D.K Jain, J.— Two orders, both dated 27th August, 2001, passed by the Deputy Commissioner 6f Income-Tax Circle 17(1), New Delhi, under Section 142(2A) of the Income-tax Act, 1961 (for short the Act) ordering special audit of the accounts of the petitioners are under challenge in these two writ petitions.

2. Since the orders are in identical terms, passed in the cases of two group concerns, for the sake of convenience, both the petitions are being disposed of by this common judgment, However, we shall treat the facts of CWP No. 7883/01 as illustrative.

3. The petitioner, a proprietary concern, is the sole selling agent for and on behalf of an organising agent authorised by the State Government to conduct the lottery business. It sells lottery tickets on consignment basis to the stockists in different States of India. Assessments for the assessment years 1995-1996 to 1998-1999 were completed under Section 143(3) of the Act. From January, 1997 to December, 1999, residential and business premises of the proprietor of the petitioner were subjected to search and seizure proceedings on four different occasions and as a consequence thereof, assessments for different block periods were completed on different dates. According to the petitioner no addition on account of business activities/transaction was made in any of the earlier block assessments and in fact the alleged undisclosed income assessed vide orders dated 26 February, 1999 and 29 September, 2000 were only on account of alleged suppression of correct sale consideration of agricultural lands, investments in jewellery and travelling expenses incurred on foreign visits. In other words, no trading addition was made.

4. The fourth search and seizure operation was carried out on 20 August, 1999. Consequently, a notice under Section 158BC, requiring the petitioner to file the return for the block period 1 April, 1989 to 20 August, 1999 was issued on 17 November, 2000. Pursuant thereto a return declaring nil undisclosed income was filed. The first notice under Section 143(2) was issued on 25 January, 2001. Various queries were raised by the Assessing Officer, which included a draw-wise and vendor-wise details of prize winning tickets. The petitioner was also required to produce the books of accounts. On 27 August, 2001 the petitioner was served with the impugned order, along with the approval of the Commissioner of Income-tax, Delhi-VI, respondent No. 1 herein, requiring him to have the books of accounts for the financial year comprising the block period 1 April, 1989 to 20 August, 1999 audited by a special auditor. The order reads as follows:

“auditing of books of account should be with the view to draw the true and correct profit and loss account and to ascertain the correct profit for each of its financial years comprised in the block period from 1.4.89 to 20.8.99”

5. It is alleged that the said order was made just four days before the expiry of limitation for completion of assessment for the said block period under Section 158BE of the Act i.e 31 August, 2001. The petitioner, while protesting against the said order, requested the Assessing Officer to furnish the basis for ordering the special audit. However, his request having been turned down by the Assessing Officer vide letter dated 25 October, 2001, the petitioner filed a writ petition challenging the order dated 25 October, 2001 but the same was withdrawn on the plea that certain important grounds and prayers had not been incorporated in the petition. Hence the present petition.

6. The impugned order is challenged on various grounds namely: (i) as per the scheme of Section 142(2A) the objective analysis of the existence of pre-conditions and necessity of special audit should be evident not only from the order made by the Assessing Officer but also from the approval granted by the Commissioner., but in the instant case no such analysis of pre-conditions of the said section is visible either from the impugned order or the approval granted by the Commissioner; (ii) though the petitioner was required to produce the books of accounts on 27 August, 2001 but on the same very day the impugned order was passed; (iii) the impugned order was not made on account of nature and complexity of accounts but for extraneous reasons to save the limitation which was expiring on 31 August, 2001; (iv) a fire having broken out at the business premises of the petitioner on 23 May, 2000, most of his books of accounts were destroyed and, therefore, it is a case where complete books of accounts do not exist and as such the respondents have failed to apply their minds as to the necessity to order special audit when it is incapable of being implemented; (v) the Commissioner has accorded his approval mechanically without independently applying his mind to the existence of pre-conditions prescribed in the said provision as no valid reason for the approval is discernible for invoking the provisions of the said Section; and (vi) petitioner's books of accounts were not only examined during the course of regular assessment proceedings under the Act but were also scrutinised in earlier block assessments and in none of these proceedings any adverse remarks as to the nature of books of accounts or complexity therein were made.

