Paharpur Cooling Towers Limited vs Senior Joint Commissioner & Ors.

The petitioner has sought a declaration that, the method of selection for audit under Section 43 of the West Bengal Value Added Tax Act, 2003 is arbitrary, illegal and violative of principles of natural justice. Although the petitioner has sought for other reliefs namely, relating to the second proviso of Section 84(1) of the Act of 2003, the same have not been pressed at the final hearing of the writ petition.

Learned Advocate for the petitioner has referred to Section 43 of the Act of 2003 and submitted that, the Commissioner is required to give notice to an assessee prior to the selection of an assessee for audit under Section 43. He has to give an opportunity of hearing to such assessee prior to the selection. He has to pass a reasoned order as to why a particular assessee has been selected. He has referred to the notice dated October 6, 2015 issued by the Commissioner to the petitioner and submitted that, the commissioner did not give any opportunity of hearing to the petitioner prior to selecting the petitioner to undergo audit under Section 43 of the Act of 2003. The notice dated October 6, 2015 is not informed with any reason. The Commissioner had proceeded to give a post decisional hearing. Such post decisional hearing does not cure the breach of the principles of natural justice happening at the time of selection. He has referred to Section 43(5) of the Act of 2003 and submitted that, by the process of Section 43, an adverse report will get converted to an order of assessment. A selection under Section 43 is likely to result in adverse civil consequences for the assessee. Therefore, an assessee should be given a notice before the selection is made. An administrative order or a decision in matters involving civil consequences has to be made consistently with the rules of natural justice. He has relied upon 2008 (300) Income Tax Reports page 403 (SC) ( Sahara India (Firm) v. Commissioner of Income-Tax & Anr .), 2010 (329) Income Tax Reports page 550 (Cal) ( Indian Aluminium Co. Ltd. v. Deputy Commissioner of Income-Tax & Ors .) and 2004 (267) Income Tax Reports page 345 (Cal) ( West Bengal State Co-operative Bank Ltd. v. Joint Commissioner of Income-Tax & Ors .) in support of such contentions. He has referred to the affidavit-in-opposition filed on behalf of the respondent authorities and submitted that, no notice should be taken of such affidavit as the same has not been properly verified. In support of the requirements of a correct verification, learned Advocate for the petitioner has relied upon All India Reporter 2002 Supreme Court page 1147 ( Range Forest Officer v. S.T. Hadimani ) and All India Reporter 1970 Supreme Court page 652 ( A. K. K. Nambiar v. Union of India & Anr .).

Learned Additional Advocate General appearing for the respondents has submitted that, the issue raised by the petitioner was considered by a Division Bench of the Orissa High Court. He has relied upon an unreported decision of such High Court dated January 20, 2011 passed in W.P. (C) No. 22588 of 2010 ( M/s. Prakash Store v. Commissioner of Sales Tax, Orissa & Ors .). Relying upon 2003 Volume 11 Supreme Court Cases page 405 ( Assistant Commissioner, Assessment-II, Bangalore & Ors. v. Velliappa Textiles Ltd. & Anr .) he has submitted that, a decision to look into an account of an assessee under Section 43 by itself does not have the effect of a conviction or imposition of a penalty causing an injury to the assessee. Therefore, the principles of natural justice are not attracted at that stage. He has submitted that, one of the issues raised in Velliappa Textiles Ltd. & Anr. (supra) was dissented from by the Supreme Court in 2005 Volume 4 Supreme Court Cases page 530 ( Standard Chartered Bank & Ors. v. Directorate of Enforcement & Ors .).

Learned Additional Advocate General has distinguished the three cases

cited on behalf of the petitioner on the point of applicability of Section 43 of the Act of 2003 by submitting that, the decision relied upon on behalf of the petitioner relates to Section 142 proceedings under the Act of 1961. Similar provisions are there in Section 43AB of the Act of

2003. The instant case relates to Section 43 of the Act of 2003.

The following issues have arisen for consideration in the present writ petition which are as follows:-

(i) Is the Commissioner acting under the provisions of Section 43(1) of the West Bengal Value Added Tax Act, 2003 obliged to give notice, an opportunity of hearing to an assessee and pass a reasoned order prior to making a selection

thereunder?

(ii) What, if any, reliefs are the parties entitled to?

By a notice dated October 6, 2015, the petitioner was informed that it had to undergo audit of accounts and assessment under Section 43 of the Act of 2003 for the financial year 2013-2014.

The petitioner is an assessee under the Act of 2003. The petitioner has undergone an audit of accounts and an assessment under Section 43 of the Act of 2003 for such financial year.

Two sections of the Act of 2003 have been referred to in the submissions of the learned Advocates for the parties. They are Sections 43 and 43AB of the Act of 2003 and are as follows:-

"43. Audit of accounts and assessment in certain cases.- (1) Notwithstanding anything contained in section 45, section 47 and section 49 and subject to such conditions, restrictions and in such manner, as may be prescribed, the Commissioner shall, from among registered dealers, select on a random basis, or upon information or otherwise, such percentage, or such class or classes of dealers, as may be prescribed, for audit of the accounts, registers or documents, including those in the form of electronic records, maintained or kept by such dealer for any year or part thereof, not being a period which has ended five years previous to the date of selection:

Provided that where selection of a registered dealer under this sub-section has been made in respect of any or part thereof and where in respect of such year or part thereof, an assessment has already been made under sub-section (1) of section 46 or assessment under sub-section (2) of section 45 has not been revoked under sub-section (3) or sub-section (4) of section 45, such registered dealer for such year or part thereof shall be deemed to have not been selected under this sub- section.

(2) After a selection made under sub-section (1), the Commissioner shall, with due notice to the dealer so selected, proceed to audit the accounts, registers and documents, including those in the form of electronic records, maintained or kept by the dealer to verify the correctness of returns furnished and the admissibility of various claims including the input tax credit or input tax rebate or refund, for the year or part thereof referred to in sub-section (1).

(3) The Commissioner shall, after considering all the evidence produced in course of the proceedings or collected by him, or to the best of his judgment where the dealer has failed to comply with the notice issued under sub-section (2) prepare a report stating his observation therein regarding the correctness of returns, admissibility of various claims of the dealer for the period for which such audit is made and also prepare a computation sheet, in the form and manner as may be prescribed, to be attached with the report showing quantification of tax, interest, or late fee payable by him:

Provided that where a dealer pays in full the amount specified in the computation sheet, the return(s) submitted by the dealer for the relevant period shall be eligible to be considered for deemed assessment under section 47 or summary assessment under section 47AA, as the case may be.

(4) Any audit under the section shall be completed within six months from the date on which the selection is made by the Commissioner:

Provided that where the Commissioner is satisfied that audit in respect of such dealer cannot be completed within six months from the date of selection, he may, upon giving the dealer an opportunity of being heard and for the reasons to be recorded in writing, extend the period for another six months:

Provided further that the order of such extension shall be made within six months from the date of selection for audit and such order shall be immediately communicated to the dealer.

(5) Where, from the finding contained in the report under sub-section (3), it appears to the Commissioner that in the return furnished by such registered dealer under section 32 in respect of a year or part of such year,-

(a) certain sale price or part thereof, contractual transfer price or part thereof, has not been disclosed in such return, or escaped levy of tax thereon at the appropriate rate erroneously or otherwise, or

(b) certain purchase price or part thereof has not been disclosed in such return, or has escaped levy of tax thereon at the appropriate rate, erroneously or otherwise, or

(c) the deductions from the turnover of sales were claimed under sub-section (1) of section 16 in such return, erroneously or otherwise, in excess of what is admissible under subsection (1) of that section, or the deductions so claimed in such return are not supported by evidence referred to in sub-section (1) of that section, or

(d) excess amount of input tax credit or input tax rebate has been enjoyed by the dealer for that period, and no reverse credit for such excess amount has been made by such dealer, or

(e) the information furnished are not correct and complete, or

(f) there are certain other discrepancies, which has resulted in reduction of the amount of net tax payable by such registered dealer or the State Government has suffered loss of revenue on any of the grounds referred to in clause (a), or clause (b), or clause (c) or clause (d), or clause (e), or clause (f), of this sub- section on account of such registered dealer in respect of such year or part of such year, the Commissioner shall, in accordance with the provision of sub-section (1) of section 46, assess to the best of his judgment the amount of net tax payable by such dealer in respect of such year or part thereof , as he may deem fit and proper:

Provided that where the assessment, as referred to in this sub-section, has to be made under subsection (1) of section 46 in respect of such year or part of such year for which the assessment is deemed to have already been made under sub-section (1) of section 47, the Commissioner shall make such assessment in respect of such year or part of such year in accordance with the provisions of the proviso to sub-section (3A) of section 47:

Provided further that no assessment under 3 [sub- section (1) of section 46 shall be made, where the dealer has admitted, in writing, the observations made in the report referred to in sub-section (3) and has paid in full the amount of net tax paid in short, due to excess claim of input tax credit, or input tax rebate or non-reversal of input tax credit, or for any other reason as mentioned in such report, with interest as payable under section 33:

Provided also that the provisions of the second proviso shall not be applicable in respect of assessment required to be made under sub-section (1) of section 46 for reasons to be recorded in writing.

