Rajes Kumar, J. - (1.) By means of the present petition the petitioner is seeking the following relief: "(I) a Writ, Order or Direction in the nature of Certiorari and to quash the order dated 31.12.2009 passed by the Additional Commissioner, Income Tax, Rang-2 Varanasi (Annexure-1 to this writ petition) and also the order dated 31.12.2009 passed by the Commissioner of Income tax, Varanasi (Annexure No. 2 to the writ petition) for special audit of the petitioner's accounts for AY 2007-08 and to further direct the Ld. Addl. Commissioner Income Tax, Varanasi to complete the petitioner's assessment for AY 2007-08 on the basis of the provisional balance sheet already submitted by the petitioner."
(2.) The brief facts giving rise to the present writ petition are as follows: The petitioner is a subsidiary company of U.P. Power Corporation Ltd. The company was known as UPPCL from 14/15.1.2000 till 11.8.2003 and with effect from 12.8.2003 UPPCL was converted as holding company of its subsidiary company, viz. M/s. Purvanchal Vidyut Vitran Nigam Ltd., Pachchimanchal Vidyut Vitran Nigam Ltd., Madhyanchal Vidyut Vitran Nigam Ltd. and Dakshinanchal Vidyut Vitran Nigam Ltd.
(3.) The petitioner is a Government Public Limited Company engaged in the business of distribution of electricity, construction of lines and service provided to the consumers. Under the provision of Section 619(2) of the Companies Act, 1956 (called the 'Companies Act' for short) the petitioner is required to get its annual accounts audited by the office of the Comptroller and Auditor General of India (hereinafter referred to 'C&AG'). Admittedly, for the assessment year in dispute, viz. 2007-08, the petitioner could not get its accounts audited under Section 619(2) of the Income Tax Act (called the 'Act' for brevity). It is the case of the petitioner that since the statutory audit under Section 619(2) of the Act could not be made, the petitioner appointed a private auditor and got its accounts audited on the basis of the provisional balance-sheets and profit & loss account and on the basis of such audited reports the petitioner submitted return on 31.10.2009 declaring the total loss of Rs. 11,51,99,56,110/-. The assessment case for the year under consideration was selected for scrutiny assessment and, accordingly, a notice under Section 143 of the Act was issued by the Additional Commissioner of Income Tax, Varanasi. It appears that during the course of hearing the assessing authority issued notice dated 22.12.2009 to the petitioner to show-cause why a special audit be not carried out in your case to arrive at a correct figure of total income/loss of the assessee looking to the nature and complicity of the account. The contents of the notice are as follows: "CONFIDENTIAL GOVERNMENT OF INDIA OFFICE OF THE ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE -2 VARANASI. No. AADCP4092M/ADCIT/R-2/09-10 Dated : 22.12.09 The Principal Officer/Managing Director/Competent Authority M/s. Purvanchal Vidyut Vitran Nigam Ltd. Vidyut Nagar Post, DLW, Bhikharipur, Varanasi. Sub:- Assessment proceedings for A. Y. 2007-08: regarding ******************** Please refer to the above. During the course of hearing u/s 143(3) of the I.T. Act in your case following notices were issued but by and large no compliance was made: S.No. Notice Date of hearing Remarks 1. 143(2) dated 24.9.2008 & 115WE(2) 24.9.2008 11.10.2008 Non-compliance 2. 142(1) dated 20.1.2009 29.1.2009 Non-compliance I 3. Show cause notice u/s 271(1)(b) dated 11.2.2009 20.2.2009 Part compliance 4. 142(1) dated 11.2.2009 20.2.2009 Power of attorney submitted. Asked to provide audited final accounts, tax audit report and notes to the account 5. 142(1) dated 2.12.2009 9.12.2009 Part compliance by Sri O.P.Shukla submitted coply of P/L account and balance sheet etc. Case was partly discussed, details as desired were informed. 6. 142(1) & 115WE(2) dated 15.12.2009 18.12.2009 Requested for adjournment. Case re-fixed on 21.12.09. 7. 21.12.09 Furnished part details During the course of assessment proceedings as stated above Sri O.P.Shukla, attended and submitted photocopy of form 3CB, Form 3CD and provisional balance sheet as at 31st March 2007. As per the computation of income the assessee has incurred losses to the tune of Rs. 11,51,99,56,110/-. It is to be pointed out that the auditors have mentioned in form 3CB that "we have examined the provisional balance sheet as on 31 st March 2007 and the provisional profit and loss account for the year ended............" It is also stated that the financial statements are the responsibility of the company's management. Our responsibility to express an opinion on these financial statements based on our audit. It was further stated that the figures of the financial statements are provisional. Audit as required under the companies Act 1956 has not been conducted for the relevant financial year. It is further