Subject:- The NPCC was asked to produce the documents it relied upon in respect of its returns.
Referred Sections:
Section 142(2A) of the Income Tax Act
Section 139 of the Companies Act, 2013.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 08.04.2019
+ W.P.(C) 592/2019 & C.M. APPL.2622/2019
NATIONAL PROJECTS CONSTRUCTION CORPORATION
LIMITED (NPCC) ......Petitioner
Through : Mr. Tarun Gulati, Mr.
Yashwant Singh and Ms. Sparsh Bhargava,
Advs.
versus
DEPUTY COMMISSIONER OF INCOME TAX & ANR.
...Respondents
Through : Mr. Ruchir Bhatia, Sr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE PRATEEK JALAN
MR. JUSTICE S. RAVINDRA BHAT
%
1. In the present writ petition, the validity of an order under Section
142(2A) of the Income Tax Act (hereafter referred to as "Act") issued by the
Assessing Officer (hereafter referred to as "AO") on behalf of the respondent
(hereafter referred to as "Revenue") has been challenged. The petitioner, a
Public Sector Undertaking (PSU) and hereafter called "NPCC", urges
various grounds, including non-application of mind and unfairness by the
AO.
2. The NPCC filed its return for Assessment Year (AY) 2016-17 on
16.10.2016 declaring a total income of `18,02,20,380/-. Later, it revised its
W.P.(C) 592/2019 Page 1 of 17
return on 29.03.2018 to reflect the correct TDS credit available based upon
the AS-22 receipts. The return was selected for scrutiny and the notice was
issued on 07.09.2018 by the Revenue. The NPCC was asked to produce the
documents it relied upon in respect of its returns. It submitted on
20.09.2018 computation of income and audit financials in respect of return
of income. Another notice calling for information was issued by the
Revenue on 29.09.2018. The NPCC uploaded the information and
documents, in the Revenue's web-portal in response to this notice (of
29.09.2018) on 21.11.2018. A week later, i.e. on 28.11.2018, the Revenue
called for particulars with respect to the following four items:
"a. Furnish in the prescribed manner details of Party wise
work done along with PAN details and ledger of the parties.
b. Provide details of other expenses along with bills and
vouchers of the expenses and its applicability towards the
business to the tune of Rs.100.75 crore.
c. Provide partywise details of the long term advances
shown at note no. 10 and 11 of the balance sheet.
d. And, provide justification and details of huge increase in
cash and cash equivalent along with evidences."
3. The NPCC contends that when it was in the process of collecting
relevant information from the concerned zonal officer, another notice was
issued on 04.12.2018 electronically by the Revenue outlining the ten key
points and calling for information which included evidence regarding
adverse comments given by the auditor; party-wise details of the liabilities
showing in the balance sheet under the head trade-payables, security
deposits, advances from project authorities, interest accrued and due on
W.P.(C) 592/2019 Page 2 of 17
advances from project authorities along with respective ledger accounts of
parties and their confirmation; copy of sales tax/VAT returns for the year
with details of the sales tax payment; project-wise details of entire works
undertaken during the year with separate profit and loss accounts of each
projects; write-ups of the modus operandi of business and comments on
method of accounting of receipts and expenses. The petitioner submits that it
could furnish the information on 11.12.2018. According to NPCC, the
queries were satisfactorily replied.
4. On 18.12.2018, a Show Cause Notice (SCN) was issued by the
Revenue proposing a special audit, under Section 142 (2A), stating as
follows:
"a. The NPCCC had not replied to the adverse comments of
the auditors satisfactorily and thus the issues and
apprehensions raised by the auditors remained unsatisfied.
b. Submissions of ledger confirmation of parties with their
copy of ITR, audit report, B/S, P/L pertaining to liabilities
shown in the balance sheet under the head trade-payable,
security deposit advances from project authorities along with
respective ledger account of parties and their confirmation
remained unattended/un-addressed.
c. The NPCC had not provided project wise details of entire
work undertaken during the year.
d. That despite of huge turnover in the last five years, the
Net profit figure is going down.
e. Further it was also alleged that details of the liabilities
as on 31.03.2016 were also not produced."