(5A) Notwithstanding anything contained in sub- section (5), where the dealer fails to pay the tax, interest, or late fee as stated in the computation sheet attached to the 5 report, in respect of any selection made under sub-section (1) on or after the 1st day of April, 2012, drawn under sub-section (3) within one month of receipt of such report and the computation sheet, such report shall, on expiry of one month , be 6 deemed to be an order of assessment under sub-section (1) of section 46 and the computation sheet attached to the report shall be deemed to be a notice of demand upon such assessment and such amount shall be payable within fifteen days thereafter:

Provided that where an amount of net tax or interest or late fee is found to have been paid in excess as mentioned in such report and computation sheet, on expiry of one month as stated above, the said computation sheet shall be deemed to be a notice of demand."

"43AB. Audit by a special team.-- (1) If at any stage of a proceeding initiated under the Act against a dealer, the Commissioner, having regard to the nature and complexity of the accounts, records and documents, has reasons to believe that the dealer is engaged in an activity detrimental to the State revenue, he may call for audit of such accounts, records and documents of the dealer by a special team of selected tax professionals to be nominated by him in such manner, and subject to such restrictions and conditions, as may be prescribed.

(2) The special team shall furnish a report of the audit in the prescribed form duly signed and verified by it and setting forth such other particulars as the Commissioner may require."

Sub-section (1) of Section 43 enjoins a duty upon the Commissioner to select assessees for audit. The proviso thereto allows assessees specified therein, if selected under Sub-section (1) to be deemed not to be selected. At the time of selection, the sub-section does not in express words provide for a right of hearing. Sub-section (2) and

(3) allows the assessee selected a right of hearing leading to the preparation of report enjoined under Sub-section (3). Sub-section (4) deals with the time frame to complete the audit. Sub-section (5) allows the Commissioner to assess the net tax payable by the assessee. Section 43AB relates to audit by a special team. It is different than Section 43. It operates at a different space. An assessee may have to undergo audit by a special team under Section 43AB, upon the satisfaction of the conditions required thereunder, notwithstanding such assessee not being selected under Section 43. It may have to undergo audit by a special team, even if, it is selected under Section 43.

Section 43AB comes into play when the Commissioner has justifiable

reasons to believe that the assessee is engaged in an activity detrimental to the State revenue.

Section 41 of the Orissa Value Added Tax Act, 2004 is somewhat similar to that of Section 43 of the Act of 2003. The vires of such section was challenged in M/s. Prakash Store (supra). The vires was upheld.

West Bengal State Co-operative Bank Ltd. (supra) has dealt with the difference between Section 44AB and Section 142(2A) of the Income Tax Act, 1961. It has held that, the Assessing Officer and the Commissioner can pass an order for special audit. However, they are to apply their mind and form their opinion having recorded satisfaction with an objective consideration, that the accounts of the assessee are of such nature and complexity, that without a special audit, assessment or re-assessment is not possible.

Sahara India (Firm) (supra) has dealt with the scope of special audit of accounts under Section 142(2) of the Income Tax Act, 1961. It has held that, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand the accounts maintained by the assessee, appreciate the entries made therein and in the event of doubt, seek explanation from the assessee. The Assessing Officer can exercise powers under Section 142(2A) of the Act of 1961. However, the opinion of such Assessing Officer acting under such provisions of law, is required to be based on objective criteria and not on the basis of subjective satisfaction. It cannot be used for the purpose of shifting the responsibility of assessment. It has gone on to say that, an administrative order or decision in matters involving civil consequences has to be made consistently with the rules of natural justice. Unless the principles of natural justice are expressly or by necessary implications excluded by a statute, the requirement of adherence thereto can be read into a provision of statute particularly when the order has adverse civil consequences for the party affected.

Indian Aluminium Co. Ltd. (supra) has dealt with Section 142(2A) of the Income Tax Act, 1961. It has held that, a post decisional hearing is an idle formality. Velliappa Textiles Ltd. & Anr. (supra) has primarily considered the issues namely, whether the sanction of Commissioner of Income Tax granted under Section 279(1) of the Income Tax Act, 1961 without affording opportunity to the respondents was vitiated by the violation of principles of natural justice, and whether a company can be proceeded against. It has held that, grant of sanction being purely an administrative act, affording an opportunity of hearing to the accused was not contemplated at that stage. The finding on account of a company being not liable was, however, reversed in Standard Chartered Bank & Ors. (supra).

