Supreme Court of India

Sahara India (Firm)

v.

Commissioner of Income-tax, Central-I

B.N. Agrawal, P.P. Naolekar and D.K. Jain, JJ.

Civil Appeal Nos. 2783 and 2784 of 2008

April 11, 2008

Section 142 of the Income-tax Act, 1961 - Assessment - Inquiry before assessment - Assessment year 2003-04 - Whether exercise of power under section 142(2A) leads to serious civil consequences and, therefore, even in absence of an express provision for affording an opportunity of pre-decisional hearing to an assessee and in absence of any express provision in section 142(2A) barring giving of a reasonable opportunity to an assessee, requirement of observance of principles of natural justice is to be read into said provision - Held, yes - [See proviso to section 142(2A) inserted with effect from 1-6-2007]

Facts

The assessee-company was directed under section 142(2A) for special audit of its accounts by a chartered accountant for the relevant assessment year. However, no opportunity of hearing was given to the assessee before passing such order. The assessee challenged that order on the ground of violation of principles of natural justice relying upon decision of the Supreme Court in Rajesh Kumar v. Dy. CIT [2006] 157 Taxman 168. The two-Judge Bench of the Supreme Court, by its order dated 14-12-2006, was of view that observation in Rajesh Kumar’s case (supra) to the effect that in every case where the Assessing Officer issues a direction in terms of section 142(2A), the assessee has to be heard before such order is passed was not correct in law. Therefore, the matter was referred to the Larger Bench.

Held

A bare perusal of the provisions of section 142(2A) would show that the opinion of the Assessing Officer that it is necessary to get the accounts of the assessee audited by an accountant has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessee; and (ii) the interests of the revenue. The word ‘and’ signifies conjunction and not disjunction. In other words, the twin conditions of ‘nature and complexity of the accounts’ and ‘the interests of the revenue’ are the pre-requisites for exercise of power under section 142(2A). Undoubtedly, the object behind enacting the said provision is to assist the Assessing Officer in framing a correct and proper assessment based on the accounts maintained by the assessee and when he finds such accounts to be complex, in order to protect the interests of the revenue, recourse to the said provision can be had. Before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand accounts maintained by the assessee; to appreciate the entries made therein and in the event of any doubt, to seek explanation from the assessee. But opinion required to be formed by the Assessing Officer for exercise of power under the said provision must be based on an objective criteria and not on the basis of an objective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and to pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision, being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a heavy duty on the said high ranking authority to see that the requirement of the previous approval, envisaged in the section 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 the relevant 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. [Para 6]

However, the question for adjudication in the instant case was whether, in view of the fact that the said provision does not postulate the requirement of a hearing before an order for special audit is passed, a pre-decisional hearing is required to be given to the assessee or not? [Para 7]

It is trite that unless a statutory provision either specifically or by necessary implication excludes the application of principles of natural justice, because in that event the Court would not ignore the legislative mandate, the requirement of giving a reasonable opportunity of being heard before an order is made, is generally read into the provisions of a statute, particularly when the order can have adverse civil consequences for the party likely to be affected. The principle will hold good irrespective of whether the power conferred on a statutory body or the Tribunal is administrative or quasi-judicial. [Para 15]

However, no general rule of universal application can be laid down as to the applicability of the principle audi alteram partem, in addition to the language of the provision. Undoubtedly, there can be exceptions to the said doctrine. Therefore, an exhaustive catalogue of the cases cannot be given where the said principle should be applied. The question whether the principle has to be applied or not is to be considered bearing in mind the express language and the basic scheme of the provision conferring; the power; the nature of the power conferred; the purpose for which the power is conferred; and the final effect of the exercise of that power. It is only upon taking into consideration all these matters that the question of application of the said principle can be properly determined. [Para 16]

Dealing with the question whether the requirement of affording an opportunity of hearing is to be read into section 142(2A), in Rajesh Kumar’s case (supra) it was held that prejudice to the assessee is apparent on the face of the said statutory provision. It was observed that on account of the special audit, the assessee has to undergo the process of further accounting despite the fact that his accounts have been audited by a qualified auditor in terms of section 44AB. An auditor is a professional person. He has to function independently. He is not an employee of the assessee. In case of misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949. Besides, the assessee has to pay a hefty amount as fee of the special auditor. Moreover, during the audit of the accounts again by the special auditor, he has to answer a number of questions. The Court has further observed that if the assessee was put to notice, he could show that the nature of accounts was not such which would require appointment of special auditors. He could further show that what the Assessing Officer had considered to be complex was, in fact, not so. It was also open to him to show that the same would not be in the interest of the revenue. [Para 20]

