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April, 01st 2014
+               WRIT PETITION (CIVIL) NO.2363/2013
                                      Reserved on: 9th December, 2013
%                                     Date of Decision:28thMarch, 2014

      DLF LTD AND ANOTHER                       ..... Petitioners
                   Through Mr. Ajay Vohra & Ms. Kavita Jha,


                                                    ..... Respondents
                         Through Mr. Sanjeev Sabharwal, Sr. Standing


      The petitioner is a real estate developer engaged in creation,
execution and sale of residential and commercial projects. It also earns
income from Special Economic Zone (SEZ) on which it had claimed
deduction under Section 80-IAB of the Income Tax Act, 1961 (Act, for

2.    For the previous year relevant to the Assessment Year 2010-11,
the petitioner filed its return of income on 15 th October, 2010 declaring
income of Rs.474,34,24,620/- (as per the impugned order dated 25th
March, 2013 the return declared income of Rs.6,52,95,98,420/-, but this
aspect need not be examined and is not relevant for the purpose of the
present decision).

3.    As per the petitioner, for computing the said income, they had

WPC 2363/2013                                                 Page 1 of 21
followed Percentage of Completion Method (POCM, for short)1 as
distinct from completed contract method.                                         The petitioner had also
claimed deduction of Rs.178.63 crores under Section 80-IAB in respect
of profits derived from projects in SEZ areas. The petitioner had granted
loans and advances to its subsidiaries and shown interest income @
6.5% per annum in respect of said loans and advances as received from
its subsidiaries.

4.        Statutory           notice         under         Section          143(2)          with        a      detailed
questionnaire dated 1st November, 2012 was issued to the petitioner
fixing the case for scrutiny assessment on 8th November, 2012, on which
date the case was adjourned to 23rd November, 2012. On the said date,
part details were filed but in the meanwhile another questionnaire dated
6th December, 2012 was issued. The assessee claims that it complied
with the details, information and clarifications requisitioned. However,
show cause notice dated 26th February, 2013 under Section 142(2A)
was issued for referring the accounts for special audit and the petitioner
was asked to respond. The petitioner objected by their letter dated 8 th
March, 2013 and protested against reference to special audit on the
ground that it was unwarranted and contrary to law (the details of the
objections raised and the merits of the same have been considered
below).         The Assessing Officer-Additional Commissioner of Income
Tax, Range 10, New Delhi by the impugned order dated 25th March,
2013 directed the petitioner to get their accounts for the Financial Year
2009-10 relevant to the Assessment Year 2010-11 audited from a
Chartered Accountant, who was nominated as per the provisions relating

     'Percentage of Completion Method' is an accounting method in which the revenues and expenses of long-term
     contracts are recognized yearly as a percentage of the work completed during that year. This is the opposite of the
     completed contract method, which allows taxpayers to defer the reporting of any income and expenses until a long-
     term project is completed. The percentage of completion method of accounting is commonly used in construction

WPC 2363/2013                                                                                            Page 2 of 21
to conduct of special audit under Section 142(2A) of the Act. The
Special Auditor was required to submit report in Form 16 as per Rule
14A of the Income Tax Rules within sixty days from the date of receipt
of the directions and the petitioner was asked to extend full and complete
cooperation for completion of the special audit within the stipulated

5.      The petitioner has challenged the said direction of special audit
stating and pleading that the mandate is contrary to the statutory pre-
conditions stipulated in Section 142(2A) for the following reasons:-

        (i)     POCM was well recognised and accepted by the Revenue.
                In terms of Accounting Standard 7 and in Guidance Note
                23, a methodology for revenue recognition by POCM stands
                elaborately provided. The Assessing Officer cannot
                outsource her functions to a Special Auditor for the assessee
                had followed POCM.        It is a matter of calculation or
                verification. The assessee had followed this method in the
                four earlier assessment years and this was the fifth year.

        (ii)    The Assessing Officer was not a layman and was expected
                to have knowledge and understanding of accounts. The
                Assessing Officer in the present case was in charge of
                corporate assessees and competent to verify and examine
                the income declared by applying POCM.