The petitioner has questioned the admissibility of the affidavit-in-opposition filed on behalf of the respondents. The result of the answer to the first issue is not depended upon the contents of the affidavit used by the respondents. The answer to the first issue would be the same taking into consideration the affidavit-in-opposition or without the same being taken into consideration.

Range Forest Officer (supra) has held that, a claimant has to lead evidence to establish its claim. The affidavit filed along with the claim is not sufficient. The claimant has to substantiate its claim. It has no manner of application to the facts of this case. A. K. K. Nambiar

(supra) has held that, an affidavit is required to be properly verified. It has emphasized the importance of verification. Verification is required to test the genuineness and authenticity of allegations and to make the deponent responsible for the allegations made. Verification enables the Court to find out as to whether it would be safe to act on such affidavit evidence. In absence of proper verification, affidavit cannot be admitted in evidence.

Section 142(2A) of the Act of 1961 and Section 43 of the Act of 2003 are not pari materia. Section 43 of the Act of 2003 allows a Commissioner to select on a random basis or upon information or otherwise, such percentage or such class or classes of assessees, as may be prescribed, for audit of accounts, registers of documents. The Commissioner, therefore, has to make a selection for the purpose of audit of accounts of an assessee in respect of a financial year. The vires of Section 43(1) of the Act of 2003 is not under challenge in the writ petition. Such sub-section enjoins and casts a duty upon the Commissioner to select a certain prescribed percentage of the assessees. Such percentage may be prescribed. Therefore, in a given financial year there will be a certain percentage of assessees who will be required to undergo an audit in terms of Section 43 of the Act of 2003.

The petitioner is one of such assessees undergoing an audit under Section 43 for the financial year 2013-2014. The petitioner claims that, it has a right to be heard at the time of selection process. Section 43(1) by express words has not excluded the applicability of the principles of natural justice. It can, however, stand excluded by necessary implication. Sub-section (1) of Section 43 allows the commissioner to select an assessee on random basis or upon information or otherwise.

The nature of activity involved in the selection of an assessee does not create a right of being heard in favour of an assessee prior to the selection. The Commissioner, in the first place has to select an assessee. The assessee has to be selected from out of a large number of assessees as a certain percentage is required to be selected and not the entirety of the assessees. Therefore, at a given stage, the Commissioner has to select the percentage prescribed. The selection process prescribed in the Section is not under challenge. For the sake of argument, if it is accepted that, the principles of natural justice enjoins upon the Commissioner, to give notice to an assessee, hear such assessee, pass a reasoned order after such hearing, as to why the assessee is selected, then such an argument misses the point that, there has to be a pre-selection of such assessee who are to be invited to be heard for selection. It is a contradiction of terms. The assessee is already selected. If such a logic is accepted, then a pre-selection assessee would legitimately claim that, it should be heard at the time of pre-selection. It would lead to an absurd situation, allow the selection procedure to fall into an abyss, under Section 43 unwieldy and unenforceable. In the event, the right to be heard is read into Section 43(1), the same will defeat the entire mechanism of selection provided thereunder and would do violence to it. It would create a vicious circle enabling an assessee never to subject itself to an audit. Requirement of audit in revenue jurisprudence is well recognized. Subjecting an assessee to an audit by itself does not result in an adverse civil consequence for the assessee. Section 43 mandates a selection of the prescribed percentage. Acting under Section 43 of the Act of 2003 a Commissioner is obliged to select the prescribed percentage in the manner mandated. The petitioner has not substantiated that, the petitioner has been selected beyond the parameters of Section 43 .

Therefore, the question of giving him a hearing does not arise prior to his selection. Subsequent to the selection the assessee falls within the procedure prescribed in Section 43 . It is not that the Commissioner has not understood the accounts and is requiring the assessee to undergo a special audit akin to Section 142(2A) of the Income Tax Act, 1961. There is a distinction between Section 43 and 43AB of the Act of 2003.

Section 43AB of the Act of 2003 allows a Commissioner to call for audit of such accounts, records and documents of such assessee by a special team, or tax professional, to be nominated by him if the requirements prescribed under such section are fulfilled. Section 43AB is more akin to Section 142(2A) of the Income Tax Act, 1961.

In view of the discussions above, the first issue is answered in the negative and against the petitioner. The second issue is answered by holding that, the petitioner is not entitled to any relief in the present writ petition.

W.P. No. 25230 (W) of 2016 is dismissed. No order as to costs.

Urgent certified website copies of this order, if applied for, be made available to the parties upon compliance of the requisite formalities.