) and 142 (4)
Referred Cases / Judgments:
Sahara India (Firm) v. CIT(2008) 14 SCC 151
Sahara India Financial Corporation Ltd. v. CIT (2017) 399 ITR 81 (DEL).
Supreme Court in Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar, AIR 1958 SC 538
Subramaniam Swamy v. CBI, (2014) 8 SCC 682
Sahara India (Firm), Lucknow v. Commissioner of Income Tax,
Swadeshi Cotton Mills Co. Ltd. v. C.I.T., [1988] 171 ITR 634 (All)
West Bengal State Co-operative Bank Ltd. v. Joint Commissioner of Income Tax, [2004] 267 ITR 345
$~59 & 60
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 28th August, 2019
+ W.P.(C) 9358/2019
RELIGARE FINVEST LIMITED ..... Petitioner
Through: Mr. Ajay Vohra, Senior Advocate
with Mr. Rohit Jain, Ms. Kavita Jha
and Mr. VaibhavKulkarni, Advocates.
versus
DEPUTY COMMISSIONER OF INCOME TAX & ANR...... Respondent
Through: Mr. Raghvendra Singh, Senior
Standing Counsel with Mr. Vipul
Agrawal, Junior Standing Counsel.
+ W.P.(C) 9359/2019
RELIGARE ENTERPRISES LIMITED ..... Petitioner
Through: Mr. Ajay Vohra, Senior Advocate,
Mr. Rohit Jain, Ms. Kavita Jha and
Mr. Vaibhav Kulkarni, Advocates.
versus
DEPUTY COMMISSIONER OF INCOME TAX & ANR...... Respondents
Through: Mr. Raghvendra Singh, Senior
Standing Counsel with Mr. Vipul
Agrawal, Junior Standing Counsel.
CORAM:
HON'BLE MR. JUSTICE VIPIN SANGHI
HON'BLE MR. JUSTICE SANJEEV NARULA
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 1 of 28
SANJEEV NARULA, J. (Oral) :
C.M. No 38598/2019 in W.P.(C) 9358/2019 &
C.M. No 38600/2019 in W.P.(C) 9359/2019
1. Exemption allowed, subject to all just exceptions.
2. The applications stands disposed of.
W.P.(C) 9358/2019 & CM APPL. 38597/2019 &
W.P.(C) 9359/2019 & CM APPL. 38599/2019
3. Both the present petitions under Article 226 of the Constitution of India
challenge the respective orders, both dated 06.08.2019, passed by Deputy
Commissioner of Income Tax, Circle 21 (1), C.R. Building, I.P. Estate, New
Delhi directing the Petitioners to have their books of account for the
assessment year 2016-17 audited by the Special Auditor under Section 142
(2A) of the Income Tax Act, 1961 (hereinafter referred to as the ,,Act).
Brief Facts
4. The facts and grounds urged in both the petition are more or less similar
and furthermore since identical arguments have been advanced, the same are
being decided by a common judgment. However, facts narrated in WP (C)
No. 9359/2019 are being noted and discussed for the purpose of deciding the
petitions.
5. The Petitioner contends that it is engaged in the business of lending,
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 2 of 28
investment, financial advisory services and distribution of third-party
financial products and has been consistently following the same method of
accounting for the purpose of maintaining its books of account and filing its
tax return. For assessment year 2016-17, the year under consideration, the
Petitioner originally e-filed its return of income declaring total income of
Rs. 44,64,06,770/-. The return of income was revised declaring same total
income. The case of the Petitioner was selected for scrutiny through CASS
and notice was issued under section 143(2) of the Act. During assessment
proceedings, Respondent No.1 called for various information, details and
data, which were duly furnished by the Petitioner from time to time. The
Petitioner filed, before the Revenue, a copy of the order dated 14.03.2019
passed by Securities & Exchange Board of India (,,SEBI). In the said letter,
the Petitioner explained that SEBI, vide order dated 14.03.2019, directed the
Petitioner and M/s. Religare Finvest Ltd. (,,RFL), subsidiary of the
Petitioner, to initiate steps to recall all the loans diverted to the companies
associated with the former promoters.
6. Petitioner further represented that the new professional management of
the Petitioner is taking all steps to recall the loan and that the transactions
referred in the SEBI order, in any case, had no effect on the taxable income
of the Petitioner.
7. A show-cause notice dated 30.05.2019 was issued by Respondent No.1
requiring the Petitioner to furnish certain details/information by 06.06.2019.
In the said notice, Respondent No.1 referred to forensic audit report
furnished by SEBI and its order dated 14.03.2019 alleging diversion/
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 3 of 28
siphoning of funds of the Petitioner to the companies related to its erstwhile
promoters. The Petitioner was directed to give an explanation and to show-
cause why books of account may not be rejected.
8. In the meanwhile, despite Petitioner furnishing the details as directed, a
notice dated 13.06.2019 was issued by Respondent No. 1 requiring it to
show-cause as to why books of accounts of the Petitioner may not be
referred for special audit under section 142 (2A) of the Act, considering the
complexity and volume of the accounts and the specialized nature of the
business activity of the Petitioner. In the said show-cause notice Respondent
No. 1 primarily referred to and reproduced the contents of the notice dated
30.05.2019, and stated that, "Due to complexity of transactions and
voluminous books of account and details, specialized nature of business
activity", the accounts of the Petitioner are proposed to be referred for
special audit under section 142(2A) of the Act. Petitioner was directed to
furnish its response within 4 days, i.e. by 17.06.2019.
