9911796707
TMI Blog2005 (5) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... partem, if at all and to what extent is applicable to the proceedings before the Assessing Officer while passing a direction as contemplated under section 142(2A) of the Income-tax Act, 1961 (for short "the Act"). Shorn of unnecessary details, the necessary facts are: The petitioner claims to be part of the Yum group which was incorporated on March 19, 1994, as a private limited company in the name and style of KFC India Holding Private Limited with effect from August 28, 2002 commonly it is known as Yum Restaurants (India) Pvt. Ltd. which globally operates and runs restaurants under the brand name of "KFC" and "Pizza Hut". The petitioner-company is regularly assessed to income-tax from the assessment year 1995-96 onwards. The petitioner has five sources of income, i.e., (i) initial fee, (ii) continuing fee, (iii) SCM fee, (iv) territorial fee and (v) stewardship fee. The petitioner has been following its mercantile system of accounting in carrying on its business and claims that it has been maintaining books of account on an universally accepted accounting package named as "BaaN". Return declaring "nil" income accompanied by the statutory audit report and tax audit report was fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions raised by the assessee in relation to the proposal under section 142(2A) by passing a speaking order and lastly that the order dated February 16, 2005, be quashed. As far as the first two reliefs are concerned, hardly anything survives in this writ petition. The petitioner has himself annexed to the writ petition, the proposal made by the Assessing Officer to the Commissioner of Income-tax, Delhi-VI, as annexure P-15 and the reply to the queries of the Assessing Officer also included the objections of the assessee and which were duly dealt with by the Assessing Officer in his proposal/letter dated January 10, 2005 and January 31, 2005, respectively. Even the order of approval passed by the Commissioner of Income-tax, Delhi, on February 11, 2005 has also been placed on record and copy whereof has been given to the petitioner. As such nothing material survives in these two prayers. In the light of these facts, they were not even pressed before us. The contention on behalf of the petitioner is that the assessee would be entitled to a pre-decisional hearing and even issuance of a show cause or a document akin thereto before an order under section 142(2A) of the Act can be passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behind enacting the said provision is to assist the Assessing Officer in framing the assessment when he finds the accounts of the assessee to be complex and is to protect the interests of the Revenue recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the account of an assessee to determine his true and correct income, on to an auditor. True that an order under the said provision cannot be passed on the ipse dixit of the Assessing Officer merely because he finds some difficulty in understanding the accounts. There has to be a genuine and honest attempt on his part to understand the accounts of the assessee, appreciate the entries therein and if in doubt, seek explanation from the assessee or his representative, rather than pass on the buck to the special auditor. A cursory look at the books of account is not sufficient. It needs little emphasis that the opinion required to be formed by the Assessing Officer for exercise of power under section 142(2A) must be based on objective consideration and not on the basis of subjective satisfaction. Similarly, the requirement of the previous approval of the Chief Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt further held that the provisions of section 142(2A) should be sparingly applied and in cases of absolutely necessary and when there is no effective alternative remedy available to the Assessing Officer: "The learned single judge of this court in the case of Peerless [1999] 236 ITR 671 has observed that the exercise of special audit can only be resorted to sparingly and not in a whimsical and capricious manner. This observation is also supported by the judgment rendered by the Allahabad High Court in the case of Swadeshi Cotton Mills [1988] 171 ITR 634. In my view, while respectfully agreeing with the views of the Allahabad High Court, two learned judges of this court and the learned single judge of the Madras High Court, the Assessing Officer before sending the proposal ought to have recorded reasons in the order after having examined the accounts by himself or getting the accounts examined by his subordinate officials, in support of his findings that the nature and complexity of the accounts is such that without special audit proper assessment is not possible to protect the interest of the Revenue. In a case where the provision for special audit under the aforesaid Act is sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of mind. Thus, the court quashed the order and held as under: "Furthermore, keeping in view the provisions of section 44AB of the Income-tax Act, the provisions of section 142(2A) have to be strictly construed. The power under the aforementioned provisions should not be lightly exercised and must be based on objective criteria. The word 'complexity' means the state or quality of being intricate or complex or that it is difficult to understand. However, anything which is difficult to understand need not necessarily be complex as the same would depend upon the capability of the Assessing Officer himself. He, therefore, in certain circumstances is enjoined with the duty to discuss the matter with the assessee or his representative. Furthermore, such opinion has to be formed in the proceeding itself. No order can be passed on whims or caprice. No order can be passed on the ipse dixit of an officer. A cursory look at the books of account would not serve the purpose. In the instant case, by a notice dated November 18, 1997, received on November 24, 1997, respondent No. 1 requested the petitioner to appear before him on December 19, 1997. No hearing took place on the same day. