Section 142

Inquiry before assessment

Scope of provision

Scope is limited to pre-assessment enquiry - The scope of section 142 is quite plainly limited to the enquiry before assessment by the ITO - Amal Kumar Ghatak v. ITO [1971] 79 ITR 452 (Cal.) (App.).

Second reference to Valuation Officer under section 55 is justi­fiable - Where a reference is made to the Valuation Officer by the ITO under section 55, and that reference was found invalid, the ITO can make a second reference. The power to make such a second reference can also be traced to section 142(2), which empowers the ITO to make inquiries which he considers proper for the purpose of obtaining full information in respect of the income of any person - Daulatram v. ITO [1990] 181 ITR 119 (AP).

Assessee must be given opportunity - Where an ITO gathers materials from a source other than the records relevant to the year of assessment he has gathered materials on the basis of enquiry within the meaning of section 142(3) and therefore he will be bound to give an opportunity to the assessee in respect of the materials so gathered. The failure to conform to the principles of natural justice of audi alteram partem would make a judicial or quasi-judicial act void - Ponkunnam Traders v. Addl. ITO (supra).

Issue of notice

Documents/information required must be specified in the body of the notice itself - Under section 142(1), the ITO is required to specify in the notice itself the documents or information that he requires the assessee to produce before him. Even if a letter accompanies a notice, particulars of information contained in that letter should not be treated as part of the notice. Failure to comply with the contents of the letter will not therefore amount to failure to comply with a notice under section 142(1), and therefore penalty cannot be imposed in such a case - Calcutta Chromotype (P.) Ltd. v. ITO [1971] 79 ITR 442 (Cal.).

Notice calling for records for periods which include time-barred period cannot be treated as fully illegal - Where the ITO issued a notice calling for production of ac­counts relating to earlier years and one of those years fell beyond the prescribed three-year limit, the whole notice could not be treated as bad, inasmuch as the illegal portion of the notice as regards one of the years was clearly severable from the rest of the terms of the notice which were legal - Murlidhar Madanlal v. CIT [1954] 26 ITR 231 (Pat.).

Combined notice for attendance and production of records is legal - A combined notice calling upon the assessee to attend in person as well as to produce account books is legal - Rm. Pl. S. Sivas­wami Chettiar v. CIT 4 ITC 207 (Mad.); Chandra Sen Jaini v. CIT 3 ITC 17 (All.); Harmukhrai Dulichand v. CIT 3 ITC 198 (Cal.).

Communication granting adjournment is not a notice - A communication granting adjournment at the request of the assessee cannot be treated a notice issued under the provisions of the Act - S.M. Perianna Pillai v. CIT 4 ITC 217 (Mad.).

Production of books

ITO is sole judge to decide nature of books - The ITO is the sole judge to decide which books are required to be produced - Tejmal Bhojraj v. CIT [1952] 22 ITR 208 (Nag.).

Restriction on calling for books relating to old periods applies only to pre-assessment stage - The restriction placed in the proviso to section 142(1) on calling for account books beyond three years applies only to the pre-assessment stage of enquiry. For making the actual assessment under section 143(3), the ITO can invoke section 131 and call for account books for even earlier periods - Calcutta Chromotype (P.) Ltd. v. ITO [1974] 95 ITR 595 (Cal.).

Direction for special audit

Honest attempt to understand the accounts must first be made - 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 - Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634 (All.).

Direction can be issued, even if accounts have already been audit­ed - The Assessing Officer can pass an order under section 142(2A) requiring the petitioner to have a special audit even though the accounts of the petitioner have already been audited because of it being a limited company - Jagatjit Sugar Mills Co. Ltd. v. CIT [1994] 210 ITR 468 (Punj. & Har.).

Non-cooperation by assessee will automatically extend time-limit for submission of audit report - Where it was observed that the assessee did not co-operate with the chartered accountant who was appointed as special auditor under section 142(2A), the period for submission of the audit report had to be extended even in the absence of an application from the assessee - Jagatjit Sugar Mills Co. Ltd. v. CIT (supra).

Effect of Commissioner order nominating a firm as accountant - An order by Commissioner nominating a firm to act as accountant cannot be termed as an approval as required under section 142(2A) - Peerless General Finance & Investment Co. Ltd. v. Dy. CIT [1999] 102 Taxman 654 (Cal.).

Mere proposal for appointment of auditor will not suffice; ap­proval by CIT must be specific - The CIT before granting approval must have before him the materials on the basis of which an opinion has been formed. A prior approval can be granted only when the materials for appointment of the extraordinary procedure is required to be taken by the Assessing Officer. The Assessing Officer is required to place all materials before the CIT to show that he intends to take recourse to the said provision having regard to the nature and complexity of the assessee and the interests of the revenue. It is well settled that a prior approval is not an empty ritual. Where the Assessing Officer merely sent a proposal to the CIT for appointment of special auditor without placing all relevant materials, and the CIT has merely nominated the special auditor straightaway without grant­ing specific approval, it must be held that there was total non-application of mind on the part of the Assessing Officer as also the CIT, and the order nominating special auditor was not sus­tainable - Peerless General Finance and Investment Co. Ltd. v. Dy. CIT [1999] 236 ITR 671 (Cal.).

Quantum of turnover or receipts is not relevant - The power conferred under section 142(2A) on the Assessing Officer, and the approval of the Commissioner is not confined to any turnover in business or profession. There is no limit or any bar on account of amount of receipts in business or profession. This power is conferred on the Assessing Officer to do justice with the assessee and also to protect the interests of the revenue - Joint CIT v. I.T. C. Ltd. [1999] 106 Taxman 373/239 ITR 921 (Cal.).

Pending litigations and correctness of claims made cannot be grounds for ordering special audit - Where the Assessing Officer took into consideration that several litigations between the assessee and the Reserve Bank of India, which had nothing to do with the orders of assessment, and that a lot of litigation was pending before the Income-tax Department by way of appeals/writ petitions for almost every year, and on that basis a special auditor was nominated by the CIT with directions to verify the correctness of the claims for various allowances, the aforesaid grounds could not be treated as valid to take recourse to the provisions of section 142(2A) - Peerless General Finance and Investment Co. Ltd. v. Dy. CIT [1999] 236 ITR 671 (Cal.).

Special audit cannot be ordered merely because stock could not be reconciled - The mere fact that the stocks could not be recon­ciled by the auditors 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 places a heavy burden on the person whose accounts are to be audited particularly on an organi­sation like the assessee. Its employees and officers will have to assist the auditors who have to dig out the old records for the purpose. Further, the expenses of the audit will have to be borne by the assessee, thereby placing substantial financial burden on the assessee - U.P. State Handloom Corporation Ltd. v. CIT [2000] 245 ITR 192 (All.).