        (iii)   For four earlier assessment years, special audit was directed
                under Section 142(2A) and held. The POCM was examined
                and accepted in the earlier special audit reports and the
                Special Auditors have not pointed out any discrepancy or

WPC 2363/2013                                                     Page 3 of 21
                inaccuracy. Reference in the fifth successive year amounts
                to harassment and unwarranted inconvenience. Repeated
                exercise was oppressive and unjustified.

      (iv)      Deduction claimed and admissible under Section 80-IAB in
                respect of profits from SEZ units has been duly certified by
                a qualified Chartered Accountant in Form No. 10 CCB.
                Without pointing out any deficiency, inaccuracy or
                discrepancy, direction for special audit on the ground that
                the profit shown from SEZ income was higher than the
                profit shown from non-SEZ income was unwarranted and
                does not disclose live nexus.

      (v)       For similar reasons, special audit was directed in the
                Assessment Year 2008-09 but the Special Auditor did not
                recommend any disallowance under Section 80 IAB of the
                Act. In the Assessment Year 2009-10, this issue was not
                referred for special audit.     The Assessing Officer for
                Assessment Year 2008-09 had made substantial dis-
                allowance contrary to the recommendation of the Special
                Auditor and in the Assessment Year 2009-10 again
                disallowance was made without aid of the special audit
                report. Commissioner (Appeals) has completely deleted the
                disallowance made for Assessment Year 2008-09 and first
                appeal for Assessment Year 2009-10 was pending. Thus
                special audit for the said reason was unwarranted.

      (vi)      Reasonable interest @ 6.5% was charged in respect of loans
                and advances to subsidiaries, cannot and should not be
                made subject matter of special audit. The petitioner had

WPC 2363/2013                                                    Page 4 of 21
                mixed pool funds, self-generated or borrowed and the
                average cost of which was 6.5% and, therefore, interest @
                6.5% was charged from the subsidiaries.            Issues and
                contentions raised on the said aspect relate to interpretation
                of law and application of legal principles. These aspects fall
                exclusively within the domain of the Assessing Officer and
                the special auditor cannot render assistance.

      (vii) Presumption that mixed pool funds had been used for
                assessees business, whereas self-generated funds used for
                lending and non-business investments, applied. Reliance
                was placed on East India Pharmaceutical Works Limited
                versus Commissioner of Income Tax, (1997) 224 ITR 627
                (SC)      and   Woolcombers    of   India   Limited      versus
                Commissioner of Income Tax, (1982) 134 ITR 219 (SC).

      (viii) Above issue was not part of the show cause notice and even
                in the impugned order there was no substantive discussion.
                The issue was mentioned at point No. 9 of the terms of
                reference. Thus, there was violation of proviso to Section
                142(2A) as reasonable opportunity of hearing has been

      (ix)      Related party transactions have been made subject matter
                of reference to the Special Auditor, though this issue was
                not stated in the show cause notice and, therefore, reference
                was hit for violation of principles of natural justice
                incorporated in proviso to Section 142(2A) of the Act.

6.    The       respondents      have   contested    the    said   pleas      on
various grounds and we shall be dealing with their submissions

WPC 2363/2013                                                      Page 5 of 21
while examining the contentions.

7.    Section 142(2A) has been examined in several decisions of the
Supreme Court and this Court. A detailed review of the said provision
was undertaken and elucidated by the Supreme Court in Sahara India
(Firm) versus Commissioner of Income Tax and Another, (2008) 300
ITR 403 (SC) and it was observed that the said provision could be
invoked if the Assessing Officer forms an opinion; (i) on the nature and
complexity of the accounts of the assessee and (ii) it was in the interest
of Revenue to get the accounts audited by an accountant. The two
requirements were conjunct and not disjunct and these were the essential
pre-requisites. The object being the special audit should be directed, if it
assists and succours, the Assessing Officer in framing correct and proper
assessment based on the accounts maintained by the assessee, i.e., the
Assessing Officer must reach a finding that the accounts of the assessee
were complex and in order to protect the interest of the Revenue,
recourse to the said provision should be made. The expression or word
"complexity" it was observed refers to state of quality of being intricate
or difficult to understand but the Supreme Court observed that what
would be the complex to one, might be simple to another and, therefore,
an Assessing Officer must make a genuine attempt to understand the
accounts, appreciate the entries, in the event of doubt, seek explanation
and then form the required opinion based upon objective criteria and not
purely on the basis of subjective satisfaction. The provision did not
entitle the Assessing Officer to pass the buck to the Special Auditor as it
was the Assessing Officers responsibility to scrutinise the accounts.
However, the Supreme Court rejected the contention that special audit
need not be directed because audit had been conducted under Section
44AB, inter alia, observing that the two provisions had altogether

WPC 2363/2013                                                   Page 6 of 21
different connotations and implications. Unlike compulsory audit under
Section 44AB, special audit was not limited to mere production of books
or vouchers and verification thereof by the auditor but involved
submission of explanations and clarifications, which might be required
by the Special Auditor on various issues with relevant data, documents
etc. Special audit was more or less in the nature of investigation and in
some cases might even turn out to be stigmatic.

8.    In Delhi Development Authority and Another versus Union of
India and Another, (2013) 350 ITR 432 (Delhi) it was observed that
detailed scrutiny of large number of entries by itself on standalone basis
might not amount to or reflect complexity of accounts. Every Assessing
Officer was required to scrutinise the entries and verify them but this
does not require services of a Special Auditor to undertake the said
exercise.   Section 142(2A) was not a provision which enabled the
Assessing Officer to delegate his powers and functions which he could
perform, to the Special Auditor. The provision had been enacted to
enable an Assessing Officer to take help of a specialist, who understood
accounts and accountancy practices when the accounts were complex
and the Assessing Officer affirms that he could not understand and
comprehend them fully till he took the said help and assistance. Interest
of the Revenue was another aspect, which had to be taken into account.
A genuine attempt to understand the accounts and entries must be made
and only when questions were raised with regard to accounts and entries
and when the explanation offered was unsatisfactory or verification was
not possible without help and assistance of the Special Auditor, action
under Section 142(2A) was required.

9.    At this stage, it would be important to notice an earlier decision of
the Supreme Court, Rajesh Kumar versus Deputy CIT, (2006) 287 ITR

WPC 2363/2013                                                  Page 7 of 21
91 (SC) wherein it has been observed that an order under Section
142(2A) does entail civil consequences and not administrative, a view
which was again reiterated in Sahara India (Firm) (supra). The three
factors to be kept in mind by the authorities were, (i) nature of accounts,
(ii) complexity of accounts and(iii) interest of revenue and opinion on
the said aspects must be formed. Special audit should not be ordered for
an underlined purpose which was not bonafide. It should not be ordered
and approved mechanically and certainly not for unauthorised purpose of
extension of limitation to complete the assessment.      The petitioner in
support of their contentions have referred to decisions of Calcutta High
Court in Bata India Limited and Another versus Commissioner of
Income Tax and Others, (2002) 257 ITR 622, West Bengal State Co-
operative Bank Limited versus Joint Commissioner of Income Tax and
Others, (2004) 267 ITR 345 and decision of Kerala High Court in
Muthoottu Mini Kuries versus Deputy Commissioner of Income Tax
and Another, (2001) 250 ITR 455. In these decisions, it was held that
the Assessing Officer should normally have workable skill and idea of
accounting because of the nature of duty entrusted to them. Assessing
Officer was not a layman or one with no experience in dealing with the
accounts.       He was supposed to be acquainted with the method of
accounting and with comprehensive knowledge with regard to matters
required to be examined.

10.   Aforesaid rulings when appraised and reflected, state that while
examining the question of complexity in accounts, we have to apply the
test of ,,reasonable man by replacing the word and qualities of a
reasonable man, with the word and qualities of a reasonably competent
Assessing Officer. The question of complexity of accounts has to be
judged applying the yardstick or test; whether the accounts would be