In the light of the afore-noted legal position, the decision of the Supreme Court in Rajesh Kumar’s case (supra) holding that an order under section 142(2A) does entail civil consequences was to be agreed with. The proviso to section 142(2D) inserted with effect from 1-6-2007 provides that the expenses of the auditor appointed in terms of the said provision shall, henceforth, be paid by the Central Government. In view of the said amendment, it could be argued that the main plank of the judgment in Rajesh Kumar’s case (supra) to the effect that direction under section 142(2A) entails civil consequences because the assessee has to pay substantial fee to the special auditor is knocked off. It is true that the payment of auditor’s fee is a major civil consequence, but it cannot be said to be the sole civil or evil consequence flowing from directions under section 142(2A). The special audit has an altogether different connotation and implication than the audit under section 44AB. Unlike the compulsory audit under section 44AB, it is not limited to mere production of the books and vouchers before an auditor and verification thereof. It involves submission of explanations and clarifications which may be required by the special auditor on various issues with relevants data, documents, etc., which, in the normal course, an assessee is required to explain before the Assessing Officer. Therefore, special audit is more or less in the nature of an investigation and in some cases may even turn out to be stigmatic. Therefore, even after obligation to pay auditor’s fees and incidental expenses has been taken over by the Central Government, civil consequences would still ensue on the passing of an order for special audit. [Para 21]

The submission of the revenue was that the order of special audit is only a step towards assessment and being in the nature of an inquiry before assessment, is purely an administrative act giving rise to no civil consequences and, therefore, at that stage, a pre-decisional hearing is not required. In Rajesh Kumar’s case (supra), it was held that in view of section 136, proceedings before an Assessing Officer are deemed to be judicial proceedings. Section 136 stipulates that any proceeding before an income-tax authority shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code and also for the purpose of section 196 of the Indian Penal Code and every income-tax authority is a Court for the purpose of section 195 of the Code of Criminal Procedure, 1973. It is the civil consequence which obliterates the distinction between quasi-judicial and administrative function. Moreover, with the growth of the administrative laws, the old distinction between a judicial act and an administrative act has withered away. Therefore, it hardly needs reiteration that even a purely administrative order, which entails civil consequences, must be consistent with the rules of natural justice. The expression ‘civil consequences’ encompasses infraction of not merely property or personal rights but of civil liberties; material deprivations and non-pecuniary damages also. Anything, which affects a citizen in his civil life, comes under its wide umbrella. Accordingly, the argument was to be rejected. Since an order under section 142(2A) does entail civil consequences, the rule of audi alteram partem is required to be observed. [Para 22]

It could not be said that since a post-decisional hearing in terms of sub-section (3) of section 142 is contemplated, the requirement of natural justice is fully met. Apart from the fact that ordinarily a post-decisional hearing is no substitute for pre-decisional hearing, even from the language of the said provision, it is clear that the opportunity of being heard is only in respect of the material gathered on the basis of the audit report submitted under sub-section (2A) and not on the validity of the original order directing the special audit. It is well-settled that the principle audi alteram partem can be excluded only when a statute contemplates a post-decisional hearing amounting to a full review of the original order on merit, which was not the position in the instant case. [Para 23]

The upshot of the entire discussion is that the exercise of power under section 142 (2A) leads to serious civil consequences and, therefore, even in the absence of an express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in section 142(2A) barring the giving of a reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. [Para 24]

Regarding the validity of the two-Judge Bench’s order dated 14-3-2006, it was found that before passing the said order, no show-cause notice was given to the assessee. On the contrary, it appeared from the record that on 9-3-2006, the assessee was required to furnish, by 20-3-2006, details/explanation in respect of queries raised vide order sheet entry dated 16-2-2006, but in the meanwhile, the impugned order was passed on 14-3-2006 itself. It was manifestly clear that when the impugned order was passed, the Assessing Officer had no occasion to have even a glimpse of the accounts maintained by the assessee. Therefore, in the light of the legal position, the impugned order was vitiated by the failure to observe the principle audi alteram partem. [Para 27]

The next crucial question was that keeping in view the fact that since 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 (3) of section 153 was already over, what appropriate order should be passed? [Para 28]

There was no denying of the fact that the law on the subject was in a flux in the sense that till the judgment in Rajesh Kumar’s case (supra) was rendered, there was divergence of opinion amongst various High Courts. Additionally, even after the said judgment was rendered, another two-Judge Bench of the Supreme Court had expressed reservation about its correctness. Having regard to all those peculiar circumstances and the fact that on 14-10-2006, the Court had declined to stay the assessment proceedings, the Court should be loathed to quash the impugned order. Accordingly, the law on the subject will apply prospectively and it would not be open to the assessee to urge before the appellate authority that the extended period of limitation under Explanation 1(iii) to section 153(3) was not available to the Assessing Officer because of an invalid order under section 142(2A). However, it would be open to the assessees 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. [Para 29]

Thus, the appeal was to be allowed. [Para 30]

Case review

Sahara India (Firm) v. CIT [2007] 161 Taxman 216 (SC) reversed [Para 29],

Rajesh Kumar v. Dy. CIT [2006] 157 Taxman 168 (SC) approved [Para 21].

Cases referred to

Rajesh Kumar v. Dy. CIT [2006] 157 Taxman 168 (SC) [Para 3], Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634/[1987] 32 Taxman 271 (All.) [Para 6], A.K. Kraipak v. Union of India [1969] 2 SCC 262 [Para 11], Swadeshi Cotton Mills v. Union of India [1981] 1 SCC 664 [Para 12], State of Orissa v. Binapani Dei AIR 1967 SC 1269 [Para 13], Mrs. Maneka Gandhi v. Union of India [1978] 1 SCC 248 [Para 22] and S.L. Kapoor v. Jagmohan AIR 1981 SC 136 [Para 22].

Soli J. Sorabjee for the Appellant. P.P. Malhotra for the Respondent.

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