2005 (5) TMI 55 - HC - Income Tax

Issuance of direction of special audit - Whether the maxim audi alteram partem, if at all and to what extent is applicable to the proceedings before the Assessing Officer while passing a direction as contemplated under section 142(2A) - It is not in dispute before us that the annual turnover of the assessee for the relevant assessment period is more than Rs. 20 crores, while the return submitted by them shows nil income. Formation of opinion on the part of the Assessing Officer in the facts and circumstances of the case cannot be stated to be unreasonably made in a mechanical manner or without proper application of mind. The proposal and grant of approval by the concerned authorities is in conformity with the spirit of the provisions of section 142(2A) - order was passed after due interaction with the assessee. - writ petition is dismissed

Issues Involved:
1. Applicability of the maxim audi alteram partem to proceedings before the Assessing Officer under Section 142(2A) of the Income-tax Act, 1961.
2. Legality and validity of the order directing a special audit under Section 142(2A).
3. Requirement of pre-decisional hearing or show-cause notice before passing an order under Section 142(2A).
4. Application of principles of natural justice in the context of Section 142(2A).

Detailed Analysis:

1. Applicability of the Maxim Audi Alteram Partem:
The court examined whether the principle of audi alteram partem (right to be heard) applies to the proceedings before the Assessing Officer under Section 142(2A) of the Income-tax Act, 1961. The petitioner argued that the Assessing Officer must grant a pre-decisional hearing before passing an order for a special audit, as the accounts were not complex and the proposal was mechanically approved without proper application of mind.

2. Legality and Validity of the Order:
The petitioner challenged the legality of the order dated February 16, 2005, directing a special audit under Section 142(2A) on grounds that the reasons for the audit did not relate to the nature and complexity of the accounts but were based on incorrect factual assumptions. The court noted that the Assessing Officer had formed an opinion based on the nature and complexity of the accounts and the interests of the Revenue, which was approved by the Commissioner of Income-tax.

3. Requirement of Pre-decisional Hearing:
The court discussed whether a pre-decisional hearing or show-cause notice is necessary before directing a special audit under Section 142(2A). The petitioner relied on judgments from various High Courts, including Gurunanak Enterprises v. CIT and West Bengal State Cooperative Bank Ltd. v. Joint CIT, which emphasized the need for proper application of mind and compliance with principles of natural justice. The court concluded that while principles of natural justice must be read into the provisions of Section 142(2A), the extent of their application is limited. A detailed pre-decisional hearing or show-cause notice is not required; instead, a "purposeful interaction and confrontation" with the assessee regarding the nature and complexity of the accounts is sufficient.

4. Application of Principles of Natural Justice:
The court held that principles of natural justice are not explicitly excluded by Section 142(2A) and must be applied to ensure fairness. However, the scope of these principles is limited in this context. The Assessing Officer must make a sincere attempt to understand the accounts and seek clarifications from the assessee. The formation of opinion by the Assessing Officer and the approval by the Commissioner must be based on objective criteria, not assumptions or mechanical processes.

Conclusion:
The court dismissed the writ petition, holding that the Assessing Officer had made a sincere effort to understand the accounts and had interacted with the assessee. The proposal for a special audit was detailed and demonstrated proper application of mind. The approval by the Commissioner was not mechanical. Therefore, the order directing a special audit under Section 142(2A) was valid and did not violate principles of natural justice. The court emphasized that the pre-decisional hearing in such cases should be limited to a meaningful interaction regarding the complexity of the accounts rather than a formal show-cause notice or detailed hearing.

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