5. The notice also stated as follows:
W.P.(C) 592/2019 Page 3 of 17
"In view of the abovementioned facts it is clear that the
assessee has not disclosed its true nature of transactions with
various zonal offices who have subcontracted the construction
also pointed out by the auditor of the assessee. It is important
to mentioned here that the documentary evidences relating the
income and expenditure are not produced by the assessee nor
any bills or voucher were produced by it. Therefore, in view of
the discrepancies pointed out by the statutory auditor of the
assessee company itself in his audit report viz-a-viz noticed
from the part details submitted by your AR during the
assessment proceedings during the year under consideration,
and in view of complexities involved in your books of accounts,
nature of transactions and complexities involved in the business
affairs, you are required to show cause as why your accounts
should not be get audited by an accountant nominated by the
Department as per provisions of section 142(2A) of the Income
Tax Act, 1961 and why such accountant not be asked to furnish
the report such audit in the prescribed for duly signed and
verified by him, in the interest of revenue.
Your reply in the matter must be reached to the
undersigned on or before 21.02.2018 failing which, it shall be
construed that you have no objection to the proposed audit of
your books of accounts by an accountant so nominated by the
Department as per the provisions of the section 142(2A) of the
Income Tax Act, 1961."
6. A reply to the SCN was given by the NPCC on 21.12.2018. The reply
stated that adverse comments of the auditor were general and it did not
impact the profitability of the assessee and moreover it relied upon the report
of the CAG on financial statements and audit report of the auditors for AY
2015-16 expressing satisfaction. With respect to the adverse comments,
specifically the assessee relied upon a chart. With respect to the query
regarding the head trade-payables, security deposits and advances from
W.P.(C) 592/2019 Page 4 of 17
project authorities, it was stated that the relevant material was already
furnished but the copy of the ITR, audit report, balance sheet and P&L
Account of the parties were not available with it. It was further explained
that as far as the copy of sub-contractor and evidences for the competitive
bidding for selection of sub-contractor was concerned, the record was very
voluminous and difficult to arrange. Regarding long term liabilities, current
liabilities and other liabilities, the NPCC submitted that the liabilities as
shown in the balance sheet are the cumulative figures of current as well as
the past many years, some of which were disputed and arbitration cases are
going on. It was stated that the balances shown in liabilities are identified
and unit/party wise detail was attached along with reply to the SCN.
Regarding cessation of liabilities, it was explained that such a decision was
taken consciously by the management. Furthermore, the NPCC further
submitted that:
"It is further submitted that
The assessee company is a Government Company with 98.89% with
Central Government and rest with State Governments.
Directors of the company are appointed by Government of India and
there is no motive to escape the income as all ultimately belongs to
Govt. of India.
The statutory audit is being done by the auditor appointed by CAG as
per the provisions of the Section 139 of the Companies Act, 2013.
Once the statutory audit is done, the Financial Statement along with
Audit report of the Statutory Auditors have to be submitted before
C&AG for Audit of the Financial Statements U/s 143(6)(a) of The
Companies Act, 2013 and comments of C&AG has to be placed before
AGM.
W.P.(C) 592/2019 Page 5 of 17
The assessee company was assessed U/s 143(3) continuously for last
15 years and disclosing the true income in their return.
The assessee company was a Sick Public Sector Undertaking within
the meaning of Sick Industrial Companies (Special Provisions) Act,
1985 (SICA) since 1980 till 2013. Even huge brought forwarded
losses have been lapsed as there were on profit in the company for a
long time.
If you go through the ,,Computation of Income of the assessee, youll
find each and every small disallowance has been added back to
calculate the Taxable Income of the assessee."
7. Further replies were issued by the NPCC in the form of submissions
on 26.12.2018 and 27.12.2018. On 28.12.2018, the AO passed an order
directing special audit under Section 142(2A) of the Act.
8. The NPCC questions that order. Mr. Tarun Gulati, learned counsel
argued that the AO without considering the NPCC's submissions passed the
impugned order. He urges that the impugned order of special audit is based
on inaccurate assumptions. Furthermore, serious exception is taken with
respect to the procedure adopted and the denial of principles of natural
justice.