9. In response to the aforesaid notice, the Petitioner gave an elaborate reply
dated 17.06.2019, rebutting the allegations and inter alia contending that
reference for special audit was unwarranted. Petitioner referred to several
decisions dealing with the subject, and in particular the judgment of the
Supreme Court in Sahara India (Firm) v. CIT(2008) 14 SCC 151 and also
the decision of this Court in Sahara India Financial Corporation Ltd.
v. CIT (2017) 399 ITR 81 (DEL). It was urged that considering that
there was no change in the nature of business of the Petitioner, its
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 4 of 28
business could not be categorized as "specialized nature of business
activities". Petitioner had undertaken transactions by way of giving loans
and advances in the normal course of business of financing and each and
every transaction is fully and appropriately recorded in the books of
accounts and this is apparent on the face of the financial statement.
Petitioner controverted that it has several subsidiaries, and explained that all
the transactions entered into by the Petitioner with its sole subsidiary viz
Religare Housing Development Finance Corporation are duly disclosed in
the related party transaction schedule of audited financial statement.
Regarding SEBI order dated 14.03.2019, it was argued that vide an earlier
letter dated 06.05.2019 filed before principal CIT, Petitioner had elaborately
explained the background of the aforesaid order, and that there was no
revenue loss to the Income Tax Department. Thus, essentially the
contention of the Petitioner was that there was no complexity in the books of
account which would warrant the Respondent No. 1 to direct special audit.
10. Respondent No. 1 considered the reply furnished by the Petitioner and
after seeking approval of the Principal Commissioner of Income Tax, passed
the order dated 06.08.2019 and directed M/s Das Gupta and Associates,
Chartered Accountants to audit the accounts of the Petitioner as per the
terms of reference within a period of ninety days.
WP (C) NO. 9358/2019
11. In the present case, the Petitioner, Religare Finvest Limited (RFL) is a
subsidiary of the Petitioner in WP(C) No. 9359/2019. As the challenge is to
a similar order dated 06.08.2019 passed by the Deputy Commissioner of
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 5 of 28
Income Tax, after seeking approval of Principal Commissioner of Income
Tax, directing M/s Das Gupta and Associates, Chartered Accountants to
audit the accounts of the Petitioner. The grounds challenging the impugned
order are identical to those which have been raised in W.P.(C) 9359/2019
and therefore our findings and reasons are applicable to both the parties.
12. However, it may be noted that the return of income e-filed by the
Petitioner in W.P. (C) No. 9358/2019, Religare Finvest Limited (RFL),
declared a total income of Rs.506,61,50,010/- . The return of income was
revised declaring total income of Rs. 504,21,26,280/-.
Contentions of the Petitioner
13. The Petitioner has impugned the aforesaid order, alleging that there is a
gross violation of the principles of natural justice and the order has been
passed without affording the Petitioner any opportunity of being heard. Mr.
Ajay Vohra, learned Senior counsel for the Petitioners argued that the order
under Section 141 (2A) leads to serious civil consequences and such an
order cannot be passed as a matter of routine, but only if the circumstances
so warrant. Petitioner was not afforded with a reasonable opportunity of
being heard prior to directing special audit and, thus, the order is vitiated on
account of violation of principles of natural justice. The order suffers from
the vice of lack of fulfilment of jurisdictional conditions for directing special
audit. He further submitted that Section 142 (2A) was amended pursuant to
Finance Act, 2013 with effect from 01.06.2013. Prior to the amendment,
special audit under the aforesaid provision could have been directed only in
cases where the accounts of the assessee were "complex" in nature, and
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 6 of 28
having regard to the interests of Revenue. After the amendment of the said
provision, the scope, of the provision has been expanded. However, the
exercise of the power under the amended provision has to be guarded and
exercised with circumspection. The expanded, enlarged provisions of
Section 142 (2A) would still require, as a condition precedent, the Assessing
Officer to demonstrate the complexity of the accounts of the assessee, which
an ordinary prudent person, reasonably informed about accounts and law, is
not in a position to comprehend. The provision of Section 142 (2A) cannot
be construed to mean that in every case where there is a large volume of
accounts and multiplicity of transactions, the Assessing Officer can direct
the conduct of a special audit under the aforesaid provision. Such an
interpretation would be highly irrational and illogical in as much as, in case
of every assessee having substantial turnover and reported taxable income, it
would become possible to order conduct of a special audit in routine merely
on the ground that the volume of accounts and multiplicity of transactions is
large. The nature of business of the Petitioner which involves dealing with
lakhs of people, would necessarily result into a high turnover, which is more
than Rs. 2000 crores. This does not mean that in case of an assessee having
turnover in excess of Rs. 2000 crores, special audit has to be directed as a
matter of rule or mechanically. He relied upon the decision of the Supreme
Court in the case of Sahara India (Firm) (supra) to contend that the
impugned order is wholly without jurisdiction, illegal and bad in law. Mr.
Vohra rebutted all the comments/findings of Respondent No. 1 in the
impugned order, and stressed that Respondent No. 1 has not made any
attempt to understand the accounts of the Petitioner, and has proceeded with
a premeditated mind to make a reference for special audit. Lastly, he argued
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 7 of 28
that the order of reference is not appropriate and has been passed on
surmises and conjectures and by virtue of the said order, the AO bypassed
the burden of undertaking the assessment to the special auditor who has
been given the responsibility to verify the books of accounts of the
Petitioner, to complete the assessment.
