2010 (8) TMI 394 - HC - Income Tax

Provisional assessment for refund - Audited books of accounts u/s 142(2A) - In the absence of these materials being made available it would not have been possible for the petitioner to effectively deal with the proposal or draw attention of the Chief Commissioner of Income-tax that the purpose for directing the special audit was unwarranted or not bona fide - Unless an assessee has the access to the mate-rials on the basis of which the Chief Commissioner of Income-tax would consider the question of granting approval to special audit such opportunity of hearing would degenerate into an idle formality - Accordingly the writ petition stands allowed by way of remand

Issues Involved:
1. Legality of the order under section 142(2A) of the Income-tax Act, 1961.
2. Compliance with principles of natural justice.
3. Complexity of accounts justifying a special audit.
4. Adequacy of opportunity of hearing before passing the order.

Detailed Analysis:

1. Legality of the order under section 142(2A) of the Income-tax Act, 1961:
The petitioner, a public company, challenged an order issued under section 142(2A) of the Income-tax Act, 1961, which directed an audit of their accounts by an accountant nominated by the Chief Commissioner of Income-tax, Calcutta-3 (CCIT) for the assessment year 1987-88. The order was issued on June 12, 2007. The petitioner had previously challenged a similar order dated February 27, 1991, which was set aside by the court on January 5, 2007, for not complying with the principles of natural justice.

2. Compliance with principles of natural justice:
The petitioner argued that the impugned order violated the principles of natural justice as they were not given a proper opportunity to explain their case. The court noted that previous judgments, including Rajesh Kumar v. Deputy CIT and Sahara India (Firm) v. CIT, established that an order under section 142(2A) entails civil consequences and requires compliance with natural justice. The court found that the petitioner was not made aware of the reasons leading to the Deputy Commissioner's opinion, and the proposal for special audit was not provided to the petitioner before the hearing with the Chief Commissioner.

3. Complexity of accounts justifying a special audit:
The income-tax authorities argued that the petitioner's accounts were complex due to the large volume of transactions and inadequate details available in the accounts submitted. However, the petitioner contended that there was no complexity in their accounts that warranted a special audit. The court deferred this issue for re-examination by the Chief Commissioner of Income-tax upon giving the petitioner a fresh hearing.

4. Adequacy of opportunity of hearing before passing the order:
The court found that the notices issued on January 11, 2007, and April 19, 2007, did not specify that the dates were fixed for hearing on the proposal for special audit. The petitioner was not provided with the proposal or the report of the Assessing Officer before the hearing with the Chief Commissioner. The court emphasized that for a hearing to be effective, the petitioner must have access to the materials on which the decision is based. The court concluded that the principles of natural justice were breached as the petitioner was not given sufficient opportunity to present their case.

Conclusion:
The court quashed the impugned order of approval, nomination of the accountant, and direction for special audit. The Chief Commissioner of Income-tax was directed to re-examine the proposal for special audit after giving the petitioner a proper opportunity of hearing and providing them with all relevant materials at least three weeks before the hearing. The writ petition was allowed, and no order as to costs was made.

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