Dismissed

atlas copeo (india) limited v. v.s. samuel assistant commissioner of income-tax,range 4 (1),mum.

Bombay HC7 Mar 2006WP/27/2006

Case brief

AI extract

What is this about?

The High Court of Bombay stated that an order under Section 142(2A) of the Income Tax Act for a special audit is purely administrative, not quasi-judicial, and does not require a hearing. The writ petition challenging the order was dismissed.

What did the court decide?

The writ petition challenging the direction for special audit was dismissed with no costs.

atlas copeo (india) limited Vs v.s. samuel assistant commissioner… — Income Tax | Bombay HC (2006)

¶1

¶2

 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
 ORDINARY ORIGINAL CIVIL JURISDICTION

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 WRIT PETITION NO.27 OF 2006

¶4

 Atlas Copco (India) Limited,
 a Company, registered under the
 the Companies Act, 1956 and
 having its registered office
 at Sveanagar, Mumbai-Pune
 Road, Dapodi, Pune- 411 012
 and the Regional Sales Office
 at Mahatma Gandhi Memorial
 Building, Netaji Subhash Road,
 Mumbai - 400 002. .. Petitioner.

¶5

 V/s.

¶6

 1. V.S. Samuel,
 Assistant Commissioner of
 Income-tax, Range 4(1),
 Mumbai, having his office
 at Room No.678, Aayakar
 Bhavan, M.K. Road,
 Mumbai - 400 020.
 2. D.D. Gupta,
 The Commissioner of Income-
 tax, City-IV, Mumbai, having
 his office at Aayakar Bhavan,
 M.K. Road, Mumbai - 400 020.
 3. Sudhir Chandra,
 The Chief Commissioner of
 Income-tax IV, Mumbai, having
 his office at Aayakar Bhavan,
 M.K. Road, Mumbai - 400 020.
 4. Lakhani & Company,
 Chartered Accountants, having
 their office at 2nd Floor,
 D.N. Road, Above Khadi Bhandar,
 Mumbai - 400 001.
 5. T. Diwakar Prasad, the
 Dy.Commissioner of Income-tax,
 Circle 8, Pune having his
 office at Pratyaksha Kar
 Bhavan, Near Akurdi Railway
 Station, Pune 411 044.
 6. Satya Prakash, the
 Commissioner of Income-tax-V,

¶7

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 Pune, having his office at
 Pratyaksha Kar Bhavan,
 Akurdi, Pune 411 044.

¶9

 7. S.M. Gadgil,
 The Chief Commissioner of
 Income-tax-I, having his
 office at Sadhu Vaswani
 Chowk, Pune.

¶10

 8. The Union of India,
 through the Secretary,
 Ministry of Finance,
 Government of India, North
 Block, New Delhi - 110 001 .. Respondents.

¶11

 Mr.F.V. Irani i/b. Mr.A.K. Jasani for the
 petitioner.

¶12

 Mr.Ashok Kotangale with Mr.S.R. Chauhan, Mr.Prashant
 Uchil & Mr.A. Nagarjun for the respondents.

¶13

 CORAM : R.M. LODHA &
 J.P. DEVADHAR, JJ.

¶14

 DATED : 7TH MARCH, 2006.

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ORAL JUDGMENT (Per R.M. Lodha, J.) :

¶16

 At the outset, the learned counsel for the
 petitioner invited our attention to the order passed
 by this Court in Writ Petition No.1314 of 2004,
 Maharashtra Distilleries Limited V/s. The Deputy
 Commissioner of Income Tax 6(3), Mumbai & Others on
 27th July, 2004 and submitted that since the said
 writ petition has been admitted wherein the issue is
 involved whether before passing the order under
 Section 142(2A) an opportunity of hearing needs to be
 given to the assessee or not and as in the present
 writ petition the said issue is also raised, this

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 writ petition be also admitted.

¶19

 2. We thought that it would be better if we
 consider this aspect finally at the admission stage.
 Hence, we heard the matter accordingly.

¶20

 3. The petitioner seeks to challenge the order
 dated 11th November, 2005 passed by the Assistant
 Commissioner of Income Tax, Range 4(1), Mumbai
 whereby he issued direction to the petitioner for a
 special audit under Section 142(2A) for the
 assessment year 2003-04. The order is challenged on
 the following grounds.