14. Learned counsel for the Revenue on the other hand, relied upon the
judgment of this Court in AT &T Communication Services India (P.) Ltd.
Commissioner of Income Tax and Anr. [2014] 362 ITR 1997 (DELHI) to
contend that under Article 226, the Court ordinarily does not interfere with
the order passed by the Assessing Officer under section 142(2A) of the Act.
He urged that the order suffers from no infirmity and the AO has duly
applied his mind and has after due consideration of the facts, in his
discretion held that he requires the assistance of the special auditor.
Analysis and Findings
15. We have given our thoughtful consideration to the contentions raised by
the parties. Section 142 (2A) of the Act provides that the Assessing Officer,
having regard to the nature and complexity of the accounts of the assessee,
volume of the accounts, doubts about the correctness of the accounts,
multiplicity of the transactions in the accounts or specialized nature of the
business activity of the assessee and the interests of the revenue, may at any
stage of the proceedings before him, direct the assessee to get the accounts
audited by special auditor after obtaining previous approval of the Chief
Commissioner or Principal Commissioner. The plain language of the
provision indicates that in order to make reference for special audit under
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 8 of 28
Section 142 (2A) of the Act, certain essential jurisdictional conditions are
required to be satisfied and in absence thereof, the direction for special audit
may not be warranted. This provision was amended by the Finance Act,
2013 whereby the words "volume of the accounts, doubts about the
correctness of the accounts, multiplicity of transactions in the accounts or
specialized nature of business activities of theAssessee" have been inserted
after the expression "the nature and complexity of the accounts", w.e.f.
1.6.2013. Prior to the amendment, special audit under Section 142(2A) of
the Act could have been directed only in case the accounts of the Assessee
were "complex" in nature and having regard to the interests of the revenue.
The reason behind the amendment can be inferred from the Memorandum
Explaining provisions in the Finance Bill, 2013, which reads as follows:
"Direction for special audit under sub-section (2A) of section 142
The existing provisions contained in sub-section (2A) of section
142 of the Income-tax Act, inter alia, provide that if at any stage
of the proceeding, the Assessing Officer having regard to the
nature and complexity of the accounts of the assessee and the
interests of the revenue, is of the opinion that it is necessary so to
do, he may, with the approval of the Chief Commissioner or
Commissioner, direct the assessee to get his accounts audited by
an accountant and to furnish a report of such audit.
The expression "nature and complexity of the accounts" has
been interpreted in a very restrictive manner by various
courts.
It is, therefore, proposed to amend the aforesaid subsection
so as to provide that if at any stage of the proceedings before
him, the Assessing Officer, having regard 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 specialized nature of business
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 9 of 28
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 Chief Commissioner of the
Commissioner, direct the assessee to get his accounts audited
by an accountant and to furnish a report of such audit."
16. Mr. Vohra has argued that notwithstanding the amendment, the said
provision must be read in proper context and perspective. He argued that
the said expression would apply in situations where the volume of the
accounts or the multiplicity of transactions in the accounts are
disproportionate to the size, volume and the reportable taxable income of the
assessee.
17. There cannot be any dispute regarding the proposition advanced by Mr.
Vohra that Section 142 (2A) of the Act cannot be resorted by the Assessing
Officer on his mere ipse dixit. The expanded/enlarged provisions of Section
142 (2A) of the Act would still require the fulfilment of the conditions
precedent for the Assessing Officer to exercise his jurisdiction for ordering a
special audit .While upholding the constitutional validity of the amendment
made by the Finance Act, 2013, this Court in Sahara India Finance
Corporation Ltd. v. CIT (supra), has held that even after the amendment, it
is imperative for the Assessing Officer to make a genuine attempt to
understand the accounts before making a reference under the said section.
The relevant passage of the said decision is para 36, wherein the principles
emerging from the decision of the Supreme Court in the case of Sahara
India (Firm) v. CIT(supra)have been discussed. Further the applicability of
the ratio of the Supreme Court decisions, even to the amended Section 142
(2A) of the Act is evident from the following paras:
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 10 of 28
"28. The rationale for the amendment, therefore, is that the
erstwhile expression "nature and complexity of the accounts" had
been interpreted in a restrictive manner by courts. The petitioner
submits that such an amendment runs afoul of the guarantee
under Article 14 of the Constitution. Before dealing with the
constitutionality of the aforesaid amendment, it would be fitting
to recollect the basic principles that must be kept in mind by the
Courts while dealing with the challenge to the constitutionality of
a legislative enactment. These principles were succinctly stated
by the Supreme Court in Ram Krishna Dalmia v. Shri Justice
S.R. Tendolkar, AIR 1958 SC 538:
"14. The principle enunciated above has been
consistently adopted and applied in subsequent cases.
The decisions of this Court further establish-
(a) that a law may be constitutional even though it relates
to a single individual if, on account of some special
circumstances or reasons applicable to him and not
applicable to others, that single individual may be treated
as a class by himself;
(b) that there is always a presumption in favour of the
constitutionality of an enactment and the burden is upon
him who attacks it to show that there has been a clear
transgression of the constitutional principles;
(c) that it must be presumed that the legislature
understands and correctly appreciates the need of its own
people, that its laws are directed to problems made
manifest by experience and that its discriminations are
based on adequate grounds;
(d) that the legislature is free to recognise degrees of
harm and may confine its restrictions to those cases
where the need is deemed to be the clearest;
(e) that in order to sustain the presumption of
constitutionality the court may take into consideration
matters of common knowledge, matters of common
report, the history of the times and may assume every
state of facts which can be conceived existing at the time
of legislation; and
(f) that while good faith and knowledge of the existing
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 11 of 28
conditions on the part of a legislature are to be
presumed, if there is nothing on the face of the law or the
surrounding circumstances brought to the notice of the
court on which the classification may reasonably be
regarded as based, the presumption of constitutionality
cannot be carried to the extent of always holding that
there must be some undisclosed and unknown reasons for
subjecting certain individuals or corporations to hostile
or discriminating legislation.