9. Learned counsel urged that the impugned order was passed as a mere
pretence with an intent to extend the limitation period for completing
assessment proceedings since the issue was getting time-barred. The NPCC
urges that special audit of accounts of NPCC can be ordered having regard to
the nature and complexity of accounts, volume of accounts, doubts about the
correctness of accounts or multiplicity of transactions in the accounts.
Safeguard in the form of approval by the Principal Commissioner is also
required.
W.P.(C) 592/2019 Page 6 of 17
10. Learned counsel submits that the mere fact there are numerous
documents involved, would neither make them complex nor voluminous so
as to justify the special audit. Likewise multiple transactions per se cannot
be the basis of invoking the power to direct the special audit. It is urged that
the special audit is an aid to assessment proceedings. It is also contested that
no evidence was submitted to verify the liabilities shown in the balance
sheets. Learned counsel urged that unit-wise details of trade payables
security deposits and advance was submitted to the Revenue on 11.12.2018
and further details of advances unit-wise travel expenses details of
advertising bills exceeding `1 crore etc. were furnished. The employee
benefit expenses with names of employees, their relevant particulars etc.
were furnished on 26.12.2018.
11. After the filing of the petition, the NPCC filed and relied upon an
additional affidavit dated 01.02.2018, which inter alia reads as follows :
"2. That the Petitioner has challenged the Impugned Order
signed on 28.12.2018 directing to get its books of account
audited by a Special Auditor in terms of Section 142(2A) of the
Income Tax Act, 1961 by way of the Writ Petition (C) No.592 of
2019. It is submitted that in addition to the pleadings already
made in the Writ Petition, the Petitioner would like to bring to
the notice of the court that it was only on 29.12.2018 that the
Petitioner received an email from the Respondent No.1
intimating the authorisation for conduction of Special Audit u/s
142(2A) of the Income Tax Act, 1961. However, it is pertinent
to note that a copy of the Impugned Order was not attached to
the said email. Further, the Petitioner was merely sent a
document attached to the mail highlighting 10 points and
requesting to furnish details/evidences pertaining to the same.
A copy of the email dated 29.12.2018 along with the attached
document attached its annexed hereto and marked as
W.P.(C) 592/2019 Page 7 of 17
Annexure-1.
3. Further, it was only at 1:16 P.M. on the 31.12.2018 (the
very date on which the limitation to culminate the assessment
proceedings in the Petitioners case was expiring) that the
Petitioner received another mail wherein a copy of the
Impugned Order was attached. However, it is also pointed out
that the Annexure A referred to in the order was not a part of
the attachment received. A Copy of the email dated 31.12.2018
along with the attachment is annexed hereto and marked as
Annexure-2. Further, the screenshot on the Departments e-
filing portal reflecting the dates in the matter is annexed hereto
and marked as Annexure-3."
12. The Revenue's position is that the impugned order is justified. It
refutes allegations relating to unfair procedure, and points out that the
order directing special audit was admittedly received by the assessee on
31.12.2018. It is submitted that apart from the procedural fairness, on the
merits the order cannot be questioned, because it was made in bona fide
exercise of power. The replies to queries such as detailed party wise
particulars, travel particulars details (and not mere particulars, unit wise)
were not furnished. Mr. Ruchir Bhatia, learned counsel for the Revenue
also urged that the mere circumstance that NPCC's returns for a number
of years were framed after scrutiny, or that it was a public sector unit of
the Central Government, did not in any manner deflect from the fact that
its returns had to be tested in the light of actual evidence. Mr. Bhatia
denied allegations of denial of natural justice and submitted that though
there may be a dispute with respect to the receipt of the annexure to the
order (outlining the terms of reference to the special auditor) even then,
assuming the petitioner were correct, it could always have approached
W.P.(C) 592/2019 Page 8 of 17
the Revenue and obtained a copy of it. Counsel also produced the
original file and submitted it for consideration of the court.
