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Akil Kureshi, J.—Petitioner has challenged an order dt. 19th Feb., 2013 (as at Annex. A to the petition) passed by the respondent No. 1-Dy. CIT, in the following factual background. The petitioner is a company registered under the Companies Act and is engaged in the business of running a chain of hotels and hospitality management institute. On 8th Sept., 2010, search and seizure operation was conducted at the premises of the petitioner-company. Pursuant to such action, a notice under s. 153A of the Act came to be issued requiring the petitioner to furnish returns for the asst. yr. 2005-06 to 2010-11. For the asst. yr. 2005-06, the petitioner filed return in compliance to such notice dt. 29th Sept., 2012 and for the asst. yr. 2006-07 to 2010-11, such returns were filed on 19th March, 2013.
Notices were issued by the AO under s. 142(1) of the Act calling for various details regarding the accounts of the petitioner. Undisputedly for sometime, the petitioner did not comply with such notices. On 26th Dec., 2012, the respondent No. 1 issued a notice stating: having regard to the nature of complexity of your accounts as mentioned above and in the interest of Revenue, 1 hereby propose to refer your case for approval to the CIT, Central-II, Ahmedabad for special audit under s. 142(2A) of the Act.
In view of above, you are required to show-cause why your case should not be referred for special audit under s. 142(2A) of the IT Act, 1961...
In such notice, the respondent No. 1 gave detailed account why he believed prima facie that special audit in case of the petitioner was necessary. He conveyed to the petitioner, thus--
I have gone through the seized material and return of income filed under s. 153A of IT Act and other documents filed during the assessment proceedings. Plethora of papers essentially, bills and vouchers related to construction were found and seized from various premises covered under the search in your case. The following cases emerged, which are summarized as under:
(i) Comparison has been made between the digital data impounded/seized from various premises during the search and the audited account submitted by you during the course of assessment proceedings. Following discrepancies found and is summarized hereunder:
..........
(ii) It is pertinent to note that there are various other differences in the books of accounts which is audited and the books of accounts seized in the digital form from Cambay square, GIDC Electronic Estate, Sector 25, Gandhinagar. For the sake of brevity, all the descriptions and narrations, where there is discrepancy in the balance sheet and profit and loss account has not been shown in the above table. Further, it is noteworthy to mention that you are not provided this office with books of accounts for asst. yr. 2007-08 to 2011-12, which you were required to furnish vide notice under s. 142(1), dt. 7th Nov., 2012. Even in the seized and other impounded digital data during the course of search/survey, the books of accounts for asst. yr. 2009-10 and 2010-11 are not found. In the light of data seized and impounded from various premises covered during the search/survey operation on your group and the discrepancies found therein with the audited accounts, makes your account highly complex.
(iii) During the course of search proceedings at the residence of Shri Sanjay Gupta, director/shareholder of your company, at B-202, Dhananjay Tower, Satellite, Ahmedabad on 8th Sept., 2012, a copy of certain documents (sale deed) were submitted by him. As per the sale deed dt. 15th May, 2008, 100 per cent shares of Palm Lagoon Backwater Resorts (P.) Ltd. was purchased by Gujarat Sysport Services (P.) Ltd. for a consideration of Rs. 3,20,00,000.
As per the another sale deed dt. 10th March, 2009, the above resort was purchased by you from Gujarat Sysport Services (P.) Ltd. for Rs. 7,00,00,000 which included consideration of Rs. 5,65,00,000 for transfer of share and Rs. 1,35,00,000 as reimbursement of expenses. You were requested to explain--
(a) What was the reason to steep hike in the valuation of the shares in such a short period.
(b) What sorts of expenses were incurred by Gujarat Sysport Services (P.) Ltd. after acquisition of the company with complete details and supporting documentary evidences.
In addition to above certain ledger accounts related to these transactions were also found. From the perusal of these accounts, it can be seen that the payment of Rs. 7,00,00,000 has been shown to have been made by you to M/s. Palm Lagoon Backwater Resorts (P.) Ltd. and Dr. V. Harikumar. Whereas as per the sale deed the amount was being paid to Ms. Gujarat Sysport Services (P.) Ltd. against the purchase of the shares of the company M/s. Palm Lagoon Backwater Resorts (P.) Ltd. Further, it is evident those bills cannot be found. In the case of Shri J.C. Patel and Shri S.V. Khant bills and vouchers were found and seized from Neesa Leisure Ltd. at Cambay Square, GIDC Electronic Estate, Sector No. 25, Gandhinagar. When the same was verified with the digital accounts seized/impounded from various premises, during the course of survey/search the entry in the books of account in the name of Shri J.C. Patel could not be found. Similar is the case with Shri S.V. Khant. It is also pertinent to note that Shri Bharat M. Shah, Prop, of Kala Sales, Manu Enterprise and P.M. Traders and director of Asopalav Trades (P.) Ltd. has already accepted during his statement taken on 29th Sept., 2010 and 10th Dec., 2010 under s. 131 of IT Act, that he has provided accommodation entries and no material was physically delivered to you. In this case, your account is highly unreliable and inaccurate. No details have been furnished by you despite lapse of three months. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
(iv) Various credits were received in the bank accounts of the company from the following entities.
You were required to explain the nature of such credits and explain the genuineness of the credits. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
(v) As per agreement to sale dt. 11th Aug., 2010 impounded vide page No. 156 to 161 of Annex. A1/15 from the premises of Neesa Technologies (P.) Ltd. at Cambay Grand, Near PERD Center, Off. S.G. Road, Thaltej, Ahmedabad, you have received cash of Rs. 95,00,000 from one Shri Rahul Kalsi. During the course of search you have claimed that the cash does not mean hard liquid cash. It also denotes the consideration in the form of wire transfer/demand draft and other banking instruments. In the same letter, it was contended that no consideration of such nature has been received.
