Special Income Tax Audit Set Aside for Lack of DIN-Based Approval: Key Takeaways from Bombay High Court Ruling in Sanjay Nathalal Shah Vs ACIT
1. Background of the Dispute
The Bombay High Court in Sanjay Nathalal Shah Vs ACIT examined the legality of a special audit ordered under Section 142(2A) of the Income Tax Act 1961 for Assessment Year 2023–24.
The assessee challenged:
- The order dated 10.02.2025 directing a special audit of accounts under
Section 142(2A); and - The consequent special audit report dated 06.06.2025.
The core issue was not about the correctness of the audit findings, but whether the very jurisdiction to direct a special audit existed in the absence of a valid prior approval from the Principal Commissioner of Income Tax (Central)-3, Mumbai, backed by a Document Identification Number (DIN) as mandated by CBDT Circular No. 19/2019 dated 14.08.2019.
2. Central Legal Question
Whether a Special Audit Under Section 142(2A) Is Valid Without DIN on the Prior Approval
The assessee argued that:
- The approval dated 06.02.2025 (relied upon by the Revenue as the basis for directing the special audit) did not contain any DIN.
- Under
CBDT Circular No. 19/2019, any communication, including “approval”, issued on or after 01.10.2019 without a DIN is:- Invalid; and
- Deemed never to have been issued.
Therefore, the assessee contended that the jurisdictional pre-condition for invoking Section 142(2A)—i.e., a valid prior approval from the Principal Commissioner—was not fulfilled, rendering the entire special audit proceeding void ab initio.
The Revenue countered this by asserting that:
- The approval dated 06.02.2025 was an internal document, not a “communication” within the scope of the Circular.
- The actual special audit order dated 10.02.2025, which was served on the assessee, did carry a valid DIN, and thus there was sufficient compliance with
CBDT Circular No. 19/2019. - Consequently, the absence of DIN on the internal approval should not vitiate the special audit order.
3. Scope and Mandate of CBDT Circular No. 19/2019
3.1 Objective and Statutory Basis
CBDT Circular No. 19/2019 was issued under Section 119 of the Income Tax Act 1961. The Circular was intended to:
- Enhance transparency;
- Establish a clear audit trail; and
- Standardise all communications by income-tax authorities through compulsory use of computer-generated DIN.
3.2 Key Clauses of the Circular
Paragraph 2:
- No “communication” shall be issued by any income-tax authority on or after 01.10.2019 unless a DIN is generated and quoted in the body of such communication.
- The term “communication” expressly covers, inter alia, approvals and various types of orders, notices, enquiries, and correspondences.
Paragraph 3:
- Provides for exceptional situations where manual issuance of communication without an immediate DIN may be permitted.
- Such manual issuance is allowed only if:
- Written reasons are recorded;
- Prior approval of the specified high-ranking authority is obtained; and
- The document clearly states that it has been issued without DIN under the approved exceptional circumstances and that the DIN will be generated and linked later.
Paragraph 4:
- Contains a strict consequence clause:
Any communication issued by an income-tax authority which is not in conformity with Paragraphs 2 and 3 shall be treated as invalid and shall be deemed to have never been issued.
The Court noted that this language leaves no room for treating such defects as mere technical or curable irregularities.