2017 (1) TMI 263 - AT - Income Tax

Reference made for special audit under section 142(2A) - non providing reasonable opportunity of being heard to assessee - Validity of assessment order passed under section 143(3) r.w.s. 153A(b) - Held that - Applying the principles laid down by the Apex Court in Sahara India (Firm) Vs. CIT and Another (2008 (4) TMI 4 - Supreme Court ) we hold that where no show cause notice was given to the assessee before making the order proposing conduct of special audit under section 142(2A) of the Act in the present case and the CIT having approved the said proposal though after giving opportunity of hearing to the assessee is vitiated because of non-compliance with the principles of natural justice. Accordingly the assessment order passed in the facts of present case is beyond the period of limitation and hence the same is invalid and bad in law. Another point raised by both the authorities was in respect of extension granted. We are not going into the said factual aspects in view of our holding that the initial order at 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

Issues Involved:
1. Validity of assessment under section 143(3) read with section 153A of the Income Tax Act, 1961.
2. Legality of the reference for special audit under section 142(2A) without giving the assessee an opportunity of being heard.
3. Validity of the extension of the time limit for completion of the special audit after the expiry of the initial period.
4. Taxation of income based on seized diaries.
5. Application of net profit rate on total sales as per seized diaries.
6. Disallowance under section 40A(3) and disallowance of construction expenses.
7. Addition of personal expenses.
8. Addition on account of withdrawals for investment.
9. Entitlement to deduction under section 80IB(3) for unaccounted income.
10. Disallowance of roofing expenses.
11. Addition based on fresh advances noted in seized diaries.
12. Addition on account of 'Hawala' entries.
13. Addition on account of seed money.
14. Addition on account of closing cash balances.
15. Netting off debit suspense entries with credit suspense entries.

Detailed Analysis:

1. Validity of Assessment under Section 143(3) read with Section 153A:
The assessee challenged the validity of the assessment on the grounds of being barred by limitation due to improper extension of time for special audit. The Tribunal held that the assessment order was invalid and bad in law as it was beyond the period of limitation.

2. Legality of Reference for Special Audit under Section 142(2A):
The Tribunal emphasized that the Assessing Officer must provide an opportunity of being heard to the assessee before making a reference for special audit. The failure to do so in this case rendered the proposal invalid. The Tribunal relied on the principles of natural justice and the precedents set by the Supreme Court in Rajesh Kumar and Others Vs. DCIT and Sahara India (Firm) Vs. CIT.

3. Validity of Extension of Time Limit for Special Audit:
The Tribunal noted that the extension of time for special audit was granted after the initial period had expired, which was not valid in law. The extension order was served late, and the Tribunal found this to be procedurally incorrect.

4. Taxation of Income Based on Seized Diaries:
The Tribunal held that the income noted in the seized diaries could not be taxed in the hands of the assessee company as the entries pertained to an individual, Shri V. L. Patel. The CIT(A) failed to appreciate this distinction.

5. Application of Net Profit Rate on Total Sales as per Seized Diaries:
The Tribunal disagreed with the CIT(A) and held that the income should be computed by applying a net profit rate of 15% on the total sales as per the seized diaries.

6. Disallowance under Section 40A(3) and Construction Expenses:
The Tribunal found that the CIT(A) erred in confirming the disallowance under section 40A(3) and the disallowance of construction expenses based on the seized diaries.

7. Addition of Personal Expenses:
The Tribunal held that the CIT(A) was incorrect in confirming the addition of personal expenses as the entries did not pertain to the assessee company.

8. Addition on Account of Withdrawals for Investment:
The Tribunal found that the CIT(A) erred in confirming the addition on account of withdrawals for investment.

9. Entitlement to Deduction under Section 80IB(3):
The Tribunal held that the CIT(A) was incorrect in allowing the benefit of deduction under section 80IB(3) for unaccounted income.

10. Disallowance of Roofing Expenses:
The Tribunal noted that the CIT(A) contradicted his own findings by disallowing roofing expenses while computing income on a profit basis.

11. Addition Based on Fresh Advances Noted in Seized Diaries:
The Tribunal found that the CIT(A) erred in not appreciating that the Assessing Officer had already considered the expenditure in question while computing the income on an income basis.

12. Addition on Account of 'Hawala' Entries:
The Tribunal held that the CIT(A) erred in not appreciating that the Assessing Officer had already considered the 'Hawala' entries while computing the income on an income basis.

13. Addition on Account of Seed Money:
The Tribunal found that the CIT(A) erred in not appreciating that the Assessing Officer rightly made an addition on account of seed money.

14. Addition on Account of Closing Cash Balances:
The Tribunal held that the CIT(A) erred in not appreciating that the Assessing Officer rightly made an addition on account of actual cash found during search operations.

15. Netting Off Debit Suspense Entries with Credit Suspense Entries:
The Tribunal noted that the CIT(A) erred in allowing netting off of debit suspense entries with credit suspense entries without proper reconciliation during assessment.

Conclusion:
The Tribunal allowed the appeals of the assessee and dismissed the appeals of the Revenue, holding that the assessment orders were invalid and barred by limitation due to procedural lapses in the special audit process.

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