2017 (12) TMI 1405 - AT - Income Tax

Proper order of referral for Special Audit - AO never granted opportunity as required under the provisions of section 142(2A) - Held that - The proviso to section 142(2A) of the Act is explained and it is the statutory requirement of law that AO shall not direct the assessee to get the accounted audited unless the assessee has been given a reasonable opportunity of being heard. Nobody can replace the AO in such matters, leave alone the CIT, as is the case in the instant case. Accordingly, the additional ground raised by the assessee is admitted and allowed as a covered issue. Since the assessee succeeds on this technical ground, the other grounds for A.Y. 2000-01 have become academic in nature and therefore, they are dismissed as academic.

Issues Involved:
1. Legality of search action under section 132 and jurisdiction under section 153A.
2. Validity of the reference for special audit under section 142(2A) and the assessment period.
3. Addition of unexplained investment in gold.
4. Addition on account of purity gain.
5. Addition of majuri charges to stock valuation.
6. Disallowance under section 40A(3).
7. Failure to grant reasonable opportunity of being heard under the proviso to section 142(2A).

Detailed Analysis:

1. Legality of Search Action and Jurisdiction under Section 153A:
The assessee contended that the proceedings under section 153A were wrongly initiated as there was no search conducted but only a survey operation. The CIT(A) held that the search action under section 132 was conducted on the assessee firm, justifying the jurisdiction under section 153A. The Tribunal did not specifically adjudicate this issue due to the resolution of the appeal on other grounds.

2. Validity of the Reference for Special Audit under Section 142(2A):
The assessee argued that the reference for special audit was invalid, citing the Rajasthan High Court decision in Bajarang Textiles [294 ITR 561]. The CIT(A) upheld the validity of the special audit reference, extending the assessment period accordingly. The Tribunal focused on whether the Assessing Officer (AO) provided a reasonable opportunity of being heard to the assessee before directing the special audit. It was found that the CIT, not the AO, issued the show cause notice, violating the statutory requirement. Consequently, the Tribunal held the assessments as time-barred due to this procedural lapse.

3. Addition of Unexplained Investment in Gold:
The CIT(A) confirmed an addition of unexplained investment in gold amounting to ?48,07,395/-. The assessee argued that the closing stock as on 31.03.1999 was undervalued, negating the need for any addition. The Tribunal did not specifically address this issue due to the resolution of the appeal on other grounds.

4. Addition on Account of Purity Gain:
The CIT(A) upheld an addition of ?41,06,948/- based on the special auditor's report, including undisclosed sales and excess stock. The assessee contended that no incriminating evidence was found during the search, and the special auditor's report did not consider the correct facts. The Tribunal did not specifically address this issue due to the resolution of the appeal on other grounds.

5. Addition of Majuri Charges to Stock Valuation:
The CIT(A) confirmed an addition of ?6,68,464/- for majuri charges added to the stock valuation. The assessee argued that this method was consistently accepted by the department over the years. The Tribunal did not specifically address this issue due to the resolution of the appeal on other grounds.

6. Disallowance under Section 40A(3):
The CIT(A) confirmed a disallowance of ?57,535/- under section 40A(3) for payments presumed to exceed ?20,000/-. The assessee contended that the disallowance was based on presumptions without concrete evidence. The Tribunal did not specifically address this issue due to the resolution of the appeal on other grounds.

7. Failure to Grant Reasonable Opportunity of Being Heard:
The Tribunal focused on the additional ground raised by the assessee regarding the failure of the AO to grant a reasonable opportunity of being heard before directing the special audit under section 142(2A). The Tribunal cited precedents, including the Pune Bench decision in Vilsons Particle Board Industries Ltd. and the Supreme Court judgment in Sahara India (Firm) Vs. CIT, emphasizing the statutory requirement for the AO to provide such an opportunity. The Tribunal concluded that the assessments were time-barred due to the procedural lapse, rendering other grounds academic.

Conclusion:
The Tribunal allowed the appeals of the assessees on the legal issue of the validity of the assessment due to the failure of the AO to grant a reasonable opportunity of being heard under the proviso to section 142(2A). Consequently, the other grounds of appeal were dismissed as academic. The Revenue's appeal was dismissed as it became an academic exercise following the resolution of the assessee's appeals.

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