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and upon compliance of the principles of natural justice. In the celebrated case of Smt. Maneka Gandhi v. Union of India, AIR 1978 SC 597, the apex court has held: 'Now if this be the test of applicability of the doctrine of natural justice, there can be no distinction between a quasi-judicial function and an administrative function for this purpose. The aim of both administrative inquiry as well as quasi-judicial inquiry is to arrive at a just decision and if a rule of natural justice is calculated to secure justice, or to put it negatively, to prevent miscarriage of justice, it is difficult to see why it should be applicable to quasi-judicial inquiry and not to administrative inquiry. It must logically apply to both. On what principle can distinction be made between one and the other? Can it be said that the requirement of 'fair play in action' is any the less in an administrative inquiry than a quasi-judicial one? Sometimes an unjust decision in an administrative inquiry may have far more serious consequences than a decision in a quasi-judicial inquiry and hence the rules of natural justice must apply equally in an administrative inquiry which entails civil consequences.' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctim a fair hearing was just as much a cannon of good administration as of good legal procedure. Even where an order or determination is unchallengable as regards its substance, the court can at least control the preliminary procedure so as to require fair consideration of both sides of the case. Nothing is more likely to conduce to good administration." Apart from the rules of audi alteram partem, which means that no one shall be condemned unheard, corollary of which is that he should be given reasonable notice of the nature of the case to be met, there are other rules of common law to the same effect. In case any person has acquired any right in any property or his right is being affected by the process he would be afforded reasonable opportunity of hearing and also to meet the cause against him.'" Reliance was also placed upon the judgment of the Kerala High Court in the case of Deputy CIT v. Muthoottu Mini Kuries [2004] 266 ITR 213 that post-decisional hearing would be of no consequence and pre-decisional hearing was necessary. Further it was also held by the court that expenses to which the assessee is exposed as a result of the order passed under section 142(2A), is appar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Their Lordships of the Supreme Court while clearly defining applicability of this principle to the quasi-judicial and administrative proceedings held as under: "The expressions 'natural justice' and 'legal justice' do not present a watertight classification. It is the substance of justice which is to be secured by both, and whenever legal justice fails to achieve this solemn purpose, natural justice is called in aid of legal justice. Natural justice relieves legal justice from unnecessary technicality, grammatical pedantry or logical prevarication. It supplies the omissions of a formulated law. No form or procedure should ever be permitted to exclude the presentation of a litigant's defence. Concept of natural justice has undergone a great deal of change in recent years. Rules of natural justice are not rules embodied always expressly in a statute or in rules framed thereunder. They may be implied from the nature of the duty to be performed under a statute. What particular rule of natural justice should be implied and what: its context should be in a given case must depend to a great extent on the facts and circumstances of that case, the framework of the statute under which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of natural justice would have to be read into the provisions of section 142(2A) of the Act, but what is the extent of their applicability, is the material question which we are called upon to consider. The Supreme Court in the case of Canara Bank [2003] 4 SCC 557 clearly stated that rules of natural justice would apply and may have to be read into the provisions of the statute but the extent of their application would depend upon the nature of the duty to be performed by the authority under a statute. Decision in this regard is in fact the panacea to the rival contentions raised by the parties in the present writ petition. Therefore, next we would proceed to discuss the nature of the proceedings before the authorities under section 142(2A) of the Act. Every person is required to file a return of income under section 139 of the Act. Once such a return is filed, the Assessing Officer may conduct an inquiry before the assessment, in consonance with the provisions of section 142 of the Act. Thereupon under section 143 of the Act, the Assessing Officer would pass an order of assessment requiring the assessee to pay the tax in terms thereof. All these powers are vested in the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring. The assessee would have to be put to notice by appropriate procedure permissible under the provisions of the Act before an order under section 142(2A) can be passed requiring the assessee to go through the special audit. At the same time, it cannot be in the form of a show cause or a prolonged and multi-faceted hearing at the pre-decisional stage. The scope of the pre-decisional hearing would be very limited and should be confined to proper interaction and confrontation, of complexity of the accounts as understood by the Assessing Officer to the assessee and requiring him to explain. In the event the Assessing Officer is not satisfied, he would be at liberty to form an opinion and pass a direction under section 142(2A) subject to the approval of the Commissioner for a special audit of the accounts of the assessee. The Assessing Officer should form the required opinion upon examining of books of account, after making sincere effort to understand the books of account and after putting the assessee to notice. Inability on the part of the assessee to provide the requisite clarifications to the satisfaction of the Assessing Officer would normally be sufficient ground for the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r different provisions of the taxation laws, but at the same time incorporated the provisions of section 142(2A) of the Act empowering the Assessing Officer to pass a direction for special audit in consonance with the said provisions. This itself indicates that the Legislature did not put any fetter or restriction on the power of the Assessing Officer for issuing such directives. On the contrary, sub-section (2B) of section 142 clearly states that the provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. This non obstante clause clearly shows that the contentions raised on behalf of the respondent are without any merit. In the case of Super Cassettes Industries Ltd. v. Asst. CIT [1999] 102 Taxman 202 (Delhi) a Division Bench of this court