Case Note & Summary
The petitioner, Hiranandani Foundation, a trust registered under Section 12A of the Income Tax Act, 1961, runs educational and medical institutions with a turnover exceeding Rs. 100 crores. For Assessment Year 2010-11, it filed a return declaring nil income after claiming exemptions. During scrutiny, the Assessing Officer issued a show cause notice on 13 February 2013 proposing a special audit under Section 142(2A) citing non-disclosure of related party transactions and accounting policies. The petitioner responded on 25 February 2013, but the Assessing Officer passed an order on 30 March 2013 directing special audit, merely reproducing the show cause notice allegations without addressing the petitioner's reply. The petitioner challenged this order by way of a writ petition under Article 226 of the Constitution. The High Court held that the Assessing Officer failed to record his satisfaction regarding the nature and complexity of the accounts as required under Section 142(2A). The order was a mechanical reproduction of the show cause notice and did not demonstrate application of mind. The court also noted that the Assessing Officer did not consider the petitioner's detailed reply, violating principles of natural justice. Consequently, the court quashed the order and directed the Assessing Officer to pass a fresh order after giving the petitioner a proper hearing. The petition was allowed.
Headnote
A) Income Tax - Special Audit under Section 142(2A) - Satisfaction of Assessing Officer - The Assessing Officer must record his satisfaction that the nature and complexity of the accounts of the assessee and the interests of the revenue necessitate a special audit. The order must be based on objective material and not be a mechanical reproduction of the show cause notice. In this case, the Assessing Officer merely reproduced the allegations from the show cause notice without independently applying his mind, rendering the order invalid. (Paras 6-10) B) Income Tax - Special Audit under Section 142(2A) - Opportunity of Hearing - The assessee must be given a meaningful opportunity to respond to the show cause notice before an order under Section 142(2A) is passed. The Assessing Officer must consider the assessee's reply and pass a reasoned order. Here, the Assessing Officer did not consider the petitioner's detailed reply and passed a non-speaking order, violating principles of natural justice. (Paras 7-9) C) Income Tax - Special Audit under Section 142(2A) - Nature and Complexity of Accounts - The mere fact that the assessee has a large turnover or runs multiple entities does not automatically justify a special audit. The Assessing Officer must point out specific complexities or deficiencies in the accounts that warrant a special audit. The order must demonstrate a nexus between the alleged complexity and the need for a special audit. (Paras 8-10)
Issue of Consideration
Whether the order directing special audit under Section 142(2A) of the Income Tax Act, 1961 was validly passed without the Assessing Officer recording his satisfaction regarding the nature and complexity of the accounts and without providing a proper opportunity of hearing to the assessee.
Final Decision
The High Court allowed the writ petition and quashed the order dated 30 March 2013 passed by the Joint Director of Income Tax (Exemption) II under Section 142(2A) of the Income Tax Act, 1961. The Assessing Officer was directed to pass a fresh order after giving the petitioner a proper opportunity of hearing.
Law Points
- Section 142(2A) of Income Tax Act
- 1961
- special audit
- satisfaction of Assessing Officer
- nature and complexity of accounts
- application of mind
- show cause notice
- opportunity of hearing
- reasons to believe