WPC 2363/2013                                                  Page 8 of 21
complex and difficult to understand to a normal assessing officer who
has basic understanding of accounts etc., without the aid, assistance and
help of a special auditor. Thus due regard has to be given to nature and
character of transactions, method of accounting, whether actuarial were
adopted for making entries, basis and effect thereof, etc., though mere
volume of entries might not be a justification by themself as volume and
complexity are somewhat different. Accounts should be intricate and
difficult to understand. Every scrutiny assessment entails investigation
and verification of the books of accounts, genuineness of the transactions
or entries reflected in the books, computation of income etc. It is an
exercise which demands expertise and a degree of skill to understand the
accounts and decipher whether true and full income has been disclosed;
whether there has been jugglery in the accounts or camouflage has been
adopted. No undesirable assumptions should be made and a return filed
is presumed to be correct, but a deep and in depth scrutiny depending
upon the facts may be warranted.       Section 142(2A) is an enabling
provision to help and assist the Assessing Officer to complete scrutiny
assessment with the help of assistance of an accountant.

11.   There has been substantial expansion of scope and ambit of
Special Audit under Section 142(2A) of the Act with effect from 1st
June, 2013. The amended section has been widened to include volume of
accounts, doubts about correctness of accounts, multiplicity of
transactions in the accounts or specialised nature of business activity of
an assessee. These amendments by Finance Act, 2013 with effect from
1st June, 2013, substitute the words "nature and complexity of accounts
of the assessee". We are not concerned with the said amendment in the
present case as the impugned order in question directing special audit
was passed on 25th March, 2013, before the amendments became

WPC 2363/2013                                                 Page 9 of 21
effective. We are, therefore, primarily concerned with whether or not
keeping in view the nature and complexity of accounts and the interest of
Revenue direction for special audit is justified for the reasons set out in
the order dated 25th March, 2013.                   (We have not examined the
constitutional validity of the amended provisions and we express no
opinion on the said aspect).

12.    The show cause notice issued on 26th February, 2013 is a detailed
one.   It mentions hearings held on various dates that the books of
accounts were requisitioned, produced and examined and questionnaires,
details and information were called for.               On POCM calculation in the
show cause notice, it was observed:-
                "It has been submitted that percentage of completion
                method (POCM) is being adopted by you for recognition of
                revenue of ongoing projects. Under the POCM method, the
                budgeted cost of project is compared with the actual stage
                of completion and based upon the level of completion
                achieved, proportionate revenue and cost are taken to the
                profit and loss account. It is noteworthy that the special
                audit report for the A. Yrs. 2006-07, 2007-08, 2008-09 &
                2009-10 contain findings that the revenue recognized from
                various projects under construction had not been correctly
                determined by you mainly on account of following

                (i)     Increase in budgeted cost or a decrease in actual
                        cost results in decrease in the quantum of revenue

                (ii)    Variance in Budgeted IDC cost and actual IDC
                        cost incurred during the year

                (iii)   Variation in budgeted construction cost and actual
                        construction cost incurred during the year

                (iv)    Variance in actual cost of construction

                (v)     R e v e n u e r e c o gn i t i on u n d e r t h e P OC M
                        m e t h o d i s understated.

                       Further observations were made by the Special
                Auditor for the A. Y. 2009-10 with reference to the

WPC 2363/2013                                                                 Page 10 of 21
                POCM method adopted by the assessee, in the Special
                Audit Report.

                (vi)   You have changed the basis of apportionment of
                       actual internal development Charges during the
                       financial year under consideration and the ITC
                       incurred up to 31.3.2009 have been charged to
                       various projects on the basis of total saleable area
                       of Phase-V which also includes the area of the
                       projects which are yet to be launched,

                (vii) You have shown sales on budgeted sales instead
                       on actual sales, which is not as per prescribed for
                       recognizing revenue resulting in higher sales

                (viii) Construction cost aggregating to Rs. 96,86,473/- in
                       respect of projects covered under Phase-V and
                       construction cost aggregating to Rs. 35,61,191/- in
                       respect of other projects, which pertains to period
                       under audit have been booked during the next
                       financial year.

