Special Audit Without Due Process? Entire Assessment Declared Void ab Initio: ITAT Delhi in Patanjali Case
In a significant ruling that underscores the importance of procedural compliance in income tax assessments, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in DCIT vs. Patanjali Ayurved Ltd. [2025] 174 taxmann.com 170 has held that an assessment completed pursuant to a special audit conducted without following the statutory mandate of Section 142(2A) and 142(2C) of the Income-tax Act, 1961 is void ab initio.
This judgment serves as a stern reminder that procedural lapses by the revenue authorities-no matter how well-intentioned-can render the entire assessment unsustainable in law.
Background: FMCG Giant Under the Scanner
The assessee, Patanjali Ayurved Ltd., a major player in the FMCG sector, had filed revised returns for AYs 2010–11 to 2012–13. The cases were selected for scrutiny. During the assessment proceedings, the Assessing Officer (AO) noted:
• The complexity of accounts;
• Non-compliance in earlier proceedings;
• The need for deeper investigation.
A show-cause notice proposing special audit under Section 142(2A) was issued. Following the Commissioner’s approval, the special audit was directed.
The assessee challenged the order via writ petition, which was dismissed by the High Court on 6-12-2018. Thereafter, the special audit report was submitted, and the AO passed an order under Section 143(3) read with Section 145(3).
The Twist: Appeal and Procedural Breakdown
The assessee appealed to the CIT(A), who held the entire assessment to be void ab initio, based on glaring procedural irregularities:
1. Satisfaction for special audit was recorded by both AO and Commissioner, violating the principle that only the AO should form the opinion.
2. The audit period and deadline were fixed by the Commissioner, not by the AO, contrary to Section 142(2A)’s requirement.
3. Extension of audit period was granted after the deadline had expired, and that too on the auditor’s request-not on the assessee’s application as mandated by Section 142(2C).
4. These cumulative deviations from the procedure rendered the entire audit and subsequent assessment legally untenable.
Tribunal’s Verdict: Procedure is Not a Mere Form
The ITAT upheld the Commissioner (Appeals)’s findings, emphasizing that statutory safeguards under Sections 142(2A) and 142(2C) are not optional formalities. These provisions are mandatory in nature, intended to balance the revenue’s investigative power with taxpayer protection.
“Where the procedure prescribed for directing and conducting special audit has not been followed, the resulting assessment stands vitiated.”
It reiterated that the authority to direct special audit vests solely with the AO, and any encroachment by superior officers, even the Commissioner, amounts to legal overreach.
Legal Takeaways
1. Audit Must Be AO’s Decision Alone
The AO must independently record satisfaction about complexity or non-compliance before directing special audit. Delegating this judgment to the Commissioner violates legislative intent.
2. Deadlines and Extensions Have Rules
The deadline for special audit and any extensions must be initiated beforeexpiry and should be sought by the assessee-not the auditor.
3. Procedural Lapses Can Invalidate Entire Proceedings
Even if the assessment ultimately reveals substantial income, if the procedural backbone is defective, the entire assessment can collapse.
4. Writ Dismissal ≠ Validation of Subsequent Process
The High Court’s dismissal of the writ petition does not imply endorsement of how the special audit and assessment were later handled.
Conclusion
This ruling is not just a procedural rap on the knuckles of the Revenue-it’s a reaffirmation of the foundational principles of natural justice and due process in tax administration. In the eagerness to tax, authorities cannot ignore the rulebook.
For taxpayers and professionals alike, DCIT vs. Patanjali Ayurved Ltd. is a textbook example of how procedural lapses can have substantive consequences. And for tax officers, it’s a crucial lesson: Follow the letter of the law, or risk losing the case altogether.
The copy of the order is as under:
