“Special audit” under the provisions of the Income Tax Act

Special audit is conducted when the Assessing Officer during any proceedings fails to understand the complexity in accounts. With the prior approval of Chief Commissioner of Income Tax, the said officer can issue notice for special audit to be done by a chartered accountant.

Relevant provisions of the Income Tax Act dealing with “special audit”:

Section 142 (2a) of the Income Tax Act, 1961 deals with the provisions relating to Special Audit. It states that if during any proceedings before an assessing Officer, due to the complexity of the accounts of the assessee and in the interests of the revenue, the said officer holds the opinion that it is necessary to call for a special audit, he may do so.

But the same has to be done with the prior approval of the chief Commissioner of Income Tax. The assessee shall be directed to get the  accounts audited by an accountant, who is nominated by the Chief Commissioner of Income Tax. The said assessee has to furnish  a report of audit in the prescribed form after signing and verifying the same by the concerned accountant.

However the assessee shall not be directed by the Assessing Officer to get the accounts audited without giving an opportunity of being heard.

However the assessee shall not be directed by the Assessing Officer to get the accounts audited without giving an opportunity of being heard.

Scope of special audit:

It is a weapon in hands of the Income Tax Department to collect facts of transactions leading to more instances of special audit. The Assessing Officer, however, should call for such audit with sufficient justification.

Notice for Special audit:

A notice can be issued during any stage of proceedings before Assessing Officer with previous approval of the Chief Commissioner or Commissioner of Income Tax.

Proceedings refer to any proceedings pending during the time of search or survey or any proceedings commenced after such date.

There are many conditions which are required to be satisfied before issuing a notice for special audit.

The Income Tax Act provides that a notice for special audit is issued upon considering the complexity of accounts. The word “Complexity “is not defined under the Income Tax Act but its meaning has been derived from case laws.

It has been decided by the Hon’ble High Court that what is hard to understand is not necessarily complex. Complexity depends upon the level of understanding of a person.

A Notice is issued only to safeguard the interest of the revenue. It is issued only when the assessing officer is of an opinion that it is necessary to conduct a special audit in the case.

Relevant factors for initiating a special audit:

The following factors are important for attracting Section 142(2A) of the Income Tax Act:

(a)      The nature of accounts of the assessee;

(b)      Complexity of the said accounts; and

(c)       Benefit of the revenue.