Section 142 of the Finance Act 2005 introduced significant amendments to the Income Tax Act, 1961, primarily aimed at enhancing the tax authorities’ powers to obtain information and conduct inquiries. These amendments were intended to improve tax compliance and curb tax evasion.
The key aspect of Section 142 is its expansion of the Assessing Officer’s (AO) authority to call for information. Before the amendment, the AO could only require an assessee to furnish information related to their income. Section 142 broadened this scope considerably. Under the amended section, the AO can now require any person, not just the assessee, to furnish information or documents that the AO deems relevant for the purpose of any inquiry or proceeding under the Income Tax Act. This allows the AO to gather information from third parties such as banks, financial institutions, and other businesses, providing a more comprehensive picture of an assessee’s financial transactions and potentially uncovering hidden income.
Another crucial change brought about by Section 142 was the AO’s power to direct a special audit. If the AO, having regard to the nature and complexity of the accounts of an assessee and the interests of revenue, is of the opinion that it is necessary to get the accounts audited by an accountant nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, he may direct the assessee to get his accounts so audited. This power allows the AO to engage independent experts to examine the assessee’s financial records, especially when the AO lacks the necessary expertise or resources to thoroughly scrutinize complex transactions. The cost of this special audit is generally borne by the assessee.
Furthermore, Section 142 provides a mechanism for the AO to compel attendance and examine witnesses. The AO possesses the same powers as are vested in a court under the Code of Civil Procedure, 1908, when trying a suit, in respect of enforcing the attendance of any person and examining him on oath, and compelling the production of books of account and other documents. This provision enables the AO to summon individuals and demand the production of relevant documentation, reinforcing the AO’s investigative capabilities. Failure to comply with such summons can result in penalties.
The practical implications of Section 142 are considerable. Tax authorities have become more proactive in gathering information from various sources, leading to increased scrutiny of tax returns and greater detection of tax evasion. The power to direct a special audit has proven particularly useful in cases involving complex financial arrangements and intricate business structures. The ability to summon and examine witnesses has further strengthened the investigation process.
However, Section 142 has also been subject to debate and judicial interpretation. Concerns have been raised regarding the potential for misuse of power and the burden placed on assessees. Courts have emphasized the need for the AO to exercise these powers judiciously and with due regard to the principles of natural justice. The AO must provide a clear justification for requiring information or directing a special audit and must ensure that the assessee is given a reasonable opportunity to be heard. In conclusion, Section 142 of the Finance Act 2005 significantly enhanced the powers of tax authorities in India. By expanding the scope of information gathering, introducing the special audit provision, and granting the power to summon and examine witnesses, the section aimed to improve tax compliance and reduce tax evasion. While concerns regarding potential misuse of power exist, the section has undeniably strengthened the investigative capabilities of the Income Tax Department.
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