In a decision aimed at clarifying how the Income Tax Settlement Commission is to proceed on tax matters, the Delhi High Court has held that the commission does not have the power to direct a special audit in the course of settlement proceedings under Chapter XIX-A of the Income-Tax Act, 1961.
While rejecting the income-tax department’s stand which argued contrary to the decision in the case of Agson Global P Ltd vs ITSC, the High Court said that such auditing cannot be ordered as the settlement commission does not engage itself in the process of assessment and cannot make an assessment order. “The order that the settlement commission makes under Section 245D(4) is not in the nature of an assessment but by way of a settlement and contains the terms of settlement. Thus, we reiterate that the powers which are vested in an income-tax authority and could be exercised by the settlement commission are such which have a nexus with the settlement proceedings which does not include, in our view, the making of an assessment under the said Act,” it held.
Senior counsel MS Syali, who appeared for the assessee in the case, argued that the settlement commission could not have directed the special audit be carried out as there is a clear distinction between a settlement and an assessment. While the procedure for assessment is provided in Chapter XIV of the Act, the procedure for settlement of cases is set out in chapter XIX-A of the Act.
He contended that the proceedings under Chapter XIX-A are entirely different from assessment proceedings and, therefore, the settlement commission which is concerned with settlement of cases would not have the jurisdiction to direct a special audit.
“Once an application for settlement is made before the settlement commission, no income-tax authority would have jurisdiction to deal with the case. It does not mean that the settlement commission from that date steps into the shoes of the income-tax authority who was hitherto dealing with the case … the settlement commission does not carry out the function of assessment and does not make an assessment order,” the High Court said, adding that “…since the requirement of a special audit falls under the procedure for assessment which is distinct and different from settlement proceedings, the settlement commission would not, in our view, have jurisdiction to direct a special audit as it does not have any nexus with the settlement proceedings.”
The decision assumes importance in view of increased demands for scrutiny of financial statements and accounts of companies post the Satyam scam.
Special audit is not unusual. In a bid to curb potential revenue leakages in the R5,600 crore scam, the income-tax department had directed a special audit of MCX-SX and NSEL.
The special audit was also done on all leading telecom firms to ensure that they were paying the required annual licence fee to the government and there was no diversion of revenues to segments which attracted a lower fee as a percentage of revenue.
Section 142(2A) provides for special audit that may be ordered at any stage of the proceedings by an assessing officer (AO) if the accounts are complex, like having doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, etc. If the AO is of the opinion that it is necessary, he, with the previous approval of the chief commissioner or commissioner, can direct the assessee to get the accounts audited by a chartered accountant nominated by the chief commissioner or commissioner and to furnish a report of such an audit in the prescribed form duly signed and verified by such an accountant. Before referring the case for a special audit, the AO has to give a hearing to the assessee.
The revenue department’s stand in the case was that the filing of an application before the settlement commission is akin to the filing of a return before the assessing authority and the settlement commission has to determine the income as is done by the AO under Section 143(3) of the Act. Thus, according to the revenue, just as the AO has a right to make any enquiry for proper assessment and can direct a special audit having regard to the nature and complexity of the accounts and keeping in mind the interest of the revenue, the settlement commission, which also has to determine the total income and thereby make an assessment, can, when it has exclusive jurisdiction over the case, certainly direct that a special audit be carried out.