had rejected a similar plea and held that the specific object behind enacting sub-section (2A) to section 142 is to assist the officer in framing an assessment when he finds the accounts of the assessee to be complex by getting the service of a special auditor in the interests of the Revenue. Merely because the format of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and upon due understanding of the books of account of the assessee. There could be and in fact, there are cases where despite the statutory audit report, the assessee's account still may not be clear to the Assessing Officer because of their nature and complexity. Having regard to such situations and the attendant circumstances, the Assessing Officer may direct special audit in the interests of the Revenue. The direction under section 142(2A) is more of an administrative action than a quasi-judicial function. It is not an order which is adjudicatory in nature. In exercise of its powers, all that the Assessing Officer can do is to direct special audit of books of the assessee. The prejudice to the assessee resulting from such an order is again of a very limited nature and to that extent the Assessing Officer may protect the assessee. Keeping in view the nature of the duty to be performed by the Assessing Officer, it is clear that a regular lengthy hearing or a show-cause notice is not contemplated to the assessee under section 142(2A) of the Act. To impose unnecessary restrictions on the scope of the power vested in the authority under section 142(2A) would not be in consonance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 250 ITR 455 is concerned, it was held that the assessee should be heard before the order under sub-section (2A) of section 142 is passed, as hearing was not statutorily excluded. It was also stated on facts that no emergency had existed justifying passing of the said order. The Bench of this court in the case of Ramesh Chand Industries Ltd. v. Union of India [1998] 100 Taxman 570 spelled out the facts in regard to which the Assessing Officer should record his satisfaction and take the approval of the Chief Commissioner or the Commissioner as the case may be. The view accepted in that judgment was that intervention of such a high ranking authority is an in-built protection to the assessee against any arbitrary or unjust exercise of power by the Assessing Officer. Thus, the jurisdiction of the High Court to interfere in such order or satisfaction, in exercise of such jurisdiction would be very limited. The High Court would not sit in appeal over the formation of opinion by the Assessing Officer. In the case of Super Cassettes Industries Ltd. v. Asst. CIT [1999] 102 Taxman 202 (Delhi) in relation to the nature and complexity of the accounts based or the fact that having profit of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assing a direction under section 142(2A) of the Act. All the principles hereunder stated are not exhaustive and merely state the general guidelines deducible from the various judgments afore-referred to and/or settled cannons of administrative jurisprudence: (a) The provisions of section 142(2A) of the Act do not contemplate by specific language or necessary implication, issuance of a show-cause notice or grant of comprehensive hearing to the assessee by the Assessing Officer. (b) Limited to the extent indicated hereinafter, principles of natural justice would be read into the principles of section 142(2A) of the Act. It is for the reason that the directions issued under this provision are bound to vest the assessee with civil consequences of compulsive expenditure and audit of its books by an accountant, who but for such a direction would have no right to such examination. This would, to some extent, be an interference in the internal management of a company related to its accounts. (c) Before the Assessing Officer seeks an approval of the competent authority under section 142(2A) of the Act, it would be obligatory upon him to call upon the assessee during the course of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only question that now remains to be answered by the court is whether the Assessing Officer had put the assessee on notice and had made a sincere attempt to understand the accounts of the assessee? Further, whether the direction was made after due application of mind? In this regard, we may refer to the order sheet entries recorded by the Assessing Officer during the course of assessment proceedings. On November 18, 2004, it was recorded that the CA of the petitioner-company had produced computer print outs of ledgers, trial balance without any supporting bills and vouchers. The narration in the print outs was found to be not self-speaking. It was further specifically noticed that the assessee's representative was not conversant with the accounting package used by the assessee-company in which accounts of the company had been maintained. We may also notice here that on November 10, 2004, the Assessing Officer had recorded that books of account in terms of the order dated November 3, 2004 were not produced. In these circumstances, the books of account of the assessee were impounded with a specific direction to the assessee to produce relevant vouchers, etc. Again on November 22, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to direct special audit in the interests of the Revenue. Copy of the proposal submitted by the Assessing Officer has been placed on record and this report by itself sufficiently demonstrates that there was due application of mind by the Assessing Officer. This proposal was considered, discussed and then approval granted by the Commissioner. From the order sheet as well as the voluminous records produced by the assessee, it is clear that the books of account and records of the assessee, subject-matter of the assessment proceedings, are voluminous and the clarifications sought for by the Assessing Officer cannot be termed as "irrelevant". Even in the case of Living Media Ltd. [2002] 255 ITR 268 the Supreme Court held that voluminous details submitted by the assessee would justify passing of an order under section 142(2A) of the Act. It is not in dispute before us that the annual turnover of the assessee for the relevant assessment period is more than Rs. 20 crores, while the return submitted by them shows "nil" income. Formation of opinion on the part of the Assessing Officer in the facts and circumstances of the case cannot be stated to be unreasonably made in a mechanical manner o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
