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TMI Blog2023 (1) TMI 1121X X X X Extracts X X X X X X X X Extracts X X X X ..... itions made/confirmed by the lower authorities. ITA Nos. 274 & 275/Chd/2014 are separate appeals filed by both the assessees agitating against levy/confirmation of the penalty under section. 271(1)(c) of the Act, levied pursuant to the aforesaid quantum additions. 2. So far as the appeal agitating the quantum additions are concerned, the assessees apart from contesting the additions on merits, have taken the following additional grounds in both the appeals: "8. That on law, facts and circumstances of the case, the appointment of special auditor u/s 142(2A) deserves to be declared illegal since the said appointment is without examination of books of accounts and also without providing reasonable opportunity of being heard to the appellant. 9. That on the law, facts and circumstances of the case, the Ld. AO has erred in making various additions which are based on the report of an illegally appointed special auditor u/s 142(2A). 10. That on the law, facts and circumstances of the case, the impugned assessment deserves to be quashed having been passed beyond the limitation period prescribed u/s 153 since the appointment of Special auditor u/s 142(2A) is illegal and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds first for adjudication. The ITA No. 1325/Chd/2010 in the case of Shri Rajiv Kumar is taken as the lead case. 6. The issue before us is whether the Assessing Officer was justified to order the appointment of special auditor u/s. 142(2A) of the Act, and thereby getting additional time to frame the assessment in terms of explanation 1 (iii) to sub-section (3) of Section 153 of the Act. 7.1 The relevant extract of s. 142(2A), as existing at the relevant time, for the sake of ready reference is reproduced as under : (2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature 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 prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in favour of the assessee by the various High Courts and different benches of the Tribunal. He in this respect has also relied upon the following decisions: 1) Consulting Engineering Services (supra) (Delhi High Court) (2019) 198 TTJ 21. 2) Bal Krishan Sood vs. ITO (2021) 125 taxmann.com 276(Chandigarh Trib.) 3) Sunder Mal Sat Pal vs. DCIT ITA No. 154 to 157/Chd/2013 (Chd I.T.A.T.) dtd. 15.6.2018. 4) Ms. Meenakshi R. Sundaram Proprietor, M/s. R.M. Sundram Caterers & Decorators vs. ITO. (ITA NO. 3196 TO 3202/MUM./2008) 5) Peerless General Finance & Inv Co. Ltd. vs. DCIT (Cal.) (1999) 236 ITR 0671. 6) ITO vs. Vilsons Particle Board industries Ltd. ( I.T.A.T. Pune Bench) (2017) 88 taxmann.com 889. 7) Rajesh Kumar & Ors. Vs. DCIT (SC) (2006) 287 ITR 0091 . 8) Hind Samachar Ltd. vs. ACIT (High Court of P& H (2010) 45 DTR 0057 9) M/s. Unitech Ltd. vs. ACIT ITA No. 5180/Del/2013. 10) CIT vs. Bajrang Textiles (Rajasthan (2007) 294 ITR 0561 10. The Ld. DR, on the other hand, has relied upon the decision of the Hon'ble Supreme Court in the case of Sahara India (Firm) vs. CIT (Supra). 11. Before proceeding further, it will be relevant to refer to the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on thereof. It would involve submission of explanation and clarification which may be required by the special auditor on various issues with relevant data, document etc., which, in the normal course, an assessee is required to explain before the Assessing Officer. Therefore, special audit is more or less in the nature of an investigation and in some cases may even turn out to be stigmatic. We are, therefore, of the view that even after the obligation to pay auditor's fees and incidental expenses has been taken over by the Central Government, civil consequences would still ensue on the passing of an order for special audit. 22. We shall now deal with the submission of learned counsel appearing for the revenue that the order of special audit is only a step towards assessment and being in the nature of an inquiry before assessment, is purely an administrative act giving rise to no civil consequence and, therefore, at that stage a pre-decisional hearing is not required. In Rajesh Kumar (supra) it has been held that in view of Section 136 of the Act, proceedings before an Assessing Officer are deemed to be judicial proceedings. Section 136 of the Act, stipulates that any proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l hearing amounting to a full review of the original order on merit, which, as explained above, is not the case here. 24. The upshot of the entire discussion is that the exercise of power under Section 142 (2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in Section 142 (2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar's case (supra). 25. It is pertinent to note that by the Finance Act, 2007, a proviso to Section (2A) has been inserted with effect from 1st June, 2007, which provides that no direction for special audit shall be issued without affording a reasonable opportunity of hearing to the assessee. 