During the course of assessment proceedings, you were required to furnish documents in support of the claim of wire transferred/demand draft and through banking channel. You have not furnished any details and evidences despite lapse of three months. Further you have not proved that such cash was offered for taxation. You were required to explain the nature of such credits and explain the genuineness of the credits. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
(vi) You have sold commercial space on the first floor of the complex in your Gandhinagar Office for a total consideration of Rs. 2.14 crores to M/s. Benefit Infomedia Ltd. You were required to provide the complete documents for this transaction and evidence in support of the income arising out of this transaction being offered to tax. Neither you have furnished any information or documentary evidences, nor you have shown whether it has been offered to taxation. Despite lapse of three months from the issuance of first notice, no information has reached this office. You were required to explain the nature of such credits and explain the genuineness of the credits. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
(vii) You were required to furnish details of expenditure in the case of "Neemrana Project" undertaken by you. Your group has obtained secured loan of Rs. 45 crores against the expenditure of only Rs. 7.66 crores as certified by chartered engineers report till 30th June, 2010. Further, an email annexed as page No. 124 of Annex. B1 seized from the residence of Shri Sanjay Gupta at B-202, Dhananjay Tower, Satellite, Ahmedabad shows the total expenditure incurred in "Neemrana Project" till 31st July, 2010 as Rs. 78.50 crores. There is huge difference of expenditure shown in email vis-a-vis the expenditure certified by the chartered engineer. You have not furnished any details of construction/expenditure on "Neemrana project" during the course of post search proceedings as well as during the course of assessment proceedings despite several opportunities. You have not explained the two different amounts of expenditure, evidence of which was found during the course of search, despite of lapse of three months from the issuance of first notice. You were required to explain the nature of such credits and explain the genuineness of the credits. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
(viii) You were required to furnish the purchases made from M/s. OTS Marketing & Estate (P.) Ltd. from asst. yr. 2005-06 to 2011-12. You were further required to explain the expenditure booked under various heads in different years. Further, you were asked to provide the details of transportation of goods so purchased and details of payments made by you with the supporting evidences. No such information has been received by this office till date even after several opportunities. Further, treatment of such purchases in your books of accounts also remains unexplained. You were required to explain the nature of such credits and explain the genuineness of the credits. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
(ix) You were required to furnish the ledger accounts in the case of Shri S.V. Khant and Shri J.C. Patel as appearing in the books of accounts. No such details were submitted. The purchases were neither properly explained, nor their genuineness were confirmed by you. Further, even the identity of Shri J.C. Patel has not been provided which was sought by this office vide letter dt. 18th Oct., 2012. You were required to explain the nature of such credits and explain the genuineness of the credits. You were given opportunity to furnish the above mentioned details vide various notices dt. 25th Sept., 2012, 18th Oct., 2012, 7th Nov., 2012, 27th Nov., 2012 and 14th Dec., 2012. But even after lapse of the stipulated time mentioned in the notice, this office has not received any details for the query.
In response to such notice, the petitioner replied under communication dt. 5th Jan., 2013. The proposal for special audit was opposed on the ground that there were no complexities in the accounts nor such an action was necessary to protect the interest of the Revenue. It was contended that the resort to the special audit is being taken only to buy time since the assessments are getting time barred on 31st March, 2013. In such reply, the petitioner prayed for an opportunity of personal hearing in the following terms:
The opportunity of personal hearing to the assessee''s Authorized Representative before your honour and CIT Central-II, Ahmedabad to represent the matter has been requested for. A letter of authority attached herewith.
The respondent No. 1, however, was not convinced by the petitioner''s opposition. He, therefore, sought the approval of the CIT, as required under the statute. The CIT granted a personal hearing to the petitioner. He took into account the grounds raised. He, however, approved the proposal for special audit. Under such circumstances, the respondent No. 1 passed the impugned order dt. 19th Feb., 2013 and referred the accounts of the assessee for special audit with specific issues on which he desired that the auditor should focus. In such order, he recorded the reasons as under:
You had submitted your contention against the proposal for special audit under s. 142(2A) vide letter dt. 5th Jan., 2013, it has been observed that you have only dealt with the legal provisions and substantive provision of s. 142(2A) of IT Act, but you grossly fail to comment on the factual aspect of your case which was specifically pointed out in the show cause under s. 142(2A) dt. 26th Dec., 2012. Further more, the reconciliation provided by you in asst. yr. 2006-07 does not explain the discrepancies pertaining to tally accounts seized during the search operations. Moreover, you did not provide any reconciliation for discrepancies mentioned in point No. 1 of the show-cause notice under s. 142(2A) for asst. yr. 2007-08 and 2008-09. However, your reply was perused and a factual report was submitted to CIT(Central)-II, Ahmedabad on 9th Jan., 2013.
4.1 Further more, you had requested for personal hearing from CIT Central II, Ahmedabad vide letter dt. 5th Jan., 2013. Although no personal hearing was required to be given once specific show-cause notice narrating the complexity of accounts have been issued by this office, but however, in the interest of natural justice personal hearing was provided to you on 5th Feb., 2013 by CIT (Central) II, Ahmedabad.
4.2 Considering the totality of facts and the circumstances Drought on the record by this office and during your personal hearing, CIT (Central) II, Ahmedabad has granted an approval for special audit under s. 142(2A) of the Act for asst. yr. 2005-06 to 2011-12 in your case vide letter No. CIT(C)II/Neesa/Special audit/2012-13 dt. 11th Feb., 2013. Relevant extract of the approval granted by CIT, Central-II, Ahmedabad is reproduced hereunder:
Please refer to your letter dt. 9th Jan., 2013 in the above case requesting the undersigned to give approval to refer the case to Special Audit under s. 142(2A) of the Act. In the above referred letter, you have also enclosed the show-cause notice issued by you to the assessee on 26th Dec., 2012 and reply of the assessee on the show-cause notice vide letter dt. 5th Jan., 2013.
The undersigned has gone through your letter dt. 26th Dec., 2012 addressed to the assessee asking it as to why its case should not be referred to special audit for asst. yr. 2005-06 to asst. yr. 2011-12. The discrepancy in date pointed by you in para. 2(i) of your show-cause notice and other specific issues referred to in your show-cause notice have also been noted. The undersigned has also noted your queries raised during the course of the assessment proceedings and non compliance of the assessee of these queries, which have been mentioned by you in almost each para of your show-cause notice. The replies of the assessee during the course of the assessment proceedings have also been perused. It is observed that the assessee has not given complete details and explanations of the queries raised by you vide notice dt. 25th Sept., 2012, 18th Oct., 2012; 7th Nov., 2012; 27th Nov., 2012 and 14th Dec., 2012. It has also been observed that the said queries have not been replied despite more than sufficient opportunities and time. You have levied penalty under s. 271(1)(b) against the assessee for non compliance of your notices, however, the compliance of the assessee has not improved inspite of levy of penalty.
The undersigned has also gone through the reply of the assessee to your show-cause notice vide its letter dt. 5th Jan., 2013. The assessee has referred to various judgments in which it is held that before referring the case for special audit, there should be an honest attempt by the AO to understand the accounts of the assessee. The assessee has also observed in its reply dt. 5th Jan., 2013 that reference to special audit is being opted for buying extra time to complete assessments.
The assessee demanded the opportunity of personal hearing before the undersigned. Although, no personal hearing is required to be given once the specific show-cause notice narrating the complexity of accounts has been issued by the AO, however, in the interest of natural justice the personal hearing was fixed on 28th Jan., 2013. Shri Dhiren Shah, chartered accountant and Authorized Representative of the assessee appeared on that date and requested for adjournment. The personal hearing was adjourned to 5th Feb., 2013.
Shri Dhiren Shah, chartered accountant, Shri Ravish Bhatt, advocate, Shri Khanjam Chhaya, chartered accountant, Shri Kapil Oza, chartered accountant and Miss Khyati Vora, chartered accountant attended on 5th Feb., 2013. In the said hearing, it was requested by Shri Dhiren Shah, chartered accountant that the guidelines mentioned in the judgment of the Hon''ble Supreme Court in the case of Rajesh Kumar and Others Vs. D.Commissioner of Income Tax and Others, should be followed while taking any decision on referring the case for special audit.
