Delhi High Court Closes Long Pending Income Tax Audit Case Against Union Of India

In a significant order marking the conclusion of a nearly two-decade-old legal battle, the Delhi High Court has finally disposed of a writ petition challenging a special audit order. The case, S.C. Sehgal v. Union of India & Ors. , reached its conclusion before a Division Bench comprising Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta, who ruled that the Union of India must bear the costs of the audit performed over 19 years ago.

A Legacy of Litigation

The dispute originated from an order dated March 30, 2006, where the Assessing Officer invoked Section 142(2A) of the Income Tax Act, 1961, to mandate a special audit of the petitioner's accounts. Aggrieved by this directive, the petitioner filed a writ petition in 2007. Despite the passage of time and several hearings, the matter remained unresolved as the petitioner failed to appear for recent proceedings, and the underlying objective of the audit had already been realized.

The Financial Burden of Audit

A critical point of contention was the payment of the special auditor's fee, which exceeded ₹20 lakhs. While a previous Division Bench had stayed the recovery of these fees from the petitioner in 2008, it kept the ultimate liability undecided. In the final hearing, the High Court observed that the introduction of the proviso to Section 142(2D) of the Income Tax Act, effective June 1, 2007, fundamentally shifted the financial responsibility for such audits to the state.

Key Observations

The Court, in its order, noted the importance of statutory evolution regarding audit cost-sharing, stating:

"We take note of the proviso to sub-section (2D) of Section 142 of the Act of 1961 which has been inserted with effect from 01.06. 2007 , according to which the fee of the auditor is required to be borne by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as prescribed by the Government."

Furthermore, acknowledging the specific circumstances of the case, the Bench observed:

"Having regard to the fact that despite service of notice, the assessee has not turned up and keeping in mind the spirit of the amendment... we hereby close the proceedings, while observing that the cost of audit fee shall be borne by the Union of India ."

Judicial Finality

By disposing of the petition, the Delhi High Court has effectively sanitized a long-pending docket entry. The ruling serves as a practical application of legislative intent, ensuring that when the state triggers a special audit, it remains responsible for the professional costs incurred, especially when the statutory framework has evolved to reflect such accountability. This decision brings a definitive close to a case that had remained in the judicial system for over 19 years.