Supreme Court Clarifies Assessing Officer’s Power to Extend Audit Report Time Under Section 142(2C) of the Income Tax Act

Date of the Judgment: March 26, 2019

Citation: (2019) INSC 264

Judges: Dr. Dhananjaya Y Chandrachud, J., Hemant Gupta, J.

Can an Assessing Officer extend the deadline for submitting an audit report under Section 142(2C) of the Income Tax Act, 1961, even if the assessee hasn’t requested an extension? The Supreme Court recently addressed this question, clarifying the scope of the Assessing Officer’s powers. This case revolves around whether the Assessing Officer can extend the time for submitting an audit report, even without a formal request from the assessee, before the amendment of the provision in 2008. The Supreme Court bench, comprising Justices Dr. Dhananjaya Y Chandrachud and Hemant Gupta, delivered the judgment.

Case Background

The core issue in this batch of appeals is whether the Assessing Officer (AO) had the authority to extend the deadline for submitting an audit report under Section 142(2C) of the Income Tax Act, 1961, before the provision was amended on April 1, 2008. The Income Tax Department contended that the AO could extend the deadline even without a request from the assessee, while the assessees argued that the AO’s power to extend time was contingent on receiving an application from the assessee. The Income Tax Appellate Tribunal (Tribunal) had previously ruled in favor of the assessees, stating that the AO lacked the jurisdiction to extend the deadline on their own before the amendment. This led to the Revenue filing appeals against the Tribunal’s order.

Timeline

Course of Proceedings

The Income Tax Appellate Tribunal (Tribunal) concluded that before the amendment of Section 142(2C) on April 1, 2008, the Assessing Officer (AO) lacked the jurisdiction to extend the time for submitting an audit report without a specific application from the assessee. The Tribunal’s decision was based on its interpretation of the unamended Section 142(2C). The Revenue challenged this decision by filing appeals before the Delhi High Court. The Delhi High Court upheld the Tribunal’s decision, leading the Revenue to appeal to the Supreme Court.

Legal Framework

The core of the legal framework lies in Section 142 of the Income Tax Act, 1961, specifically subsections (2A) and (2C). Section 142(2A) allows the Assessing Officer (AO) to direct an assessee to get their accounts audited if they deem it necessary, considering the nature and complexity of the accounts and the interests of the revenue. Section 142(2C) deals with the time frame for submitting the audit report.

Prior to April 1, 2008, Section 142(2C) stated:

“(2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer: Provided that the Assessing Officer may, on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.”

After the amendment by the Finance Act, 2008, Section 142(2C) reads:

“(2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer: Provided that the – Assessing Officer may, suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.”

The amendment introduced the term “suo motu,” allowing the AO to extend the deadline on their own. The interpretation of the pre-amendment provision is the central issue in this case.

Section 153B of the Income Tax Act, 1961, which prescribes time limits for the completion of assessments under Section 153A, also plays a role. Explanation (ii) to Section 153B excludes the period between the date the AO directs an audit and the date the assessee is required to submit the report, for the purpose of computing limitation period.

Arguments

Assessees’ Arguments:

• The assessees argued that the phrase “on an application made in this behalf by the assessee” in the pre-amendment Section 142(2C) meant that the AO could only extend the deadline if the assessee specifically applied for it.
• They contended that the introduction of “suo motu” in the amended provision made it clear that such power did not exist before April 1, 2008.
• The assessees also argued that extending the deadline for audit report submission also extends the period of limitation for completing an assessment under Section 153B, making the extension a substantive matter and not a procedural one.
• They further submitted that the word “and” in the proviso to Section 142(2C) should be interpreted conjunctively, meaning that both conditions (application by assessee and good reason) must be satisfied for the AO to extend the time. They relied on the Supreme Court’s decision in Sahara India (Firm), Lucknow v Commissioner of Income Tax, Central-I [2008] 14 SCC 151, where the word “and” was held to be conjunctive.
• They argued that the failure to submit the audit report by the prescribed date empowers the AO to frame a best judgment assessment under Section 144(1)(b) of the Income Tax Act, 1961.