7. The petition is resisted by the respondents, inter alia, on the grounds that the accounting of lottery business is very complex and the assessee has shied away from production of books of accounts and other details to substantiate its trading results despite repeated opportunities; over the years comprising the afore-noted block period, the two concerns have shown huge turnover from lottery business which runs into thousands of crores of rupees; for instance for assessment year 1997-1998 M/s. Gurunanak Enterprises and M/s. Bhagya Rekha Enterprises, the two petitioners herein, have shown purchases of Rs. 1615.24 crores and Rs. 710.03 crores respectively and in the related case of M/s. Associates Group, gross profit has been shown to be ranging from 2.6% to as high as 3.96% but for the corresponding period M/s. Gurunanak Enterprises’ has shown gross profit of only 0.7% and 0.52% while M/s. Bhagya Rekha Enterprises has shown a gross profit of merely 0.2% on sales for assessment year 1997-1998; the scheme of lottery business involves a highly specialised and complex accounting system and the accounting becomes even more complex because of very high number of draws (15 to 20 draws per day to thousands of draws per annum), it necessitates very comprehensive and detailed accounting; in the block period comprising more than ten financial years the number of draws held would be more than 20000 and to ascertain correct profit details, each of the draws requires to be verified. It is asserted that considering the complexity of accounts in this highly specialised trade and the interests of Revenue, the Assessing Officer had made proposal for audit of books of accounts for the afore noted block period to the Commissioner, who was satisfied after going through records, appraisal report and seized material and the order sheets in both the cases that these were fit cases for special audit under the said provision.

8. We have heard learned Counsel for the parties. On our directions, assessment records pertaining to both the petitioners have also been produced.

9. It is strenuously urged by Mr. Vimal Goel, learned Counsel for the petitioner, that on the facts of both the cases, special audit in terms of Section 142(2A) of the Act was not warranted particularly when the Assessing Officer has not found any fault with the statutory tax audit report, submitted under Section 44AB of the Act; no complexity in the accounts had been found by any of the Assessing Officers for the past ten years and there has been no challenge to the accounting system thereafter. It is asserted that the special audit has been ordered without application of mind by the Assessing Officer as well as by the Commissioner, and without the existence or satisfaction of the conditions precedent for forming the requisite opinion, just to save limitation, as the assessment was getting barred by limitation within a few days. In support of the proposition that the Commissioner having granted the approval mechanically, without application of mind regarding pre-resquisites for ordering special audit, the impugned orders are not sustainable, reliance is placed on two decisions of the Calcutta High Court in Bata India Limited v. Commissioner of Income-tax, (2002) 257 ITR 622 and Peerless General Finance & Investment Co. Ltd. v. Deputy Commissioner of Income-tax, (1999) 236 ITR 671 and a decision of the Kerala High Court in Muthoottu Mini Kuries v. Commissioner of Income-tax, (2001) 250 ITR 455.

10. Mr. R.D Jolly, learned Senior Standing Counsel for the Revenue, on the other hand, while seeking to support the impugned orders on the basis of the reasons contained therein as also on a detailed note submitted by the Assessing Officer to the Commissioner, would submit that merely because in the past special audit under Section 142(2A) was not ordered or the assessments were completed on the basis of statutory audit report, the authorities are not precluded from invoking the said provision as facts of each assessment year are to be considered independently. Learned Counsel has placed reliance on the decisions of the Allahabad High Court in Swadeshi Cotton Mills Company Limited v. Commissioner of Income-tax, (1988) 171 ITR 634; Ramesh Chand Industries Ltd. v. Union of India, (1998) 100 570 (Delhi) and Super Cassettes Industries Ltd. v. Assistant Commissioner of Income-tax, (1999) 102 Taxman 202 (Delhi).

11. We are not impressed with the contentions of learned Counsel for the petitioner. Section 142(2A), which has been the subject-matter of consideration by various High Courts, reads as follows:

“(2A) If at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below Sub-section (2) of Section 288 nominated by the Chief Commissioner or Commissioner in this behalf and 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.”

12. A bare perusal of the provision would show that the opinion of the Assessing Officer has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessee and (ii) the interests of the Revenue. The word “and” signifies conjunction and not disjunction. In other words, the twin conditions of “nature and complexity of the accounts” and “the interests of Revenue” are the pre-requisites for exercise of power under Section 142(2A). Although the object behind enacting the said provision is to assist the Assessing Officer in framing the assessment when he finds the accounts of the assessee to be complex and is to protect the interests of Revenue but recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinising the accounts of an assessee to determine his true and correct income, on to an auditor. True that an order under the said provision cannot be passed on the ipse dixit of the Assessing Officer merely because he finds some difficulty in understanding the accounts. There has to be a genuine and honest attempt on his part to understand the accounts of the assessee, appreciate the entries therein and if in doubt, seek explanation from the assessee or his representative, rather than pass on the buck to the special auditor. A cursory look on the books of accounts is not sufficient. It needs little emphasis that the opinion required to be formed by the Assessing Officer for exercise of power under Section 142(2A) must be based on objective consideration and not on the basis of subjective satisfaction. Similarly, the requirement of the previous approval of the Chief Commissioner or the Commissioner, being an in-built protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the section, is not turned into an empty ritual. Needless to add that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case. A bare endorsement of the proposal would not be sufficient. Peerless General Finance and Muthoottu Mini Kuries (supra) hold so.