The undersigned has gone through the judgment of the Hon''ble Supreme in the case of Rajesh Kumar (supra). The said judgment basically deals with the issue of natural justice. It has been held by the Hon''ble Supreme Court that order under s. 142(2A) of the Act without giving an opportunity of hearing to the assessee cannot be sustained. The Hon''ble Supreme Court has held that the AO and the approving authority should observe principles of natural justice. It seems that the AO had not provided any opportunity of hearing to the assessee before referring the case to the CIT in that case. The complexities in the accounts of the assessee were never disclosed to the assessee before order under s. 142(2A) of the Act.
The reply of the assessee dt. 5th Feb., 2012 has been considered. The perusal of the reply reveals that the assessee has not given reply on many issues of your show-cause notice dt. 26th Dec., 2012. After going through the assessment records, the reply of the assessee during the assessment proceedings and your show-cause notice for special audit, it cannot be said that you have not attempted to understand the accounts of the assessee in a fair and honest manner. Further, the complexities of accounts referred to you in your show-cause notice for special audit are genuine and the assessee has not been able to given any satisfactory reply of your notice on many issues.
In the present case, you have not only issued an elaborate show-cause notice to the assessee specifying the complexities and non compliance of various queries during the assessment proceedings by the assessee. You have referred the case for special audit through Jt. CIT, Central Range-2, Ahmedabad after taking into account the reply of the assessee. The undersigned has also given personal hearing to the assessee. The assessee has also submitted one written submission in ''dak'' on 5th Feb., 2013 after conduct of personal hearing. There is no reply on specific issues raised by you in the said submission and it has reiterated reply given to you vide letter dt. 5th Jan., 2013.
The assessee has alleged that the reference to the Special Audit is being made to buy time to complete the assessments. In this regard, it is to be noted that notice under s. 153A of the Act was issued in this case on 7th Nov., 2011 and the assessee was required to file its return of income within 45 days. The assessee did not file return till 9th Feb., 2012 for asst. yr. 2005-06 and till 19th March, 2012 for rest of the assessment years. It is clear that there is considerable delay on the part of the assessee to avoid the proceedings. Even after filing return of income, the assessee has not complied with your notices as it clear from your show-cause notice. Therefore, at one hand the assessee is itself using dilatory tactics on the other hand it is alleging the Department for buying time, which is contrary to the facts. The assessee has contended that non compliance of the notices cannot be the basis of referring the case for Special Audit. In this regard, it is observed that you have not only mentioned non compliance but also pointed out complexity of accounts of the assessee in your show-cause notice, it is to be further observed that when the assessee itself is not supplying information, then this fact itself refers to the complexity of the accounts.
In view of the facts lying on the assessment records. I am satisfied that it is a fit case for reference to special audit under s. 142(2A) of the Act having regard to the nature and complexity of the accounts of the assessee and the interest of the Revenue. Therefore, approval is hereby accorded to you under s. 142(2A) of the Act.
The respondent No. 1, in the said order, raised following issues for the consideration of special auditor:
4.3 You are directed to furnish the report of the special auditor in Form No. 6B as mentioned in the r. 14A of IT Rules, 1962. The special auditor is also specifically required to go through the following issues:
(i) To take into account seized/impounded documents, seized/impounded papers, seized/impounded books of accounts, material seized/impounded in soft copies, document submitted during the course of search and survey proceedings and report.
(a) Whether there is any discrepancy in entries in regular books of account vis-a-vis the seized/impounded material.
(b) Whether transactions reflected in seized/impounded materials are shown in regular books of account.
(c) Whether books of account of the assessee show true and correct picture of the affairs. If not, then the nature and quantum of discrepancies.
(d) Whether some transaction shown in regular books of account need more investigation by the AO.
(ii) To verify whether proper records of income and expenditure are maintained, if not then details thereof.
(iii) To verify the depreciation claim of the assessee.
(iv) To examine the banking transactions of the assessee and ascertain whether the same have been duly reflected in books of accounts and IT return.
(v) To list all the transactions of loan given by the assessee above Rs. 1,00,000 giving such particulars as name and address of the borrower, mode of payment, date of loan, period of loan, interest rate, amount of interest, amount received back and mode of repayment.
(vi) To ascertain the quantum of secured loan used for the business purpose of the concern.
(vii) To list all immovable properties acquired and/or constructed or sold by the assessee giving, particulars of identity of buyers/sellers, address and location of the property, date of acquisition/consideration. Mode of payment and whether such property is reflected in regular books of account.
(viii) To ascertain the capital employed by the assessee including opening capital, capital introduced and closing capital.
(ix) To ascertain the actual purchase of assets/stock in trade vis-a-vis the purchase bills/vouchers/other loose papers seized/impounded during the course of search and ascertain whether evidences of transportation of such goods assets are available. The details of payment against the purchases are also to be obtained.
(x) To ascertain the actual purchases of assets/stock in trade vis-a-vis the entries in regular books of account.
(xi) To ascertain whether plant and machinery appearing in seized impounded records are reflected in regular books of accounts and are also physically available at site and whether evidences of transportation and installation of plant and machinery are available with the assessee. The details of payment against purchases of plant and machineries are also to be obtained.
(xii) To ascertain actual sale of assets/stock in trade vis-a-vis the seized/impounded records/books of account. To ascertain whether such sales have been reflected in sales-tax/VAT returns. The details of receipts against sales are also to be obtained.
(xiii) To comment on valuation of physical stock on the date of survey/search vis-a-vis the stock shown in the books of account.
(xiv) To ascertain whether assessee had enough stock, when sale was effected.
(xv) To ascertain whether entries in seized books of account/regular books of account have been made as per accepted accounting norms and practices.
(xvi) Any other issue that may come to knowledge during the course of special audit, which has bearing on computation of total income/loss of the assessee.
It is this order that the petitioner has challenged in the present petition.
Learned counsel for the petitioner raised following contentions:
(a) No personal hearing was granted to the petitioner by the respondent No. 1 before passing the impugned order. Counsel contended that hearing envisaged under s. 142(2A) of the Act necessarily includes a personal hearing. In the present case, though a specific request was made for such personal hearing, the respondent No. 1 did not grant such hearing.
(b) The order passed by the respondent No. 1 is not a reasoned order. Various grounds and objections raised by the petitioner in the reply to the show-cause notice have not been dealt with.
(c) Counsel lastly contended that the requirement of exercise of the powers under s. 142(2A) of the Act are not fulfilled. This is neither a case of complexities of accounts nor a case where interest of Revenue required any such reference to the special auditor.
In support of his contentions, counsel relied on the following decisions:
(a) In case of Rajesh Kumar and Others Vs. D.Commissioner of Income Tax and Others, , wherein, the Supreme Court in the context of the provisions of s. 142(2A) of the Act held that an order passed under the said provision results in civil consequences against the assessee, and therefore, the principles of natural justice were implicit.
(b) In case of Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I and Another, in which the Supreme Court approved the ratio in the decision in case of Rajesh Kumar & Ors. (supra).
(c) In case of Sahara Hospitality Ltd. Vs. Commissioner of Income Tax-8, in which, the Bombay High Court in the context of transfer of assessment proceedings under s. 127(1) and (2) of the Act quashed the order on the ground that the petitioner had not been heard.