seen that cash in hand have shown at a negative figure of Rs. 52,30,50,115/- for which no sufficient reason on record. It is not possible to have a negative cash balance. The auditors have also pointed out that irregularity in depositing TDS has been observed. As it may be seen from the earlier chart that no proper compliance has been made to produce the books of accounts and other details as asked earlier and also informed to the representative of assessee as well as looking to the facts that the accounts are not audited and hence the final results as mentioned in the provisionally audited accounts are not acceptable and also looking to the observation by the auditors the correct position of loss cannot be determined, you are hereby given a notice in compliance to the provisions of Section 142(2A) of the I.T. Act to show cause that why not an special audit be carried out in your case to arrive at a correct figure of total income/loss of the assessee, looking to the nature and complexity of the accounts. You are hereby requested to submit your compliance latest by 29 December 2009 by 3.30 P.M. at my office, failing which it may be presumed that you have no explanation to offer and you are in agreement with the proposal of undersigned for special audit u/s 142(2A) of the IT. Act. Notice u/s 142(1) of the IT. Act is also enclosed for the compliance of details asked earlier and production of books of account alongwith bills and vouchers. (SANDEEPJAIN) Addl. Commissioner of Income Tax Range-2, Varanasi. End: As above." The petitioner filed reply to the show cause notice on 29.12.2009 of the various queries being made in the notice. The contents of the reply are as follows: "Show cause notice U/s 142(2A) for Special Audit: (a) That the learned Add. Commissioner of Income Tax has issued a show cause notice for conducting for special Audit U/s 142(2A) of the IT Act. It is here by submitted that as above mentioned the Assessee's company is government organization and all the receipts and expenses has been incurred on day to day business and prior approval of its respective authority. (b) That assessee's company has filed return declaring total loss During the Year to the tune of the Rs. 11519956110.00 and the auditor has finalized the balance sheet alongwith Tax Audit Report U/s 44AB of the Income Tax and submitted tax Audit report in form No. 3CB. We would like to draw your kind attention that the auditor has not made audit as required as per companies Act, 1956 and as report submitted the auditor provisionally due to the statutory obligation is required for submit the return of income. (c) That as per the your letter dated 22/12/2009 as mentioned that you have only issued notice and fixed the date for compliance for 6 times and as mentioned the notices issued by your goodself has not served on the assessee's company properly. It has observed above that the notices served on the assessee's company properly. It has observed above that the notices served on the assessee' scompany after closing of our office after at 5:00 PM or on the dateon which hearing was fixed which can verified the notice received and annexed thereof. (d) It is crystal clear that the assessee's company has already express its inability to furnish the audited accounts by the statutory auditor and has submit the return of income within stipulated time limit U/s 139(1) of the Income tax act. (e) That you have made query on 9/12/2009 through order sheet entry on the request of assessee's counsel and the compliances of your query has already been done on 18/12/2009 / 21/12/2009 and assessee is able to reconcile the negative cash in hand and you can easily verified from the negative cash balance without any issued show cause notice U/s 142(2A) and arrived correct figure in cash in hand hence there are no complexity to reconcile the cash in h and it may be easily verified and reconcile by the assessee's company and there are no need to appoint a Special Audit and expend huge amount as perthe rule 14B (2) of the income tax rule, we would like to draw your kind attention that w.e.f. 01/06/2007 all the expenses incurred by the income tax department and will pay the amount of minimum Rs. 3750.00 per hour and maximum Rs. 7500.00. As per; the act maximum six month will be available to the auditor to complete the audit and we observed that if the minimum one month take for complete the audit the minimum 240 hours will be engaged and minimum Rs. 9.00 Lacs will be payable to the auditor. The assessee's company is suffering huge losses and total accumulated loss as on 31/03/2009 is Rs. 42209415577.00 and no revenue will be received from the such special audit under Section 142(2A) of the Income Tax Act. Hence on the basis of the such issue that the negative cash balance has been shown and account is provisional no notice under Section 142(2A) may kindly be issued in the interest of justice. (f) That