26. In the light of the afore-noted legal position, we may now advert to the facts of both the cases to consider the validity of orders dated 14th March, 2006, requiring the appellants to have their accounts for the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, it will be open to the appellants to question before the appellate authority, if so advised, the correctness of the material gathered on the basis of the audit report submitted under sub-section 2A of Section 142 of the Act." 13. A perusal of above reproduced observations made by the Hon'ble Supreme Court would reveal that: In 'Para 21' of the decision, the Hon'ble Supreme Court has observed that they are in respectful agreement with the decision the Hon'ble Supreme Court in the case of Rajesh Kumar and Ors. (supra) and that an order u/s. 142(2A) does entail civil consequences. The Hon'ble Supreme Court has further observed that despite insertion of proviso to Section 142(2D) w.e.f. 1st June, 2007, which provides that expenses of the auditor appointed in terms of the said provision shall be borne by the Central Government, civil consequences would still unsue on the passing of an order for special audit. The Hon'ble Supreme Court also observed that the special audit has implications which involve submission of explanation and clarification on various issues with relevant data, document etc. before the Special Auditor, which, in normal course the assessee is required to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itor under section 142(2A) of the Act. In Para 24, the Hon'ble Supreme Court has concluded the discussion by holding that since the exercise of power under Section 142 (2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. The Hon'ble Supreme Court, therefore, reiterated the view expressed in Rajesh Kumar's case (supra). The Hon'ble Supreme Court , thus, deliberating upon pre amended provisions before passing the Finance Act, 2007, held that even in the absence of express provision for affording an opportunity of hearing to the assessee before passing of an order for appointment of Special Auditor u/s. 142(2A), still the principle of natural justice are to be followed and opportunity of hearing to the assessee for objecting to such appointment of Special Auditor should be given. In para 25 of the said decision, the Hon'ble Supreme Court, thereafter, took note of the proviso to sub Section 2A inserted w.e.f. 1st June, 2007, which provides that no directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame fresh assessment for the relevant assessment year by ignoring the extended period of limitation in terms of explanation 1 (iii) to sub-section (3) of Section 153 of the Act was already over, what appropriate order should be passed in that case i.e. in the case of Sahar India (Firm). The learned Additional Solicitor General pleaded before the hon'ble Supreme Court that if the hon'ble Supreme Court was not inclined to agree with him, the interpretation of the provision by the supreme court be given prospective effect and that the same should not be applied to the case of assessee [Sahara India (firm)], otherwise the interest of the Revenue would be greatly prejudiced. The Hon'ble Supreme Court, thereafter, considering the above argument of the Revenue observed that there was no clear position of law before the judgment of the Hon'ble Supreme Court in the case of Rajesh Kumar (Supra) and further that till the judgment in Rajesh Kumar (supra) was rendered, there was divergence of opinion amongst various High Courts. Additionally, even after the said judgment, another two-Judge Bench of the Hon'ble Supreme Court had expressed reservation about its correctness. Hence, considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft the court with the consolation that posterity will enjoy the fruits of walnut tree planted by them." The doctrine of prospective overruling also finds reference in the case of Indra Sawhney v. Union of India AIR 1993 SC 477 often known as the Mandal Commission Case. In this case, hon'ble Supreme court held that the ruling in that case would be effective after five years from the date of the ruling. The Court thus postponed giving effect to the ruling for five years from the date of the judgment. Though it was held in Golak Nath's case that doctrine of prospective overruling can be applied by the Supreme court only and that too in decisions relating to constitutional amendments only, but since then the law has evolved and it has now been held that application of the doctrine of prospective overruling has been extended to the interpretation of the ordinary statutes as well. The Hon'ble Supreme Court in the case of Managing Director Ecil Hyderabad Etc. Etc. vs. B. Karunakar Etc. Etc. (1993) 4 SCC 727 has observed: "Accepting the lead given in the above decision, this Court has since extended the doctrine to the interpretation of ordinary statutes as well. In Waman Rao v. Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing prospective and this applies in the constitutional area where the exigencies of the situation require such an application. The direction with regard to the prospective operation of the law laid down in Mohd. Ramzan Khan's case (AIR 1991 SC 471) (supra) was followed by various Benches of this Court, viz., S. P. Viswanathan v. Union of India, (1991) Supp 2 SCC 269 : (1991 AIR SCW 730); Union of India v. A. K. Chatterjee (1993) 2 SCC 191 and Managing Director, Food Corporation of India v. Narendra Kumar Jam, (1993) 2 SCC 400." Furthermore, explaining the principle, in the case of Harsha Dhingra v. State of Haryana (2001) 9 SCC 550, the Honourable Supreme Court has held: "Prospective declaration of law is a device innovated by this Court to avoid reopening of settled issues and to prevent multiplicity of proceedings. It is also a device adopted to avoid uncertainty and avoidable litigation. By the very object of prospective declaration of law it is deemed that all actions taken contrary to the declaration of law, prior to the date of the declaration are validated. This is done in larger public interest. Therefore, the subordinate forums which are bound to apply law decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court in the case of Sahara India (Firm) (Supra), the Special Audit is an investigative process ensuing civil consequences and the same being integral part of the assessment proceedings, hence, determinative of the very validity of such an assessment order passed in the extended period availed by the AO. Hence, the assessee, in our view, can very well challenge in appeal the validity of such an assessment order pleading with reference to the Special Auditor was bad in law and that the extended period of limitation in such circumstances was not available to the AO. 16. Now, coming to the facts of the present case before us, the Ld. AR of the assessee has made following submissions to contend that the reference to the Special Auditor by the AO was bad in law: a) Before issuing the Statutory Show Cause Notice (SCN) dated 07.11.2008 u/s 142(2A), the accounts were never called for by the Ld. AO, they were never produced by the assessee and they were never examined by the Ld. AO. Having not even looked at the accounts of the assessee, the jurisdictional condition, being complexity in accounts of the assessee, to appoint spl. auditor u/s 142(2A) was not fulfilled. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been discussed in the SCN. No document has been referred in the SCN. Everything discussed in the SCN as well as in the order is subjective without any objective finding. This shows that spl. audit in this case was ordered without having any specific finding. d) It is also evident from the SCN that the issues raised/alleged are not such on the basis of which accounts can be dubbed as complex. AO can not delegate his duties and powers to the Special Auditor. e) On a look at the order of the Worthy CIT, granting statutory approval u/s 142(2A), attached at Pg. 397, it is evident that he did not look into any material at all and it was only the SCN that was produced before him. Neither the assessment record nor the seized record was produced before him and he granted approval mechanically. Further, on a reading of said approval granted in this case, it is also evident that he did not approve the case or that he did not record that it is a fit case for conduct of spl. audit, rather he merely nominated the name of a person to be the spl. auditor. In proceedings u/s 142(2A), the CIT must record that this is a fit case for conduct of spl. audit and only thereafter the spl. audito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar circumstances, has held as under: "20. ...............Not only that, no comments on nature of complexity of accounts year wise has been attempted by the Assessing Officer.......... .....The impugned order under section 142(2A) of the Act thus does not meet the requirement of law and based on the judgment of Hon'ble High Court of Delhi in the case of Delhi Development Authority and Another Vs. Union of India and Another (350 ITR 432) wherein it was held that an Assessing Officer is required to scrutinize the entries and verify them, but this does not require services of a special auditor or a Chartered Accountant to undertake the said exercise. Section 142(2A) is not a provision by which the Assessing Officer delegates his powers and functions, which he can perform to the special auditor, it can be said that the Assessing Officer is not right in getting the accounts audited. We also hereby place reliance in the case of Sahara India (Firm) Vs. Commissioner of Income Tax, Central-1 300 ITR 403 (SC) wherein it was observed that "Before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above discussion and considering the relevant aspects that the reference by the AO to special auditor being bereft of plausible reasons for holding about the complexity of accounts and forming such opinion even without examining such accounts and the principals of natural justice being violated, the assessee being given no proper opportunity to object to such reference and even mechanical approval by the CIT, therefore, in the light of the legal proposition laid down by the Hon'ble Supreme Court in the case of Sahara India (Firm) Vs. CIT (supra), we hold that the order appointing Special Auditor u/s 142(2A) of the Act passed by the AO as bad in law. Since the extended period was taken by the AO under the guise of Special audit, hence the same cannot be counted for computing the period of limitation to pass the assessment order. As held by the Hon'ble Supreme Court in the case of 'Harsha Dhingra Vs. State of Haryana' (supra), the subordinate Forums including this Tribunal is bound to apply law declared by the Hon'ble Supreme Court and is duty bound to apply such dictum to case which would arise in future. 20. The original limitation to pass the assessment order expired ..... X X X X Extracts X X X X X X X X Extracts X X X X
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