(d) In case of Dr. N. Rajkumar vs. Dy. CIT (2010) 33 DTR (Mad) 273 in which, the proceedings which were decided in absence of the assessee were restored back to the Tribunal for fresh hearing to enable the assessee to appear for fresh hearing.
(e) In case of Commissioner of Wealth Tax, Bihar-I, Patna Vs. Jagdish Prasad Choudhary, Sahebganj , in which, the Full Bench of Patna High Court in the context of the provisions of ss. 18(2) and 39 of the WT Act held that the requirement of hearing in such provisions would include personal hearing.
(f) In case of Shikshana Prasaraka Mandali Vs. The Commissioner of Income Tax and Others, in which an order under s. 127(2) of the Act was quashed for want of personal hearing.
(g) In case of Simple Viniyog P. Ltd. Vs. Commissioner of Income Tax, in which the Calcutta High Court in the context of the provision of s. 127 of the Act quashed the order passed by the authority on the ground that no opportunity of hearing was granted.
(h) In case of Oriental Bank of Commerce and Another Vs. R.K. Uppal, wherein, the Supreme Court in the context of requirement of hearing in appeal, revision and review arising in disciplinary proceedings made certain observations, with respect to requirement of personal hearing, to which we would advert to at a later stage.
On the other hand, learned counsel Shri Manish R. Bhatt for the Department opposed the petition, raising following contentions:
(a) Requirement of personal hearing cannot be read into s. 142(2A) of the Act. Whenever the legislature desired that a personal hearing should be given, it has been specifically so provided. He drew our attention to s. 250 of the Act, in which, the procedure in appeal before the appellate CIT is provided. Sub-s. (2) of s. 250 provides that the appellant, either in person or by an Authorized Representative; and the AO, either in person or by a Representative, shall have a right to be heard at the hearing of the appeal. Likewise, r. 23 of the ITAT Rules, 1963 provides that on the date fixed by the Tribunal or any other date to which, the hearing may be adjourned, the appellant shall be heard in support of the appeal. The Tribunal shall then, if necessary hear the respondent against the appeal and in such case, the appellant shall be entitled to reply. On the basis of such statutory provisions, counsel contended that when no personal hearing is envisaged under s. 142(2A) of the Act, the same cannot be read into the said provision.
(b) Counsel further submitted that the petitioner was granted personal hearing by the CIT before the approval was accorded to the action proposed by the Dy. CIT. The contentions raised by the representative of the petitioner were taken into account. This should be seen as substantial compliance of the requirement of personal hearing; even if it was otherwise necessary.
(c) With respect to validity of the order, counsel contended that there was sufficient material before the Dy. CIT to come to a conclusion that looking to the complexity of the accounts and in the interest of Revenue, special audit was required. Counsel pointed out that the petitioner did not respond to notices issued under s. 141(1) of the Act for which penal proceedings under s. 271(1)(b) of the Act had to be initiated.
(d) In support of his contentions, counsel relied on the following decisions:
(i) In case of A.K. Gopalan Vs. The State of Madras, ;
(ii) In case of Ganesh Santa Ram Sirur Vs. State Bank of India and Another, in which the apex Court observed as under:
Mr. Salve invited our attention to para. 17 of the judgment in State of Patiala vs. S.K. Sharma which deals with the opinion of the House of Lords in the United Kingdom. He also drew our attention to S.L. Kapoor vs. Jagmohan and Managing Director, ECIL vs. B. Karunakar in SCC paras 25, 26 and 28. The decisions relied on and cited above make one thing clear, namely, principles of natural justice cannot be reduced to any hard and fast formulae and as said in Russel vs. Duke of Norfolk, these principles cannot be put in a straitjacket. Their applicability depends upon the context and the facts and circumstances of each case. The objective is to ensure a fair hearing, a fair deal to a person whose rights are going to be affected. In our opinion, the approach and test adopted in Karunakar case should govern all cases where the complaint is not that there was no hearing, no notice, no opportunity and no hearing but one of not affording a proper hearing that is adequate or a full hearing or violation of a procedural rule or requirement governing the enquiry.
On the decision of the Supreme Court in case of Sahara India (Firm) vs. CIT & Anr. (supra) in which it was observed that the object behind enacting the provision of s. 142(2A) is to assist the AO in framing the correct and proper assessment based on the accounts maintained by the assessee and when he finds the accounts of the assessee to be complex, with a view to protect the interest of the Revenue, recourse to said provision can be had.
In case of Purvanchal Vidhut Vitran Nigam Ltd. Vs. Union of India (UOI), , the Allahabad High Court upheld such order passed by the concerned authority with the approval of the CIT observing that on facts and circumstances of the case, approval granted by the CIT could not be said to be mechanical or without application of mind.
Having thus heard learned counsel for the parties, we may first examine whether requirement of hearing envisaged under s. 142(2A) of the Act includes personal hearing.
Sec. 142 of the Act pertains to inquiry before assessment. Sub-s. (2A) thereof provides that if, at any stage of proceedings the AO, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, may with the previous approval of the Chief CIT or CIT, direct the assessee to get the accounts audited by an accountant, as defined in Explanation below sub-s. (2) of s. 288, and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the AO may require. Said section reads as under:
Inquiry before assessment. (1)..........
(2A) If, at any stage of the proceedings before him, the AO, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief CIT or CIT, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-s. (2) of s. 288, nominated by the Chief CIT or CIT in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the AO may require:
Provided that the AO shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.
Proviso to s. 142(2A) in clear terms requires that the AO ''shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard. Such proviso was inserted by the Finance Act, 2007 w.e.f. 1st June, 2007. The question is whether such requirement of giving reasonable opportunity of being heard should include personal hearing.
Even before insertion of said proviso, the Supreme Court in case of Rajesh Kumar & Ors. (supra) had read such requirement as implicit in exercise of power under s. 142(2A) of the Act. It was observed as under:
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 AO 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.
Such decision was approved by the Supreme Court in a later decision in case of Sahara India (Firm) vs. CIT & Anr. (supra), observing as under:
... The upshot of the entire discussion is that the exercise of power under s. 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of predecisional hearing to an assessee and in the absence of any express provision in s. 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar''s case (supra).
The above legal position, which was till the introduction of the proviso governed by the decisions of the Supreme Court noted above was statutorily recognized by insertion of the said proviso. What was implicit was made explicit. Statutorily now, it is required for the AO to give a reasonable opportunity of being heard to the assessee before passing an order to get the accounts audited under s. 142(2A) of the Act.
An opportunity of being heard is one of the prime aspects of the principles of natural justice. A reasonable opportunity of being heard normally includes a show-cause notice; disclosure of material adverse to the notice; an opportunity to the party likely to be adversely affected to make representation against such a notice and a reasoned order; howsoever brief, taking in account such representation, if so made. The requirement of personal hearing, however, is normally not seen as necessary concomitant to a reasonable opportunity of being heard. In other words, opportunity of hearing does not always include personal hearing.