the assessee's company has already disclosed the accurate income from sale of power, accurate expenditure from purchase of power, electricity duty received and payable to the government, loan received from the Government organization and paid with in time the expenses incurred under the head repaid & maintenance, employees Cost, administrative Expenses and general expenses and are fully vouched four zones and four division and about one thousands sub units and power stations it is a huge tambu of electricity division and it is not possible the any person to produce the bills & vouchers ones in a time as required by your goodself. All the expenses incurred was fully vouched and paid prior to the approval of the respective authority hence no any negative observation and inference may be withdrawn against the assessee's company and no any complexity in nature of accounts the details of purchase of power and other relevant details has already been furnished before your goodself on 18/12/2009 / 21/12/2009. (g) That the assessee's company has claimed depreciation as per the electricity Act, 1948 @ 7.84% and as per rule 5(1A) of the Income Tax rule appendix 1A the depreciation is admissible for assets of an under taking engaged in the generation and distribution of powers a copy of appendix 1A is enclosed for your kind perusal. No any rate has coated depreciation has charged under the income tax act. In the assessee's case the depreciation charged by the assessee's company has already been accepted by the income tax department for the A.Y. 2004-05 and 2005-06 hence it is a settled law and no adverse inference may be drawn (h) That before the issue of show cause notice the reasonable opportunity to the assessee must be provide for hearing of the case in the interest of principle of natural justice. To explain the accounts proper in manner. The CBDT Circular No. 1076 dated 12/07/1977 the central board of direct taxes has issued a instruction/guideline which are binding on the authority and special auditor can be appointed only the under the following condition- (i) There are report of missfeasance, gross neglect or breach of duty on the part of principal officer or director in relation to the affairs of the company. (ii) The company affairs have been the subject of the search or seizure under the Income Tax Act or been the subject of a prove under the foreign exchange regulation act. (iii) The Company has foreign Collaboration arrangement where the companies principle is a foreign company and deduction of head office expenses etc. have been claimed. (iv) Where the company has export/import with a yearly turnover of more than 1.00 Crore of rupees. (v) Where there are allegations of substantial tax evasion. (vi) Where the Income Tax Officer has any other information necessitating special Audit. It is hereby submitted that the above condition will not be applicable in the assessee's company case and the various judicial pronouncements the following principle emerged which has kept in mind while exercising the power under Section 142 (2A)- (i) The Assessing officer should form and opinion that the nature of the accounts of the assessee is complex. (ii) The interest of the revenue will be adversely affected if the special audit is not directed, the opinion should be formed objectively on the basis of material before him and should be based on relevant consideration. (iii) The Chief commissioner or commissioner should grant approval such a proposal after his applying all the material placed before him. (iv) The guideline issued by the CBDT contained in instruction as above are binding on the authority and special auditor can be appointed only if the case falls under any of clause mentioned their in provided the condition mentioned under Section 142(2A) are fulfilled. (i) That above condition for issued the show cause notice will not be applicable in the assessee's company case due to the following reason- (a) That the assessee's company has already filed return under Section 139(1) of the income Tax Act within stipulated time limits. All the information regarding Balance sheet, profit loss A/c has already available in data records of online system. The assessee is a company and filed return and sign through digital signature and the assessing officer easily examined balance sheet, profit loss A/c after filing the return but since expiry of one years no any query has been issued on the provisional balance and negative cash in hand when the time limit is came to expired on 31st December 2009 and only one a weak (including four holidays from 25th to 28th December) in hand for completed the assessment, the learned assessing officer has issued notice under Section 142(2A) of the income tax Act. The assessee's company is government body and for the audit it has more limitation all the purchase of power and sale of power and expenses incurred are fully