IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION WRIT WRIT WRIT PETITION NO.123 OF 2008 PETITION NO.123 OF 2008 PETITION NO.123 OF 2008 1) International Metro Civil ] Contractors, an association of ] persons with its management ] office at B-14, T.V. Industrial, ] 284A, S.K. Ahire Marg, Worli, ] Mumbai - 400 030 through its ] duly authorised representative ] Mr. Humeed Contractor. ] ] 2) DYWIDAG INTERNATIONAL GmbH, ] a Company duly constituted and ] existing under the laws of Germany ] having its Registered Office at ] Erdinger Landstr, 1, P.O. Box ] 81 02 80, 81902, Munchen,Germany ] ] 3. LARSEN & TOUBRO LIMITED, ] a Company duly constituted and ] existing under the laws of ] of Republic of India,having its ] Registered Office at "L&T House", ] Narottam Morarjee Marg, Ballard ] Estate, Mumbai- 400 001 and ] its ECC Division Headquarters at ] Mount Poonamallee Road, Manapakkam,] P.O. Box 979, Chennai 600 089 ] India. ] 4. SAMSANG CORPORATION, a company ] PETITIONERS duly constituted and existing ] under the laws of Korea, having ] its Registered Office at Kangnam, ] P.O. Box 1430, Keungil B/D, ] 677-25, Yeoksam-Dong, Kangnam-ku, ] Seoul, Korea. ] ] 5. IRCON INTERNATIONAL LIMITED ] a Company duly constituted and ] existing under the laws of the ] Republic of India, having its ] Registered Office at Pallika ] Bhawan, Sector-XIII, R.K. Puram, ] New Delhi - 110 066, India. ] 6. SHIMZU CORPORATION, ] a Company duly constituted and ] existing under the law of Japan, ] having its Registered Office at ] No.2-3, Shibaura 1-Chome, ] 2 Minato-ku, Tokyo, Japan. ] Vs. 1. UNION OF INDIA ] Ministry of Law, Aaykar Bhavan, ] New Marine Lines, Mumbai- 400 020 ] 2. Commissioner of Income Tax-18, ] Mumbai. Room No.517, 5th Floor, ] Piramal Chambers, Parel, ] Mumbai - 400 012. ] 3. DEPUTY DIRECTOR OF INCOME TAX ] 18(1), 1st Floor, Piramal Chambers ] Parel, Mumbai - 400 012. ] 4. ADDITIONAL COMMISSIONER OF INCOME ] TAX - 18(1), 1st Floor, ] Piramal Chambers, Parel, ] Mumbai - 400 012. ] Mr. Y.P. Trivedi, Sr. Counsel with Ms. Usha Dalal i/by Paras Kuhad & Associates for Petitioners. Mr. R.G. Bhat with Mr. P.S. Sahadevan for Respondents. CORAM CORAM CORAM : F.I. REBELLO & : F.I. REBELLO & : F.I. REBELLO & R.S. R.S. R.S. MOHITE, JJ. MOHITE, JJ. MOHITE, JJ. DATE DATE DATE : 19TH MARCH, 2008 : 19TH MARCH, 2008 : 19TH MARCH, 2008 ORAL ORAL ORAL JUDGMENT ( PER F.I. REBELLO, J) : JUDGMENT ( PER F.I. REBELLO, J) : JUDGMENT ( PER F.I. REBELLO, J) :- 1) Rule. Heard forthwith. 2) Petitioners had earlier approached this Court by Writ Petition No.176 of 2007 to challenge the order dated 28th December, 2006 whereby the special audit was ordered of the Assessee’s Books of Accounts during the Assessment Year 2004-2005. 3 Minutes of the order were submitted, based upon which this Court disposed of the Petition by order dated 20th June, 2007. In the minutes of the Order, the parties agreed that the order directing special audit under Section 142(2A) of the Income Tax Act be set aside and the period, for completing the assessment proceedings for Assessment Year 2004-2005 stands extended to 5th November,2007. It was also provided that it was open to the Respondent no.3 in that petition to pass any order permissible in law and in accordance with law including audit under Section 142(2A) of the Act, if permissible. 3) Subsequent to the order of this Court, a Show Cause Notices were issued to the Petitioners by Respondent no.4 as to why the Books of Accounts should not be subjected to special audit under Section 142(2A) of Income-Tax Act, 1961. The Petitioners filed their reply on 16/10/2007 as to why the special audit should not be dropped. After considering the cause shown by the Petitioners, Respondent no.2 approved the proposal of the Assessing Officer for special audit under Section 142(2A) of the Income Tax Act, 1961 for the Assessment Year 2004-2005 by order dated 4 25/10/2007. Respondent no.4 by order of the same day, communicated to the Petitioners that in view of the nature and complexity in the accounts of the Assessee and in the interest of Revenue, special audit was being ordered under Section 142(2A) of the Act for Assessment Year 2004-2005. These audit/ orders are the subject matter of the present petition. 4) Respondent no.2 while granting sanction observed that it had considered the proposal forwarded by the Assessing Officer and the assessment records of the year 2004-2005 as also the reply filed on behalf of the Petitioner and held that there were sufficient grounds for audit under Section 142(2A) of the Act for the reasons set out in the sanction order. Respondent no.2 whilst granting sanction held that considering the nature and complexity of the Assessee’s accounts and the interest of Revenue, notice had been issued to the Petitioners asking them to explain as to why the Books of Accounts be not subjected to special audit. The order of sanction specifies that the Petitioners were represented and the matter was discussed with them. Respondent no.2 thereafter considered the various aspects and 5 noted that the Assessee has not followed AS-7, which is the form for maintaining accounts for construction and project related activity. In the