TMI Blog2017 (1) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... the pre-decisional stage passed by the Assessing Officer without show causing the assessee as to whether any special audit should be conducted in his case under section 142(2A) of the Act is bad in law. Hence, consequential orders of extension, if any become of no consequence. Since, we have decided the jurisdictional issue on merits, the other grounds of appeal becomes academic. - Decided in favour of assessee - ITA No.447/PN/2013, ITA No s.309 & 310/PN/2013, ITA No s.448 & 449/PN/2013 - - - Dated:- 21-12-2016 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For The Assessee : S/Shri Sunil Pathak and Nilesh Baheti For The Revenue : Shri Rajeev Kumar, CIT ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of appeals, two cross appeals filed by the assessee and the Revenue and another appeal filed by the Revenue are against consolidated order of CIT(A), Kolhapur, dated 27.11.2012 relating to assessment years 2005- 06, 2006-07 and 2004-05 against respective orders passed under section 143(3) r.w.s. 153A(b) of the Income Tax Act, 1961 (in short the Act ). 2. This bunch of appeals relating to the same assessee on identical issue were heard together and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment while computing income on profit basis. A.Y. 2005-06 Rs.1,28,894/- A.Y. 2006-07 Rs.1,88,79,242/- A.Y. 2007-08 Rs.1,20,69,729/- Considering the facts and legal aspect of the case, the CIT(A) erred in contradicting his own findings that computation of total income of the assessee company made on income basis, as well as, on the basis of accretion to net asset basis has been held appropriate. 3. In assessment, on examination of seized diaries, it was concluded that fresh advances were made to various persons relevant to assessment years under consideration are detailed hereunder: A.Y. 2005-06 Rs.2,54,00,000/- A.Y. 2006-07 Rs.1,96,47,800/- A.Y. 2007-08 ₹ 30,66,720/- Considering the facts and legal aspect of the case, the CIT(A) erred in not appreciating the fact that, while computing the income of the assessee on income basis, the AO has already considered the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued by the DCIT (Central) Circle, Kolhapur on 13.03.2007. In response to the said notice, the assessee furnished the return of income on 12.04.2007 declaring income of ₹ 74,71,360/- as shown in the original return of income filed under section 139(1) of the Act. The case of the assessee was taken up for scrutiny. The Assessing Officer noted that Patel group has five main persons viz. Shri Virji Ladharam Patel and his four sons Shri Mohan Virji Patel, Shri Mahendra Virji Patel, Shri Ramji Virji Patel and Shri Ravji Virji Patel. Out of four brothers, Shri Mohan Virji Patel was a person who was looking after the accounting of total group concerns and other persons were looking after the factory works. During the course of search at the residential premises of Shri Mohan Virji Patel and Shri Mahendra Virji Patel, both Directors of the assessee company, certain documents were seized as Annexure A to Panchanama dated 24.08.2006 containing S.No.1 to 12, out of which S.No.1 contains loose papers and S.No.5 to 10 were note books containing prima facie unaccounted transactions. All these note books and loose papers of bundle No.1 were written chronologically by Shri Mohan Virji Patel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entries from the seized diaries which are appearing in assessee s regular books of account of various concerns. The explanation of assessee was that these were rough notings which do not lead to any income computation and it was not possible for the assessee to give explanation of various pages. As regards the classification of unaccounted income concern-wise, it was submitted by the assessee that total unaccounted income has been offered in the hands of Virji Ladharam Patel, being the head of family. The special auditor had prepared the audit report and the transactions in the diaries were bifurcated and categorized under various heads on the basis of prima facie meaning of the words used by the person writing the diaries. The auditor had computed the profit from sale transactions year-wise after allocating the expenses recorded in the diaries. He also pointed out that certain disallowable expenses, expenses of personal nature and expenses on capital account. On receipt of special audit report, detailed questionnaire was issued to the assessee. In response to which, various written explanations were filed and books of account were produced before the Assessing Officer. The Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for 90 days after expiry of initial period of 60 days, the total time available to the Assessing Officer was 150 days which would expire on 03.04.2009. The assessment order then should have been passed on or before 02.06.2009 which in fact was passed on 11.06.2009 and hence, was time barred by limitation. The second objection raised by the assessee was that no direction for special audit could be issued without affording reasonable opportunity of being heard to the assessee. Reference was made to the proviso under section 142(2A) of the Act