¶21

 i) The Assistant Commissioner of Income
 Tax, Range 4(1) who passed the order giving
 direction to the petitioner for special audit
 under Section 142(2A) for the assessment year
 2003-04 has no jurisdiction over the
 petitioner’s case.

¶22

 ii) That no hearing of any nature
 whatsoever was given to the petitioner prior
 to passing of the impugned order under
 Section 142(2A). The learned counsel relied

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 upon the following judgements; Peerless
 General Finance and Investment Co. Limited &

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 Another V/s. Deputy Commissioner of

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 Income-tax and Others, (1999) 236 I.T.R.
 671; West Bengal State Co-operative Bank
 Limited V/s. Joint Commissioner of
 Income-tax and Others, (2004)267 I.T.R. 345,
 Muthoottu Mini Kuries V/s. Deputy
 Commissioner of Income-tax and Another (2001)
 250 I.T.R. 455 and U.P. State Handloom
 Corporation Limited V/s. Commissioner of
 Income-tax and Another, (2000) 245 I.T.R.
 192.

¶27

 iii) That by issuing the direction under
 Section 142(2A) for a special audit, the
 assessing officer has abdicated his duty and
 the said directions are beyond the scope of
 Section 142(2A) of the Income Tax Act, 1961.

¶28

 4. On the other hand, Mr.Kotangale, the learned
 counsel appearing for the revenue supported the
 order.

¶29

 5. We reflected over the submissions of the
 learned counsel for the parties and perused the
 available material and the judgments cited by the
 learned counsel for the parties.

¶30

¶31

Re : Contention (i)

¶32

 6. The learned counsel for the petitioner
 referred to para 1 of the petition wherein averment
 has been made that the respondent No.5 - the Deputy
 Commissioner of Income Tax, Pune has the jurisdiction
 over the petitioner’s case under the Income Tax Act
 and para 7 of the reply-affidavit wherein this fact
 is not traversed by the revenue. He also took us
 through the letters exchanged between the petitioner
 and the respondent No.5.

¶33

 7. Admittedly, the petitioner filed its return
 of income for the assessment year 2003-04 on 25th
 November, 2003 with the Assistant Commissioner of
 Income Tax, Range 4(1), Mumbai. There is also no
 dispute that the Assistant Commissioner of Income
 Tax, Range 4(1), Mumbai issued and served a notice
 under Section 143(2) upon the petitioner on 12/18th
 October, 2004. It is also not in dispute that though
 initially in the return of income filed by the
 petitioner for the assessment year 2003-04, a total
 income of Rs.54,64,90,595/- was declared but pursuant
 to the notice under Section 143(2), the revised
 return of income was filed by the petitioner on 31st
 March, 2005 reducing total income by Rs.7.50 crores.
 It is not in dispute that pursuant to the notice

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 issued under Section 143(2) and the revised return
 filed by the petitioner, the petitioner has been
 appearing before the Assistant Commissioner of Income
 Tax, Range 4(1), Mumbai. As late as on 20th
 September, 2005 and 14th October, 2005 the petitioner
 through its Chartered Accountant and Accounts
 Officers appeared before the Assistant Commissioner
 of Income Tax, Range 4(1), Mumbai. At no stage,
 before the Assistant Commissioner of Income Tax,
 Range 4(1), Mumbai, the petitioner challenged his
 jurisdiction on the ground that its case has been
 transferred to Pune. As a matter of law, it could
 not have been. Section 124(3)(a) of the Income Tax
 Act permits challenge to the jurisdiction of the
 assessing officer, inter alia, within one month from
 the date on which the assessee is served with the
 notice under Section 143(2) of the Income Tax Act.
 As already indicated above, the notice under Section
 143(2) was served upon the assessee on 12/18th
 October, 2004. In this backdrop, the challenge to
 the jurisdiction of the Assessing Officer could have
 been done only within one month therefrom but that
 was not done. The communication between the
 petitioner and respondent No.5 is only with regard to
 the filing of the return of income for the assessment
 year 2005-06. The said communication has no relation
 to the return of income filed for the assessment year

¶36

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 2003-04. There is nothing on record that indicates
 that the assessment proceeding for the assessment
 year 2003-04 has been transferred from the Assistant
 Commissioner of Income Tax, Range 4(1), Mumbai to the
 Deputy Commissioner of Income Tax, Pune. We, thus,
 find no merit in the submission of the learned
 counsel for the petitioner that the Assistant
 Commissioner of Income Tax, Range 4(1), Mumbai has no
 jurisdiction in respect of the assessment proceedings
 for the assessment year 2003-04. The contention (i)
 of the learned counsel for the petitioner is
 overruled.

