Facts of the Case

  • The petitioner, NPCC (a Government PSU), filed return for AY 2016-17 declaring income of ₹18.02 crore.
  • The return was selected for scrutiny and multiple notices were issued seeking detailed financial information.
  • The Revenue raised concerns regarding:
    • Large liabilities in balance sheet
    • Adverse auditor remarks
    • Lack of supporting documents and confirmations
    • Declining profitability despite high turnover
  • A Show Cause Notice dated 18.12.2018 proposed special audit under Section 142(2A).
  • NPCC submitted replies claiming compliance and explaining practical difficulties.
  • The Assessing Officer passed an order on 28.12.2018 directing special audit.
  • NPCC challenged the order before the Delhi High Court.

Issues Involved

  1. Whether the order directing special audit under Section 142(2A) was valid in law.
  2. Whether the AO applied independent mind or acted mechanically.
  3. Whether principles of natural justice were violated.
  4. Whether complexity and volume of accounts justified special audit.

Petitioner’s Arguments (NPCC)

  • The AO failed to consider detailed replies and documents submitted.
  • No real complexity existed; mere volume of documents cannot justify special audit.
  • Order was passed to extend limitation period, not for genuine reasons.
  • Being a Government company audited by CAG, there was no intent to conceal income.
  • Violation of natural justice due to improper communication of order and annexures.

Respondent’s Arguments (Revenue)

  • The order was passed after detailed inquiry and multiple opportunities.
  • NPCC failed to provide:
    • Party-wise confirmations
    • Supporting documents for liabilities
    • Detailed project-wise accounts
  • Accounts were complex due to:
    • Multiple transactions
    • Huge liabilities
    • Auditor’s adverse comments
  • Special audit is necessary to ensure correct assessment of income.

Court’s Findings / Order

  • The Court upheld the validity of the special audit order.
  • Key observations:
    • AO made genuine efforts over several months to understand accounts.
    • Multiple notices and opportunities were provided.
    • NPCC failed to provide adequate supporting evidence.
    • Large liabilities and auditor remarks indicated complexity in accounts.
    • Approval from Principal Commissioner was duly obtained.
  • The Court rejected the argument that the order was passed to extend limitation.
  • The writ petition was dismissed.

Important Clarifications by Court

  • Special audit must be based on objective satisfaction, not subjective opinion.
  • AO cannot shift responsibility blindly to auditor but can seek assistance where complexity exists.
  • Volume + lack of clarity + inadequate documentation = valid ground for special audit.
  • Past assessments or PSU status does not exempt scrutiny.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:1996-DB/SRB08042019CW5922019.pdf

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