In case of F.N. Roy Vs. Collector of Customs, Calcutta, contention was raised that the petitioner was not given a personal hearing in the appeal which he preferred before the Central Board of Revenue and in the petition for revision to the Government. Such proceedings arose out of an order of confiscation of goods of the petitioner by the Customs authorities. The contention regarding personal hearing was rejected in the following terms:
It was then stated that the petitioner had not been given personal hearing of the appeal that he preferred to the Central Board of Revenue and the application in revision to the Government. But there is no rule of natural justice that at every stage a person is entitled to a personal hearing. Furthermore, the appeal was out of time. The memorandum of appeal to the Central Board of Revenue was posted on 4th May, 1954. The time to file the appeal, however, expired on 1st May, 1954, so that even if the date of the posting is taken as the date of the appeal the petitioner was out of time.
In case of Union of India (UOI) Vs. Jyoti Prakash Mitter, , the Constitution Bench of the Supreme Court observed as under:
Article 217(3) does not guarantee a right of personal hearing. In a proceeding of a judicial nature, the basic rules of natural justice must be followed. The respondent was on that account entitled to make a representation. But it is not necessarily an incident of the rules of natural justice that personal hearing must be given to a parry likely to be affected by the order. Except in proceedings in Courts, a mere denial of opportunity of making an oral representation will not, without more, vitiate the proceeding. A party likely to be affected by a decision is entitled to know the evidence against him and to have an opportunity of making a representation. He however cannot claim that an order made without affording him an opportunity of a personal hearing is invalid. The President is performing a judicial function when he determines a dispute as to the age of a Judge, but he is not constituted by the Constitution a Court. Whether in a given case the President should give a personal hearing is for him to decide. The question is left to the discretion of the President to decide whether an oral hearing should be given to the Judge concerned. The record amply supports the view that the President did not deem it necessary to give an oral hearing. There were no complicated questions to be decided by the President.
In case of S. Kapur Singh Vs. Union of India (UOI), , the Constitution Bench of Supreme Court observed as under:
By the Constitution, an opportunity of showing cause against the action proposed to be taken against a public servant is guaranteed and that opportunity must be a reasonable opportunity. Whether opportunity afforded to a public servant in a particular case is reasonable must depend upon the circumstances of that case. The enquiry in this case was held by the Enquiry Commr. who occupied the high office of Chief Justice of the East Punjab High Court. The appellant himself examined 82 witnesses and produced a large body of documentary evidence and submitted an argumentative defence which covers 321 printed pages. An opportunity of making an oral representation not being in our view a necessary postulate of an opportunity of showing cause within the meaning of Art. 311 of the Constitution, the plea that the appellant was deprived of the constitutional protection of that Article because he was not given an oral hearing by the President cannot be sustained.
In case of Capt. Harish Uppal Vs. Union of India (UOI) and Others, in the context of court martial, it was observed that:
The contention that Brig. Bhilla should either have given a hearing to the petitioner or the Chief of Army Staff should have given a hearing to the petitioner before confirming the subsequent sentence by the court martial is not a requirement under the Act. While it can be atleast said that there is some semblance of reasonableness in the contention that before he ordered what in effect was an upward revision of the sentence passed on the petitioner, he should have been given a hearing, to insist that the respect of the court martial, a contention which cannot be accepted in the face of the very clear indications in the Constitution that the provisions which are applicable to all the civil cases are not applicable to cases of Armed Personnel. It is not a requirement of the principles of natural justice. Indeed when he was informed that the subsequent sentence passed on him had been sent to the Chief of the Army Staff for confirmation, it was open to the petitioner to have availed himself of the remedy provided under s. 164 of presenting a petition to the confirming officer, i.e., the Chief of the Army Staff in this case. He does not appear to have done so.
In case of Smt. Ambeydevi vs. State of Bihar & Anr. AIR 1996 SC 1509 in the context of contention of denial of opportunity of personal hearing before rejecting the prayer for dispensing with predeposit of the penalty, the apex Court observed as under:
The High Court has primarily considered the question as to whether denying an opportunity to the appellant to be heard before his prayer to dispense with the deposit of the penalty is rejected, violates and contravenes the principles of natural justice. In that connection, several judgments of this Court have been referred. It need not be pointed out that under different situations and conditions the requirement of compliance of the principle of natural justice vary. The Courts cannot insist that under all circumstances and under different statutory provisions personal hearings have to be afforded to the persons concerned. If this principle of affording personal hearing is extended whenever statutory authorities are vested with the power to exercise discretion in connection with statutory appeals, it shall lead to chaotic conditions. Many statutory appeals and applications are disposed of by the competent authorities who have been vested with powers to dispose of the same. Such authorities which shall be deemed to be quasi judicial authorities are expected to apply their judicial mind over the grievances made by the appellants or applicants concerned, but it cannot be held that before dismissing such appeals or applications in all events the quasi judicial authorities must hear the appellants or the applicants, as the case may be. When principles of natural justice require an opportunity to be heard before an adverse order is passed on any appeal or application, it does not in all circumstances mean a personal hearing. The requirement is complied with by affording an opportunity to the person concerned to present his case before such quasi judicial authority who is expected to apply his judicial mind to the issues involved. Of course, if in his own discretion if he requires the appellant or the applicant to be heard because of special facts and circumstances of the case, then certainly it is always open to such authority to decide the appeal or the application only after affording a personal hearing. But, any order passed after taking into consideration the points raised in the appeal or the application shall not be held to be invalid merely on the ground that no personal hearing had been afforded. This is all the more important in the context of taxation and revenue matters ....
We are not unmindful of certain other decisions of the Supreme Court where requirement of personal hearing is read into the principles of natural justice in the context of the statutory provision or the facts of the case. In case of Travancore Rayon Ltd. Vs. Union of India (UOI), , it was observed as under:
The question raised before the Collector of Customs was of a complicated nature and for its proper appreciation required familiarity with the chemical composition and physical properties of nitrocellulose lacquers and of the substance produced by the appellant company. The Collector in deciding the appeal wrote an order running into 18 typed pages. There were before the Collector conflicting opinions of the Chemical Examiner and the Silk Mills Research Association, Bombay. The Collector gave two personal hearings to the appellant Company. No personal hearing was given by the Government of India to the appellant Company even though the matter raised complex questions. It is true that the rules do not require that personal hearing shall be given, but, if in appropriate cases where complex and difficult questions requiring familiarity with technical problems are raised, personal hearing is given, it would conduce to better administration and more satisfactory disposal of the grievances of citizens. ...
In case of State of Uttar Pradesh and Others Vs. Maharaja Dharmander Prasad Singh and Others, , it was observed as under:
On the point of denial of natural justice, we agree with conclusion of the High Court, though not for the same reasons, that there has been such a denial in the proceedings culminating in the order of cancellation. The show-cause notice itself is an impalpable congeries of suspicions and fears, of relevant or irrelevant matter and has included some trivia. On a matter of such importance where the stakes are heavy for the lessees who claim to have made large investments on the project and where a number of grounds require the determination of factual matters of some complexity, the statutory authority should, in the facts of the case, have afforded a personal hearing to the lessees....
