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TMI Blog2006 (11) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 142(1) of the Act. Questionnaire was issued on November 1, 2004. On November 22, 2004, the Deputy Commissioner decided to proceed first with the assessment proceedings under section 158BC of the Act in the case of three individuals, viz., Smt. Sushila Rani, Smt. Sunayana Prabhakar and Smt. Sunanda Prabhakar as also two companies, viz., M/s. Daily Agro Milk Food P. Ltd., and M/s. Sushila Milk Specialities P. Ltd. The said questionnaire was responded to Affidavits were also filed before the Deputy Commissioner on behalf of Mis. Sushila Milk Specialities P. Ltd. By a letter dated November 23,2004, the Deputy Commissioner mooted a proposal for special audit in terms of section 142(2A) of the Act to the Commissioner of Income-tax stating: "There is no link between the business conducted by the assessee and books of account prepared for the purpose of filing return of income. Two sets of books of account have been found for the same concern for the same financial year in two separate computers. There have been numerous instances of transactions outside the books. Few of them are listed as under:..." Several instances therefor were given. It was furthermore stated: "There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity of hearing was given to them. The Deputy Commissioner was requested by the appellants herein to supply a copy of the reasons therefor by a letter dated December 11, 2004, which was refused by a letter dated December 13, 2004. The chartered accountant submitted its" audited report on January 17, 2005. A writ petition was filed by the appellants before the Delhi High Court raising, inter alia, a question that the order impugned therein was vitiated in law having been passed without giving an opportunity of hearing to them as also on the ground that the same suffers from total non-application of mind. Mala fides on the part of the Deputy Commissioner were also alleged. By the impugned judgment, the said writ petition has been dismissed. The submissions of Mr. K. Sampath, learned counsel appearing on behalf of the appellants are: (i) Section 142(2A) of the Act having regard to the enormity of power deserves a strict construction. (ii) Principles of natural justice inhere in the said provisions. (iii) Application of mind on the part of the Assessing Officer on three relevant factors is imperative. (iv) Statutory power contained in section 142(2A) of the Act cannot be used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. No order can be passed on whims or caprice. It is also not in dispute that whereas the Calcutta High Court and the Kerala High Court have taken a view that before issuance of a direction under section 142(2A) of the Act, it is necessary to comply with the principles of natural justice, the Allahabad High Court, the Bombay High Court and the Delhi High Court have thought it otherwise. When a raid is conducted on the premises of an assessee, block assessment is permissible, procedures wherefor have been laid down under section 158BC of the Act. Section 158BE(b) of the Act contemplates that the order thereunder is necessary to be passed within two years from the end of the month in which the last of the authorizations for search under section 132 or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated or books of account or other documents or any assets are requisitioned. The statute of limitation is a statute of repose. Indisputably the same, subject to the exceptions contained in the Explanation appended to section 158BE, is imperative. Having regard to the aforementioned, we may have to construe sub-section (2A) of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the assessee. (2D) The expenses of, and incidental to, any audit under sub-section (2A) (including the remuneration of the accountant) shall be determined by the Chief Commissioner or Commissioner (which determination shall be final) and paid by the assessee and in default of such payment, shall be recoverable from the assessee in the manner provided in Chapter XVII-D for the recovery of arrears of tax. (3) The assessee shall, except where the assessment is made under section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) or any audit under sub-section (2A) and proposed to be utilised for the purposes of the assessment." The principles of natural justice are based on two basic pillars: (i) Nobody shall be condemned unheard (audi alteram partem) (ii) Nobody shall be judge of his own cause (nemo debet esse judex in propria sua causa) The duty to assign reasons is, however, a judge-made law. There is dispute as to whether it comprises a third pillar of natural justice. However, the other view is that the question as to whether reasons are required to be assigned is a matter of legislative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourts while exercising power of judicial review shall proceed on the basis that assignment of reasons is imperative in character. When an authority be it administrative or quasi-judictal adjudicates on a dispute and if its order is appealable or subject to judicial review, it would be necessary to spell out the reasons therefor. While applying the principles of natural justice, however, the court must also bear in mind the theory of useless formality and the prejudice doctrine. If an assessee files a return the same is not presumed to be incorrect. When the Assessing Officer, however, intends to pass an order of assessment, he may take recourse to such steps including the one of asking the assessee to disclose documents which are in his power or possession. He may also ask third parties to produce documents. Section 136 of the Act by reason of a legal fiction makes an assessment proceeding, a judicial proceeding. The assessment proceeding, therefore, is a part of the judicial process. When a statutory power is exercised by the assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature. It st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roval of the Commissioner. But he must be satisfied that the accounts of the assessee are of a complex nature, and, in the interests of the Revenue, the accounts should be audited by a special auditor. The special auditor is also an auditor like the company's auditor, but he has to be nominated by the Commissioner and not by the company. The accounts are again to be audited at the cost of the company. This is the substance of the statutory provisions. The power thereunder cannot, in our opinion, be lightly exercised. The satisfaction of the authorities should not be subjective satisfaction. It should be based on objective assessment regard being had to the nature of the accounts. The nature of the accounts must indeed be of a complex nature. That is the primary requirement for directing a special audit. But the word 'complexity' used in sub-section (2A) is a nebulous word. Its dictionary meaning is: 'The state or quality of being intricate or complex "or" that is difficult to understand.' However, all that are difficult to understand should not be regarded as complex. What is complex to one may be simple to another. It depends upon one's level of understanding or comprehension. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion v. D. T. C. Mazdoor Congress [1991] Suppl 1 SCC 600 ; [1991] 79 FJR 1 (SC), Ray J. opined: "It is now well-settled that the 'audi alteram partem' rule which in essence, enforces the equality clause in article 14 of the Constitution is applicable not only to quasi-judicial orders but to administrative orders affecting prejudicially the party-in-question unless the application of the rule has been expressly excluded by the Act or Regulation or Rule which is not the case here. Rules of natural justice do not supplant but supplement the Rules and Regulations. Moreover, the rule of law which permeates our Constitution demands that it has to be observed both substantially and procedurally." Some exceptions to the applicability of the principle are stated in Jagdish Swarup's Constitution of India, 2nd edition, page 289 in the following terms: "Not only, therefore, can the principles of natural justice be modified but in exceptional cases they can even be excluded. There are well-defined exceptions to the nemo judex in causa sua rule as also to the audi alteram partem rule. The nemo judex in causa sua rule is subject to the doctrine of necessity and yields to it as pointed out by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciples of natural justice, it was opined that interaction with and confrontation of the assessee would serve the purpose. Distinguishing the judgments of the Calcutta High Court in the cases of Peerless General Finance and Investment Co. Ltd. v. Deputy CIT [1999] 236 ITR 671 and West Bengal State Co-op. Bank Ltd. v. Joint CIT [2004] 267 ITR 345, the High Court observed: "However, the scope of the kind of hearing that an assessee would be entitled to, was not discussed even in these judgments, primarily for the reason that in one case the Assessing Officer had taken into consideration irrelevant material like litigation pending between the Reserve Bank of India and the assessee while in the other case, the Assessing Officer had not even asked for books of account of the assessee before passing an order of special audit under section 142(2A). These judgments have no application to the facts of the case in hand on any known canon of ratio decidendi. Respectfully we would differ with the view taken by the Calcutta High Court in the above noticed judgment only with regard to the extent of application of principles of natural justice at a pre-decisional stage in exercise of powers u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. There has to be serious attempt on the part of the Assessing Officer to seek clarification of his doubts in regard to nature and complexity of the assessee's accounts for better comprehension." [Highlighting is ours for showing the inconsistencies in the judgment] In any event, the learned judges did not exclude the application of the principle altogether. A Division Bench of the Bombay High Court in Atlas Copco (India) Ltd. v. V. S. Samuel, Asst. CIT [2006] 283 ITR 56, however, disagreed with the decisions of the Calcutta High Court and the Kerala High Court stating that the order passed under section 142(2A) of the Act is purely administrative in nature. It was opined: "Such order, in our opinion, does not entail any civil consequences. No decision is given. Merely because the assessee is required to pay the auditor's fee, that does not mean that any liability is created against the assessee and that such order entails any civil consequences. The issuance of direction for special audit facilitates the Assessing Officer to have the complex accounts of the assessee examined by an independent auditor. That helps and assists him in assessing the income of the assessee...." We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culiar fact situation obtaining therein. The fact, thus, remains that there may be a situation when the provision would be misused. An order may be passed not only without any application of mind but also in ignorance of the requirements of law. The Bombay High Court and the Delhi High Court, with respect, in our opinion, are not correct in stating a direction issued under section 142(2A) of the Act to be administrative in nature. In view of section 136 of the Act, the entire proceedings of assessment before the Assessing Officer being judicial, it is difficult to understand how a part thereof, which indisputably is resorted to in aid of the ultimate order of assessment, without any statutory interdict would be called to be an administrative order. When the books of account have been produced and examined, the Assessing Officer would be proceeding to make the ultimate order of assessment. In SBP and Co. v. Patel Engineering Ltd. [2005] 8 SCC 618; [2005] 128 Comp Cas 465 (SC), a seven-judge Bench of this court opined that an order of the Chief Justice or the designated judge being final in nature, an order passed thereunder would be a judicial order and not an administrative order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd any order passed by it would be prejudicial to him, principles of natural justice must be held to be implicit. The principles of natural justice are required to be applied, inter alia, to minimize arbitrariness. It is trite, even if there is a possibility that the Tribunal would correctly follow the statutory provisions, still compliance with principles of natural justice would be required. Justice, as is well known, is not only to be done but manifestly seem to be done. If the assessee is put to notice, he could show that the nature of accounts is not such which would require appointment of special auditors. He could further show that what the Assessing Officer considers to be complex is in fact not so. It was also open to him to show that the same would not be in the interest of the Revenue. In this case itself the appellants were not made known as to what led the Deputy Commissioner to form an opinion that all relevant factors including the ones mentioned in section 142(2A) of the Act are satisfied. If even one of them was not satisfied, no order could be passed. If the attention of the Commissioner could be drawn to the fact that the underlying purpose for appointment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which the Assessing Officer thinks to be necessary. The reasons assigned therefor need not be detailed ones. But, that would not mean that the principles of justice are not required to be complied with. Only because certain consequences would ensue if the principles of natural justice are required to be complied with, the same by itself would not mean that the court would not insist on complying with the fundamental principles of law. If the principles of natural justice are to be excluded, Parliament could have said so expressly. The hearing given is only in terms of section 142(3) which is limited only to the findings of the special auditor. The order of assessment would be based upon the findings of the special auditor subject of course to their acceptance by the Assessing Officer. Even at that stage the assessee cannot put forward a case that power under section 142(2A) of the Act had wrongly been exercised and he has unnecessarily been saddled with a heavy expenditure. An appeal against the order of assessment, as noticed hereinbefore, would not serve any real purpose as the appellate authority would not go into such a question since the direction issued under section 142(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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