13. This Court has considered the original file which discloses that
after receipt of SCN on 18.12.2018, reply was filed on 25.12.2018; the
petitioner's representative approached the AO and submitted voluminous
documents manually, in terms of a previous letter of the same day. The
AO had proposed audit by letter of 25.12.2018 which was forwarded by
the Additional Commissioner to the concerned Principal Commissioner.
On 26.12.2018, the Principal Commissioner, by separate letter addressed
to the Additional Commissioner granted approval which was then
forwarded to the AO. The Court also noticed that the letter addressed by
the AO seeking permission dated 24.12.2018 is a detailed one outlining
and reproducing the reasons and particulars contained which were
eventually contained in the final order.
14. This Court also had the benefit of considering the notesheet and
copies of the final order which are on the record. It is evident that the
final order was issued and received on 28.12.2018 by the concerned
Chartered Accountant, who had to conduct the special audit; the
endorsement of the petitioner's representative dated 28.12.2018. The file
contains a photocopy of the order [under Section 142(2A)] signed by the
petitioner's representative dated 25.12.2018 and a second copy of the
order containing the final order, with an endorsement of the special
auditor's/CA firm designated for special audit. There is another second
copy of the terms of reference along with that order that too contains
the endorsement of the said CA firm. Given all these circumstances, it
W.P.(C) 592/2019 Page 9 of 17
appears that the petitioner's complaint with respect to non-furnishing of
terms of reference is merited. At the same time, this doubt cannot be used
entirely to invalidate the order under Section 142(2A). The reason is that
the petitioner became aware that the order was made on 28.12.2018; copy
was received by its representative subsequently. The letters on record
addressed by the petitioner's representative CA firm the earliest of
which is dated 04.01.2019 nowhere reflect a complaint that the annexure
to the order containing the terms of reference was withheld. On the other
hand, requests for inspection were made of the assessment file and
certain other documents. Those letters significantly do not contain any
grievance in that regard. Even otherwise, having received a copy on
31.12.2018, the petitioner could easily have sought to obtain a copy of
the terms of reference.
15. As far as the merits of the order is concerned, this Court notices
that to say that a special audit was needed, the AO has given several
reasons. The first one is that several anomalies were noted in the books of
accounts which led to questionnaires eliciting information. According to
the AO, on examination of details, it was felt that the accounts were
complex, for several reasons, It was stated that the company repeatedly
reported losses for a long time in its core activity, i.e. construction
business and stated that it was a sick company and had regained its net
worth in 2012-13; and NPCC also stated that the market conditions were
depressing and by way of comparison refers to the performance of the
Engineering Projects India (EPI). The AO noticed that the income had
not been reported by the assessee and it was only carrying losses and that
W.P.(C) 592/2019 Page 10 of 17
if any positive result in the P&L account existed it was on account of
income from other sources. With respect to the company being sick, it
was reasoned that there was nothing on record that showed heavy losses
on account of huge burden of liabilities of earlier years. It was further
noticed that that performance of EPI on the one hand compared to that of
the NPCC was not justified since the bills of income etc. of EPI were not
known.
16. The AO inter alia stated in the order that:
"9.3 Huge trade liabilities shown in the balance sheet:
S.No Particulars Amount
.
1 Long term liabilities 8,69,55,84,34
5/-
2 Current liabilities 7,00,35,77,99
0/-
3 Other current liabilities 43,38,14,031/-
During the course of assessment the assessee neither produce
any cogent evidences to explain these liabilities nor the
confirmation along with relevant details were furnished. So the
identity and genuineness of these liabilities was not
ascertained. The auditor of the assessee company had also
made certain adverse comments regarding these liabilities and
had pointed out the systemic defect in ascertaining of these
liabilities. Further the auditor has also pointed out the
pendency of certain court cases against these liabilities. But no
details were furnished. So the assessee was vide the show cause
u/s 142(2A) was asked to furnish the details with explanation.
In response to the query the assessee vide his reply dated
21.12.2018 stated as under :-
W.P.(C) 592/2019 Page 11 of 17
"With reference to the query no. 3 of the questionnaire dated
04.12. 2018, it is submitted that unitwise detail of Trade
Payable, Security Deposit and Advance from Project Authority
were submitted as Annexure-3 on 11.12.2018, however the copy
of the JTR, Audit Report, Balance Sheet, Profit & Loss Account
of the parties are normally not available with the assessee.