15. The above principles will have to be constantly borne
in mind by the court when it is called upon to adjudge the
constitutionality of any particular law attacked as
discriminatory and violative of the equal protection of the
laws."
29. The above principles have been consistently followed by the
courts in India and the law in relation to challenge on the
constitutionality of an enactment on the touchstone of Article 14
was reiterated by the Supreme Court in Subramaniam
Swamy v. CBI, (2014) 8 SCC 682 in the following terms:
"Where there is challenge to the constitutional validity of
a law enacted by the legislature, the Court must keep in
view that there is always a presumption of
constitutionality of an enactment, and a clear
transgression of constitutional principles must be shown.
The fundamental nature and importance of the legislative
process needs to be recognised by the Court and due
regard and deference must be accorded to the legislative
process. Where the legislation is sought to be challenged
as being unconstitutional and violative of Article 14 of
the Constitution, the Court must remind itself to the
principles relating to the applicability of Article 14 in
relation to invalidation of legislation. The two dimensions
of Article 14 in its application to legislation and
rendering legislation invalid are now well recognised and
these are: (i) discrimination, based on an impermissible
or invalid classification, and (ii) excessive delegation of
powers; conferment of uncanalised and unguided powers
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 12 of 28
on the executive, whether in the form of delegated
legislation or by way of conferment of authority to pass
administrative orders-if such conferment is without any
guidance, control or checks, it is violative of Article 14 of
the Constitution. The Court also needs to be mindful that
a legislation does not become unconstitutional merely
because there is another view or because another method
may be considered to be as good or even more effective,
like any issue of social, or even economic policy. It is well
settled that the courts do not substitute their views on
what the policy is."
xxxxxxxxx
34. The task that this Court is, therefore, faced with is to
determine whether the grounds added by amendment to Section
142(2A) of the Act, are of such nature that they violate Article 14
of the Constitution. In this regard, the mere possibility that the
AO may abuse the discretion that the provision vests in him
would be insufficient to declare the provision as unconstitutional.
The Supreme Court in Sahara India (Firm),
Lucknow v. Commissioner of Income Tax, [2008] 300 ITR 403
(SC), had the occasion to interpret Section 142(2A) of the Act, as
it stood prior to the amendments in question. The Court was
faced with the question as to whether Section 142(2A) required
giving the assessee a pre-decisional hearing before proceeding to
order a special audit under the provision. The Court noted:
"A bare perusal of the provisions of Sub -section (2A) of
the Act would show that the opinion of the Assessing
Officer that it is necessary to get the accounts of assessee
audited by an Accountant has to be formed only by
having regard to: (i) the nature and complexity of the
accounts of the assessee; and (ii) the interests of the
revenue. The word "and" signifies conjunction and not
disjunction. In other words, the twin conditions of
"nature and complexity of the accounts" and "the
interests of the revenue" are the prerequisites for
exercise of power under Section 142(2A) of the Act.
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 13 of 28
Undoubtedly, the object behind enacting the said
provision is to assist the Assessing Officer in framing a
correct and proper assessment based on the accounts
maintained by the assessee and when he finds the
accounts of the assessee to be complex, in order to
protect the interests of the revenue, recourse to the said
provision can be had. The word "complexity" used in
Section 142(2A) is not defined or explained in the Act. As
observed in Swadeshi Cotton Mills Co.
Ltd. v. C.I.T., [1988] 171 ITR 634 (All) it is a nebulous
word. Its dictionary meaning is: "The state or quality of
being intricate or complex or that is difficult to
understand. However, all that is 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. Sometimes, what
appears to be complex on the face of it, may not be really
so if one tries to understand it carefully." Thus, 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; appreciate the
entries made therein and in the event of any doubt, 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 objective
criteria and not on the basis of subjective 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 pass on the buck to the special auditor. Similarly, the
requirement of previous approval of the Chief
Commissioner or the Commissioner in terms of the said
provision being an inbuilt protection against any
arbitrary or unjust exercise of power by the Assessing
Officer, casts a very heavy duty on the said high ranking
authority to see to it that the requirement of the previous
approval, envisaged in the Section is not turned into an
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 14 of 28
empty ritual. Needless to emphasise that before granting
approval, the Chief Commissioner or the Commissioner,
as the case may be, must have before him the material on
the basis whereof an opinion in this behalf has been
formed by the Assessing Officer. The approval must
reflect the application of mind to the facts of the case."
35. On the question of whether Section 142(2A) involves giving
a predecisional hearing to the assessee, the Court held:
"The upshot of the entire discussion is that the exercise of
power under Section 142(2A) of the Act leads to serious
civil consequences and, therefore, even in the absence of
express provision for affording an opportunity of pre-
decisional hearing to an assessee and in the absence of any
express provision in Section 142(2A) barring the giving of
reasonable opportunity to an assessee, the requirement of
observance of principles of natural justice is to be read into
the said provision."
36. Thus, what emerges from the Sahara (supra) decision of the
Supreme Court in relation to Section 142(2A), can be
summarized as under:
(i) The Assessing Officer must make a genuine and honest
attempt to understand the accounts maintained by the assessee.
