Natural Justice must for 142(2A) Special Audit

AIT News Network

NEW DELHI. Vide a significant ruling dated 1^st November AIT-2006-216-SC; the Apex Court has ruled that the principles of natural justice are required to be followed before directing special audit in terms of Section 142(2A) of the Income Tax Act.  

T H E  F A C T S:

A raid was conducted in their premises of Assessee on 18.12.2002.  Some documents including their books of accounts were seized; a few of which were in the hard disk of the computer.  They upon seizure all through remained in possession of the respondents.  Assessment was under the law required to be completed within a period of two years.  A notice was issued under Section 158BC of the Act by the Deputy Commissioner of Income Tax, Central Circle - 18 requiring the appellants to submit return of undisclosed income for the block period of ten years pursuant whereto returns were filed.  A notice was issued under Section 142(1) of the Act.  Questionnaire was issued on 1.11.2004.  On 22.11.2004, the Deputy Commissioner decided to proceed first with the assessment proceedings under Section 158BC of the Act in the case of three individuals, viz., Smt. Sushila Rani, Smt. Sunayana Prabhakar and Smt. Sunanda Prabhakar as also two companies, viz., M/s. Daily Agro Milk Food (P) Ltd. and M/s. Sushila Milk Specialities (P) Ltd.  The said questionnaire was responded to.  Affidavits were also filed before the Deputy Commissioner on behalf of M/s. Sushila Milk Specialities (P) Ltd.    

            By a letter dated 23.11.2004, the Deputy Commissioner mooted a proposal for special audit in terms of Section 142(2A) of the Act to the Commissioner of Income Tax stating: 

"There is no link between the business conducted by the assessee and books of account prepared for the purpose of filing return of income.  Two sets of books of accounts have been found for the same concern for the same financial year in two separate computers. 

            There have been numerous instances of transactions outside the books.  Few of them are listed as under:..." 

            Several instances thereafor were given.  It was furthermore stated: 

"There are many more instances like these listed above.  The above analysis makes it clear that the account of the assessee involves complication and requires an expert audit to bring out the financial results which can be relied upon at the time of assessment" 

            The Commissioner of Income Tax approved the said proposal of the Deputy Commissioner of Income Tax by a letter dated 29th February, 2004. 

            Pursuant thereto one M/s. Dhanesh Gupta & Co. was appointed as a special auditor.  Only on 7.12.2004, Appellant Nos. 1 to 3 were informed by a letter in regard to appointment of an auditor for special audit of their accounts in terms of Section 142(2A) of the Act.  Indisputably, prior thereto no opportunity of hearing was given to them.  The Deputy Commissioner was requested by the appellants herein to supply a copy of the reasons therefor by a letter dated 11.12.2004 which was refused by a letter dated 13.12.2004.  The Chartered Accountant submitted its audited report on 17.1.2005.   

            A Writ Petition was filed by the appellants before the Delhi High Court raising inter alia a question that the order impugned therein was vitiated in law having been passed without giving an opportunity of hearing to them as also on the ground that the same suffers from total non-application of mind.  Malafide on the part of the Deputy Commissioner was also alleged.  By the impugned judgment, the said writ petition had been dismissed.      

T H E  R U L I N G:

• The following are the relevant factors for invoking Section 142(2A) of the Act: 

  (i)         The nature of accounts

  (ii)        Complexity of accounts and

  (iii)       Interest of the revenue.

• The factors enumerated in Section 142(2A) of the Act, thus, are not exhaustive.  Once it is held that the assessee suffers civil consequences and any order passed by it would be prejudicial to him, principles of natural justice must be held to be implicit.  The principles of natural justice are required to be applied inter alia to minimize arbitrariness.   

• Justice, as is well known, is not only be done but manifestly seem to be done.  If the assessee is put to notice, he could show that the nature of accounts is not such which would require appointment of special auditors.  He could further show that what the assessing officer considers to be complex is in fact not so.  It was also open to him to show that the same would not be in the interest of the Revenue.   

• In this case itself the appellants were not made known as to what led the Deputy Commissioner to form an opinion that all relevant factors including the ones mentioned in Section 142(2A) of the Act are satisfied.  If even one of them was not satisfied, no order could be passed.  If the attention of the Commissioner could be drawn to the fact that the underlined purpose for appointment of the special auditor is not bona fide it might not have approved the same. 
  
  ·  Assuming that two sets of accounts were being maintained the same would not mean that the nature of accounts is difficult to understand.  It could have furthermore not been shown that the power is sought to be exercised only for an unauthorised purpose, viz., for the purpose of extension of the period of limitation as provided for under Explanation 2 to section 158BE of the Act. 
  
  
  ·        An order of approval is also not to be mechanically granted.  The same should be done having regard to the materials on record.  The explanation given by the assessee, if any, would be a relevant factor.  The approving authority was required to go through it.  He could have arrived at a different opinion.  He in a situation of this nature could have corrected the assessing officer if he was found to have adopted a wrong approach or posed a wrong question unto himself.  He could have been asked to complete the process of the assessment within the specified time so as to save the Revenue from suffering any loss.  The same purpose might have been achieved upon production of some materials for understanding the books of accounts and/ or the entries made therein.  While exercising its power, the assessing officer has to form an opinion.  It is final so far he is concerned albeit subject to approval of the Chief Commissioner or the Commissioner, as the case may be.  It is only at that stage he is required to consider the matter and not at a subsequent stage, viz., after the approval is given.           
  
  ·   Whereas the order of assessment can be subject matter of an appeal, a direction issued under Section 142(2A) of the Act is not.  No internal remedy is prescribed.  Judicial review cannot be said to be an appropriate remedy in this behalf.  The appellate power under the Act does not contain any provision like Section 105 of the Code of Civil Procedure.  The power of judicial review is limited.  It is discretionary.  The court may not interfere with a statutory power. 
  
  ·   The hearing given, however, need not be elaborate.  The notice issued may only contain briefly the issues which the assessing officer thinks to be necessary.  The reasons assigned therefor need not be detailed ones.  But, that would not mean that the principles of justice are not required to be complied with.  Only because certain consequences would ensue if the principles of natural justice are required to be complied with, the same by itself would not mean that the court would not insist on complying with the fundamental principles of law.  If the principles of natural justice are to be excluded, the Parliament could have said so expressly.  The hearing given is only in terms of Section 142 (3) which is limited only to the findings of the special auditor.  The order of assessment would be based upon the findings of the special auditor subject of course to its acceptance by the assessing officer.  Even at that stage the assessee cannot put forward a case that power under Section 142(2A) of the Act had wrongly been exercised and he has unnecessarily been saddled with a heavy expenditure.  An appeal against the order of assessment, as noticed hereinbefore, would not serve any real purpose as the appellate authority would not go into such a question since the direction issued under Section 142(2A) of the Act is not an appellate order.  

( Click here for full text of ruling AIT-2006-216-SC )

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