                (ix)   You have recognized lesser profit amounting to
                       Rs. 77,83,55,804/- in respect of following
                       projects:- Phase-V, Cross Point, Star Tower
                       Silokhera, Ludhiana City Court Sikander Pur,
                       Jallandhar   and   Kolkatta   (Residential   +
                Apart from that a detailed project wise description has
                been recorded in the special Audit Report for the A.Y.
                2006-07, 2007-08, 2008-09 and 2009-10. Wherein, the
                complexities involved and the discrepancies noted have
                been discussed threadbare for each project. Several
                instances are reported in the special Audit Report of
                earlier years where the actual expenditure incurred on the
                projects had been shown as Work in Progress resulting in
                understatement of the actual level of completion and also
                in understatement of revenue required to be recognized.
                All such factual findings can only be reached upon
                thorough examination and audit of the books of accounts
                and the related vouchers/bills, which as discussed are not
                only complex but also voluminous."

13.   The next paragraph records that in the regular hearing books of
accounts were examined for the purpose of computing and understanding
the POCM profit as worked out.                By Order sheet entry dated 1 st

WPC 2363/2013                                                            Page 11 of 21
February, 2013, the petitioner was           asked to furnish the following

                "Name of the projects               Information required

                Phase-V                             Area as well as EDC

                Kolkatta                            Unbooked Area reduced

                Jallandhar                          Area Increased

                Ludhiana                            Unbooked Area reduced

                City Court Sikandar Pur             Increase in total area

                Cross Point Unbooked Area reduced   Land value related cost
                Courtyard                           reduced"

14.   Thereafter observations with regard to DLF Phase -V project,
Jallandhar Project, City Court Sikandar Pur project and Courtyard
project have been made.            In another paragraph reference was made
relating to Cross Point Project and Kolkatta Project and observations on
various entries were highlighted.          Thereafter method of accounting on
issue of stock to the contractors stands elucidated and observed that on
the basis of the entries, there was difficulty in understanding the
accounts. These were multiple transactions in relation to sale of plots and
development cost with sister concerns. Transactions relating to land
purchases were routed through various related group concerns which
were very intricate and complex. Project at Indore, Kakanad and Begur
were referred to. Assessing Officer noted that it appeared that different
revenue recognition methods had been adopted.               Lastly, reference was
made to the special audit reports for the earlier years and detailed
working of each project undertaken in the earlier years had resulted in
additions.      Books of accounts and related bills and vouchers were not
only complex but voluminous as there were large numbers of ongoing

WPC 2363/2013                                                            Page 12 of 21
15.   In response, the petitioner assessee has submitted that consistently
the petitioner was following the policy of accounting construction costs
only when bills were approved and verified and thereupon final liability
became crystalised or due for payment. Entry with regard to purchases
of stocks was made not upon receipt of material but after the inspection
and when the material was accepted.              On the question of Internal
Development Charges (IDC), it was stated that saleable area at PhaseV
Gurgaon stood increased and this was the cause for confusion and errors
made in the special audit report for the last year.                Several factual
assertions made by the Assessing Officer were disputed, on the questions
relating to submissions of reply or part replies/explanation, sale of
construction material, bills, vouchers in respect of Cross Point and
Kolkatta Projects and material issued note and material receipt note. The
petitioner claimed that entries in the books of account including stock
register, were explained to the Assessing Officer.          With regard to the
observations on land purchases through various related concerns, it was
stated that this was not complex and the observation made by the
Assessing officer was vague, ambiguous and confused and was driven by
focused intent to subject the accounts for special audit.                 However,
interestingly, the petitioner has themselves stated as under:-

                       "Further, the details of additions made by the
                Assessing Officer based on the recommendations of the
                Special Auditors and relief allowed by the CIT(Appeals)
                for earlier years four years, where special audit was
                ordered, are as under:-
                Assessment Year         Addition made by the     Relief
                Allowed                                             by
                                    AO on POCM Issue            CIT(A)
                2006-07             325.40               203.78
                2007-08               33.99                33.99
                2008-09               42.92

WPC 2363/2013                                                          Page 13 of 21
                2009-10                 77.83 Appeal pending with CIT(A)

                Your kind attention is drawn to the special audit report for
                the AY 2009-10, wherein the special auditor has
                recommended an addition of Rs.77.83 Crores under
                POCM. In this regard, it may please be noted that the
                assessee company itself had worked out an addition of
                Rs.120.62 Crores on the lines of Special Auditor's
                working for the A. Y. 2008-09.
                This working was filed vide assessee's reply dated
                08.12.2011 in response to certain queries raised by the then
                Assessing Officer vide Order Sheet entries dated
                24.11.2011 with regard to working of POCM revenue. It is
                a different matter that the learned Assessing Officer
                decided to go with the findings of the Special Auditor even
                though the same was prejudicial to the interest of revenue."