which was inserted by the Finance Act, 2007 w.e.f. 01.06.2007. In this regard, two questions were raised as to whether the opportunity of being heard had to be given by the Assessing Officer before he forms an opinion on nature and complexity of accounts and whether the opportunity of being heard had to be given by the Assessing Officer or the opportunity of being heard if given by the superior authority to the aggrieved party prior to approving the proposal for special audit and before the directions under section 142(2A) of the Act was passed by the Assessing Officer, would constitute sufficient compliance with the rules of audi alteram pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner could be drawn to the fact that the underlined purpose for appointment of the special auditor is not bona fide he might not have approved the same. Thus the role of the superior authority i.e. the Commissioner or the Chief Commissioner in the process leading to special audit is too vital to be ignored. In the matter of directions of special audit, it is the opinion of the Commissioner or the Chief Commissioner which is binding, conclusive, final and unchallengeable for all purposes. Hence, if such authority gives an opportunity of being heard to the appellant before granting an approval, there would be sufficient compliance to the rules of audi alteram partem and there would be no miscarriage of justice. 17. The other argument of the assessee is that the section provides for an opportunity of hearing to the assessee and only thereafter, formation of opinion of the Assessing Officer as to whether reference to special audit is to be made or not. Assessee has relied on the decision given in the case of DCIT v. Muthoottu Mini Kuries [2004] 266 ITR 213 (Ker) to urge that it has been held in that case that the Assessing Officer should grant opportunity of hearing before m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner It is not the assessee's case that the Chief Commissioner or the Commissioner had denied this opportunity. 8. The CIT(A) concluded by holding as under:- 18. In any case the facts of the case indicate that the assessing officer provided the assessee with opportunity to explain the contents of the seized material containing voluminous narrations in Gujarati language of numerous entries indicating transactions running into crores of Rupees spread over a period of three - four years during the course of assessment on 16/05/2008 itself by order sheet entries. This fact is not denied by the assessee. It is equally true that this fact was recorded by the CIT (Central) while conducting the hearing for grant of approval for conducting special audit and it has not been contested by the assessee as incorrect. It is also true that the appellant had wasted the opportunity by not complying with the request made by the assessing officer. Under these circumstances I fail to understand as to how the assessee can instigate the issue of opportunity not being given by the assessing officer before forming an opinion about complexity of accounts for the purpose of invoking the jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication to the Assessing Officer and the Assessing Officer thereafter, may extend the time for such periods. The Assessing Officer may suo moto also extend the said period as he thinks fit. The CIT(A) noted that in the instant case, the said audit report was not furnished by the assessee on the assumed date i.e. 20.01.2009. The assessee also did not seek extension of initial time limit of sixty days given by the Assessing Officer. It was also a fact that the Assessing Officer extended the time for another 93 days on the next working day i.e. 21.01.2009. The CIT(A) held that extension of time limit on the next working day would tantamount to valid extension of time limit for special audit. The CIT(A) observed that under the Act, the Assessing Officer took an action suo motu to extend the time limit and he can do so provided of course, the outer limit of 180 days had not expired. The order of extension was thus, held to be not time barred by limitation. He further contended that the provisions of sub-section (2C) and the proviso thereunder should be liberally construed to enable carriage of justice to the aggrieved party. The said provisions were said to be procedural sections a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (2C) in the proviso thereto has to be read into the provisions of section 153B of the Act as omission to make the reference would lead to consequences not intended or material to be intended. The other contention of the assessee that the letter was dispatched late was also brushed aside by the CIT(A), in view of reference number appended to the letter of assessee which preceded i.e. 1207 which precedes other numbers 1208 to 1213 which were dated 18.02.2009. The contention of assessee that it had received extension letter dated 21.01.2009 on 27.02.2009 i.e. after lapse of more than one month, and the order extending the time limit was backdated was held to be not correct, in the absence of any evidence. The CIT(A) thereafter, decided the issue on merits. 12. The ground of appeal No.1 raised by the assessee is jurisdictional issue of validity of assessment order passed under section 143(3) r.w.s. 153A(b) of the Act. The issue vide ground of appeal No.1.1 raised by the assessee is against reference made for special audit under section 142(2A) of the Act being illegal as the Assessing Officer had not given opportunity of hearing to the assessee. Under the proviso to section 142(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lleged notice. Referring to the provisions of section 292BB of the Act, he pointed out that the same is regarding improper service of notice but when no notice has been issued, there is no question of any service of notice. He placed reliance on the ratio laid down by Hon ble Bombay High Court in Nickunj Eximp Enterprises Pvt. Ltd. Vs. ACIT (2012) 346 ITR 6 (Bom) for the proposition that for conducting special audit, condition precedent was to give an opportunity to the assessee to be heard. He then, referred to the ratio laid down by the Hon ble High Court of Allahabad in Kaka Carpets Vs. CIT (2014) 266 CTR 485 (All), wherein similar proposition was laid down that the Assessing Officer has to consider the objections raised by the assessee to the special audit and afford reasonable opportunity of being heard and only thereafter, the Commissioner as approving authority would consider whether special audit is required or not. He further referred to the ratio laid down by Mumbai Bench of Tribunal in Rajendra C. Singh Vs. JCIT (2008) 117 TTJ 885 (Mum-Trib)m wherein it was held that where the Assessing Officer simply forwarded the recommendations of Additional Director of Income Tax to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stressed that based on this, assessment orders passed by the Assessing Officer are time barred. The next contention raised by the learned Authorized Representative for the assessee was that the Assessing Officer had extended the time limit for completion of special audit after lapse of original time. In this regard, he says that the provisions of Limitation Act had to be directly applied as held in M.K. Srikanta Setty Vs. CIT (1986) 160 ITR 517 (Kar) and the equitable provisions were within place while determining the period of limitation. Another point raised by the learned Authorized Representative for the assessee was that the order extending time limit was received on 27.02.2009, where the dispatch number mentioned as 1207. He pointed out that the documents at 1208 to 1213 were also extension letters for other group concerns, which are all dated 18.02.2009. He stressed that between dispatch No.1207 which is claimed to be on 21.01.2009 and 1208 which is dispatched on 18.02.2009, there is gap of one month and no single letter has been issued in between. He further stressed that where all the extension orders were received dated 27.02.2009 by group concerns, the presumption is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative for the Revenue has relied on the decision of Hon ble Bombay High Court in Atlas Copco (India) Ltd. Vs. ACIT (supra), which decision relates to the position prior to 2007. It also not applies to the decision of the Hon ble Supreme Court in Rajesh Kumar and Others Vs. DCIT (supra). He further pointed out that factually, the Department wanted paras to be translated in English and for that time, was sought to explain the details, but the Assessing Officer made reference for special audit. He also pointed out that the learned Departmental Representative for the Revenue has relied on Special Bench of Tribunal in ACIT Vs. Sushila Milk Specialties (P) Ltd. (supra), which was also for the period prior to amendment. With regard to issue of notice being mere irregularity, he referred to the ratio laid down by the Hon ble Supreme Court in ACIT Anr. Vs. Hotel Blue Moon (2010) 321 ITR 362 (SC), where it was held that where the notice is to be issued within time frame provided in the Statute and in case no such notice, then the assessment framed thereunder is invalid. He further referred to the explanatory notes of the Finance Bill while introducing the proviso to section 142(2A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require: Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard. 21. As per provisions of said section if at any stage during the course of assessment proceedings, the Assessing Officer in view of the nature and complexity of the accounts, its volume, doubts about correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of assessee and the interests of revenue, is of the opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Assessing Officer. However, if the said audit has not been completed within such fixed period, then the Assessing Officer has power on his own motion or on an application moved by the assessee or for any other reasons, to extend the period for furnishing the special audit report within such extended period. 