(ii) The opinion required to be formed by the Assessing Officer
under Section 142(2A) must be based on objective criteria and
not merely subjective satisfaction. The powers under the
provision cannot be used by the Assessing Officer merely to shift
his responsibility of scrutinizing the accounts to the special
auditor.
(iii) The requirement of previous approval of the Chief
Commissioner or Commissioner, casts a heavy duty on these
authorities to ensure that this requirement is not reduced to an
empty formality. Before granting the approval, the Commissioner
or the Chief Commissioner, must have before him the materials
on the basis of which the opinion has been formed by the
Assessing Officer. The approval granted by the Commissioner or
the Chief Commissioner must reflect application of mind to the
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 15 of 28
facts of the case. This requirement was elaborated by the Calcutta
High Court in West Bengal State Co-operative Bank Ltd. v. Joint
Commissioner of Income Tax, [2004] 267 ITR 345 (Cal), where
it noted that-
"The Commissioner of Income Tax should not give any
approval mechanically and if he finds that there is no
examination of the books of account by the Assessing
Officer before sending the proposal, he will not certainly
give any approval. Under this section, the Commissioner
of Income Tax does not exercise the jurisdiction of the
appellate authority rather the approving authority.
Approval means and connotes supporting and accepting
of an act and conduct done by another person. Therefore,
it would be his duty to examine on receipt of his proposal,
whether the Assessing Officer has correctly done it or
not, if he finds that this requirement has not been fulfilled
then he must not approve of the same."
(iv) In accordance with the principles of natural justice, the
assessee must be given the opportunity of a pre-decisional
hearing before action is taken under Section 142(2A).
37. While this decision of the Supreme Court was prior to the
amendments inserted by the Finance Act, 2013, this Court sees
no reason as to why these holdings of the Supreme Court
in Sahara (supra) would not be applicable to the amended
Section 142(2A). The fact that the AO's determination under this
provision must be based on objective material and not subjective
satisfaction, that he must make an honest attempt at
understanding the accounts of the assessee, that the grant of
approval by the higher authority must not be mechanical, that
principles of natural justice must be followed by giving the
assessee a pre-decisional hearing, would all be equally applicable
even under the amended Section 142(2A). It would still be
impermissible for the AO to shift the responsibility of auditing
the accounts mechanically to the special auditor. In these
circumstances, we fail to understand the petitioner's contention as
to how the amendments would in effect nullify these procedural
safeguards that the Supreme Court has read into Section
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 16 of 28
142(2A)."
(Emphasis supplied)
18. While there can be no quarrel with the proportion that the Assessing
Officer while exercising jurisdiction under Section 142 of the Act should
ensure compliance with the aforesaid view of this Court in Sahara India
Finance Corporation Ltd. (supra), we are, however, not convinced with the
submission of Mr. Vohra that notwithstanding the amendment, the scope of
the said provision should be limited and restricted to only those categories of
cases, where the volume of account, or the multiplicity of transactions are
disproportionate to the size and volume of business and the reported taxable
income of the assessee. Since the legislative intent while amending Section
142 was to expand and enlarge the scope of the jurisdiction of the
Competent Authority to order special audit, by laying down the guideline for
exercise of the said jurisdiction, it cannot be interpreted to give it a
restrictive meaning. If the legislature has added new words in the grounds
for ordering a special audit under section 142(2A), it would be contrary to
all rules of construction to ignore the impact of the newly added words and
to so construe the definition as if the newly added words were either not
there or were intended to be otiose and redundant. Such an interpretation
would neutralize the effect of the amendment and run counter to the
legislative intent. From a bare reading of the amended provision, we are
unable to discern a restrictive scope, as sought to be interpreted by Mr.
Vohra. The AO can resort to the aforesaid provision under any of the
circumstances, mentioned in the section. If the subjective satisfaction of the
Assessing Officer is based on objective assessment, for any of the reasons
specified in the amended provision, the court would not ordinarily interfere
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 17 of 28
with the exercise of the discretionary power vested with the AO under the
said provision. Of course, the expanded provisions are not without fetters
and safeguards. The power under Section 142 (2A) of the Act cannot be
exercised lightly, and the Assessing Officer must exercise his discretion in a
reasonable manner by taking into account all relevant and germane aspects.
The exercise of the power would be subject to the guiding principles laid
down by the Supreme Court in Sahara India (Firm) (supra), as notice by
this Court in Sahara India Finance Corporation Ltd.(supra).
19. Now lets examine the reasons assigned by Respondent No. 1 in the
impugned order dated 06.018.2019 directing special audit. While testing the
reasoning on the touchstone of the principles enunciated by the Supreme
Court in Sahara India (Firm) (supra), we would like to underscore that
while exercising jurisdiction under Article 226 of the Constitution of India,
the Court does not be sit in appeal over the order passed by the Assessing
Officer. The subjective satisfaction is a subject matter which falls
exclusively within the domain of the Assessing Officer. In Article 226, we
would not like to tread or invade into the jurisdiction of the AO. As long as
the exercise of the jurisdiction is based on cogent reasons, Court would
certainly have the jurisdiction to examine whether the discretion to refer the
account for special audit was exercised objectively, or not. However whether
the material produced before the AO was sufficient for him to conclude
"complexity " would essentially remain a matter falling in his discretion. In
fact, the view expressed by this Court, in AT &T Communication Services
India (P.) Ltd. (supra), lays down the scope of interference of the Court in
such matters in the following words:
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 18 of 28
"16. The question whether the accounts and the related
documents and records available with the A.O. present
complexity is essentially to be decided by the A.O. and in this
area the power of the court to intrude should necessarily be
used sparingly. It is the A.O. who has to complete the
assessment. It is he who has to understand and appreciate the
accounts. If he finds that the accounts are complex, the court
normally will not interfere under Article 226. The power of the
court to control the discretion of the A.O. in this field is limited
only to examine whether his discretion to refer the accounts for
special audit was exercised objectively, as far as the accounts,
records, documents and other material present before the A.O.