¶38

Re : Contention (ii)

¶39

 8. The contention of the learned counsel that
 the petitioner must have been given an opportunity of
 hearing before passing order under Section 142(2A)
 for a special audit is based on few decisions.

¶40

 9. The learned Single Judge of the Calcutta High
 Court in the case of Peerless General Finance and
 Investment Co. Ltd. (supra) held that to restrict
 the abuse of power under Section 142(2A), the Court
 will presume that the principles of natural justice
 are required to be complied with. It was held that
 by issuing direction of special audit, the assessee

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 may be deprived of some right and such order entails
 in civil consequences.

¶43

 10. In the case of Peerless General Finance and
 Investment Co. Ltd., it is pertinent to note that
 the assessing officer without placing the material
 before the Chief Commissioner of Income Tax appointed
 the auditor and in that backdrop, the learned Single
 Judge observed that the case depicted as to how the
 power can be abused.

¶44

 11. In the case of West Bengal State Co-operative
 Bank Limited (supra), the learned Single Judge of the
 Calcutta High Court relied upon the judgment in the
 case of Peerless General Finance and Investment Co.
 Ltd., and took the view that the assessee needs to be
 heard before passing an order for special audit.

¶45

 12. According to the learned Single Judge of the
 Kerala High Court in the case of Muttoottu Mini
 Kuries (supra), Section 142(2A) postulates right of
 hearing. In this case also, the learned Single Judge
 relied upon the judgment of the Calcutta High Court
 in the case of Peerless General Finance and
 Investment Co. Ltd.

¶46

 13. Mr.Ashok Kotangale, the learned counsel

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 appearing for the revenue, on the other hand, relied
 upon the Division Bench judgment of the Allahabad
 High Court in the case of Jhunjhunwala Vanaspati
 Limited V/s. Assistant Commissioner of Income-tax
 and Another, (2004) 266 I.T.R. 657. The Division
 Bench of the Allahabad High Court in clear and
 unambiguous terms gave its opinion that it was not
 necessary for the Assessing Officer to issue a show
 cause notice or give a hearing to the assessee before
 issuing the direction of special audit under Section
 142(2A). The Division Bench of the Allahabad High
 Court held that an order under Section 142(2A) giving
 direction of special audit does not entail any civil
 consequences nor affects the rights of the assessee.
 Such order does not create any liability against the
 assessee. The Allahabad High Court held thus :

¶49

 "A bare perusal of sub-section (2A)
 of section 142 shows that all that is
 required therein is that the Assessing
 Officer should be of the opinion that in view
 of the nature and complexity of the accounts
 of the assessee and the interest of the
 Revenue it is necessary to direct special
 audit of the assessee’s accounts.

¶50

 In our opinion, it is not necessary
 for the Assessing Officer to give a show
 cause notice or give a hearing to the
 assessee before issuing the directions under
 Section 142(2A). In our opinion, the
 direction under sub-section (2A) of section
 142 is purely administrative in nature and
 not quasi judicial. Moreover, in our
 opinion, such a direction does not have civil
 consequences. It does not affect the
 assessee’s rights or liability. Hence, the
 decision of the Supreme Court in State of

¶51

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 Orissa v. Dr.Binapani Dei, AIR 1967 SC 1269
 does not apply. No doubt an administrative
 order if it has civil consequences can only
 be passed after giving opportunity of
 hearing, but in our opinion a direction under
 sub-section (2A) of section 142 does not have
 civil consequences because it does not affect
 his rights and does not create any liability
 against the assessee. It is only the
 assessment order which will create a
 liability. The purpose of the direction
 under sub-section (2A) of section 142 is to
 ensure that a correct assessment order is
 passed so that the Revenue is not deprived of
 its dues. Hence, we do not agree with
 learned counsel for the petitioner that an
 opportunity of hearing or show cause notice
 has to be given to the assessee before
 passing the direction under section 142(2A)."