24. Section 142(2A) of the Act in the first instance talks about the period which is specified by the Assessing Officer i.e. the period given to assessee to conduct special audit by issue of notice in this behalf. When the period is extended then, the cap is placed on aggregate period in which the report is to be given wherein, it is provided that the same shall not exceed 180 days from the date on which the direction under sub-section (2A) is received by the assessee. If we consider the main provisions of sub-section (2C) and proviso thereunder, then the reference is made to different periods. In the main provision, the reference is made to the period which has been specified by the Assessing Officer in the notice issued to the assessee. However, in order to reckon the period of 180 days, then from the date on which direction under sub-section (2A) is received by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustive. 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. 56. It is trite, even if there is a possibility that the Tribunal would correctly follow the statutory provisions, still compliance with principles of natural justice would be required. [See R. v. Kensington and Chelsea Rent Tribunal, Ex p. MacFarlane [1974] 1 WLR 1486 (QB)]. 57. Justice, as is well known, is not only to 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. 58. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be pointed out herein itself that pursuant to decision in Rajesh Kumar and Others Vs. DCIT (supra) by the Apex Court, Larger Bench was affirmed on the point that whether in every case where the Assessing Officer issued directions in terms of section 142(2A) of the Act, the assessee has to be heard before such order is passed. The Division Bench was of the view that it does not appear to be correct position of law. The Three Judge Bench thereafter, took note of the provisions of section 142(2A) to (2D) of the Act and section 142(3) of the Act and observed that the twin conditions of the nature and complexity of accounts and interest of revenue were the pre-requisite for exercise of power under section 142(2A) of the Act. It was further observed the word complexity used in section 142(2A) of the Act was not defined or explained in the Act but what may be complex to one, may not be complex as far as the understanding of other. So, there has to be genuine and honest attempt on the part of Assessing Officer to understand the accounts maintained by the assessee, entries and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l justice are required to be followed and in such an event, although no express provision is laid down in this behalf, compliance with the principles of natural justice would be implicit, the learned judges held {1.[2006] 287 ITR 91 (SC) 2.[1967] AIR 1967 SC 1269.} that by virtue of an order under section 142(2A) of the Act, the assessee suffers civil consequences and the order passed would be prejudicial to him and, therefore, the principles of natural justice must be held to be implicit. The court has further observed that if the assessee was 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 interests of the Revenue. 21. In the light of the aforenoted legal position, we are in respectful agreement with the decision of this court in Rajesh Kumar that an order under section 142(2A) does entail civil consequences. At this juncture, it would be relevant to take note of the insertion of the proviso to section 142(2D) with effect from June 1, 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Penal Code, 1860, and also for the purpose of section 196 of the Indian Penal Code and every income-tax authority is a court for the purpose of section 195 of the Code of Criminal Procedure, 1973. Though having regard to the language of the provision, we have some reservations on the said view expressed in Rajesh Kumar's case, but having held that when civil consequences ensue, no distinction between quasijudicial and administrative order survives, we deem it unnecessary to dilate on the scope of section 136 of the Act. It is the civil consequence which obliterates the distinction between quasi-judicial and administrative function. Moreover, with the growth of the administrative law, the old distinction between a judicial act and an administrative act has withered away. Therefore, it hardly needs reiteration that even a purely administrative order which entails civil consequences, must be consistent with the rules of natural justice. (Also see : Mrs. Maneka Gandhi v. Union of India and S. L. Kapoor v. Jagmohan. As already noted above, the expression civil consequences encompasses infraction of not merely property or personal rights but of civil liberties, material deprivati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar's (1) case. 31. The Apex Court further recognized the insertion of proviso under section 142(2A) of the Act w.e.f. 01.06.2007 which provided that no direction for special audit shall be issued without affording reasonable opportunity of hearing to the assessee. In the facts of the case before the Apex Court before passing the order requiring the assessee to have their accounts audited by Chartered Accountant, no show cause notice was given to the assessee. The assessee in the said case was required to furnish by March 20, 2006 the detailed explanation in respect of queries raised vide order sheet entries but in the meantime impugned order asking the assessee to get the accounts audited by the special auditor were passed on 14.03.2006. The Apex Court held that It is manifestly clear that when the impugned orders