From the above catena of decisions, it can be seen that ordinarily requirement of hearing cannot be seen to include a right of personal hearing. The same must depend on the statutory provisions from which such right flows; the nature of the proceedings and the consequences likely to follow from such proceedings. As held by the Supreme Court in case of Travancore Rayons Ltd. (supra), when complex and technical questions of law and facts are involved, such hearing would be necessary.
In the present case, therefore, we need to examine the provisions of the Act and the nature of order passed by the authority. As already noted, s. 142(2A) of the Act empowers the AO; with the previous approval of the Chief CIT or the CIT, during the pendency of an assessment proceedings, to get the accounts of the assessee audited by the special auditor. It is, of course, true that any such order that the AO may pass would result into adverse civil consequences. We may, however, recall that post-2007, the requirement that the assessee must weigh the financial burden of special audit has been done away with. Once such special auditor submits his report, setting forth particulars; as may be prescribed, as also such as the AO may require, further assessment would take place.
In the present case, the AO had issued notices to the assessee under s. 142(1) of the Act. When there was no compliance, notice for appointment of special auditor came to be issued. Petitioner''s objections were considered, approval from the CIT was sought. On the strength of such approval so granted by the CIT, the AO on the basis of his opinion that the accounts of the assessee were complex and in the interest of the Revenue, it was so required, directed that the accounts be audited by the special auditor.
To our mind the proviso to s. 142(2A) of the Act does not envisage any personal hearing before an order under sub-s. (2A) can be passed. The said proviso only requires giving reasonable opportunity of being heard to the assessee. Such reasonable opportunity ordinarily would not include right of personal hearing. It may, in a given case, at the discretion of the AO that the same may be granted. The same may even be either desirable or necessary in given set of circumstances where complex and technical questions of law and facts are involved. Such requirement, however, cannot be read into or fastened under the proviso to s. 142(2A) of the Act. In other words, in the context of the statutory provisions, such requirement cannot be seen as part of the scheme of the Act. In a given case, in special set of facts and circumstances it may be desirable or even necessary, but not in all cases.
In case of Rajesh Kumar & Ors. (supra), the Supreme Court though read the requirement of hearing in s. 142(2A) even prior to introduction of provision, nowhere provided that such hearing must be personal hearing. In fact, the observations made by the Supreme Court in para. 63 of the said judgment would indicate that such hearing would be of summary nature. It was observed as under:
The hearing given, however, need not be elaborate. The notice issued may only contain briefly the issues which the AO 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 s. 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 AO. Even at that stage the assessee cannot put forward a case that power under s. 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 s. 142(2A) of the Act is not an appealable order.
It was this view, which the Supreme Court approved in Sahara India (Firm) (supra). In such decision also, the requirement of personal hearing was not read into the provision.
We may now examine the decisions cited by the petitioner more closely.
The decision in case of Sahara Hospitality Ltd. & Anr. vs. CIT & Ors. (supra) of the Bombay High Court was rendered in context of s. 127 of the Act. The main thrust of the decision was interpretation of the expression, "Director General or Chief CIT or CIT may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, ...". In such context, the Court came to the conclusion that the word "may" should be interpreted as "shall". The requirement is mandatory and hearing must be granted wherever it is possible to do so. This clearly comes out from the conclusion of the Court in para. 18 of the judgment, where it was observed as under:
In conclusion, therefore, we hold that the word ''may'' in s. 127 should be read as ''shall''. The requirement of giving an assessee a reasonable opportunity of being heard wherever it is possible to do so, is mandatory. The discretion of the authorities is only as to what is a reasonable opportunity in a given case and on the question, whether it is possible in a given case to provide the opportunity.
It is true that the order of the IT authorities was quashed on the ground that no details were furnished as to when the petitioner''s counsel were heard. However, the question whether such personal hearing was necessary or not was not answered. Such decision, therefore, cannot be seen as an authority to the proposition that requirement of personal hearing is inbuilt in s. 127 of the Act.
The decision in case of Dr. N. Rajkumar vs. Dy. CIT (supra) of the Madras High Court does not lay down any ratio which can be applied in the present case. In the said decision, the Tribunal at Chennai had proceeded to decide appeal in absence of the assessee. In such a case, the Court observed that the approach of the Tribunal in proceeding with the passing of the final order cannot be faulted. The assessee was however given an opportunity of full-fledged hearing. For which purpose, the order was set aside solely with a view to comply with the principles of natural justice and with a view to extend one more opportunity of hearing and for such purpose, the proceedings were remitted to the Tribunal for de novo hearing.
The decision in case of Jagdish Prasad Choudhary (supra) was rendered by the Full Bench of Patna High Court in the context of the provisions contained in the WT Act. Sec. 18(1) pertains to levy of penalties. Sub-s. (2) of s. 18 provides that no order shall be made under sub-s. (1) unless the person concerned has been given reasonable opportunity of being heard. Sec. 39 deals with effect of transfer of authorities during the pendency of a proceeding. It is provided that in such a case, when an authority initiating the proceeding is succeeded by another, the authority so succeeding, may continue the proceeding from the stage at which the proceeding was left by the predecessor. The proviso to s. 39 gives a right to the assessee to demand that before the proceeding is so continued by the succeeding officer, the previous proceeding or a part thereof may be reopened or that before any order is passed against him, he may be reheard. It was in background of such statutory provisions, in the context of penal consequences, the Court was persuaded to hold that requirement of hearing included personal hearing. It was observed. ...This condition obviously implies and postulates that before the assessee can demand the right given to him under the proviso, he must necessarily have a right to be put on notices of the two facts, namely: (a) that the previous authority who was so long continuing the proceeding has been succeeded by another officer; and (b) that the officer so succeeding wants to continue the proceeding from the stage at which the proceeding was left by his predecessor.
It is upon his being informed of the aforesaid two facts, that the assessee can make an effective exercise of his right to demand that the previous proceeding or part thereof may be reopened or that he may be rehead before a final order is passed in the proceeding. This is an opportunity of hearing at a predecisional stage.
In case of Simple Vinoyog (P.) Ltd. (supra), the learned Single Judge of the Calcutta High Court though quashed an order under s. 127 of the Act on the ground that no opportunity of hearing was given, the said case did not deal with the question of granting personal hearing at all as can be seen from the concluding portion of the judgment, which reads thus:
I find from para. 5 of the order impugned that the respondent No. 1 had ''considered'' the written objection. In the context of the case, consideration means taking into account and dealing with the materials on record leading to a decision. However, in the instant case, the order impugned is silent how the replies and enclosures on record were considered. Therefore, the logical conclusion would be that the materials on record were not considered at all. Further, s. 127 of the Act postulates that the assessee should be given a reasonable opportunity of being heard in the matter, wherever it is possible to do so, thus making it imperative for the Revenue to give the assessee an opportunity of being heard. I find the petitioner was not given an opportunity of hearing. No reason has been spelt out for denying such opportunity. Hence, the order is in breach of the provisions contained in s. 127 of the Act. In view of the clear mandate in s. 127, the principles of law in Madhya Pradesh Industries (supra) passed in the light of the provisions contained in Mines & Minerals (Regulation & Development) Act, 1957 are not applicable to the facts of the case. For the reasons as indicated, the order impugned passed under s. 127 of the Act cannot be sustained and is, thus, set aside and quashed. The writ petition is allowed. The respondent No. 1 is directed to proceed afresh in accordance with law after giving the petitioner an opportunity of hearing on the basis of materials already on record.