16.   The aforesaid observations to our mind show that substantial
additions have been made on POCM issue earlier. Assessee may have
succeeded before CIT (Appeals) in the assessment year 2007-08 and
2008-09, but further appeals were pending. With regard to Assessment
year 2006-07, addition of more than Rs.120 crores stands sustained in
the first appeal.       The Petitioner has made inquisitive observations with
regard to assessment year 2009-10 as it was indicated that the Petitioner
had made addition of Rs. 120.62 crores on the lines of the Special
Auditors working for the assessment year 2008-09.

17.   We have referred to the aforesaid reply to show cause that the
POCM working itself was examined in the special audits in the earlier
years and was subject to scrutiny by the special auditor.                  At another
place, in the said reply the petitioner has made the following statement:

                "It is rather misleading that the observations of the Special
                Auditors, on POCM in AN. 2006-07 to A.Y. 2009-10 have
                been referred to without mentioning the fate of their
                findings before the CIT(A) i.e. first Appellate Authority.
                The table below bears testimony to this:

WPC 2363/2013                                                             Page 14 of 21
            F.Y.                  Addition      Addition made Addition
            proposed                            by Assessing deleted    by
            by Special                          Officer       Commissione
            Auditor                             (Rs./Crores)
                                                              r of Income
            (Rs./Crores)                                      Tax
            2006-07                 1215.44                         851.22
                                                     1015.99 (Rs./Crores)
            2007-08                 291.71           181.84            174.03
            2008-09                 160.72           1256.00          1243.64

      It is further stated in the objections as :

                "It may also be noted, from the table above, that despite the
                fact that the additions made in the 2006-07 to 2009-10
                as a result of Special Audit have been mostly deleted vet on
                the same issues, the Ld. Assessing Officers have been
                repeatedly resorting to Special Audit u/s 142(2A). It is a
                matter of record that all the issues which could warrant
                Special Audit have been dealt with in the very first year of
                Special Audit i.e. A.Y. 2006-07."

18.   Thus what is apparent that the matter of computation of income by
applying POCM has been subject matter of debate and opposite positions
have been taken and adopted by the Revenue and the petitioner. As
noticed above, the petitioner, in respect of Phase V, Gurgaon project has
stated that during the assessment year 2009-10, the saleable area had
increased due to increased permissible height in the building from
25,34,775 sq. ft. to 37,65,972 in respect of one building and 12,49,200
sq. ft. to 19,25,500 sq. ft. in respect of second building. This necessarily
would involve reworking of the entire project costs including reduced
budget costs of all components etc. like EDC, IDC, construction cost,
etc. This is also discernible from the reply filed by the petitioner in
which they have disputed the calculations made by the special auditors in
the last assessment year.

19.   Referring to the reply of the petitioner, the Assessing Officer in

WPC 2363/2013                                                             Page 15 of 21
paragraph 18.1 of the impugned order has observed that during the
assessment proceedings on number of instances or entries, queries were
raised and 4 or 5 persons were required to clarify the facts. The ledger
account did not contain narration therefore scrutiny of the entries had
become cumbersome and difficult.

20.   On the question of loans and advances to the subsidiaries, the
petitioner had submitted that the loans and advances to the subsidiaries
should not and would not affect interest payments in the hands of the
holding company.     We are not primarily concerned with the legal
submissions in the present case because the legal principle applicable
depends upon facts which have to be verified and ascertained. The
petitioner in response to the show cause notice had stated that the
petitioner had own funds to the extent of Rs.12,830 crores and had
borrowed funds to the extent of Rs.12,638 crores during the year in
question. The petitioner has granted loans and advances to the extent of
Rs.10,14,344.97 lacs to the subsidiary companies @ 6.5% per annum
which as per the petitioner was the borrowing costs. It was claimed that
in view of the aforesaid position, the petitioner was not evading tax as
the transactions were tax and revenue neutral. The Assessing Officer has
observed that it has to be shown and established that the charging of
interest @ 6.5% was a revenue neutral exercise. This could be only
ascertained after all entries were examined by the special auditor. On the
question of commercial expediency, it has been observed in the
impugned order that it would come into play when the actual picture was
ascertained i.e. extending of loan to the subsidiary and charging of
interest was thoroughly examined.