would permit. There must be valid material before the A.O. from
which he apprehends that there is complexity. As to what
material would make the accounts complex is essentially for the
A.O. to determine and unless his decision can be attacked on the
ground of perversity or absolute arbitrariness or mala fide, it
should not be interfered with. In the present case we are satisfied
that the accounts including the documents, records and other
material before the A.O. did make the issues for his decision
complex requiring a special audit. We are accordingly not
inclined to accept the contention of the assessee to the contrary."
(Emphasis supplied)
20. Though the above decision was rendered in the context of the
unamended provisions, views expressed concerning the scope of jurisdiction
of the Court under Article 226 are still relevant and would be applicable. In
view of the limited and guarded scope of judicial review, we now proceed to
evaluate the impugned order. The Assessing Officer has taken a view that
there is complexity in the accounts of the assessee. He is also of the view
that the interests of the revenue are adversely affected. The relevant portion
of the impugned order reads as under:
"15. Anomalies and complexities noted in the books of
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 19 of 28
accounts of the assessee:
During the course of assessment proceedings various anomalies
and complexities were noted in the books of accounts of the
Assessee company. These were communicated to assessee
company vide show cause notice dated 30.05.2019 and
subsequently vide show cause notice issued under section
142(2A) of the Act. The reply of the assessee company filed on
06.06.2019, 12.06.2019, 17.06.2019 and 28.06.2019, in this
regard, have been considered and the same has been disposed of
issue wise as under:
a. The assessee company is a Non-banking Finance Company
(NBFC) engaged in the business of financing. The assessee
borrowed loans from Various Banks, Financial Institutions and
others on which interest was paid. The said loans were given to
various parties and interest received from them was declared as
income. Total loans of Rs. 682 Crores borrowed by the assessee
company and total amount of Rs. 232 Crores lent by the assessee
were outstanding as on 31/03/2016. The assessee declared
interest income of Rs. 125.40 Crores during the year and has
claimed interest expense of Rs. 110 Crores. The assessee has also
claimed professional / litigation expenses of Rs. 3,53,45,032/-.
(a.i) Further, an amount of Rs. 432.92 Crores was invested by the
company in its subsidiaries / associated concerns / group
companies and an amount of Rs. 218.84 Crores was given as
loans and advances to them. An amount of Rs. 24,17,69,927/- has
been shared as expenses with its associated concerns during the
year without any stated reasons/ basis. Thus, the transactions
with the associated concerns / related parties involved huge
amounts.
(a.ii) Enquiries were conducted and action taken against the
assessee company by various Government agencies like
Enforcement Directorate (ED), Serious Fraud Investigation
(SFIO), Delhi Police (EOW) etc. In the said enquiries, it comes
out that the assessee has diverted the funds for the benefit of
promoter and promoter group companies and was involved in
siphoning of funds borrowed by it by way of advancing money or
paying expenses paid to its associated concerns or making
investment in them in the form of shares.
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 20 of 28
(a.iii) The assessee was specifically raised query regarding the
fact of misappropriation and siphoning of funds vide notice dated
30/05/2019 vide point no. 13.In this connection, report of the
forensic audit of the assessee company got conducted by the
SEBI which bears testimony to the said diversion/siphoning of
funds, was also confronted to the assessee company.
(a.iv) The assessee categorically denied that some of the
transactions mentioned therein were related to the assessee or
entered into by it and further stated that the observations made by
SEBI and Forensic Auditor in respect of transaction were not
applicable. However, no such evidence was placed on record to
show that these transactions were not entered into by the assessee
or the same were not related to the assessee. Thus, an in-depth
verification of the books of account is required to ascertain and
establish the fact about these transactions.
b. The assessee company has recorded huge losses on account of
investment made in the subsidiary / associated companies/
partnership firms etc. Capital gain / loss of Rs. 371,47,42,141/-
has been claimed on sale of such investments during the year.
The assessee was raised specific query regarding the said claim
vide point no. 1 of the notice dated 30/05/2019. In reply the
assessee company placed voluminous information in the form of
agreement; balance sheets etc. on record which needs in depth
verification for allowability of the said claim. The said
information runs into 9 bulky volumes of more than 1000 pages.
Justification regarding the investment into the subsidiary /
associated companies/ partnership firms and resultant gain/loss
has also not been provided.
c. The assessee has made provision of Rs. 279.25 crores for
diminution in value of investment made in subsidiary company
during the year. Each year such provisions are made for
diminution in the value of shares of subsidiary company which
creates a suspicion as to how the value of investment in
subsidiaries can diminish at such a level. Despite being
confronted on this issue no satisfactory reply with the help of
relevant supporting evidencescould be furnished by the assessee.
In fact the reply needs indepth
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 21 of 28
backward integration and verification of the reasons/business
expediency/sources having revenue implication that ultimately
lead to such diminution.
d. The assessee claimed legal and professional fees of Rs.