matter of percentage of completion of work, considering the reply filed by the Petitioners, noted that nature of accounts definitely made accounts complex and correct determination of Revenue required technical qualification in accounts for detailed examination of voluminous records which the assessee - Petitioners claimed to be in 65 cartons. It was also noted that the matter of schedule of milestones as included in the general conditions of the contract which means the schedule included in each cost centre in the pricing document, it was noted that the assessee was unable to give details apparently due to the complexities involved in the determination of investment in each milestone which was included in the Cost Centre and only a special audit would determine the cost incurred, which would help in natural understanding and determining the assesses correct income, which otherwise is difficult because of its nature and complexity. The Respondent no.2 also noted in the matter of material purchases and payments to sub-contractors, it was difficult to verify the 6 correctness of the claims. A random verification of the bills and vouchers revealed that there are cases where the bills and vouchers have not been signed and work had been started without any work order which are claimed to be regularised on a later date. Held that this would adversely affect the interest of the revenue, if these verifications are not carried out. Various other reasons have also been given which need not be set out. 5) On receiving approval from Respondent no.2, Respondent no. 4 ordered special audit. Whilst directing special audit, the Respondent no. 4 noted amongst others that considering the contention of the assessee that it has completed the project upto the extent of 62.66 percent and the method of accounting, made the accounts complex and correct determination of Revenue required technical qualification of accounts for detailed examination of voluminous records. In the matter of cost centre, it was observed that it was a very important and a special audit would held in determining the correct income of assesses which was otherwise difficult, because of its nature and complexities. For these reasons and 7 other reasons set out therein, the Respondent no.4 ordered special audit. 6) At the hearing of this petition, on behalf of the Petitioners, the learned counsel submits as under : (a) "considering Section 44AB of the Income Tax Act as the Petitioners business exceeds 40 Lacs Rupees in any previous year, they were bound to get accounts audited by an Accountant as set out in that Section. It is submitted that once the accounts have been audited by an Accountant, then in all such cases the provisions of Section 142(2A) would not be attracted. In the instant case, it is submitted that therefore the order of special audit is clearly without jurisdiction and consequently the said order is bad at law and liable to be quashed and set aside. (b) It is next submitted that considering the language of Section 142 (2A) of the Act, a special audit can only 8 be ordered by the Assessing Officer in proceedings before him having regard to the nature and complexities of the accounts of the Assessee and the interest of the Revenue, if of the opinion that it is necessary so to do, with the previous approval of the Commissioner direct the Assesses to get the accounts audited by an Accountant as defined in explanation bill/below Sub-Section 2 of Section 288 nominated to the Chief Commissioner. In the instant case, it is submitted that there was no complexities, the Petitioners accepted returns filed for the previous years and the accounts are to be audited only for the year 2004-2005. It is, therefore submitted that the opinion to be formed must be based on objective criteria. In the instant case, there was no material for Respondent no.4 to have arrived at the conclusion that a special audit to be done and consequently the order is liable to be set aside. (c) It is lastly submitted that Section 142(2A) requires issuing a 9 direction to the Accountant to complete the audit within the time framed. In the instant case, it is submitted that there is no such order directing the Accountant to submit the report with a particular period. This would also disclose non-application of mind on the part of Respondent no.4 and consequently also the order is liable to be set aside. (7) On behalf of the Respondents, a reply has been filed by Sunil Kumar Singh, Additional C.I.T., Range (18)(I). The contention raised by the Petitioners have been contested. It is set out that the Petitioners were given an opportunity for showing cause and only after considering the reply filed and obtaining the permission as required under Section 142(2A) of the Act and having regard to the nature and complexities and the interest of Revenue a special audit has been ordered for the assessment year 2004-2005. The communication dated 5/11/2007 whereby Respondent no.2 has appointed an Accountant has been placed before us. The same is taken on record. That indicates Accountant is directed to submit the Audit report for the Assessment Year 2004-2005 and 10 the same should be completed by 31/3/2008. 