As far as copy of sub-contractor and evidences for the
competitive bidding for selection of subcontractor is concerned
in this regard it is submitted that the record is so voluminous
therefore it is quite difficult to arrange the same within the lime
allowed by AO i.e. 2 days. The copy of contract agreements
with some sub-contractors are attached herewith for your kind
reference.
In reference to the selection of sub-contractor is concerned it
is submitted that the assessee is following the guidelines
issued by CPWD for selection of the sub-contractors as well
as the instructions issued by the vigilance in respect of award
of the work to sub-contractors. Please find attached herewith
as (annexure-5) the sample for notice Inviting Tender (NIT)
for your kind reference.
In reference to the Long Term Liabilities, current Liabilities
and other current liabilities are concerned in this regard it is
submitted that the liabilities as shown in the Balance Sheet are
the cumulative figures of current as well as past many years,
some of them are disputed and arbitration cases are going on.
Similarly there are some amount recoverable from them but
adjustment cannot be carried out because of the court cases are
going on. The balances shown in liabilities are identified and
unit/party wise detail is attached herewith as (Annexure-6) for
your kind reference please.
It is further submitted that the assessee company is regularly
writing back the liabilities when it is established that it is no
more payable as all and no further litigation is pending. The
liabilities written back during the year under consideration is
Rs. 2,06,0,57251- and the same has been shown under head of
other income (Note 17 to the financial statement) in profit and
W.P.(C) 592/2019 Page 12 of 17
loss account and the same has also been taxed during the year
under consideration.
The assessee company submission on this account is perused
and found untenable as it has not submitted any evidence so as
to verify the genuineness of these liabilities. Furthermore it will
not out of place to mention that the onus was on the assessee to
furnish the evidence relating to identity and genuineness of
these transactions. Furthermore, the assessee could have
justified the genuineness of these liabilities by furnishing the
evidences relating the payments of these liabilities in the
subsequent years. Not only it should establish the identity and
genuineness of these transactions.
9.4 Adverse comments of the auditor in the audit report :-
The auditors had made certain adverse comments in the audit
report regarding various aspect of account of the assessee
company. The assessee vide show cause letter dated 18.12.2018
was asked to furnish replies/comments adverse comments.
In response to the query the assessee in its submission dated
2l.12.2018 gave vague comments such as
i) Reconciliation of accounts is a continuous process and the
company calls a remittance reconciliation meet every year to
reconcile the balance.
ii) The company has the proper system of intra/inter zone/unit
reconciliation. Intra/Inter unit reconciliation is being done at
corporate office yearly. The instance quoted in the para
pertains to F. Y 2012-13. Necessary corrective action has
already been taken in earlier years. The copy of the JE has
already been submitted as annexure-4 in our reply dated 11.12.
2018. There is no impact on the profitability of the current year.
iii) The point does not pertains to the F. Y 2015-16, therefore
no impact on the profitability of the company for the year under
consideration.
iv) The amount of 14.22 lakhs is recoverable from previous
Statutory Auditors of the Company. Neither having impact on
the P&L Account nor pertains to the year under consideration.
W.P.(C) 592/2019 Page 13 of 17
On perusal of the above reply it can be seen that no specific
reply with documentary evidences has been furnished by the
assessee on these comments of auditor.
9.4 Other issues as submitted by the assessee in its
submission dated 21.12.2018.
· The assessee company is a Govt. Company with 98.89% with
Central Govt. and rest with State Govt.
· Directors of the company are appointed by Govt. of India and
there is no motive to escape the income as all ultimately
belongs to Govt. of India.
· The statutory audit is being done by the auditor appointed by
CAG as per the provisions of the section 139 of the Companies
Act, 2013.
· Once the statutory audit is done, the Financial Statement
along with Audit report of the Statutory Auditors have to be
submitted before C&AG for Audit of the Financial Statements
u/s 143(6) (a) of the Companies Act, 2013 and comments of
C&AG has to be placed before AGM
· The assessee company was assessed u/s 143(3) continuously
for last 15 years and disclosing the true income in their return.