vouched which details already been submitted before the learned Add. Commissioner of Income Tax but the learned assessing officer the facts of the case and only ground that the accounts is the provisional and cash in hand is negative hence we can not determined the correct position of losses. It is well settled law that even in case to which principal of audialteram partem is not applicable and legislature has left the matter to the wisdom of the authority, the authority must insured its action is inspired by reason and not on arbitrary and extraneous consideration. The requirements of reasonableness and fair play are in essences emanates from doctrine of natural justice. (b) That the proper opportunity of the hearing before the issued show cause notice u/s 142(2A) has not been given to the assessee's company. The assessee company has already submitted the details and information as required by your good self and explanation on some points is required to explain the issues but Ld. A.O. without given any opportunity the negation cash balance and other issued which explanation has already been furnished and without made any query regarding the explanation on the accounts he has issued shown cause notice without any reason that the account is nature in complexity though the negative cash balance and reason for the provisional accounts submitted to the Income tax department may easily be explained to the authority. In the case of Sahara India v. Commissioner of Income Tax and others, 300 ITR 403 Hon'ble Supreme Court has already given finding that the excirsse of the power under Section 142(A) leads to serious civil consequences and therefore even in absence of and expression provision for affording an opportunity of pre -decisional hearing to an assessee and in absence of any express provision in Section 142(2A) barring giving of a reasonable optometry to an assessee required of observance of principals of natural justice is to be read in to said provision, it could not be said that since a post decisional hearing in term of sub-section (3) of Section 142 is contemplated required of natural justice is fully met. In the case of Swadesi Cotton Mills v. CIT, (1988) 171 ITR 634 the Hon'ble Allahabad high Court has given finding that Honest attempt to the understand the accounts must first be made. The special audit should not be directed at a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee the power under Section 142(2A) can't be lightly exercised the satisfaction of the authority should not be subjective satisfaction. It should be based an objective assessment being had to the nature of the accounts must indeed be of a complex nature this is primary requirement for directing of special audit. The expression complexity in Section 142(2A) would mean that the state or quality of being intricate or complex or that is a difficult to understand. Difficulty in understanding would however not lead to the conclusion that the accounts are complex in nature. The formation of opinion under Section 142(2A) that the accounts of the assessee is required and expert audit should indisputable be based on objective consideration. No order can be passed on whims or caprice all that is difficult to under stand should not be regarded as complex, what is complex? To one may appear simple to another. It depends upon ones level of understanding or compensation some times what appears to be complex on the face of it, may not be really so if one tries to understand it carefully. Therefore the special audit should not be directed on a cursory look at the account there should be an honest attempt to understand the accounts of the assessee. It is hereby mentioned that the Ld. A.O. has not made any Honest attempts to understand the accounts and issued the show cause notice only for saving his face and inability for completion of assessment. In the case of Jhunjhunwala Vanaspati Ltd. v. Assit. Commissioner of Income Tax, (2004) 266 ITR 657 and in the case of UP. State Hand loom Corporation Ltd. v. C/7,(1988)171 ITR 640 The Hon'ble Allahabad High Court relied on the facts that two sets of accounts were maintained by the assessee it did not mean that the nature of the accounts was difficult to understand and order under Section 142(2A) could not be made on that sole basis. (c) It is hereby mentioned that the special audit can not be ordered merely because the cash in hand is negative. That it is hereby submitted that mere facts that the negative cash in hand can be reconciled by the auditor could not be a justification to order special audit of the accounts of the assessee which is a state public sector undertaking and whose accounts have been audited by the statutory auditors. An audit place a heavy burden on the person whose accounts are to be audited particularly on an origination like the assessee. Its employees and officer will have to assist the auditor who have to