3,53,45,032/- in its profit and loss account. The assessee was
asked to substantiate the same vide point no. 3 of notice dated
30/05/2019. The assessee submitted copies of the invoices / bills
of the said expenses. On perusal of the bills, it was observed that
the same pertained to the litigation expenses related to various
cases against company, Managing director, key personnel etc.
Since a number of criminal cases have been launched against the
company and its key personnel, so each and every bill along with
the litigation status of each case needed in depth verification to
examine the allowability of such expenses have been factually
incurred solely & exclusively for the purpose of business of the
assessee. The assessee company though queried on the issue
calling for specific details and supporting evidence, did not file
the complete details as required. Thus, prima facie it can not be
denied that the personal expenses of the directors have been
claimed as legal expenses of the assessee company.
e. There is multiplicity of transactions of borrowing, lending and
investing with same parties or same nature of transactions with
various parties. As already stated, that the assessee has borrowed
funds of Rs. 682 crores and lent funds of Rs. 232 crore during the
year under consideration. The assessee has lent money to various
parties from whom interest has been earned. The funds have been
borrowed and lent on different terms and conditions. However,
the assessee has only provided lists in support without going into
the detail as to how the revenue has been recognised on all the
transactions of such nature and also amongst the parties to whom
the money has been lent or obtained including the associated and
group concerns.
f. Further, this is an NBFC company which is governed by RBI
and is engaged in specialized nature of business activity and not a
regular business involving manufacturing or trading. Various
rules and regulations are applicable on such entities. This NBFC
has undertaken transactions with its associated companies as a
chain or series of transactions. The money has been rotated
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 22 of 28
through various companies through layering. Further, there are
allegations of misappropriation of funds. Thus, the accounts are
not only voluminous but are complex and need in depth
verification for ascertaining the actual nature of transactions.
(f.i) The assessee was asked to produce books of account.
However, the assessee stated in para 11.1 of its submissions as
under:
"With reference to the same, it is submitted that the assessee has
already submitted ledger accounts, party-wise details and
relevant information with respect to the points raised vide the
subject mentioned SCN. The relevant extracts of the documents
relating to the anomalies as mentioned in the SEBI report have
been enclosed as per the reply in the preceding paras. However,
of your goodself required any other information in respect of
books of accounts, then please let us know specific requirement,
the assessee shall submit the same...................."
(f.ii) This shows that the assessee is reluctant to produce the
books of account, as it will reveal the true nature of the
transactions undertaken by the assessee. It must be appreciated
that ledgers of particular expenses helps to understand the nature
of the said expense but the books of account need to be verified
in detail to understand the overall scenario of the business of the
assessee and transactions undertaken by it. Non-production of the
books of account further strengthens the view about the
correctness of the same.
g. As of now, enquiries were conducted and action was taken
against the assessee company by various Government agencies
like Enforcement Directorate (ED), Special Fraud Investigation
(SFIO), Delhi Police (EOW) etc. In the said enquiries, it comes
out that the assessee has diverted the funds for the benefit of
promoter and promoter group companies and was involved in
siphoning of funds borrowed by it, by way of advancing money
or paying expenses paid to its associated concerns or making
investment in them in the form of shares. In fact the Promoter
director vide his complaint to Delhi Police(EOW) has himself
alleged that accused(s) as mentioned in the complaint have
carried out and orchestrated serious financial fraud in two
companies namely Religare Enterprise Limited and
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 23 of 28
ReligareFinvest Limited in addition to RHC Holdings (P) Ltd
and such fraud has been undertaken by the accused(s) in a pre-
planned manner through various dubious transaction(s). This fact
has also been amply illustrated, as already mentioned, in the
Forensic audit report of the SEBI dated 12.12.2018 shared with
the department and also confronted to the assessee company by
the Assessing officer.
(g.i) The assessee has no satisfactory answer to the said report
and issues related to it. It is pertinent to mention that this is when
the assessee company itself in a series of complaints/petitions
before various regulatory authorities including EOW wing of
Delhi Police have since been alleging that diversion of funds has
been made and thus been claiming its retrieval through suitable
Statutory order from the competent authorities. Thus, the fact of
diversion/ siphoning of finds remaining un-refuted, stands as
established and revenue implication involved in it can only be
investigated through a special audit by a technical expert like a
special auditor.
h. Further it is held by judicial authorities all over the country
that assessing officer is duty bound to determine the correct
income/loss of each assessment year of an assessee. The purpose
of direction for special audit is to ensure that a correct assessment
order is passed so that revenue is not deprived of its dues. The
direction to the Assessee for compulsory audit of accounts u/s
142(2A) of the Income Tax Act does not affect the Assessees
right especially in view of the fact that cost of audit is not
payable by the Assessee but by the department and therefore,
assessees interest are not affected in any way except to the
extent of correct determination of taxable income.
i. In view of the above discussed facts the statutory provisions
with regard to ordering of special audit is satisfied in this case in
view of the basic two ingredients i) Nature and complexity of
accounts, its voluminous, doubts about the correctness of
accounts, multiplicity of transactions, specialized nature of
business activity of the assessee, and ii) Interest of the revenue
for forming an opinion for the purpose of special audit u/s
142(2A) is satisfied in this case.
j. Therefore, I am of the considered opinion in view of foregoing
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 24 of 28
discussion and complexity involved in information submitted and
in the interest of revenue, that this is a fit case for invoking
provisions of section 142(2A) of the Income Tax Act, 1961 so as
to determine correct and true income of the Assessee company
for the A.Y. 2013-14."