¶53

 14. That the order passed under Section 142(2A)
 is purely administrative in nature and that such
 order is not quasi judicial admits of no ambiguity.
 The law-makers while enacting Section 142(2A)
 empowered the assessing officer to direct the
 assessee to get the accounts audited by Special
 Auditor. The legislature, to ensure that such power
 is not abused, provided safeguards. For forming an
 opinion as to whether it is necessary to have the
 accounts of the assessee audited by a special
 auditor, the Assessing Officer has to have regard to
 the nature of complexity of the accounts of the
 assessee and the interest of the revenue. After
 forming such opinion, he has to seek the approval of
 the Chief Commissioner or the Commissioner, as the
 case may be, before any direction is issued to the
 assessee to have his accounts audited by a special

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 auditor. This by itself is a vital safeguard in
 preventing abuse of power. In the very scheme of
 things, we are unable to read that the assessee needs
 to be heard before the directions are issued to the
 assessee for audit of its accounts by a special
 auditor. Such order, in our opinion, does not entail
 any civil consequences. No decision is given. Merely
 because the assessee is required to pay the auditor’s
 fee, that does not mean that any liability is created
 against the assessee and that such order entails any
 civil consequences. The issuance of direction for
 special audit facilitates the Assessing Officer to
 have the complex accounts of the assessee examined by
 an independent auditor. That helps and assists him
 in assessing the income of the assessee. We find
 ourselves in agreement with the view of the Allahabad
 High Court in the case of Jhunjhunwala Vanaspati
 Limited (Supra) and respectfully disagree with the
 view of the Calcutta High Court in the case of
 Peerless General Finance and Investment Co. Limited
 (supra) and West Bengal State Co-operative Bank
 Limited (supra) and the view of the Kerala High Court
 in the case of Muthoottu Mini Kuries (supra). In our
 opinion, the assessee is not required to be heard
 before passing an order under Section 142(2A) of the
 Income Tax Act, 1961.

¶56

¶57

 15. In so far as the present case is concerned,
 it would be seen that after the return of income was
 filed by the assessee on 25th November, 2003, a
 notice under Section 143(2) of the Income Tax Act was
 issued and served upon the petitioner on 12/18th
 October, 2004. Pursuant thereto, the petitioner
 appeared through its Chartered Accountant and
 Accounts Officers from time-to-time in the
 proceedings before the Assessing Officer. On behalf
 of the assessee, it was admitted before the assessee
 in the proceedings on 20th September, 2005 that the
 transaction with M/s.Utkal Investment Limited was
 very complicated and the matter needed to be
 considered with regard to the provisional agreement
 which also contained the non-compete agreement.
 Various queries that were raised by the assessing
 officer were not fully answered by the assessee.
 This aspect is reflected from the proceedings dated
 20th September, 2005. That there is complexity of
 accounts is evident from the consideration of the
 matter by the assessing officer and the Chief
 Commissioner of Income Tax-IV, Mumbai. In para 14 of
 the reply-affidavit filed by the respondent No.1, it
 is stated thus :

¶58

 "1. The Petitioner had submitted only
 part of the details called for during the
 assessment proceedings for A.Y. 2003-04.
 Even though a detailed questionnaire was
 issued to the Petitioner as early as

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 09.08.2005, important details like the
 write-up on the reasons necessitating the
 revised return, details of expenses debited
 to the P & L Account, details of commission
 payments are still to be submitted alongwith
 other details till date. In fact, during the
 course of assessment, it is admitted by the
 Petitioner’s representative that the revised
 return was filed subsequent to obtaining
 additional opinion from Shri Soli Dastur,
 Advocate. It is stated that the transaction
 with M/s.Utkal Investment Ltd. is very
 complicated and the matter has to be
 considered with reference to the provisional
 agreement which also contained the
 non-compete agreement. The circumstances
 under which M/s.Utkal Investment Ltd. went
 to court subsequent to M/s.Atlas Copco
 (Parent Company to Petitioner) acquired
 M/s.Ingersoll Rand globally has to be taken
 into account regarding the need of the
 agreement and the resultant revised return of
 income. However, the Petitioner has failed
 to make its submission in this regard till
 date.