In case of Shikshana Prasaraka Mandali vs. CIT & Ors. (supra), the Bombay High Court following the decision in case of Sahara Hospitality Ltd. (supra) held and declared that the order transferring the assessment of the petitioner was in breach of principles of natural justice. In the said decision, the Court observed that, "..It is a settled position in law as held by this Court in the matter of Sahara Hospitality Ltd. (supra) that before an order of transfer of case is passed under s. 127(2) of the Act, an opportunity of personal hearing is mandatory, wherever it is possible to do so."
It was strenuously argued by Shri J.P. Shah that the very fact that the AO believed that the accounts were complex, it must mean the issues were complex and the personal hearing was required. To our mind, this contention is misconceived. Complexity of accounts and complexity of the question whether accounts are complex or not are two totally different things. This is amply demonstrated in the later argument of Mr. Shah himself where in the context of the accounts he argues that the same not being complex, the reference to the auditor was not warranted. We thus draw a clear distinction between the two. Whether the accounts are complex so as to call for special audit is one aspect. Another aspect is whether the question to ascertain if the accounts are complex is itself a complex question. This would have a bearing on whether personal hearing was necessary.
In the result, the first contention is rejected.
Coming to the question of validity of the order on the premise of complexity and the requirement of interest of Revenue, we notice that the petitioner had been given previous notices under s. 142(1) of the Act with respect to its accounts. For a long time, the petitioner did not comply with such notices. The AO, therefore, issued notice why considering the complexities in the accounts, the same may not be audited by the special auditor. The petitioner''s detailed representation was considered. Approval by the CIT was obtained before passing the final order; after considering the objections. The authorities have highlighted several aspects of the matter to indicate that the accounts were complex and that interest of Revenue would be served if the special audit report is obtained. The various points on which the AO desired that the auditor should make a report itself would demonstrate that the accounts were complex. They were also of the opinion that it would be in the interest of Revenue to get the accounts audited. The contention that only to buy time, the action was taken, cannot be accepted since notice was issued in December, 2012 where admittedly, the proceedings were getting time barred on 31st March, 2012. There was thus sufficient time to complete the assessment even without the extended time limit.
In case of U.P. Financial Corporation Vs. Joint Commissioner, Income Tax, Special Range, Commissioner, Income Tax, Central Board of Director Taxes and Union of India (UOI), , the Allahabad High Court upheld the order passed under s. 142(2A) of the Act, making following observations:
From the above decisions, the following principles emerge which have to be kept in mind while exercising the powers under s. 142(2A) of the Act:
(1) The AO should form an opinion that the nature of the accounts of the assessee is complex.
(2) The interests of the Revenue will be adversely affected if the special audit is not directed.
(3) The opinion should be formed objectively on the basis of the materials before him and should be based on relevant considerations.
(4) The Chief CIT or the CIT should grant approval for such a proposal after applying his mind to all the materials placed before him.
(5) The guidelines issued by the CBDT contained in Instruction No. 1076 dt. 12th July, 1977, is binding on the authorities and a special auditor can be appointed only if the case falls under any of the clauses mentioned therein provided the conditions mentioned in s. 142(2A) of the Act are fulfilled.
(6) No show-cause notice or opportunity of hearing is required to be given to the assessee before appointing a special auditor as it does not involve civil consequences. The order appointing a special auditor is an administrative order.
Applying the aforesaid principles to the facts in the present case, we find that from a perusal of appendices in and IV, which are proposals dt. 1st March, 1999, and 3rd March, 1999, submitted by respondent No. 1 to the CIT seeking approval for appointment of special auditor under s. 142(2A) of the Act, respondent No. 1 who is the AO of the petitioner had formed the opinion on the materials which were before her during the course of the assessment for the asst. yr. 1996-97, that the nature of the accounts were complex and the interests of the Revenue would suffer if a detailed audit is not directed. Even, according to the own showing of the petitioner, when it was asked to give explanation/reply to the various points raised in the notice dt. 29th Jan., 1999, it had taken a stand that it would take several months in compiling the information. The CIT had applied his mind and had also come to the conclusion that it is essential to know the actual state of affairs of the corporation as the books of account are complex and enormous anomalies and discrepancies have also been pointed out by the statutory auditors in their audit report. Thus, it cannot be said that the preconditions for appointment of the special auditor, as envisaged under s. 142(2A) of the Act, have not been fulfilled. The reasons are also contained in the communication letter dt. 8th March, 1999, Appendix V, and therefore, the approval granted by the CIT does not suffer from any infirmity. As held by this Court in the case of Jhunjhunwala Vanaspati Ltd. Vs. Assistant Commissioner of Income Tax and Another (No. 1), and Uttaranchal Welfare Society Vs. Commissioner of Income Tax and Others, , this Court cannot sit in appeal over the decision taken by the authorities in directing the special audit. The order is based on the objective satisfaction of the authorities and does not suffer from any legal infirmity.
We are conscious that the observations in para. 28(c) of the judgment are not in consonance with the judgment of the Supreme Court in case of Rajesh Kumar (supra) and in case of Sahara India (Firm) (supra). This however would not water down above observations/conclusions of the decision.
In case of Purvanchal Vidyut Vitran Nigam Ltd. vs. Union of India & Ors. (supra), it was observed as under:
In the circumstances, we are of the view that the present is the case where the opportunity has been given to the assessee and there are proper reasons for forming the opinion that the nature of the accounts is complex and in the interest of the Revenue, special audit is necessary. Therefore, the direction for the special audit for the reasons stated in the order cannot be said to be without any material. We are also of the view that on the facts and circumstances the approval granted by the CIT, Varanasi, cannot be said to be mechanical and without application of mind.
The proceedings under s. 142(2A) of the Act is not strictly a judicial proceeding and therefore, the elaborate reasoning is not required to be given. In the case of Rajesh Kumar (supra) the apex Court has held that the hearing given need not be elaborate. The notice issued may only contain briefly the issues which the AO thinks to be necessary. The reasons assigned, therefore, need not be detailed one. We are further of the view that under Art. 226 of the Constitution of India, in a writ jurisdiction, this Court can consider whether there was material for the issue of direction and not the sufficiency of the material.
Unless the final balance sheet and profit and loss are being prepared by the auditor after examining the books of account verifying the various entries, etc., the correct income cannot be deduced for the purpose of assessment. This exercise cannot be done by the assessing authority during the course of assessment proceeding. This exercise is only possible by the chartered accountants who are experts for the job. Therefore, direction to get the accounts audited and to prepare final balance sheet and P & L a/c cannot be said to be without jurisdiction or exceeding to jurisdiction or outside the ambit of the provision.
