Sadana Electric Stores vs Commissioner of Income Tax, Central, Kanpur

Satish Chandra, J.—Present appeal is filed by the assessee u/s 260-A of the income tax Act, 1961 against the judgment and order dated 15.06.2007 passed by the Income Tax Appellate Tribunal, Lucknow in Income Tax Appeal No. 760 & 790/LUC/2005 for the assessment year 2001-02. On 20.08.2008, a Coordinate Bench of this Court has admitted the instant appeal on the following substantial questions of law:

i. Whether the Tribunal was legally correct in not taking into account the invalidity as had crept-in in the directions dated 09.11.2004 as given by the Assessing Officer for Special Audit u/s 142(2A) which has rendered the assessment order 09.11.2004 itself as vitiated in law?

ii. Whether the Tribunal was legally correct in not taking into account the law as laid down by the Apex Court in the case of Rajesh Kumar and Others Vs. D.Commissioner of Income Tax and Others, , while deciding the cross appeals preferred by the parties before it, in relation to the assessment order dated 09.11.2004?

iii. Whether on a due and correct interpretation of the provisions of sub-section (3) of Section 145, the Tribunal was legally correct in upholding the rejection of accounts and in sustaining extra addition of Rs. 5.0 lacs.

iv. The Tribunal while interpreting Section 10 of income tax Act 1961 was wrong in recording finding that persons exempted u/s 10 of the Act are not required to compute its total income in accordance with the provisions of the Act, which may include the computation of depreciation on written down value and not in any other manner?

The brief facts of the case are that the assessee/appellant has been carrying on business of electronic goods, appliances and other commodities from last 40 years. The books of account are subjected to the tax audited as per section 44AB of the Act. For the assessment year under consideration, the case of the assessee was picked up for scrutiny. So, after issuing notice, the A.O. has rejected the books of account u/s 145 and made the various additions on estimate basis. Total addition made by the A.O. is for Rs. 29,56,690/- under the various heads like car expenses, depreciation commission, printing stationary, advertisement, security expenses, stall welfare, rebate discount, telephone-electric expenses, building repair maintenance etc. The same was upheld not only by the first appellate authority but also by the Tribunal. Being aggrieved, the assessee has filed the present appeal.

With this background, Sri S.K. Garg, learned counsel for the assessee submits that the notice u/s 143(2) was issued on 28.01.2002 and the time limit for completion of the scrutiny was due to expire on 31.03.2004. However, before completion of the assessment, the A.O. took a view that there are certain discrepancies. So, he referred the matter to the CIT (Central) Kanpur for seeking the approval to issue a direction for special audit u/s 142(2A) of the Act. He read out Section 142(2A), which on reproduction, reads as under:

142(2A) If, at any stage of the proceedings before him, the Assessing Officer, 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 Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner 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 Assessing Officer may require.

Learned counsel for the appellant further submits that the copy of the letter dated 08.03.2004 written by the A.O. was never served on the assessee. However, the CIT has granted the approval for issuance of a direction for special audit under the said provision. Had an opportunity been given, the proper explanation might have been given by the assessee but that was not so. Both the authorities have violated the principle of natural justice. As per letter dated 17.03.2004, the assessee was asked to obtain special audit report u/s 152(2A) of the Act and submit a report within a period of 90 days. So, the accounts were audited by M/s. D. & Pathak Company, Chartered Accountant. After completing the audit, a report was submitted within a period of 90 days from the date of receipt of the direction. In the meantime, the limitation for completion of assessment as prescribed u/s 153(1)(b) had already expired. So, the assessment order dated 09.11.2004 passed by the A.O. u/s 143(3) is time barred and the same is likely to be set aside. For this purpose, he relied on the decision dated 20.08.2010 passed by this Hon''ble Court in the case of his sister''s concern namely - Sadana Electric Co. v. CIT (IT Appeal No. 167 of 2008).

For this purpose, he relied on the ratio laid down in the case of the Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I and Another, , where it was observed that an order u/s 142(2A) of the income tax Act, 1961 directing the assessee to get the accounts audited by an accountant nominated in this behalf by the Chief Commissioner or the Commissioner and to furnish a report of such audit, does entail civil consequences. The special audit u/s 142(2A) is not limited to the mere production of the books and vouchers before the auditor and verification thereof; it involves the submission of explanations and clarifications which may be required by the special auditor on various issues with relevant data, documents, etc., which, in the normal course, an assessee is required to explain before the Assessing Officer. Therefore, the special audit is more or less in the nature of an investigation and in some cases it may even turn out to be stigmatic. This is so even after the insertion of the proviso in section 142(2A) with effect from June 1, 2007.

The exercise of power u/s 142(2A) leads to serious civil consequences, and, therefore, even in the absence of any express provision for affording an opportunity of pre-decisional hearing to the assessee and in the absence of any express provision in section 142(2A) barring the giving of reasonable opportunity to the assessee, the requirement of observance of the principles of natural justice is to be read into the said provision.

Lastly, he made a request that the similar benefit may kindly be given to the assessee.

On the other hand, Sri Prashant Kumar, learned counsel for the department has justified the orders passed by the authorities below. He submits that the opportunity of hearing was given to the assessee and books of account were rightly rejected.

After hearing both the parties and on perusal of record, it appears that the books of account were properly audited u/s 44AB. It is only after receiving the special audit report, the A.O. has rejected the books of account.

It may be mentioned that in the case of Sahara India (Firm) (supra) as well as in the case of Rajesh Kumar and Others Vs. D.Commissioner of Income Tax and Others, , the Hon''ble Supreme Court observed that the word ''and'' in section 142(2A) relating to compulsory audit of accounts signifies conjunction and not disjunction. The twin conditions of "nature and complexity" and "the interests of the Revenue" are the per-requisites for the exercise of the power u/s 142(2A).

