Reliance on Special Audit Report From Earlier AY to Assume Similar Pattern in Subsequent AY is Unjustified | HC

Case Details: World Vision India vs. ITO - [2025] 170 taxmann.com 594 (Madras)

Judiciary and Counsel Details

• C. Saravanan, J.
• M.V. Swaroop, for the Petitioner.
• V. Mahalingam, Sr. Standing Counsel for the Respondent.

Facts of the Case

The petitioner was a trust registered under section 12AA of the Income-tax Act, 1961. For the Assessment Year 2014-2015, a report under Section 142(2A) was prepared. Pursuant to this, the return of income was scrutinised by placing reliance on the Special Audit Report and the Assessment Orders passed for the Assessment Years 2014-2015, 2015-2016 and 2017-2018.

The entire amount claimed towards salary disbursed to the staff has been added to the income of the petitioner. Aggrieved by the order, the assessee filed a writ petition to the Madras High Court.

High Court Held

The High Court held that the demand was confirmed based on the Special Audit Report of the External Auditor appointed for this purpose under Section 142(2A). A reading of Section 142(2A) indicates that the report can relate only to a particular Assessment Year.

The Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or the specialised nature of the assessee’s business activity, and the interests of the revenue, can direct the assessee to get the accounts audited by an accountant. Assessee required to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require.

This report generated for the earlier Assessment Years cannot be a basis to conclude that the similar pattern would have been followed by an assessee during the subsequent Assessment Years. To do so would amount to assessment by sampling which is frowned upon by the Court.

Therefore, the matter was remitted back to the Assessing Officer to pass a fresh order on merits and in accordance with law independently without getting influenced by the Special Audit Report generated for the Assessment Year 2014-2015.