Sri Hemant Joshi vs The Commissioner of Income Tax and Others

We have heard Sri S.D. Singh, learned Counsel for the Petitioner and Sri Dhananjay Awasthi appearing for the department.

In these two connected writ petitions are filed by one Sri Hemant Joshi, and the other by nine individuals and two firms, the Petitioners have challenged orders dated 5.3.01 and 20.7.01 passed by the Commissioner of Income Tax Meerut for special audit u/s 142(2A) of the Income Tax Act, 1961(In short, the Act).

The orders have been challenged on the ground that these were passed without following the conditions requisite for passing the order u/s 142(2A) of the Act namely that there is No. finding that the accounts seized from the business premises of the Petitioners in the search carried out u/s 132 of the Act are so complex in nature, that it is not possible to compute income of the Petitioners and further No. opportunity of hearing was given by the Assessing Officer before making the order.

There is No. interim order in these writ petitions.

The Petitioners did not cooperate in special audit. They did not present themselves or give any assistance to the auditor. In the circumstances, the Income Tax Officer proceeded u/s 144 to make the assessment. The Petitioners filed revisions against the assessment orders u/s 264 of the Act before the Commissioner of Income Tax. The revisions were partly allowed with direction for de novo inquiry. These orders have been stayed in Writ Petitions No. 358/2002, 359/2002 and 366/2002 which are cognizable by learned Single Judge of the court.

The nature of the proceedings and the conditions necessary for making the order u/s 142(2A) of the Act, came up for consideration of Supreme Court in Rajesh Kumar and Others Vs. D.Commissioner of Income Tax and Others, and in Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I and Another,

In Rajesh Kumar and Ors. (Supra) the Supreme Court held that in view of Section 136 of the Act, the entire proceedings before the Assessing Officer being judicial, a part thereof, which indisputably is resorted to in aid of the ultimate order of assessment, without any statutory interdict, cannot be called an administrative order. The expression "having regard to" in Section 142(2A) is significant. An opinion must be formed strictly in terms of the factors enumerated therein. The expression indicates that in exercising the power regard must be had also to the factors enumerated therein together with all factors relevant for the exercise of the powers. The factors enumerated in Section 142(2A) are not exhaustive. The Assessee suffers civil consequences and that any order passed is prejudicial to him, thus the principles of natural justice must be held to be implicit. They are required to be applied to minimize arbitrariness. If the Assessee is put to notice, he could show that the nature of the accounts is not such as would require appointment of special auditors. The Assessee can further show that what the Assessing Officer considers complex is in fact not so. It would also be open to him to show that the same would not be in the interest of the Revenue.

The Supreme Court further held that the expression "complexity" in Section 142(2A) would mean the state or quality of being intricate or complex or that which is difficult to understand. Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature. The formation of opinion No. doubt is based on objective considerations. No. order can be passed on whims or caprice. What is complex to one may appear simple to another. It depends upon one''s level of In Sahara India (Firm) (Supra), the three judges Bench of Supreme Court considered as to whether the order leads to any civil consequences and thus, even in the absence of any express provision for affording pre-decisional hearing 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 principle of natural justice is to be read into the said provision. The Supreme Court considering the facts that the question of given opportunity in Section 142(2A) was considered and declared, by the first time by the decision rendered on 11th April, 2008, made the interpretation and the requirement of giving opportunity prospective in nature.

The operative portion of the judgment in Sahara India (Firm) (Supra) as quoted below:

The next crucial question is that keeping in view the fact that the time to frame fresh assessment for the relevant assessment year by ignoring the extended period of limitation in terms of Explanation 1(iii) to Sub-section be passed. As noted above, the learned Additional Solicitor General had pleaded that if we were not inclined to agree with him, the interpretation of the provision by us may be given prospective effect, otherwise the interest of the Revenue will be greatly prejudiced.

There is No. denying the fact that the law on the subject was in a flux in the sense that till the judgment in Rajesh Kumar was rendered, there was divergence of opinion amongst various High Courts. Additionally, even after the said judgment, another two-judge Bench of this Court had expressed reservation about its correctness. Having regard to all these peculiar circumstances and the fact that on December 14, 2006, this Court had declined to stay the assessment proceedings, we are of the opinion that this Court should be loath to quash the impugned orders. Accordingly, we hold that the law on the subject, clarified by us, will apply prospectively and it will not be open to the Appellants to urge before the appellate authority that the extended period of limitation under Explanation 1(iii) to Section 153(3) of the Act was not available to the Assessing Officer because of an invalid order u/s 142(2A) of the Act. However, it will be open to the Appellants to question before the appellate authority, if so advised, the correctness of the material gathered on the basis of the audit report submitted under Sub-section (2A) of Section 142 of the Act.

