2017 (1) TMI 1252 - AT - Income Tax

Validity of special audit under section 142(2A) - non issue of notice - Held that - The appeal for instant assessment year relates to the year of search, wherein also special audit under section 142(2A) of the Act was proposed to be carried out by the Assessing Officer. However, no notice was given to the assessee at the pre-decisional stage and following the principle laid down in assessee s own case in earlier years, we hold that in the absence of show cause notice given before making the order proposing conduct of special audit under section 142(2A) of the Act and the CIT having approved the said proposal, though after giving opportunity of hearing to the assessee, is vitiated because of non compliance to the principles of natural justice. Consequently, the assessment order passed was beyond the period of limitation and hence, the same is invalid and bad in law. Accordingly, we hold so. The preliminary issue raised by the assessee is thus, allowed

Issues Involved:
1. Validity of assessment under section 143(3) r.w.s 153A(b) 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 hearing.
3. Additions made based on seized diaries and their attribution to the assessee company.
4. Methodology for determining undisclosed income.
5. Disallowance of expenses under section 40A(3) and other related sections.
6. Entitlement to deduction under section 80IB(3) for unaccounted income.
7. Additions on account of 'Hawala' entries, seed money, and closing cash balances.

Detailed Analysis:

1. Validity of Assessment under Section 143(3) r.w.s 153A(b):
The assessee contended that the assessment order passed under section 143(3) r.w.s 153A(b) was null and void. The Tribunal examined the provisions of section 153B(1)(a) and (b) and concluded that the assessment was time-barred. The search was conducted on 23.08.2006, and the assessment should have been completed within 21 months from the end of the financial year, i.e., by December 2008. However, the assessment was completed in June 2009, making it invalid and bad in law.

2. Legality of Reference for Special Audit:
The assessee argued that the reference for special audit under section 142(2A) was illegal as no opportunity of hearing was given. The Tribunal referred to its own decision in the assessee's case for earlier years, where it was held that the failure to provide a pre-decisional hearing vitiated the proceedings. Consequently, the assessment order passed after the special audit was deemed invalid.

3. Additions Based on Seized Diaries:
The assessee challenged the additions made based on seized diaries, arguing that the income belonged to an individual, not the company. The CIT(A) upheld the additions, stating that the notings in the diaries pertained to the assessee company. The Tribunal did not delve into the merits of this issue due to the preliminary finding that the assessment itself was invalid.

4. Methodology for Determining Undisclosed Income:
The CIT(A) confirmed the methodology adopted by the Assessing Officer (AO) for determining undisclosed income. The assessee contended that income should be computed by applying a net profit rate of 15% on total credits. The Tribunal did not address this issue in detail as the assessment was already deemed invalid.

5. Disallowance of Expenses under Section 40A(3):
The CIT(A) confirmed the disallowance of expenses under section 40A(3) and other related sections. The assessee argued that the provisions of section 40A(3) do not apply to unaccounted payments and cited various ITAT Pune decisions. The Tribunal did not address this issue in detail due to the invalidity of the assessment order.

6. Entitlement to Deduction under Section 80IB(3):
The Revenue contended that the assessee should not be entitled to deduction under section 80IB(3) for unaccounted income. The CIT(A) had allowed this deduction. The Tribunal did not address this issue in detail due to the invalidity of the assessment order.

7. Additions on Account of 'Hawala' Entries, Seed Money, and Closing Cash Balances:
The Revenue challenged the CIT(A)'s decision to not appreciate the AO's additions on these accounts. The Tribunal did not address these issues in detail due to the invalidity of the assessment order.

Conclusion:
The Tribunal allowed the appeal of the assessee, declaring the assessment order invalid due to the failure to provide a pre-decisional hearing before the special audit. Consequently, the appeal of the Revenue on merits was dismissed as infructuous.

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