By TIOL News Service

NEW DELHI, AUG 25, 2017: THE issue before the Bench is - Whether the amended Section 142(2A) vests any right in the assessee which cannot be snatched away by a retrospective amendment. NO is the verdict of the High Court which also ruled that the Sahara India decision of the Apex Court on the provisions of Sec 142(2A) given prior to the amendment, still holds good.

Facts of the case

There are many assessees in this writ petition. Mr Dhir Chand Sharma is one of them. He is a contractor and during the assessment year in question he was engaged in the business of supplying earth materials. Search and seizure operations were carried out in M/s. NKG and the contractor who at the time was undertaking contract work for M/s. NKG which was also subject to search and seizure operations under Section 132. A notice under Section 153A was issued to the assessee and in response, he filed return for the assessment year (AY) 2010-11 declaring income of Rs. 8,56,148/-. Notices were issued under sections 143(2) and 142(1) of the Act. In his reply the assessee submitted that the main source of its income for the AY under consideration was that of the contract from the M/s NKG. Notice under Section 142(2A) was then issued requiring the assessee to show cause as to why special audit of its accounts for the AYs 2007-08 to 2013-14 should not be directed. The AO was of the view that the accounts of the assessee were complex and voluminous and the same were of specialized nature. In response to this notice, the assessee objected to the proposed special audit. Thereafter, the AO proceeded to pass the order under Section 142(2A) of the Act after seeking the approval of the Principal Commissioner of Income Tax, for AYs 2010-11 to 2012-13, leaving out AYs 2007-08 and 2013-14, which were originally also sought for special audit. The AO directed the assessee to furnish report of special audit within period of 90 days from the receipt of the impugned order. The assessee preferred writ route.

Having heard the parties, the HC held that,

++ after the amendment vide Finance Act, 2013, four new grounds were added to Section 142(2A), on which Special Audit may be ordered. These are: (i) volume of accounts, (ii) doubts about the correctness of accounts, (iii) multiplicity of transactions in the accounts and (iv) specialized nature of business activity of the assessee;

++ the rationale for the amendment, therefore, is that the erstwhile expression "nature and complexity of the accounts" had been interpreted in a restrictive manner by courts. The assessee submits that such an amendment runs afoul of the guarantee under Article 14 of the Constitution. Before dealing with the constitutionality of the relevant amendment, it would be fitting to recollect the basic principles that must be kept in mind by the Courts while dealing with the challenge to the constitutionality of a legislative enactment;

++ while delegation of powers to the executive to implement legislative policy is a concept well-recognized, a statute would run contrary to Article 14 of the Constitution if it delegates unbridled power and discretion to the executive. While delegation of uncontrolled or unguided discretion would undermine principles of equality and non-arbitrariness enshrined in Article 14, the mere possibility that the executive authority may abuse its discretion would not be a ground for declaring the legislation unconstitutional;

++ the mere possibility that the AO may abuse the discretion that the provision vests in him would be insufficient to declare the provision as unconstitutional;

++ the Supreme Court decision in the case of Sahara India Firm was prior to the amendments inserted by the Finance Act, 2013 but this Court sees no reason as to why these holdings of the Supreme Court in Sahara would not be applicable to the amended Section 142(2A). The fact that the AO's determination under this provision must be based on objective material and not subjective satisfaction, that he must make an honest attempt at understanding the accounts of the assessee, that the grant of approval by the higher authority must not be mechanical, that principles of natural justice must be followed by giving the assessee a pre-decisional hearing, would all be equally applicable even under the amended Section 142(2A). It would still be impermissible for the AO to shift the responsibility of auditing the accounts mechanically to the special auditor. In these circumstances, we fail to understand the assessee's contention as to how the amendments would in effect nullify these procedural safeguards that the Supreme Court has read into Section 142(2A);

++ the presence of procedural safeguards in a provision, it has been repeatedly emphasized, saves the provision from being used in an arbitrary manner. In other words, while dealing with the challenge to constitutionality of a provision on the basis of Article 14, it would be a relevant factor to see whether the said provision has adequate safeguards to prevent the possibility of wanton abuse;

++ where statutory discretion conferred upon an executive authority is circumscribed by adequate safeguards and that there are sufficient guidelines to govern such discretion, then the provision cannot be said to be arbitrary;

++ in relation to the amended Section 142(2A), this court notices that the exercise of discretion of the AO is adequately circumscribed by fetters and safeguards. Section 142(2A) already contains a safeguard in the form of requiring the prior approval of the Commissioner or the Chief Commissioner before the AO can order special audit under this provision. Moreover, the Supreme Court's ruling in Sahara insists that approval by the Commissioner or the Chief Commissioner must not be mechanical and must show application of mind. Additionally, after the Sahara decision, a pre-decisional hearing must also be mandatorily given to the assessee and the AO himself must arrive at the decision to order a special audit based on objective material and not just subjective satisfaction. Thus, it becomes clear that through the procedural safeguards already envisaged in the plain text of the statute, as well as those read into the statute by the Supreme Court in Sahara, the impugned provision, even with the amendments, cannot be classified as arbitrary or conferring un-canalized discretion on the AO;

++ even the term 'nature and complexity of accounts' is also capable of different interpretations at the hands of different AOs and in that sense, equally open-ended. However, merely because a particular term is capable of different interpretations or is open-ended, would not be sufficient to hold that it is arbitrary and against the requirements of Article 14. In fact, as held by the Supreme Court in Sahara, the requirements of the provision must be met on the basis of objective material and not subjective satisfaction and, therefore, even though the requirements themselves are open-ended or capable of different interpretations, the AO would still have to act prudently and on the basis of the material on record. Thus, this Court does not see any reason as to why the criteria inserted after the amendment are arbitrary and unreasonable;

++ it is necessary to examine the purpose of enacting a provision as Section 142(2A) in the Income Tax Act, 1961. While examining the purpose of the unamended Section 142(2A), a Division Bench of this Court in DLF Ltd. & Anr made it clear that Section 142(2A) was enacted to facilitate investigation into the accounts of an assessee for the proper determination of tax liability. It deals with cases where the AO needs to take the assistance of a Chartered Accountant in order to be able to understand the assessee's accounts and determine the correct tax liability. It is, therefore, abundantly clear from the dictum, that Section 142(2A) confers an important power on the Revenue to curb tax evasion and balances it with the inconvenience that an assessee may face. The impugned amendments to Section 142(2A) also have to be viewed in that light and hence must be considered to be reasonable;

++ in fiscal matters, the Legislature has the ability to amend the law retrospectively. Moreover, Section 142(2A) of the Act does not confer any vested right on the assessee, which could not be taken away by retrospective amendment. Therefore, even if the amendments to Section 142(2A) were given retrospective effect, the same would be within the powers of the Legislature, as per the law laid down in the ruling of the Supreme Court.

(See 2017-TIOL-1663-HC-DEL-IT)