21. With regard to the profit from SEZ and non-SEZ projects it was
noted that profit of Rs.1,78,63.73 lacs has been declared on SEZ

WPC 2363/2013                                                 Page 16 of 21
income/turnover of Rs.2,38,31.36 lacs and profit of Rs.6,57,01.92 lacs
has been declared on non-SEZ income/turnover of Rs.24,19,20.81 lacs.
The order records that the petitioner was required to submit comparative
detail with regard to expenditure in SEZ and non-SEZ income projects
but this was not filed. The affairs of the company, therefore, were not
transparent and required audit.

22.   SEZ and non-SEZ income figures mentioned by the Assessing
Officer were contested in the reply. Discrepancies were alleged.
Reference was made to the earlier reports of the statutory auditor and the
fact that in the special audit reports no adverse inference was drawn in
respect of deduction under Section 80IAB. Further provisions of Section
142(2A) were not invoked for the assessment year 2009-10 in regard to
SEZ accounts. At the same time, the petitioner has stated:

                "Your goodself will appreciate that the profit margin of
                the SEZ project has to be on higher side as compared to
                other non-SEZ projects for the simple reason that there is
                no element of sale of land in the SEZ income. In non-
                SEZ projects land cost is a major component, where in
                SEZ Project land is not subject matter of sale as
                mentioned earlier. The land notified as per the provisions
                of Special Economic Zones Act, 2005 cannot be sold."

23.   In the impugned order, the Assessing Officer on this aspect has

                "18.7 The assessee had raised the objection that the
                amount in respect of profit had been taken as Rs.
                17863.73 lacs is, actually the profit shown in return of
                income is Rs. 17861.74 lacs. In his reply dated
                28.12.2012 on page no 178 assessee has furnished the
                details of profit and loss account in respect of SEZ
                Division. The income including land lease income is
                Rs. 238,55.58 lacs while under schedule 15 sales and
                other income has been shown as income revenue from
                development charges Rs. 23,831.37. The difference is

WPC 2363/2013                                                              Page 17 of 21
                due to income from land lease income. Further the
                assessee has raised an objection that during the course
                of assessment proceedings no query with. respect to
                SEZ deduction was raised. In this regard it is stated
                that query can be raised at any point of time before the
                completion of the assessment in the interest of the
                revenue and it is not prerogative of the assessee to
                challenge the same. Further assessee was given
                opportunity to reply to this query, hence this objection
                cannot be entertained.

                18.8 Assessee has raised use of word Transparent'. In
                this regard it is stated that non transparency in the
                maintenance of books of accounts leads to complexity
                both in terms of examination and determination of
                revenue realization. Without prejudice it is further
                stated that the Income Tax Act does not prevent the
                Assessing Officer from examining the form No

24.   We do not find any merit in the contention raised by the petitioner
that related party transactions or reasonableness of interest paid to the
petitioner on loans and advances by its subsidiary was an issue which
was never raised in the show cause notice and therefore, there was
violation of principles of natural justice. This question was specifically
raised in the show cause notice and answer or reply was called for. Even
if the said aspect was not independently examined by raising a written
question in the assessment proceedings, it is apparent that the Assessing
Officer had applied his mind to the said aspect.              On the question of
related parties transaction, we have quoted the observations made by the
Assessing Officer to the effect that there were number of transactions
between the petitioner and related companies. The petitioner had stated
that till 25th February, 2013, ten hearings were held before the Assessing
Officer and 78 queries were raised through questionnaire/order
sheet/verbally. The claim of the petitioner was that he has complied with
all the queries. Thus it is accepted and admitted position that detailed
queries in writing and orally were raised. This shows due application of

WPC 2363/2013                                                              Page 18 of 21
mind and focus on the issues and aspects that arose for consideration.
The said facts are indicative of the assessing officers conduct in trying
to understand the accounts and whether true and correct income had been
disclosed. The aforesaid submissions of the petitioner, therefore, do not
appeal to us.