Revenue’s Arguments:

• The Revenue argued that the AO’s power to extend the deadline was not limited to situations where the assessee applied for an extension.
• They contended that the amendment inserting “suo motu” was merely clarificatory and intended to remove ambiguity in the existing provision.
• The Revenue submitted that the AO, who sets the initial deadline, inherently has the power to extend it within the overall limit of 180 days.
• They argued that the phrase “and for any good and sufficient reason” should be interpreted as “or for any good and sufficient reason,” allowing the AO to extend the deadline even without an application, as long as there is a valid reason.
• The Revenue further argued that the amendment was procedural and should be applied retrospectively.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether, under Section 142(2C) of the Income Tax Act, 1961, as it stood prior to the amendment with effect from April 1, 2008, the Assessing Officer had the jurisdiction to extend the time for submission of the audit report without an application from the assessee?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the Assessing Officer (AO) had the authority to extend the deadline for submitting an audit report under Section 142(2C) of the Income Tax Act, 1961, even before the amendment of April 1, 2008, without needing an application from the assessee. The Court concluded that the amendment was clarificatory and intended to remove ambiguity in the existing provision.

How each authority was viewed by the Court?

• Sahara India (Firm), Lucknow v Commissioner of Income Tax, Central-I [2008] 14 SCC 151: The Court distinguished this case, stating that the interpretation of “and” must be based on the context in which it is used.
• Ishwar Singh Bindra v State of UP [1969] 1 SCR 219: The Court relied on this case to support the principle that the expression “and” can be read as “or” in a given context.
• Commissioner of Income Tax-1, Ahmedabad v Gold Coin Health Food Pvt Ltd [2008] 9 SCC 622: The Court relied on this case to support the principle that a clarificatory amendment can have retrospective effect.
• Commissioner of Income Tax (Central – I) v Vatika Township (P) Ltd [2014] 31 ITR 466 (SC): The Court relied on this case to support the principle that a clarificatory amendment can have retrospective effect and procedural amendments are generally retrospective.
• Zile Singh v State of Haryana [2004] 8 SCC 1: The Court relied on this case to support the principle that the Court would have due regard to (i) the general scope and purview of the statute; (ii) the remedy sought to be applied; (iii) the former state of the law; and (iv) what power that the legislature contemplated.
• Sedco Forex International Drill Inc. v Commissioner of Income Tax [2005] 279 ITR 310 (SC): The Court distinguished this case, as it involved a substitution of the Explanation to Section 9(1)(ii) of the IT Act, 1961, with effect from 1 April 2000, and was held to be prospective.
• Jagatjit Sugar Mills Co Ltd v Commissioner of Income Tax [1994] 210 ITR 468: The Court noted that the same view was adopted by several High Courts, including this case.
• Commissioner of Income Tax, Cochin v Popular Automobiles [2011] 333 ITR 308: The Court noted that the same view was adopted by several High Courts, including this case.
• Ghaziabad Development Authority v Commissioner of Income Tax, Ghaziabad (UP) [2011] 2011 SCC OnLine All 1151: The Court noted that the same view was adopted by several High Courts, including this case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to provide a logical and practical interpretation of Section 142(2C) of the Income Tax Act, 1961. The Court aimed to ensure that the provision was not interpreted in a manner that would defeat the purpose of ordering a special audit under Section 142(2A). The Court emphasized that the Assessing Officer (AO), who has the power to fix the initial deadline for submitting the audit report, must also have the power to extend it, even without a formal request from the assessee, to ensure the audit is completed effectively.

The Court also considered the legislative intent behind the amendment of Section 142(2C) in 2008. While the amendment explicitly introduced the term “suo motu,” the Court concluded that this was done to clarify an existing ambiguity rather than to introduce a new power. The Court noted that the amendment was procedural and should be applied retrospectively.

Additionally, the Court recognized that the interpretation of the term “and” in the proviso to Section 142(2C) must be based on the context in which it is used. In this case, the Court held that “and” should be read as “or” to ensure that the AO has the flexibility to extend the deadline for submitting the audit report when necessary.