8) Learned counsel for the Respondents further submits that an orders under Section 44(AB) and special audit under Section 142(2A) are independent orders. Under Section 44(AB), any person covered by the said provisions is bound to submit special audit accounts to enable the Assessing Officer to pass an order of assessment. Section 142(2A) is independent and resort can be at only in the event the requirement as set out therein are met. The purpose and object of enquiry is also different. It is, therefore, submitted that it was within the jurisdiction of Respondent no.4 to have directed a special audit of accounts for the Assessment Year 2004-2005. . Lastly, it is submitted that there are complexities and considering the complexities, Respondent no.4 it was within the jurisdiction of Respondent no.4 to direct the audit. For all the aforesaid reasons, the petition it is submitted should be dismissed. 9) We shall first consider the contention urged that once a person is subjected to audit 11 under Section 44(AB), the provisions of Section 142(2A) would not be attracted. To understand that, we may gainfully reproduce. Section 44AB which reads as under : 44AB 44AB 44AB. Every person, - (a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year, or (b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any [previous year; or (c) carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or Section 44AE or section 44AF [or section 44BB or section 44BBB], as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of is business, as the case may be, in any previous year,] get his accounts of such previous year audited by an accountant before the specified date and [furnish by] that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed : [Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44B or [section 44BBA], on and from the 1st day of April,1985 or, as the case may be, the date on which the relevant section came into force, whichever is later : . For a discussion, Section 142 (2A) is also 12 material and it reads as under : 142(2A) : If, at any stage of the proceedings before him, 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 previous approval of the [Chief Commissioner or Commissioner], direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the [Chief Commissioner or Commissioner] in this behalf and to furnish a report of such audit in the prescribed from duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the [Assessing] Officer may require : [Provided [Provided [Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.] 10) Section 44AB was inserted in 1984 with effect from 1/4/1985. The object behind Section 44AB is to enable the Respondents to get the accounts prepared by an independent expert unconnected with the assesses. Section 142(2A) of the Act on the other hand was inserted by Taxation Laws (Amendment) Act, 1975 w.e.f. 1/4/1976. This is a special provision whereby the Assessing Officer is empowered to get accounts audited by an Accountant. Further requirement is that Assessing 13 Officer shall not direct a special audit without giving an opportunity of being heard to the Petitioners and further arriving at a satisfaction that there is a need for special audit, having regard to the nature and complexities of the accounts of the Assessee. It would thus be seen that the two Sections operate differently. Under Section 44AB, a duty is cast on the person to appoint an Accountant. Under Section 142(2A), the duty is cast on the Assessing Officer, with a previous approval of the Chief Commissioner to get an account audited by an Accountant. The object is different. One is to ensure that the accounts are properly audited, the other to ensure in case of complexities that the accounts as audited are correct. It is in the nature of a check on the work of an accountant when interest of Revenue are involved. There are also substantial procedural aspects which are different from an audit carried out under Section 44AB. 11) Learned counsel for the Petitioners had drawn our attention to the judgment of Rajesh Kumar vs. Deputy Commissioner of Income Tax and Others., reported in [2006] 287 ITR 91 (SC) with a view to contend that apart from the Respondent 14 no.4 being satisfied, he has to form an opinion and seek the approval of Respondent no.2. In the case of Rajesh Kumar vs. Deputy Commissioner of Income Tax and Others (supra) though there are other issues in so far as appointment of special audit under Section 142(2A), this is what the Supreme Court observed : "Indisputably, the prejudice of the assessee, if an order is passed under section 142(2A) of the Act, is apparent on the face of the statutory provision. He has to undergo the process of further accounting despite of the fact that his accounts have been audited by a qualified auditor in terms of section 44AB of the Act. An auditor is a professional person. He has to function independently. He is not an employee of the assessee. In case of misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949." . It is thus be clear that the Supreme Court did consider the provision of Sections 142(2A) and 44AB of the Act. The Court did not hold that once an Accountant is appointed under