In case of Central Warehousing Corporation Vs. The Secretary, Department of Revenue, Ministry of Finance, Government of India, The Chairman, Central Board of Direct Taxes, Ministry of Finance, The Chief Commissioner of Income Tax and The Joint Commissioner of Income Tax, Special Range 14, , it was observed thus--
Learned counsel for the petitioner relied upon the judgments of the Calcutta High Court in the cases of West Bengal State Co-operative Bank Ltd. Vs. Joint Commissioner of Income Tax and Others, and Bata India Ltd. and Another Vs. Commissioner of Income Tax and Others, . There is no doubt that in both these cases the Court had taken the view that the order under s. 142(2A) of the Act was not called for, but the facts of these cases are entirely different. In those cases, the AO had not examined the books of account and had formed an opinion as contemplated under s. 142(2A) of the Act without proper application of mind. While in the case of Bata India (supra) the Court found that it was only the doubt of the AO which had been equated to the complexity of accounts and the satisfaction has not been recorded upon objective considerations. In fact, the authorities did not find any fault with the two audit reports filed by the petitioner along with the return in that case. These cases are of no help to the petitioner because it is only after perusing the records of the assessee, raising queries for the year in question as well as for such years and having failed to get any satisfactory answer and keeping in view the complexity and nature of accounts and the interest of the Revenue, that such a direction has been made by the AO. We have already noticed that on the own showing of the assessee they have a huge business of different kinds, part of which is taxable while part of which is exempted from taxation. The losses of one are being set off against the other and without proper bifurcation thereof being shown to the AO much less to his satisfaction. The AO formed his opinion and submitted the same for previous approval of the competent authority which was admittedly granted. We may also refer to the judgment of the Allahabad High Court in the case of Sahara India Mutual Benefit Co. Ltd. vs. CIT (2002) 174 CTR (All) 286 : (2004) 269 ITR 563 (All) where the petitioner had more than 1200 branches, a large number of depositors by itself would show the complexity of the accounts and the order of the AO was held to be proper. As far as the contention of the petitioner that there should be compliance with the principles of natural justice, before such an order is passed, is again without merit. Firstly, we are unable to appreciate what prejudice the petitioner/corporation has suffered as a result of the impugned order. In fact, in the representations as well as the replies submitted by the assessee itself, no ground was raised in regard to the violation of the principles of audi alteram partem and in fact it was stated that the order under s. 142(2A) of the Act should be kept in abeyance. It was admitted in the letter dt. 14th Nov., 2000 that the AO had issued notice for hearing of the case. Even in these documents no averments have been made which could ex facie show that the opinion or satisfaction recorded by the AO lacs objectivity and is not in consonance with the principles enunciated in s. 142(2A) of the Act. In the impugned order, the AO has clearly stated the complexity in the accounts, the points which the special auditor should deal with in his report specifically and that the order was being passed in the interest of the Revenue.
In case of Rajesh Kumar, Prop. Surya Trading Vs. The Deputy Commissioner, I. Tax, , Division Bench of Delhi High Court observed as under:
The above enunciated principles clearly show that there has to be objective consideration and application of mind by the AO, based upon the material and proper examination of the books of account produced by the assessee, before a direction, as contemplated under s. 142(2A), can be issued to the assessee. In the present case, there was search and seizure on the premises of the petitioners on 18th Dec., 2002. Large records along with the books of account were seized. During the pendency of the assessment proceedings, commenced upon issuance of notice under s. 158BC of the Act for the block period 1st April, 1996 to 18th Dec., 2002, the return filed by the assessee was found to be unsatisfactory. After examination of the books of account and the documents which were seized, the AO was of the opinion that it would be in the interests of the Revenue to direct special audit under the provisions of the Act. The contention raised before us is that there is no application of mind and no reasons have been provided in the impugned direction by the AO. We find no merit in this contention. Before passing the impugned direction, the AO had issued a detailed questionnaire under s. 142(1) of the Act to each of the petitioners requiring them to furnish the details. As many as 120 questions were served upon the assessee under the questionnaire dt. 1st Nov., 2004. It is not necessary for us to note these questions in greater detail. Suffice it to note that certain amounts which were not found in the books of account but for which documents were seized, the assessee was called upon to answer about the income in relation to various years out of the block period. For example, cash amounting to Rs. 3,60,000 was found from the residence of one of the assessees and the assessee was called upon to explain the same in relation to the books of account for the financial year 2002-03. A sum of Rs. 10,81,000 was stated to be seized from the assessee by the Director of Investigation under s. 132 of the Act on 31st Oct., 2002, which was not shown in the books of account and the assessee was required to show why the same be not treated as unexplained income for the financial year 2001-02. A large number of amounts were referred to, in the same manner in this questionnaire. Thereafter the answer to the questionnaire was not found to be satisfactory by the AO and thereupon he issued the impugned direction for special audit. In these circumstances, we cannot hold that there was no application of mind by the concerned officer before issuing the impugned direction.
In case of U.P. State Industrial Development Corpn. Ltd. Vs. Chief Commissioner of Income Tax, , it was observed as under:
.... We do not find that the Chief CIT, Kanpur has committed any error in exercising his discretionary administrative powers under s. 142(2A) in directing special audit. In Purvanchal Vidhut Vitran Nigam Ltd. Vs. Union of India (UOI), , this Court held that the proceedings under s. 142(2A) are not strictly a judicial proceeding and therefore, elaborate reasons are not required to be given. In Swadeshi Cotton Mills Company Ltd. Vs. Commissioner of Income Tax and Another, , this Court held that the IAC and the CIT with due regard to the nature of the account books were satisfied that the accounts of the company were of a complex nature and that it was necessary in the interests of the Revenue that a special audit should be conducted. It was held that it could not be said that there was any arbitrary exercise of the powers in directing the special audit under s. 142(2A) of the Act.
We also do not find any substance in the contention that in the present case, the Chief CIT has not examined the accounts in arriving at a conclusion that accounts books were not complex in nature for which the special audit is required. The satisfaction of the complexity of the accounts is not required to arrive at by discussing the accounts in meticulous details. Where the approving authority has considered the account books along with auditors reports and finds that there was a mala fide intention to avoid the verification of the books of accounts and that there are various comments on the auditors justifying gross neglect, and misappropriation of funds, the satisfaction, in this case for special audit, cannot be said to be without application of mind.
The order under s. 142(2A) may have civil consequence as it involves investigation but that in the facts and circumstances of the present case where the activities of the UPSIDC were found to be extremely large and that there is delay in carrying out the statutory audit coupled with the fact that full and detailed accounts including ledger of the parties was not complete and produced before the auditors, the satisfaction of the nature of the complexity of accounts and interest of Revenue, is entirely justified.
Bearing in mind above principles, we see no reason to interfere. In exercise of judicial review against the order of the competent authority, we do not find that the reasons are insufficient so as to strike down the order. The AO had sufficient material at his command to form an opinion that the accounts were complex and that it was in the interest of the Revenue to get them audited by the special auditor. The AO had examined the accounts. He formed the opinion after hearing the petitioner that the accounts were complex as to require a special audit and that it was in the interest of the Revenue to do so. CIT after granting personal hearing to the petitioner, gave his detailed reasons for granting approval. It was thereupon that the impugned order was passed. In the result, petition is dismissed.