were made, the Assessing Officer had no occasion to have even a glimpse of the accounts maintained by the appellants. Therefore, in the light of the legal position noted abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act after considering the objections of the assessee and affording a reasonable opportunity of being heard, in terms of Section 142(2A) of the Act. It is only after the A.O. reaches to a fair conclusion after considering the reply given by the petitioner, and affording an opportunity of hearing, the CIT as approving authority will consider whether the special audit is required to be carried out for the purposes of understanding the accounts maintained by the assessee. The opinion must be formed reflecting the application of mind based on objective criteria and not on the basis of subjective satisfaction. 35. The Hon ble High Court of Allahabad in Kaka Carpets Vs. CIT (supra) thus, has distinguished between the adjudicating authority and approving authority and held that the first decision is to be made by the Assessing Officer, the adjudicating authority of giving the approval after considering the objections of assessee and affording reasonable opportunity of hearing in terms of provisions of the said section. The approval given by the Commissioner was as an approving authority and that also should be passed after application of mind to the facts of the case and the reply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking out the limitation period for passing the assessment order. In this regard, the communication and correspondence before permission given to special audit need to be looked into. The learned Departmental Representative for the Revenue has filed on record copy of order sheet entries, wherein the assessee was asked to file English translation of the seized note books after assignment of case upon the DCIT, Central Circle, the order shee t entry is dated 16.05.2008. Thereafter, there was proposal to centralize Patel group cases with Addl. CIT, Circle-1, Pune. Vide order sheet entry dated 11.09.2008 itself, a proposal for audit under section 142(2A) of the Act in the case of Patel was submitted to CIT, Central, Pune through proper channel. The cases of Patel group were assigned to the ITO, Central-I, Pune on 13.10.2008. On 22.10.2008, a proposal for audit under section 142(2A) of the Act in the case of Patel group was submitted to CIT(C), Pune through proper channel. Thereafter, letter dated 21.11.2008 in respect of special audit under section 142(2A) of the Act was served upon the assessee as per order sheet entry dated 25.11.2008. On 16.12.2008, the Counsel filed a letter reque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the Assessing Officer before sending a proposal for conducting special audit under section 142(2A) of the Act has not given an opportunity of being heard to the assessee and in view of the proviso to section 142(2A) of the Act, is the said proposal made without affording pre-decisional hearing to the assessee valid and can the proceedings conducted thereafter be held to be vitiated in law. The Hon ble Supreme Court in Three Judge decision in Sahara India (Firm) Vs. CIT and Another (supra) had decided the issue of show cause notice to be given on pre-decisional stage and post-decisional stage of starting the proceedings under section 142(2A) of the Act and had also referred to the earlier decision of Apex Court in Rajesh Kumar and Others Vs. DCIT (supra). The principles laid down by the Hon ble Supreme Court are that the principle of audi alteram partem cannot be ignored even at the stage of pre-decisional hearing. In other words, in case the Assessing Officer is of the view that having regard to the nature and complexity of the accounts and interests of revenue, it is necessary to get the accounts audited by an accountant, with previous approval of Principal Chief Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial audit under section 142(2A) of the Act at the pre-decisional stage, then such proposal made by the Assessing Officer to the CIT(C), Pune is against the principles of natural justice and suffers from infirmity. The case of Revenue before us is that the CIT(C), Pune before passing his order of giving permission to the Assessing Officer to ask the assessee to get the special audit conducted had given fair opportunity of hearing to the assessee. The role of CIT(C) is the role of approving authority. The role is not that of adjudicating authority which had to be carried out by the Assessing Officer. The adjudicating authority in the present set of facts has failed to give any opportunity to the assessee before making proposal for special audit and the opportunity allowed by the approving authority, who in any case is enshrined with the duties of checking whether there is no arbitrariness in functioning of adjudicating authority, has to be satisfied before giving approval. Hence, the opportunity allowed by the CIT(C), Pune after proposal was made by the adjudicating authority does not absolve the non-allowance of reasonable opportunity of hearing by the Assessing Officer. 41. App ..... X X X X Extracts X X X X X X X X Extracts X X X X
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