13. The word “complexity” used in Section 142(2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills (supra), it is a nebulous word. Its dictionary meaning is: “The state or quality of being intricate or complex or that is difficult to understand. However, all that is difficult to understand should not be regarded as complex. What is complex to one may be simple to another. It depends upon one's level of understanding or comprehension. Sometimes what appears to be complex on the face of it may not be really so if one tries to understand it carefully.

14. It is, thus, clear from the decisions referred to supra that before exercising the power to direct special audit under Section 142(2A) the Assessing Officer must form an opinion with regard to the twin conditions, namely, the nature and complexity of the accounts and the interests of the revenue, with added approval of the Chief Commissioner or the Commissioner, as the case may be. Both these conditions would of course depend upon the facts of each case. Further, power under the section is not to be lightly exercised and has to be based on objective criteria and an honest and sincere effort should be made to understand the accounts of the assessee since an order under the provision not only entails heavy monetary burden on an assessee, it causes a lot of inconvenience to him as well.

15. In the light of it all, we shall now consider the validity of the impugned orders. As noted above, the records of the petitioners have been made available to us. The relevant portion of the proposal of the Deputy Commissioner to the Commissioner, on which his satisfaction had rested, reads as follows:

“Interest of Revenue.

From the above trading results it is clear that despite the net sales being in hundreds of crores the G.P shown is very low. In fact it is lower by 1.5% to 2.00% from the G.P Percentage of other lottery agencies of M.S Associates Group, which has been calculated and found from seized material of the M.S Associates group and reflected in the appraisal report of the DDL Thus, clearly the possible gross profit suppression taken cumulatively over the years for the block period for both the concerns might run into hundreds of crores of rupees. This calls for a comprehensive and in depth examination of books of accounts of M/s. Bhagya Rekha Enterprises and M/s. Guru Nanak Enterprises so as to ascertain the correct gross profit.

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“However investigations during the course of search and during the post search operations reflect the following points regarding the assessee's business and the maintenance of accounts.

1. Furnishing, of draw wise details: The assessee was asked to furnish draw-wise details of

(i) Unsold tickets

(ii) Prize winning tickets received from vendors

(iii) Unclaimed P.W.T's

(iv) P.W.T's returned to M.S Associates and State Govt.

The above details are essential for examining the authenticity of accounts and ascertaining the correct G.P However, the same were never furnished despite repeatedly being asked vide order sheet entries dated 13.7.2001, 20.7.2001, 20.8.2001, 22.8.2001 and 24.8.2001 In fact the A.Rs expressed their inability in producing these draw wise. In the absence of above the extremely low G.P shown by assessee is unverifiable and unjustifiable.

Unclaimed prizes: As per Supreme Court's decision in Suman Enterprises v. State of Haryana, (194) the unclaimed prizes are the property of the State and must revert back to it. However, assessee has failed to give the details of unclaimed prizes and substantiate its return.

Bumper lotteries and weekly draws: The Director, Nagaland State has approved deduction @ 40%, 30% and 20% from the first second and third prizes respectively in case of bumper and weekly draws. As reported in the appraisal report these deductions are not being paid to the State Government, and in the case of the same being retained by assessee, it is taxable in its hand. However, the details of the same have not been furnished despite repeatedly being asked.

Recording of PWTs.

The assessee is required to account for the PWTs in its books and return them to the organisers (M.S Associates) periodically after conclusion of draws. However, examination of records found during the course of search and survey operations revealed, that this was not being done. The return of PWTs was done only in the end of the month or financial year. In the statement under Section 131 recorded on 16.3.2000) Shri S.K Sethi was asked to comment on return of PWTs worth 13,52,78,74,671 (1352 crores) on 31.3.1997 (last day of F.Y) to M.S Associates. In his reply, Sri S.K Sethi has accepted that the return of PWTs might have been on various dates but voucher entry was passed on 31.3.1997 He was further asked if M/s. M.S Associates were acknowledging the receipt of PWTs. To this his reply was evasive, that he will have to check his accounts. However, the receipts of PWTs from M.S Associates were never produced either in post search or block assessment proceedings.

