2011 (5) TMI 1133 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the proposal for special audit under Section 142(2A) of the Income Tax Act, 1961.
2. Basis of allocation of Head Office and other common expenses.
3. Compliance with principles of natural justice.
4. Bias in the approval process for special audit.

Detailed Analysis:

1. Legality of the Proposal for Special Audit:
The petitioner challenged the proposal dated 14th December 2007 by the Joint Commissioner of Income Tax seeking approval for a special audit for the Assessment Year 2005-06 under Section 142(2A) of the Income Tax Act, 1961. The Commissioner of Income Tax approved this proposal on 24th December 2007. The petitioner argued that the approval was given in haste and without proper consideration of their objections. The court found that the Commissioner acted beyond the proposal by considering transactions with M/s. P.C. Chandra Jewellery Apex Pvt. Ltd., which were not part of the original proposal for special audit.

2. Basis of Allocation of Head Office and Other Common Expenses:
The petitioner company had been consistently following a method of apportioning Head Office and other common expenses to its units based on the ratio of the turnover of the units to the total turnover of the company. This method had been accepted by the Department in previous years and upheld by the Income Tax Appellate Tribunal (Tribunal). The court noted that the Tribunal had previously held that the basis adopted by the petitioner for allocation of common expenses was reasonable and scientific, and this view had become final as it was not challenged further.

3. Compliance with Principles of Natural Justice:
The court emphasized that the principles of natural justice must be strictly followed in the exercise of power under Section 142(2A). The petitioner was not given a reasonable opportunity to address the grounds for the special audit, particularly the transactions with M/s. P.C. Chandra Jewellery Apex Pvt. Ltd., which were not part of the original proposal. The approval was given on the same day the petitioner submitted its objections, indicating a lack of proper consideration and application of mind by the Commissioner.

4. Bias in the Approval Process for Special Audit:
The court found that the Commissioner had a predisposition towards appointing a Special Auditor, as evidenced by his earlier order under Section 263 for the Assessment Year 2002-03, which had been set aside by the Tribunal. The Commissioner's prior opinion that a special audit was required for allocation of expenses under Section 80-1B suggested a clear likelihood of bias. The court held that the approval process was vitiated by bias, as the Commissioner had pre-decided the matter.

Conclusion:
The court quashed the impugned order of approval for special audit, finding that it was passed without proper consideration of the petitioner's objections, in violation of principles of natural justice, and was influenced by bias. The court granted a stay of the operation of this order for four weeks.