Section 44AB, no Accountant can be appointed. It held to the contrary. . Even otherwise, as noted earlier, Order under Section 44AB is mandatory for every person 15 falling within the said provisions and having an income of over Rs.40 Lacs. Section 142(2A) on the other hand is a power of the Assessing Officer on the particular facts including nature and complexities of the accounts of the Assessee and the interest of Revenue to order an audit. . We are clearly therefore of the opinion that though in the judgment of Rajesh and others (supra), the issue was not directly the issue, attention of the Court was invited to both the provisions and the Court took the view that order appointing special Auditor under Section 142(2A)is independent. In our opinion, therefore, first contention as raised must be rejected. 12) We then come to the second contention as to the nature and complexities of the accounts of the assessee and the interest of the Revenue. These predicates have to be satisfied before a special auditor is ordered. In the judgment of Rajesh and Others (supra), the Supreme Court noted that before the order of audit, the principle of natural justice must be complied with in as much as notice must be given to the assessee. We find with effect from 1/6/2007 by the Finance Act, 2007 16 a proviso has been added to Section 142 (2A) requiring the Assessing Officer to give opportunity to the assessee to be heard before a special auditor is appointed. The first question is whether there was material for the Respondent no.4 to form opinion based on objective criteria and secondly in considering the nomination whether there was material to show that there was complexity in the matter of the accounts. In so far as the formation of opinion that it must be based on the objective consideration, is settled by the judgment of the Supreme Court in Rajesh Kumar and others (supra). The Court noted that relevant factors of invoking Section 142(2A) are as below : (1) The nature of the accounts, (2) complexity of the accounts and (3) the interest of the Revenue. . We have earlier referred to the order of Respondent no.2 granting permission to Respondent no.4. Both show cause notice and the order granting sanction by Respondent no.2 and the order by which special audit was directed would indicate that apart from the nature of the account, there 17 were complexities and that the interest of the Revenue had to be protected. In our opinion, there was sufficient material on record to arrive at an objective opinion. This formation of opinion has to be prima facie. We are of the opinion that considering the material on record and the reasons given directing the audit which we have considered in the earlier part of judgment, the order directing special audit cannot be faulted. The second contention is also to be rejected. 14) The last contention namely that no time limit was set out for the Accountant to complete the audit. It is true that in the order appointing an Accountant, Respondent no.4 in order of 25/10/2007 did not give time frame nor named any Accountant. It is only due by communication of 5/11/2007. The language of Section 142(2A) does not postulate that the Accountant must be ordered to give his report within the time frame. It is sufficient that after the Respondent no.4 forms an opinion and passes an order, he can nominate an Accountant and set out the time framed. In our opinion, therefore, the third point is also devoid on merits and consequently is 18 liable to be rejected. 15) The last question which is unconnected with the merits of the order passed. We find that pursuant to the minutes of order filed before this Court in Writ Petition no.166 of 2007, the petition was disposed of in terms of the minutes of the order. The last date for completing the assessment for the year 2004-2005 was 5th November, 2007, that period has not been extended. It was not possible for Respondent no.4 to comply with the directions of this Court dated 20th June, 2007. The second petition is pending in this Court since 12/12/2007. The order appointing Accountant and giving him time free was issued on 5/11/2007 i.e. before the date fixed by this Court for completing the assessment. It is true that no interim relief was granted by this Court. In our opinion, this would not be material, as the Respondents were under a bonafide belief and in the instant case, that time would be extended. The Respondent no.4 granted time to the Accountant to complete the audit by 31/3/2008. That could not take place on account of the intervening circumstances including filing of this petition. In our opinion, the rights of the Respondents 19 cannot be defeated either on account of the failure of this Court to extend time and or independently asking for extension of time. In our opinion, considering the facts and records, reasonable time can be granted to the accountant to submit the audit report by 31st October,2008. The Assessment proceedings for the Assessment Year 2004-2005 to be completed on or before 31/3/2009. 16) Rule made absolute accordingly. No order as to costs. ( F.I.REBELLO, J.) F.I.REBELLO, J.) F.I.REBELLO, J.) ( R.S. MOHITE, J.) R.S. MOHITE, J.) R.S. MOHITE, J.)