In the result, both the appeals are allowed to the extent indicated above leaving the parties to bear their own costs.

The proviso has also been added to Section 142(2A) by Finance Act 2007 with effect from 1.6.07, providing that the Assessing Authority shall not direct the Assessee to get the accounts so audited unless the Assessee has been given a reasonable opportunity of being heard.

In the present case, we find that since the proviso was added to Section 142(2A) by Finance Act with effect from 1.6.07 and the requirement of opportunity was held to be inbuilt u/s 142(2A) by the Supreme Court in Sahara India (Firm) (Supra) we are not required to consider, whether the order is bad on account of violation of principles of natural justice.

In Sahara India (Firm) (Supra) the Supreme Court further held that the requirement of the objective satisfaction of complexity of the accounts and the interest of revenue is coupled with the word "and" which signifies conjunction and not disjunction. The twin conditions of "complexity of accounts" and "the interests of the revenue" are the pre-requisites for the exercise of the power u/s 142(2A) of the Act.

In the present case, the Petitioner Sri Hemant Joshi, in Writ Petition No. 991 of 2001, filed a return based on No. accounts. A search u/s 132 of the Income Tax Act was conducted at residential as well as business premises of M/s Saharanpur Associates on 17.3.99 in which the Petitioner is a partner and number of incriminating documents were seized. On the basis of seizure, the Petitioner was required to file return for block assessment, which he did not file. His contention is that he never prepared any books of accounts which could be found to be misleading. The monetary transactions were recorded in loose papers, diaries and rough note books. The Petitioners filed return of income for the assessment year 1995-96 and 1996-97 showing nominal income, which were processed u/s 143(1) of the Income Tax Act, there was thus No. question of calling books of accounts whether maintained or not by the Petitioners.

The impugned order dated 5.3.01 issued u/s 142(2A) of the Act does not refer to the approval accorded by the learned Commissioner of Income Tax, Meerut dated 2.3.01 in case of Petitioner or in all the group cases. The order does not state that the accounts books seized from the business premises of the Petitioner were examined and found to be complex by the Assessing Authority. It also does not refer to any satisfaction recorded by the Assessing Authority with regard to complexity of the accounts. The orders simply states that in connection with the assessment proceedings u/s 158BC, read with Section 143(3) pending before the undersigned in the group cases the Petitioners are directed to get the accounts audited by Chartered Accountant defined in explanation below Sub-Section 2 of Section 288 of Income Tax Act. The order further states that necessary approval in this regard has been accorded by the learned Commissioner of Income Tax, dated 2.3.01 in all group cases recommended by his office vide letter dated 12.2.01.

In the counter affidavit the department has filed a letter dated 2.3.01 sent by the Income Tax Officer (Technical) for Income Tax Commissioner Meerut, stating in reference to the letter dated 1.3.01 sent by the Deputy Commissioner, Investigation Circle Dehradun that as proposed u/s 142(2A) approval is given for appointment of M/s Anurag Singhal & Company, C.A. Tilak Road, Dehradun as auditor. The letter further states that in view of the complexity in relation to the group, the Petitioners are requested to get all search issues audited by the auditor which are necessary for computation of the income and that taking into account the complexity of the matter and further the fee of auditor is fixed Rs. 40,000/-.

We do not find in the order and in the letter of the Income Tax Officer (Technical) for Commissioner Income Tax, Meerut any approval for special audit. In the order of the Assessing Authority or in the counter affidavit there is No. statement that the Assessing Authority had examined the loose papers, diaries and rough note books which were seized and on which he had formed an opinion that they were so complex so as to call for special audit for ascertaining transactions and the income for making assessment.

The complexity may vary from person to person and depends on satisfaction of person; a simple matter may be complex for another, but there should be an attempt as held in Rajesh Kumar and Ors. (Supra) and Sahara India (Firm) (Supra) to examine the accounts to find out whether they are complex to the persons on his examination to arrive at conclusion that the special audit u/s 142(2A) is necessary.

The proposal sent by the Assessing Officer to the Income Tax Commissioner, for giving approval for special audit has not been brought on record, nor there is any assertion that the proposal contained the opinion of the assessing authority with regard to the Sri Dhananjay Awasthi has relied upon the judgments in Swadeshi Cotton Mills Company Ltd. Vs. Commissioner of Income Tax and Another,

We find that the law with regard to the special audit u/s 142(2A) as considered and declared by Supreme Court in Rajesh Kumar and Ors. (Supra) and Sahara India (Firm) (Supra) is clear and thus we need not consider all the judgments cited by Sri D. Awasthi appearing for department.

For the aforesaid reason the writ petitions are allowed. The impugned orders dated 5.3.01 and 20.7.01 passed by Commissioner of Income Tax are set aside.