Before dubbing the accounts as complex and difficult to understand, 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 opinion required to be formed by the Assessing Officer for exercise of power u/s 142(2A) must be based on objective criteria and not on the basis of subjective satisfaction. Recourse to that provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner, being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer casts a very heavy duty on the said high ranking authority to see that the requirement of previous approval is not turned into an empty ritual. Before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case.

Rules of natural justice are not embodied rules. The expression ''natural justice'' is also not capable of a precise definition. The underlying principle of natural justice, evolved under the common law, is to check arbitrary exercise of power by the State or its functionaries. Therefore, the principle implies a duty to act fairly, i.e., fair play in action. The aim of rules of natural justice is to secure justice or, to put it negatively, to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made; they do not supplant the law but supplement it.

Further, the Hon''ble Supreme Court in the case of Income Tax Officer and Others Vs. Madnani Engineering Works Ltd., Calcutta, observed that even an administrative order or decision in matters involving civil consequences has to be made consistently with the rules of natural justice. The concept of natural justice is invariably read into administrative actions involving civil consequences, unless the statute conferring the power excludes its application by express language.

This Hon''ble Court in the case of Swadeshi Cotton Mills Company Ltd. Vs. Commissioner of Income Tax and Another, observed that the power u/s 142(2A) cannot be lightly exercised. The satisfaction of the authorities should not be subjective satisfaction. It should be based on objective assessment regard being had to the nature of the accounts. The nature of the accounts must indeed be of a complex nature. The principles of natural justice are based on two principles: (i) nobody shall be condemned unheard (audi alteram partem); (ii) nobody shall be judge of his own cause (nemo debet judex in propria sua causa). Duty to assign reasons is, however, judge-made law.

In the instant case, it is evident that the copy of the letter dated 08.03.2004 written by the A.O. was never served on the assessee. However, the CIT has granted the approval for issuance of the direction for special audit under the said provision. Had an opportunity given, the proper explanation might have been given by the assessee but that was not done, which is the violation of the principles of natural justice.

It may be mentioned that in the case of the sister concern, this Hon''ble Court has passed the following order:

Income Tax Appeal No. 167 of 2008

M/s. Sadana Electric Company

vs.

Commissioner of income tax and another

Hon''ble Pradeep Kant, J.

Hon''ble Ritu Raj Awasthi, J.

This appeal u/s 260-A of the income tax Act, has been filed against the order passed by the Income Tax Appellate Tribunal, Lucknow Bench, Lucknow rejecting the appeal of the assessee-appellant against the order dated 23.8.05 passed by the Commissioner of income tax (Appeals)-I, Kanpur.

Challenge has been made on the ground that the entire proceedings of assessment were totally without jurisdiction and authority, as the assessment orders were passed beyond the period of two years, as prescribed u/s 153(1)(a) of the income tax Act.

The following substantial questions of law arise in the appeal:

Whether on the facts and circumstances and legal aspects of the case the assessment order dated 26.10.2004 itself, passed without jurisdiction is a nullity, in view of the settled principles of law as well as statutory provision of the clause (a) of sub-section (1) of Section 153 of income tax Act, 1961?

The return of income for the assessment year 2001-02 u/s 139 was filed on 31.10.2001. It was processed u/s 143(1) on 26.12.01. The return was selected on 28.1.02 for scrutiny u/s 143(3) and the notice u/s 143(2) was issued, which was duly served on the assessee on 13.2.02. The assessment year 2001-02 came to an end on 31.3.04. The Assessing Officer, Central Circle passed the assessment order u/s 143(3) of income tax Act on 26.10.04. The Commissioner of Income Tax (Appeal)-I, Kanpur passed an order on 23.8.05 and the Income Tax Appellate Tribunal passed the order on 23.11.08.

Section 153(1)(a) of the Income Tax Act prescribes the limitation, during which the assessment order is to be passed and reads as under:

153(1). No order of assessment shall be made u/s 143 or Section 144 at any time after the expiry of-

(a) two years from the end of the assessment year in which the income was first assessable.

Obviously, in the instant case, the order of assessment has been passed in violation of the period prescribed in the aforesaid provision of the income tax Act, therefore, the same cannot be sustained.

In the case of Commissioner of Income Tax, Delhi, Central-I Vs. Escorts Farms P. Ltd., ., the Court observed as under:

In our opinion, the decision of the Tribunal is correct when it stated that the effect of holding that the assessment was barred by time is that all further proceedings pursuant to the said decision would be infructuous. The income tax Officer gets jurisdiction to pass an assessment order if it is within limitation. If the assessment is barred by time, then any decision on merits would be of no consequence, and for the same reason, the decision, on merits, by the appellate authorities would also be of no consequence and would have to be ignored. This is exactly what the Tribunal has observed in the impugned order. For, if the assessment is barred by time; no effect can be given to the other decision on merits. If, however, the reference of the Department against the order passed in M.A. No. 4 of 1985 succeeds, then the decision on merits of the various appellate authorities would automatically remain.

In view of the aforesaid facts and legal position, the appeal deserves to be allowed. The order passed by the Assessing Officer, First Appellate Authority and the Income Tax Appellate Tribunal are liable to be set aside, which are hereby set aside.

The appeal is allowed.

In the light of the above discussion and by following the earlier order passed by this Court (supra), the order passed by the lower authorities including Tribunal cannot be sustained as the facts and circumstances are identical.

Therefore, we allow the appeal and set aside the impugned order dated 15.06.2007 passed by the Tribunal and other authorities. When the assessment order is quashed, then the answer to the substantial questions of law are not required and the same will be discussed in an appropriate case. In the result, the appeal is allowed. The assessee will get the relief accordingly.