Back
2016 Supreme(Guj) 1856
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
Akil Kureshi and A.J. Shastri, JJ.
Takshashila Realties Pvt. Ltd. – Petitioner
Vs.
Deputy Commissioner of Income Tax & Others – Respondents
Special Civil Application No. 6810 of 2016
Decided On : 06-09-2016
For the Petitioner: Mr. Manish J. Shah.
For the Respondent: Mr. Nitin K. Mehta.
The main legal point established in the judgment is the requirement for a reasonable opportunity of being heard before directing a special audit under section 142(2A) of the Income Tax Act and the limitations on the scope of such audit beyond the relevant financial year.
Headnote:
Special Audit - Income Tax - Section 142(2A) - The court discussed the provisions of section 142(2A) of the Income Tax Act and the requirement for a special audit in the case of complex and voluminous accounts involving multiple transactions and mergers of entities. The court highlighted the need for a reasonable opportunity of being heard before directing a special audit and the limitations on the scope of such audit beyond the relevant financial year. The judgment emphasized the objective assessment of the nature of accounts and the statutory changes regarding the expenses incidental to the audit.
Fact of the Case:
The petitioner, a private limited company, challenged the order of the Deputy Commissioner of Income-tax directing a special audit of its accounts for the assessment year 2013-14. The petitioner contended that the accounts were not complex and did not warrant a special audit. The Assessing Officer expanded the scope of the special audit to include other years and entities without a specific proposal in the show cause notice.
Finding of the Court:
The court allowed the petition in part, quashing the direction for special audit for the remaining years in the case of the petitioner and all other entities, except for the assessment year 2013-14.
Issues: The issues involved the requirement for a special audit under section 142(2A) of the Income Tax Act, the scope of the special audit beyond the relevant financial year, and the need for a reasonable opportunity of being heard before directing a special audit.
Ratio Decidendi: The court held that the direction for special audit beyond the relevant financial year and for other entities was impermissible without a specific proposal in the show cause notice, and it did not provide a reasonable opportunity for the petitioner to oppose such direction.
Final Decision: The petition was allowed in part, quashing the direction for special audit for the remaining years in the case of the petitioner and all other entities, except for the assessment year 2013-14.
AKIL KURESHI, J.
1. Petitioner, a private limited company, has challenged an order dated 31.03.2016 passed by the Deputy Commissioner of Income-tax, petitioner's Assessing Officer.
2. For the assessment year 2013-14, the petitioner filed the return of income on 28.09.2013 The Assessing Officer took such return into scrutiny. During such scrutiny assessment, the Assessing Officer issued a notice dated 08.03.2016 to the petitioner company, proposing to get the petitioner's accounts for the financial year 2012-13 relevant to assessment year 2013-14, audited by a special accountant. In such notice, he recorded that he had received information called for from the assessee. On verification of the record, he found that the Gujarat High Court had passed an order dated 30.03.2012, under which, five companies viz. Chanakya Buildcon Pvt. Ltd., Chanakya Infracon Pvt. Ltd., Takshashila Properties Pvt. Ltd., Takshashila Realities Limited and Youngstar Infracon Pvt. Ltd., were amalgamated with the Takshashila Gruh Nirman Pvt. Ltd. It was noticed that these five companies were initially the partnership firms already doing the business of real estate and construction which were later on converted into companies. It was noticed that the project in relation to which deduction under section 80IB of the Act was claimed, had changed hands and eventually, the deduction is being claimed in the hands of the present assessee. With this background, in the said notice, the Assessing Officer noted as under:
“4. It is seen that the time of formation, or at a later date some of the partners brought land into the firms as their capital contribution. Before conversion to companies, the firms got the lands available in the books revalued and the amounts were credited in the current capital accounts of the partners. Consequent to amalgamation, the company has issued 6,00,000 equity shares at a fare price of Rs. 10/- and a premium of Rs. 390/- per share against the unsecured balances of Rs. 24 crore, treating the same as share application money and share premium. The fair market value of shares has been arrived by the company on ‘Discounted Cash Flow’ (DCF) method. The basis for free cash flow to equity is randomly taken by the company.
5. Conversion of 5 firms into companies, after revaluation of lands, merger of 5 companies with Takshashila Gruh Nirman Pvt. Ltd. Later with issue of equity shares against the balances of revaluation credits at a premium. Valuation of shares as Discounted Cash Flow method by estimating cash flows and adopting a random discounted rate for valuation. There is complex web of transactions in the group of firms namely introduction of land by some of the partners, revaluation of lands and crediting of amounts in the current accounts of all partners, conversion of firms in to companies which merged with the existing company, valuation of share by discounted cash flow method and allotment of shares against the amounts outstanding as unsecured loans at unreasonable premium, clubbed with multiple revaluation or properties over the years starting from 2008 to 2013 in various entities involves application of provisions of the Companies Act, application of Accounting Standards and examination of provisions of capital gains in the hands of various partners, firms and directors is involved. Having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of transaction in the cases which finally of the assessee, and the interests of the revenue, am of the opinion that it is necessary to get the accounts audited by a Special Auditor from the point of view of taxation of capital gains and accounting of stock-in-trade at each stage of transfer so that there is no loss to the revenue out of the complex web of transactions involved.”
3. Based on these facts, in the said notice, the Assessing Officer called upon the
