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2020 (2) TMI 131 - HC - Income TaxSpecial audit u/s 142(2A) - non-compliance to the principles of natural justice at the stage of making the proposal - whether the AO before sending a proposal for conducting special audit under Section 142(2A) of the Act, was required to provide an opportunity of hearing to the assessee and in absence of the same, can the proceedings conducted thereafter be held to be vitiated in law ? - HELD THAT - Following the amendment, it is now a statutory requirement that the Assessing Officer has to provide reasonable opportunity of hearing to the assessee before directing the assessee to get the accounts audited under the said provision. Reverting back to Sahara India 2008 (4) TMI 4 - SUPREME COURT Supreme Court held that special audit is more or less in the nature of an investigation and in some cases, may even turn out to be stigmatic. Therefore, even after the obligation to pay the auditor's fees by the assessee, civil consequences would still ensue on the passing of an order for special audit. We have no hesitation in holding that in the absence of pre-decisional hearing, the decision to have special audit was invalid and consequentially, all the proceedings conducted thereafter stood vitiated. - Decided in favour of assessee.
Issues Involved:
1. Whether the Tribunal was justified in treating the assessment order as bad in law by holding that reasonable opportunity of being heard should have been allowed by the Assessing Officer at the pre-decisional stage, considering the mandate of Section 142(2A) of the Income Tax Act, 1961. 2. Whether the Tribunal was right in holding that the opportunity of being heard has to be given by the Assessing Officer and that the opportunity given by the superior authority (Commissioner of Income Tax) does not suffice for compliance with the rules of natural justice. Issue-wise Detailed Analysis: 1. Reasonable Opportunity of Being Heard at Pre-decisional Stage: The Tribunal addressed whether the Assessing Officer (AO) is required to provide a reasonable opportunity of hearing to the assessee before sending a proposal for a special audit under Section 142(2A) of the Income Tax Act, 1961. The Tribunal referred to the facts of the case, noting that a search and seizure operation was conducted on 23.08.2006, and the assessment order was passed on 11.06.2009, beyond the statutory period. The Revenue argued that the time allowed for the special audit should be excluded from the limitation period for passing the assessment order. The Tribunal observed that the AO had submitted a proposal for a special audit to the administrative Commissioner on 22.10.2008, who granted approval on 04.11.2008. The Tribunal posed a question to itself regarding the necessity of providing an opportunity of hearing to the assessee before the AO submits a proposal for a special audit. The Tribunal held that the principles of natural justice, as outlined in the Supreme Court's decision in Sahara India (Firm) Vs. CIT, require that the AO must provide a pre-decisional hearing to the assessee. The Tribunal concluded that the AO's failure to provide such an opportunity rendered the proposal for a special audit invalid, and consequently, the assessment order was beyond the period of limitation and invalid. 2. Sufficiency of Opportunity Given by Superior Authority: The Tribunal further examined whether the opportunity of being heard provided by the Commissioner of Income Tax (CIT) was sufficient to comply with the principles of natural justice. The Tribunal noted that the CIT, acting as the approving authority, had given an opportunity of hearing to the assessee before granting approval for the special audit. However, the Tribunal emphasized that the role of the CIT is to act as an approving authority and not as an adjudicating authority. The adjudicating authority, in this case, the AO, must provide the opportunity of hearing before making the proposal for a special audit. The Tribunal held that the opportunity provided by the CIT does not absolve the AO's failure to provide a pre-decisional hearing. The Tribunal applied the principles laid down by the Supreme Court in Sahara India (Firm) Vs. CIT, concluding that the absence of a pre-decisional hearing by the AO vitiated the proceedings. Consequently, the Tribunal declared the assessment order invalid and bad in law due to non-compliance with the principles of natural justice. Legal Position and Conclusion: The Tribunal's decision was based on the legal position established by the Supreme Court in Rajesh Kumar Vs. Deputy CIT and Sahara India (Firm) Vs. CIT. The Supreme Court had held that an order directing a special audit under Section 142(2A) entails civil consequences, and therefore, principles of natural justice must be observed. The Finance Act, 2007, further reinforced this by adding a proviso to Section 142(2A), mandating that the AO must provide a reasonable opportunity of hearing to the assessee before directing a special audit. The Tribunal found that the AO's failure to provide a pre-decisional hearing rendered the decision to conduct a special audit invalid, and all subsequent proceedings were vitiated. The High Court upheld the Tribunal's decision, finding no error or infirmity in the order and dismissed the appeals, concluding that no substantial question of law arose from the Tribunal's order. Disposition: The appeals (Income Tax Appeal Nos. 1188 of 2017, 1321 of 2017, and 1329 of 2017) were dismissed, affirming the Tribunal's decision that the assessment orders were invalid due to the AO's failure to provide a pre-decisional hearing, in violation of the principles of natural justice.
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