· The assessee company was a Sick Public Sector Undertaking
within the meaning of Sick Industrial Companies (Special
Provisions) Act, 1985 (SICA.) since 1980 till 2013. Even huge
brought forwarded losses have been lapsed as there were on
profit in the company for a long time.
· If you go through the 'Computation of Income' of the assessee,
you will find each and every small disallowance has been
added back to calculate the Taxable Income of the assessee.
The assesses above mentioned submission does not find merit
on the simple ground that each assessment year is a separate
assessment year and the assessment proceeding has nothing to
do with the past assessment years unless or until the
transaction related to past year has an impact on the
transactions and business affairs of the current year.
10. 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
W.P.(C) 592/2019 Page 14 of 17
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
Assessee's right especially in view of the fact that cost of audit
is not payable by the Assessee but by the department and
therefore, assessee's interest are not affected in any way except
to the extent of correct determination of taxable income ..
11. 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 and multiplicity of transactions ii)
Interest of the revenue for forming an opinion for the purpose
of special audit u/s l 42(2A) is satisfied in this case.
17. Sections 142(2A) to (2D), 142(3) and 142(4) are relevant with
respect to what considerations weighed while directing special audit in
the provision titled "Inquiry before Assessment". The guiding principles
regarding conduct of special audit and the nature of orders to be made
were dealt with by the judgments of the Supreme Court in Sahara India
(Firm), Lucknow v. Commissioner of Income Tax 2008 (300) ITR 403
(SC). The Court had underlined that the opinion required to be formed
must be based on objective criteria and ought not to be subjective
satisfaction. It was also stated that the AO cannot merely shift his
responsibility of scrutinizing account and pass the buck to the special
auditor. The Supreme Court further emphasized that before concluding
the accounts that are complex or difficult to understand there should be a
genuine attempt on part of the AO to understand the accounts maintained
by the assessee appreciating the entries made and in the event of doubt
seek explanation. In the present case, the nature of proceedings which
W.P.(C) 592/2019 Page 15 of 17
culminated in the passing of the order under Section 142(2A), to this
Court's mind, do not show any unfairness; they in fact highlight that the
AO started the enquiry to understand the claims of the assessee as far
back as in September. In fact, the notice seeking detailed facts issued in
late September 2018 could be replied with the relevant details only after
two months, i.e. 21.11.2018 by the NPCC. Thereafter too, on not less
than three occasions, the AO called for further details. The process of
receiving these details continued even after the issuance of the SCN on
18.12.2018. The last of these documents was in fact given on 21.11.2018.
In these circumstances, it cannot be said that there was no genuine
attempt on part of the AO to understand the nature of the assessee's
business; its method of accounting or to understand the nuances of its
books or documents. So far as the reasons given by the AO are
concerned, this Court is of the opinion that the NPCC's argument that the
conclusion amounts to mere pretence is unwarranted. The extract of the
order (para 9.3 to para 11) clearly reflect the AO's reasoning. The
inability of the assessee to provide particulars with respect to various
units (in regard to each of which it had claimed substantial deductions by
way of expenses) as well as the adverse remarks made by the NPCC's
auditor do amount to voluminous evidence which also present
complexity of the accounts that needed a close scrutiny.
18. For the above reasons, this Court is of the opinion that there is no
merit in the writ petition. Furthermore, a perusal of the original file
produced by the Revenue would disclose that even as late as in the third
week of January, the special auditor designated by the AO, was
W.P.(C) 592/2019 Page 16 of 17
repeatedly calling for details; the AO had sought for the order to be kept
in abeyance. Eventually, this Court had stayed the direction to conduct
special audit. In these circumstances, the time during which the present
writ petition was pending, i.e. 17.01.2019 till today shall be excluded for
the purpose of computing the period of limitation to carry on and
conclude the special audit. The writ petition is, therefore, dismissed.
There shall be no order as to costs.
S. RAVINDRA BHAT
(JUDGE)
PRATEEK JALAN
(JUDGE)
APRIL 8, 2019
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