dig out the old records for the purpose. The assessee's company has already explained negative cash in hand as per annexure A and the learned assessing officer can easily understand the accounts before formation of opinion. It is not difficult to understand the reason for the negative cash balance and reconciliation furnished by the assessee." On the consideration of the aforesaid reply the assessing authority has passed the order dated 31.12.2009 under Section 142(2A) of the Act and directed for the special audit under Section 142(2A) of the Act. The reasons are as follows: "OFFICE OF THE ADDL. COMMISSIONER OF INCOME-TAX RANGE-2, VARANASI F.No. Addl. CIT/R-2A/ns/142(2A)/PWNU2009-10 Dated:31.12.2009 To The Principal Officer,/MD M/s Purvanchal Vidyut Vitaran Nigam Ltd., Vidyut Nagar, P.O. DLW, Varanasi Sir, Sub: ASSESSMENT PROCEEDINGS U/S. 143(3)-SPECIAL AUDIT U/S. 142(2a) OF THE IT. ACT, 1961 IN THE CASE OF M/S. PURVANCHAL VIDYUT VITRAN NIGAM LTD. FOR THE ASSESSMENT YEAR 2007-08. Please refer to the subject cited above. 2. During the course of assessment proceedings for the Assessment Year 2007-08, it has been noticed that final accounts i.e. Balance Sheet and Profit and Loss Account are provisional as sper the report of the auditor, carrying out the Tax Audit as submitted before me. On perusal of the said provisional audited accounts as carried out by the auditors M/s. Jamuna Shukla & Associates following points have been noticed/qualified- (a) As per form No. 3CB of the said Audit report, it has been mentioned that, We have examined the Provisional Balance Sheet as at 31st March, 2007 and the Provisional Profit and Loss Account for the year ended on the date, attached herewith of PURVANCHAL VIDYUT VITRAN NIGAM LIMITED, Vidyut Nagar, P.O., DLW, Varanasi Permanent Account No. AADCP4092M" It was further clarified by the Auditors that the figures of the Financial Statements are provisional. (b) In Form No. 3CD, against Column No. 12(a), the auditor has made following comments- "No inventory is maintained by the Company except for the Stores, materials required for maintenance of lines and sub-stations. Such stores materials are valued at established. (c) Against Column 17(k), it has been mentioned by the auditor that, "the Balance sheet and Profit and Loss Account are provisional, no Contingent liability has been stated." (d) Against Column 21(1), the auditor has mentioned that, "In respect of Electricity Duty Payable to UP Government and interest on secured loans provided for during the year, such liabilities has been transferred to the holding company, the UPPCL, as such the status of the payment or otherwise rest with the Holding Company." (e) Against Column 27(a), the comment of auditor is as under: "We have verified the Compliance with the provisions of Chapter XVIl-B regarding the deduction of tax at source and regarding the payment thereof to the credit of Central Government in accordance with the auditing standards generally accepted in India which include test checks and the concept of Materiality. Various non-compliance were observed, however the same can not be given due to non-availability of sufficient information." (f) It is worthy to mention that the details of Unit trading has not been quantified by the auditors in their report. (g) It was further observed that as per the Schedule '10' of provisional Balance Sheet. 'Loans and Advances' there is negative figure of (-) Rs. 3,6.1,17,059/- as on 31st March, 2007. As per the narrations mentioned in Schedule '10' of the Unsecured Advances to the tune of Rs. 3,57,44,435/- is also shown as negative balance. (h) In Schedule "11" of Balance sheet, current Liabilities to the tune of Rs. 19,95,03,431/- has been shown as Electricity Duty and other levies payable to the Government and no further proof has been mentioned there. Similarly, other liabilities and payable amounts to UPPCL may also attract the provisions of Section 43B. (i) The net amount of prior period income / expenditure has been shown for an amount of Rs. 1,59,59,646/- and the provision of bad / doubtful debts has been made against the revenue from sale of Power 5% on the incremental basis. G) As per Schedule "8" of Balance Sheet, Rs. 52,30,50,115/- has been shown negative balance as cash in hand. (k) It was also observed that how and why the consumer contribution be treated as capital receipt and capitalized accordingly. 3. Looking to the above-mentioned qualifications as well as acknowledging the fact that the Profit and Loss Account and Balance Sheet are provisionally audited, the assessee was provided an opportunity of being heard in view of proviso to Section 142(2A) of the IT. Act, 1961. The authorized representative, Shri O.P. Shukla advocate attended in response to the said notice and submitted his detailed reply vide letter dated 29.12.2009. However, books of accounts were not produced for verification, details of TDS etc. have also not been submitted in the light of the observation of the auditor. Afurther opportunity was provided to the AR of the assessee on his request on 30.12.2009 wherein he has submitted his written reply dated 30.12.2009 alongwith its enclosures, however, no books of account produced. 