25.   In view of the aforesaid discussion, we are satisfied that in the
present case the Assessing Officer had applied his mind to various
aspects like nature of accounts, method of maintaining accounts, entries
recorded etc. and reached the conclusion that the accounts were complex
and it was in the interest of the Revenue that special audit under Section
142 (2A) of the Act, should be directed. No doubt in the past also
special audit was directed but the Assessing Officer has not directed
special audit in the present assessment year without examining the
accounts for the year in question, the entries made, peculiarity involved
etc. Special audit has not been directed for getting over the limitation or
in routine.

26.   Powers under Section 142(2A) have to be exercised in terms of
the legislative provisions. The object and purpose behind the legislation
is to facilitate investigation and proper determination of the tax liability.
The    importance    and   relevancy    of   the   legislation   cannot     be
underestimated and it is a power available with the Assessing Officer to
aid and assist him. Accounts should be accurate and provide real time
record of the financial transactions of the assessee.        Preparation of
accounts is the work of the accountant on the payrolls or employed by
the assessee.    In order to ensure reliability and accuracy, enterprises
resort to internal audit and an external audit which can be a statutory
audit. Internal audits are normally conducted in house generally by
acquainted or qualified accountants. Statutory audit is compulsory under

WPC 2363/2013                                                    Page 19 of 21
the Companies Act, 1956 or when stipulated by the Act and accounts
have to be audited by a qualified Chartered Accountant.          Chartered
Accountants are not ordinary accountants but specialists who have
successfully undergone academic study and have extensive practical
experience and trained for the said work. Curriculum requires articleship
under a mentor who is himself a Chartered Accountant with some years
of experience.    As opposed to an ordinary accountant, a Chartered
Accountant with his experience and academic background is in a better
position to investigate, examine and scrutinize entries and records of
financial transactions. Calibre and competence of Chartered Accountants
is of a high degree and should not and cannot be equated with the
capability of an ordinary accountant or a normal person having
knowledge or acquainted with accounts. Off late there has been demand
for increased public scrutiny of accounts, inspite of statutory audit.
Enron and other cases abroad and Satyams case in India have
highlighted the need and necessity to have controls and system of
checks, perhaps even beyond scope of traditional audit.          Financial
statements and accounts are being increasingly exiguously examined to
rule out possibility of wrong doings, cover up or evasion of taxes.
Financial statements and accounts are coming under increasing scrutiny
and investigation. A Chartered Accountant is a financial investigator
and prober, is required to be curious, tenacious and well conversant to
identify and unearth frauds, misreporting and wrong claims in the

27.   The aforesaid observations should not be construed as a general
expression or opinion, that every account or statement of income must be
viewed with suspicion, distrust and scepticism.    The past instances are
mere warnings, for closer and more indepth scrutiny. It is also a fact that

WPC 2363/2013                                                  Page 20 of 21
the business transactions have become more complicated and accounting
entries more complex than ever before. This may be one of the causes
why possibly the frauds could not be detected in some cases.      Indeed
such cases have made the audit work more comprehensive, intrusive and
investigative. Ethical managements may at times regard such enquiries
as an unwarranted intrusion or a hounding approach. Section 142(2A)
does not permit fishing or roving inquiry approach or a witch hunt but is
a regulated provision which accepts the need and necessity of the
Assessing Officer to take help of an expert accountant i.e. a Chartered
Accountant, a person who is academically qualified and has practical
experience to understand accounts and unearth tax evasion or furnishing
of inaccurate particulars etc. The provision balances the right of the
Revenue with the inconvenience which the assessee may face.
Assessing Officers are not Chartered Accountants and when required and
permissible, therefore, can take help and assistance from the qualified
specialists to complete the assessment and determine the taxable income
of an assessee.

28.   In view of the aforesaid we do not find any merit in the present
Writ Petition. Stay order is vacated and the assessment proceedings will
continue as per law. There will be no order as to costs.

                                              (SANJIV KHANNA)

                                           (SANJEEV SACHDEVA)
MARCH 28, 2014

WPC 2363/2013                                                Page 21 of 21
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