¶61

 2. The Petitioner-company is having huge
 business turnover of Rs.254 Crores which
 consist of turnover of various divisions and
 units. The assessee company is engaged in
 manufacturing activity, trading activity,
 export of goods, investment activities and
 has number of divisions and the individual
 accounts of the divisions are merged to form
 combined results. The assessee company has
 various branches / divisions and have claimed
 substantial amount of deductions under
 different provisions of Income-tax Act. The
 accounting year followed by the petitioner
 under the Companies Act is the Calendar Year
 and the accounting year for tax purpose is
 the Financial Year. In addition to above
 various issues, the fact of merger of M/s.
 Chicago Pneumatic Ltd. with the Petitioner-
 company in the past has made the examination
 of the accounts further complex in nature.
 Further, there are many issues in the return
 of income for A.Y. 2003-04 which are complex
 and require thorough examination, some of
 which are as under :

¶62

 (i) Bad Debts :

¶63

 On examination of the earlier year’s

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 claim for bad debts it was found that
 the Petitioner’s claim for bad debt
 was unacceptable since the conditions
 as laid down by sec.36(i)(vii) of the
 I.T. were not met.

¶66

 (ii) Commission Payment :

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 Huge expenses have been claimed by
 the Petitioner on account of
 commission payments. On verification
 of such claim in the earlier year it
 was found that the Petitioner was not
 in a position to justify either the
 genuineness or the necessity of the
 commission payment.

¶68

 (iii) Stock Write Off :

¶69

 The Petitioner company regularly
 claim write off of huge quantities of
 stock on account of alleged
 obsolescence. However, all such
 written off stock are thereafter
 found to be in the possession of the
 Petitioner. A large number of items
 are manufactured by the petitioner.
 Accordingly, the determination of the
 claim of obsolescence becomes a very
 difficult exercise.

¶70

 (iv) Claim u/s.80HHC :

¶71

 In terms of the decision of the
 Hon’ble Supreme Court in the case of
 IPCA Ltd. it is the duty of the
 Petitioner to establish that it had
 earned profit in its export activity.
 Since the Petitioner is maintaining
 combined books of accounts, it is
 very difficult to correctly ascertain
 the profit arising out of its export
 activity."

¶72

 16. The transaction with M/s.Utkal Investment

¶73

 Limited is admittedly complicated. For the reasons
 recorded by the Assessing Officer as well as the
 approving authority, we find that the opinion of the
 assessing officer that there is complexity of the

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 accounts for computing the true and chargeable income
 of the assessee-company for the assessment year
 2003-04 and that it is in the interest of the revenue
 and that special audit is required, is not unfounded
 and cannot be said to be based on no material or that
 the order under Section 142(2A) has been passed
 without proper application of mind.

¶76

Re : Contention (iii)

¶77

 17. Mr.F.V. Irani, the learned counsel for the
 petitioner argued that by issuing direction for audit
 of the accounts by the special auditor, the
 confidential documents shall be disclosed to third
 party and that there shall be disruption of
 activities. He contended that the Assessing Officer
 has abdicated his duty and that certain aspects
 referred to the special auditor are beyond the scope
 of Section 142(2A). We are not persuaded by the
 submissions. In the very scheme of Section 142(2A),
 where a special audit is ordered by the assessing
 officer, on fulfilment of the conditions prescribed
 therein, obviously, the accounts of the assessee are
 audited by a person so appointed specially. Seen
 thus, the provision contained in Section 142(2A)
 contemplates audit of the assessee’s accounts by a
 third person. The audit by the special auditor, in

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 the circumstances, is a step for the completion of
 the assessment proceedings and, therefore, there is
 no substance that the confidential documents shall be
 disclosed to third party. For the reasons that have
 been indicated by the Assessing Officer in directing
 audit of the assessee’s accounts, it cannot be said
 that the assessing officer has abdicated his duty.
 The findings on various issues by the special auditor
 as required in the order under Section 142(2A),
 obviously, cannot be final but shall facilitate the
 Assessing Officer in understanding the complex nature
 of assessee’s accounts and correctly assessing the
 assessee’s income.

¶80

 18. We have no hesitation in concluding that the
 order dated 11th November, 2005 giving direction to
 the petitioner for special audit under Section
 142(2A) for assessment year 2003-04 does not suffer
 from lack of jurisdiction or error of law.

¶81

 19. The writ petition is, accordingly, dismissed.
 No costs.

¶82

 (R.M. LODHA, J.)

¶83

¶84

 (J.P. DEVADHAR, J.)

atlas copeo (india) limited v. v.s. samuel assistant commissioner of income-tax,range 4 (1),mum.

Case brief

What is this about?

What did the court decide?

atlas copeo (india) limited v. v.s. samuel assistant commissioner of income-tax,range 4 (1),mum.

Case brief

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What did the court decide?

What the court decided

A compact analysis

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