Facts of the Case

The petitioners, Religare Enterprises Ltd. and its subsidiary Religare Finvest Ltd., are engaged in financial services including lending and investment.

For Assessment Year 2016–17, their returns were selected for scrutiny. During assessment:

  • Authorities referred to a SEBI order and forensic audit report alleging diversion/siphoning of funds.
  • Multiple notices were issued seeking explanations and documents.
  • Subsequently, the Assessing Officer (AO) issued a show cause notice proposing special audit under Section 142(2A) citing:
    • Complexity of transactions
    • Volume of accounts
    • Nature of business

Despite detailed replies from the petitioners, the AO passed an order directing special audit by an external auditor with approval of the Principal Commissioner.

Issues Involved

  1. Whether the conditions under Section 142(2A) were satisfied for directing special audit.
  2. Whether the order violated principles of natural justice.
  3. Whether the AO applied objective criteria or acted mechanically.
  4. Scope of judicial interference under Article 226 in such matters.

Petitioner’s Arguments

  • No Complexity in Accounts: Transactions were routine lending activities duly recorded.
  • Mechanical Exercise of Power: AO failed to genuinely examine accounts.
  • Violation of Natural Justice: No proper opportunity of hearing was provided before passing the order.
  • Misuse of Section 142(2A): Cannot be invoked merely due to:
    • High turnover
    • Large volume of transactions
  • Reliance on Precedents:
    • Sahara India (Firm) v. CIT – Special audit requires objective satisfaction.
  • Improper Delegation: AO attempted to shift his responsibility to the special auditor.

Respondent’s Arguments

  • Existence of Complexity:
    • Large financial transactions with related parties
    • Allegations of fund diversion
    • Multiple agencies investigating financial irregularities
  • Objective Satisfaction by AO: Decision was based on material on record.
  • Limited Judicial Review: Courts should not interfere under Article 226 unless:
    • Mala fide
    • Arbitrariness
  • Reliance on Case Law:
    • AT & T Communication Services India (P.) Ltd. – Courts should not substitute AO’s opinion.

Court’s Findings / Analysis

The Court elaborated the legal framework of Section 142(2A):

1. Preconditions for Special Audit

  • Must be based on:
    • Nature & complexity of accounts
    • Volume and multiplicity of transactions
    • Doubts about correctness
    • Interest of revenue
  • Satisfaction must be objective, not subjective

2. Principles from Sahara India Case

  • AO must:
    • Make genuine effort to understand accounts
    • Not shift responsibility to auditor
  • Natural justice applies – pre-decisional hearing required
  • Approval by higher authority must not be mechanical

3. Effect of 2013 Amendment

  • Scope of Section 142(2A) expanded
  • Includes:
    • Volume of accounts
    • Multiplicity of transactions
    • Specialized business activity
  • However, safeguards still apply

4. Scope of Judicial Review

  • High Court will not act as appellate authority
  • Interference only if:
    • Lack of objective basis
    • Arbitrariness or mala fide
  • AO’s satisfaction is largely within his domain

Court Order / Decision

  • The Court upheld the validity of the special audit direction.
  • Held that:
    • AO had sufficient material indicating complexity
    • Decision was based on objective considerations
    • No ground for interference under Article 226

Important Clarifications by Court

  • Special audit cannot be ordered routinely, but:
    • Large volume + complex transactions + doubts = valid grounds
  • Even after amendment:
    • Natural justice remains mandatory
  • AO must:
    • Apply mind independently
    • Not rely solely on external reports

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:4209-DB/SVN28082019CW93582019.pdf

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