(Emphasis supplied)
21. The Assessing Officer deduced that the queries raised by the
questionnaire dated 30.05.2019 remain conclusively unanswered. The
Assessing Officer has held that the Petitioner company was unable to cull
out the requisite details from the books of accounts to be furnished during
the course of assessment proceedings, and held that the accounts were not
only voluminous but were also complex for him to handle deftly. He
therefore, felt a need to have the assistance of an expert. Further, the fact of
diversion/siphoning of funds has also come out in the forensic audit report of
SEBI dated 12.12.2018 and, therefore, in order to protect the interest of the
Revenue, in-depth verification is required. It is also not in dispute that the
direction to the assessee for compulsory audit of accounts under Section 142
(2A) of the Income Tax Act does not have any financial impact on the
assessee, as the cost of audit is not payable by the assessee, but the
department. The special audit would only assist the department to correctly
determine the taxable income. Thus, having regard to the nature and
complexity of the accounts being voluminous and the doubts about the
correctness which are evident from the material before the Assessing
Officer, we cannot say the findings of the Assessing Officer are without
application of mind.
22. There is no quarrel regarding the proposition advanced by Mr. Vohra
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 25 of 28
that the Assessing Officer has a duty to apply his mind and not to resort to
the provisions of special audit, as a matter of routine. The discretion that the
Assessing Officer exercised for ordering special audit, cannot be said to be
arbitrary or mala fide or a routine or casual exercise. In these circumstances,
on the basis of the reasons recorded in the impugned order, it cannot be said
that there was no genuine attempt on the part of the Assessing Officer to
understand the nature of his business, its method of accounting, or to
understand the nuances of the books of accounts or documents. The
impugned order clearly reflects the reasons for ordering a special audit. The
Assessing Officer initially issued a notice under Section 142(1) on
03.08.2018 along with detailed questionnaire including the reason for
selection of case for scrutiny under Section 143 (3). Thereafter, a fresh
notice under Section 142 (1) was issued on 30.10.2018 along with pending
and fresh queries. Since there was continued non compliance, a show cause
notice in respect of specific queries raised therein was issued on 30.05.2019.
Another notice dated 03.06.2019 in the form of corrigendum to show cause
notice was issued, calling upon the Petitioner to produce the books of
accounts. The questionnaire raised by the Assessing Officer was not
specifically answered, and if the same had been satisfactorily answered, he
would have found the same to be useful for verification of various claims
made by the assessing companies in its return of income for the assessment
year under consideration [AY 2016-17]. The Petitioner also placed reliance
on the judgment of the Kerala High Court in Muthoottu Mini Kuries v
Deputy Commissioner of Income Tax 250 ITR 455 (Kerala) to contend that
the direction to the assessee to get accounts audited without hearing the
assessee would be unjustified. However, the ratio of the said judgment is not
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 26 of 28
applicable to the facts of the present case. Each case turns on its own facts
and the present case is distinguishable from the said judgment keeping in
view the facts and circumstances in both the cases. For the foregoing reasons
it is, thus, evident that the Petitioner was given sufficient opportunity of
being heard. Thus, the contention of violation of principles of natural justice
is also without merit.
23. Sections 142 (2A) (2D), 142 (3) and 142 (4) are the relevant provisions
dealing with the considerations that are to be weighed while directing special
audit. The Supreme Court has also laid down the guiding principles relating
to conduct of special audit. In essence, the Supreme Court has underlined
that the opinion required to be formed must be based on objective criteria,
and not subjective satisfaction. On a reading of the impugned order, it is
demonstrated that the Assessing Officer has examined the objections raised
by the Petitioner and has exercised his jurisdiction objectively on due
consideration of the records, documents and other material before him for
ordering a special audit. There is no perversity or arbitrariness in the order
of the Assessing Officer. On careful perusal of the afore-noted reasons spelt
out in the impugned order, we are of the considered opinion that the
Assessing Officer has carefully scrutinized the objections raised by the
Petitioner and has fairly and objectively arrived at the conclusion that special
audit is required.
24. Before parting, we would also like to deal with the objections raised qua
the terms of reference. We are unable to agree with Mr. Vohra that the
Assessing Officer has directed the special audit to undertake the entire work
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 27 of 28
of assessment. We do not find any reason to hold that the Assessing Officer
has shifted the responsibility of scrutinizing the accounts and passed the
buck to the special auditor, as has been contended by the Petitioner. The
special auditor who has been appointed, has been asked to give comments on
several issues. Of course, while carrying out the audit, the special auditor
would have to verify the books of accounts of the Petitioner so that the
report furnished by him, is of assistance to the Assessing Officer to
determine the taxable income. We have perused the terms of reference and
do not find the same to be inappropriate, especially having regard to the fact
that despite the honest attempt made by the Assessing Officer in
understanding the accounts of the assessee, it has not yielded the desired
results, thereby warranting the appointment of the special auditor. At this
stage, we cannot hold that there is no co-relation between the aspects which
require scrutiny and the terms of reference for the special auditor under the
law. Petitioner can raise such objections at the appropriate stage.
25. In view of the afore-going observations, the Court is of the opinion that
there is no infirmity in the order directing the special audit. The writ
petitions have no merit, and consequently the same are dismissed. The
assessee(s) in both the petitions are directed to cooperate with the special
auditor. There shall be no order as to costs.
SANJEEV NARULA, J
VIPIN SANGHI, J
AUGUST 28, 2019/nk
W.P.(C) 9358/2019 & W.P.(C) 9359/2019 Page 28 of 28
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