5. Treatment of minimum guaranteed sale proceeds on cancellation of draw

M/s. Bhagya Rekha has shown a G.P.0.27% of sales in A.Y.1997-1998 and M/s. Guru Nanak Enterprises has shown a G.P of 0.34% in 1998-1999. The unsold tickets for these years have been shown to me as high as 70% and 90% respectively. The high unsold tickets is reportedly on account of cancellation of draws. This implies that payment of minimum guaranteed sale proceeds given to organisers should have been reversed on account of cancellation of draw. However, the assessee's account do not reflect such a reversal. The revenue implication of even this reversal will be millions of rupees.

The above reasons clearly establish the need for comprehensive and in depth examination of assessees accounts in both the concerns. The gross profit shown by the assessees is very low and the possibility of suppression of revenue is in crores of rupees. Considering the complexity of accounts in this highly specialised trade and the interest of revenue, it is proposed that the approval for the auditing of books of accounts for the block period 1.4.89 to 20.8.1999 as per the provisions of Section 142(2A) may be given in the case of:

1. Shri S.K Sethi, Prop. M/s. Guru Nanak Enterprises

2. Smt. Leela Sethi Prop. M/s. Bhagya Rekha Enterprises.”

16. The Commissioner recorded his satisfaction and accorded approval to the proposal by noticing that he had seen the case records, appraisal report of the seized material as also the order sheets on the files of both the petitioners.

17. Having given our thoughtful consideration to the entire matter in the light of the materials available on the assessment records of the petitioners and bearing in mind the parameters of Court's power of judicial review of administrative decisions, we are of the view that no interference is called for in both the cases. The afore-extracted proposal submitted to the Commissioner for his approval depicts application of mind on the part of the Assessing Officer as regards the nature and complexity of accounts of the petitioners and the interests of the revenue, the prerequisites for exercise of power under Section 142(2A). Similarly it cannot be said that on the facts on hand, there was no application of mind by the Approving Authority or that dome irrelevant factors have weighed with the authorities in ordering special audit, as is alleged by the petitioners.

18. It is not within the province of judicial review to minutely analyse the materials on which the opinion of the Assessing Officer is rested to find out whether the same is sufficient for the authority concerned to come to the conclusion that the accounts of the assessee need to be subjected to special audit. As noticed above, what is complex to one may be simple to another and, therefore, the issue has to be examined from the view point of the Assessing Officer concerned. The Court is not expected to substitute its own understanding and comprehension of the accounts of an assessee.

19. We also do not find any substance in the submission of learned Counsel for the petitioners that merely because no special audit under the said provision had been directed in the past several years or that their accounts had already been subjected to statutory audit under Section 44AB of the Act and petitioners' assessments were completed without noticing any complexity in the accounts, the Assessing Officer is denuded of his power to order special audit subsequently, even though the nature of business and the method of accounting adopted by the assessee had remained the same as in the past. If the facts and circumstances so warrant, a special audit under Section 142(2A) may be ordered in respect of any year. We, however, hasten to add that in those cases where the accounts have already been compulsorily audited under Section 44AB, the Approving Authority is expected to be circumspect in according the approval for special audit.

20. The decisions of the Calcutta and Kerala High Courts, heavily relied upon by the Counsel for the petitioners, though succinctly explain the scope and the principles governing an order under Section 142(2A) of the Act and we are in respectful agreement with the same, but on facts none of the decisions is of any avail to the petitioners. In all these decisions, decided on their own peculiar facts, their Lordships have been pleased to observe that either no previous approval of the Commissioner was sought for or merely a proposal was placed for perusal of the Chief Commissioner and, therefore, the Chief Commissioner did not apply his mind at all as regards the pre-requisites for grant of previous approval and mechanically appointed the special auditor (Peerless); or that the special auditor was not appointed because of the complexity of the accounts, for examining the related supporting vouchers in relation to the expenses in various heads specified therein (Bata India); or that special auditor was appointed for want of response to notice under Section 142(1) of the Act and not because of the complexity of accounts (Muthoottu Mini Kuries), which is not the case here.

21. For the foregoing reasons, the writ petitions, being devoid of merit, fail and are accordingly dismissed. Interim orders staying the operation of the impugned orders/assessment proceedings stand vacated. However, there will be no order as to costs.

Writ Petitions dismissed.