Facts of the Case

  • The petitioners, Religare Enterprises Ltd. and Religare Finvest Ltd., are engaged in financial services including lending and investment.
  • For AY 2016–17, returns were filed and selected for scrutiny under Section 143(2).
  • During assessment, the Assessing Officer (AO) relied on:
    • SEBI order alleging diversion/siphoning of funds,
    • Forensic audit findings,
    • Transactions with group companies.
  • Show-cause notices were issued questioning:
    • Complexity of accounts,
    • Multiplicity of transactions,
    • Correctness of entries.
  • Subsequently, AO passed orders dated 06.08.2019 directing special audit under Section 142(2A) with approval of the Principal Commissioner.

Issues Involved

  1. Whether the conditions under Section 142(2A) were satisfied for ordering a special audit.
  2. Whether the AO complied with principles of natural justice before passing the order.
  3. Whether volume and multiplicity of transactions alone justify special audit.
  4. Scope of judicial review under Article 226 in such matters.

Petitioner’s Arguments

  • No complexity in accounts; transactions were routine and duly recorded.
  • AO passed the order mechanically without proper application of mind.
  • Natural justice violated – inadequate opportunity of hearing.
  • Section 142(2A) cannot be invoked merely due to:
    • Large volume of transactions,
    • High turnover.
  • Relied on:
    • Sahara India (Firm) v. CIT (2008)
    • Sahara India Financial Corporation Ltd. v. CIT (Delhi HC)
  • Alleged AO shifted his burden of assessment to the special auditor.

Respondent’s Arguments

  • AO exercised power lawfully and after due consideration.
  • Accounts involved:
    • Huge related-party transactions,
    • Alleged fund diversion,
    • Multiple complex financial arrangements.
  • Judicial interference under Article 226 is limited.
  • Relied on:
    • AT & T Communication Services India (P.) Ltd. v. CIT

Court’s Findings / Analysis

  • Section 142(2A) (post-2013 amendment) includes:
    • Complexity,
    • Volume,
    • Multiplicity of transactions,
    • Specialized nature of business.
  • However, safeguards must be followed:
    • AO must objectively assess complexity,
    • Must make genuine effort to understand accounts,
    • Cannot shift responsibility to auditor.
  • Reaffirmed principles from Sahara India (Firm):
    • Objective satisfaction required,
    • Pre-decisional hearing mandatory,
    • Approval must not be mechanical.
  • Court emphasized:
    • Judicial review is limited; Court does not sit in appeal over AO’s decision.
  • On facts:
    • Huge transactions,
    • Allegations of siphoning,
    • Voluminous records,
    • Non-production of complete books,
      justified the AO’s satisfaction regarding complexity.

Court Order / Decision

  • The Delhi High Court upheld the order of special audit under Section 142(2A).
  • Writ petitions were dismissed.

Important Clarifications by Court

  • Special audit is not routine, but can be invoked when justified.
  • Post-amendment, scope of Section 142(2A) is expanded, not restricted.
  • High turnover alone ≠ complexity, but combined factors may justify audit.
  • Courts will interfere only if:
    • Decision is arbitrary,
    • Based on no material,
    • Or violates natural justice.

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

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.