Delhi HC Flags Absence of ‘Complexity’ in Ordering Special Audit Against Huawei under Income Tax Act [Read Order]

In a recent ruling, the Delhi High Court questioned the validity of a special audit ordered against Huawei Telecommunications (India) Pvt. Ltd., observing that such an audit cannot be directed without clearly establishing the complexity of accounts and examining whether the statutory conditions under the Income Tax Act, 1961 are satisfied.

Huawei Telecommunications (India) Pvt. Ltd., the petitioner, filed writ petitions challenging the reassessment proceedings initiated under Section 148 and the direction for special audit under Section 142(2A) of the Income Tax Act for Assessment Years 2013–14 and 2015–16.

The case arose after a search and seizure operation conducted by the Income TaxDepartment on 15 February 2022, following which the Revenue issued notices for reassessment and directed a special audit of the petitioner’s accounts.

The petitioner’s counsel argued that the direction for special audit was issued without satisfying the mandatory conditions under Section 142(2A). They argued that the accounts were neither complex nor doubtful and that the alleged discrepancies in ERP data were merely clerical errors that had already been explained and reconciled. The counsel further argued that the Revenue had not even examined the books of accounts before forming an opinion on their complexity.

On the other hand, the Revenue argued that the data provided by the petitioner was voluminous and unreliable, with duplicate and missing entries, raising doubts about its correctness. It argued that the ERP data alone was insufficient and required reconciliation, which justified the direction for special audit.

The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the power to direct a special audit under Section 142(2A) cannot be exercised mechanically. The court observed that the Assessing Officer must form an objective opinion based on factors such as complexity, volume and correctness of accounts before ordering such an audit.

The court explained that mere volume of data or existence of multiple transactions does not automatically make accounts complex. It also pointed out that without proper examination of the books of accounts, the Assessing Officer cannot conclude that the accounts are complex or unreliable.

The court scrutinised the actions of the Revenue and clarified the limits of its powers in ordering special audits under the Income Tax Act.

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