2006 (10) TMI 107 - HC - Income Tax

Court upholds special audit order under Income-tax Act, rejects petitions. Natural justice principles upheld.

The court dismissed both writ petitions, ruling that the decision to order a special audit under section 142(2A) of the Income-tax Act was valid. The ... - Issues Involved:1. Compliance with principles of natural justice.2. Application of mind by the Assessing Officer before issuing the impugned orders.Summary:Issue 1: Compliance with principles of natural justiceThe petitioner contended that the principles of natural justice were not complied with as there was no interaction between the petitioner and the Assessing Officer before the order u/s 142(2A) of the Income-tax Act, 1961 was passed. The court referred to the case of Yum Restaurants India Pvt. Ltd. v. CIT [2005] 278 ITR 401, which mandates purposeful interaction between the assessee and the Assessing Officer regarding the complexity of the accounts. However, the court noted that the principles of natural justice are flexible and depend on the facts and circumstances of each case. The court cited several precedents, including R. S. Dass v. Union of India [1986] Supp SCC 617 and Union of India v. Anand Kumar Pandey [1994] 5 SCC 663, emphasizing that the rules of natural justice are not rigid. Given the background facts, including the continuous direction for special audits from the assessment year 1994-95 onwards, the court concluded that there was enough material compelling the Assessing Officer to pass the order u/s 142(2A). Therefore, the court rejected the first contention of the petitioner, stating that even if there was no interaction, the principles of natural justice were not violated.Issue 2: Application of mind by the Assessing OfficerThe petitioner argued that there was no application of mind by the Assessing Officer before issuing the impugned orders. The court found this contention factually incorrect, noting that the case records were received by respondent No.2 on February 20, 2006, and a detailed proposal was prepared by the Assistant Commissioner of Income-tax on March 3, 2006. The proposal, running into 15 pages, highlighted various aspects of the accounts, including intermingling of accounts among various units of the Sahara group and vague remarks in the tax audit report. The Commissioner of Income-tax also noted substantial intermingling of accounts and the inability to arrive at the correct income of the assessee based on the tax audit report. Similarly, in the case of M/s. Sahara India (Firm), a detailed note running into 22 pages was prepared, highlighting issues such as unverifiable details and non-compliance with the mercantile system of accounting. The court concluded that the decision-making process was not vitiated and there was due application of mind by the statutory authorities. Therefore, the court dismissed the second contention of the petitioner.Conclusion:The court dismissed both writ petitions, stating that the decision to order a special audit u/s 142(2A) was unexceptionable. The time spent in litigation would not be included for the purposes of the assessment proceedings or the completion of the special audit. The respondents were entitled to costs of Rs. 5,000 for each writ petition.