4. In its reply, it was conceded by the assessee that the provisional Profit and Loss Account and Balance Sheet has been filed because, the Statutory Auditor appointed under Section 619(2) of the Companies Act, by the Office of the C & AG of India, has not completed the audit till date. However, the assessee company has already provided the relevant documents yet, the Statutory Auditor has not provided the signed copy of the Balance Sheet and Profit and Loss Account till date, therefore, the assessee company is unable to submit the Balance Sheet alongwith Tax Audit Report and the delay is on the part of the Statutory auditors. 5. It is further noteworthy to mention that in the earlier years also, while submitting the return of income the provisional balance sheet were submitted. However, now a copy of Balance Sheet as on 31st March, 2006 (A.Y. 2006-07) duly signed by the Statutory Auditor M/s. M.B.Gabhawala on 12.02.2009 has been furnished where the loss as per Profit and Loss Account as on 31 st March 2006 has been worked out to Rs. 603,89,57,805/- against the returned loss for the Assessment Year 2006-07 as per provisional Balance Sheet and Profit and Loss Account of Rs. 1357,43,92,601/-. This shall have cascading effect in the Balance Sheet and Profit and Loss Account for the current year also. This clearly indicates that there is huge difference in losses between loss shown in the final audited account and provisional Profit and Loss Account and balance sheet for the Assessment Year 2006-07 running into Rs. 753.54 crores. Full reconciliation of the negative cash balance is also not submitted as there is a difference of approximately 49 lakhs even after going through submissions given before me. 6. In this scenario, the financial results shown in the provisional accounts are not presenting true and correct figure of the assessable loss under the Income tax Act, 1961. Looking to the above complexities and in order to safeguard the interest of Revenue. It is necessary that Special Audit under Section 142(2A) of the IT. Act, 1961 be carried out. 7. After considering the reply of the assessee, making an honest attempt to understand the submissions, and providing reasonable opportunity, I am of the opinion that it is necessary to direct the assessee to get accounts audited looking to the nature and complexities of the accounts and in the interest of revenue. 8. Therefore, after obtaining prior approval of the learned Commissioner of Income Tax, Varanasi, as communicated vide letter F. No. CIT/VNS/Spl. Audit/2009-10 dated 31.12.2009,1 hereby direct the assessee company to carry out the audit under Section 142(2A) of the IT. Act, 1961 as mentioned above from Shri V.K. Jindal of M/s. V.K. Jindal & Company, Chartered Accountants, D.53/118:B, Plot No. 11, Kaliya Nagar (Near Peshwanibag), Rathyatra Crossing, Varanasi, as nominated by the Commissioner of Income tax, Varanasi. The assessee shall submit his audit report and details after getting it conducted by April 30, 2010. 9. The assessee is requested to extend its full cooperation by production of books of accounts and relevant bills and vouchers and other documents to the auditors appointed, so that compliance can be made properly. Sd/- 31/12/09 (SANDEEP JAIN) Addl. Commissioner of Income-tax Range-2, Varanasi. Even No. of date (1) Copy to the learned Commissioner of Income-tax, Varanasi with reference to his letter F. No. CITA/NS/Spl. Audit/2009-10 dated 31.12.2009 for favour of kind information. (2) Copy to M/s. V.K. Jindal & Company, Chartered Accountants, D.53/ 118-B, Plot No. 11, Kaliya Nagar (Near Peshwanibag), Rathyatra Crossing, Varanasi with a request to carry out such audit, as directed and also to submit as follows: (i) to find out the correct and true affairs in the form of drawing Profit and Loss Account and Balance Sheet, so that exact profit/loss assessable as per IT Act can be quantified. (ii) Prepare correct cash flow to ascertain the reason for such negative cash balance/and reconciliation thereof. (iii) Any laps of the assessee with respect to the non deduction and non payment of TDS, specially with respect to the expenditure, here the provisions of Section 40(a)(1 a) is applicable. (iv) To examine the capital receipts as discussed above. (v) To examine the purchase and sale of units alongwith expenditure incurred by the assessee after examining the books of accounts/bills/vouchers or other records/documents. He should contact assessee and make effort to complete the desired audit within stipulated time. Sd/- 31/12/09 (SANDEEP JAIN) Addl. Commissioner of Income-tax Range-2, Varanasi";