Logical Reasoning:

The Court considered alternative interpretations but rejected them as they would lead to absurd consequences. For instance, if the AO could only extend time on the assessee’s application, the assessee could control whether or not an extension is sought, even if there were valid reasons for the audit report not being ready. This would defeat the purpose of ordering the audit. The Court also rejected the argument that the amendment was substantive, holding that it was clarificatory and procedural.

The Court’s decision was based on the following reasons:

• The Assessing Officer (AO), who is empowered to set the initial deadline for submitting the audit report, must also have the inherent power to extend it.
• The amendment to Section 142(2C) by the Finance Act, 2008, was intended to remove an ambiguity and was clarificatory in nature.
• The term “and” in the proviso to Section 142(2C) should be interpreted as “or” in the context of granting extensions of time.
• The amendment was procedural and should be applied retrospectively.

The Court also quoted from the judgment:

“The submission of the assessee would have this Court interpret the proviso to mean that the assessing officer can extend the period which was originally fixed only on the request of the assessee. Besides leading to absurd consequences, such a construction of the proviso is patently contrary to its language, purpose and intendment.”

“To hold otherwise, and to construe the proviso to sub-section (2C) as foreclosing the authority of the assessing officer to extend time without a request by the assessee, would lead to an absurd consequence.”

“Since the purpose of the amendment was to remove this ambiguity, we are clearly of the view that by the Finance Act, Parliament essentially clarified the position as it existed prior to the amendment.”

There were no dissenting opinions in this case.

Key Takeaways

• Assessing Officers (AOs) have the authority to extend the deadline for submitting audit reports under Section 142(2C) of the Income Tax Act, 1961, even without a formal application from the assessee.
• The amendment to Section 142(2C) in 2008 was clarificatory and intended to remove an ambiguity in the existing provision.
• The interpretation of the term “and” in the proviso to Section 142(2C) should be flexible and context-based, allowing for a reading as “or” when necessary.
• This decision clarifies that the AO has the power to ensure that audits are completed effectively, even if the assessee does not request an extension.

This judgment has significant implications for future cases involving the interpretation of Section 142(2C) of the Income Tax Act, 1961. It confirms the AO’s power to extend time limits for audit report submissions, which will likely lead to more efficient and effective tax assessments. The decision also reinforces the principle that procedural amendments should generally be applied retrospectively.

Directions

The Supreme Court restored the appeals to the file of the Commissioner of Income Tax (Appeals) or the Income Tax Appellate Tribunal for decision on merits, consistent with the findings in this judgment.

Specific Amendments Analysis

The judgment primarily focused on the amendment to Section 142(2C) of the Income Tax Act, 1961, by the Finance Act, 2008. This amendment introduced the term “suo motu,” allowing the Assessing Officer (AO) to extend the deadline for submitting an audit report without a formal application from the assessee. The Court analyzed this amendment and concluded that it was clarificatory and intended to remove an ambiguity in the existing provision, rather than introduce a new power. The Court also held that the amendment was procedural and should be applied retrospectively. The Court clarified that the amendment did not alter the fundamental purpose of Section 142(2C), which is to ensure that audit reports are submitted within a reasonable time frame.

Development of Law

The ratio decidendi of this case is that the Assessing Officer (AO) has the authority to extend the time for submitting an audit report under Section 142(2C) of the Income Tax Act, 1961, even without a formal application from the assessee. This is a clarification of the existing law, as the Court held that the amendment to Section 142(2C) by the Finance Act, 2008, was clarificatory and intended to remove an ambiguity in the existing provision. The Court also clarified that the interpretation of the term “and” in the proviso to Section 142(2C) should be flexible and context-based, allowing for a reading as “or” when necessary. This decision overruled the judgment of the Delhi High Court in Commissioner of Income Tax v Bishan Swaroop Ram Kishan Agro Pvt. Ltd. [2011] 203 TAXMAN 326 (Delhi), which had held that the AO could not extend the deadline without an application from the assessee.