2014 (10) TMI 707 - HC - Income Tax

Invalidity of Income Tax audit order under Section 142(2A) due to lack of hearing opportunity

The High Court held that the order directing the petitioner to audit its accounts under Section 142(2A) of the Income Tax Act was invalid as it did not ... Principles of natural justice not followed - Opportunity of being heard - Validity of direction made by AO for audit of accounts u/s 142(2A) - Whether Section 142(2A) of the Act renders it imperative that before passing an order an AO is required to afford a reasonable opportunity of being heard to an assessee – Held that:- An opportunity of being heard was not granted to the assessee thereby prohibiting the AO from exercising power u/s 142(2A) of the Act, to order audit of the assessee's accounts by an auditor nominated by the AO – the contention of the revenue cannot be accepted that during the process of examination of accounts, spread over the period of six months during which various queries were raised with respect to the accounts, may be considered as an opportunity of hearing, disregards the fact that a hearing is to be afforded after the AO forms a prima-facie opinion, based upon credible material that the accounts produced by the assessee require to be audited by an auditor nominated by the department - The AO formed such an opinion and served a show cause notice upon the assessee but thereafter did not afford an opportunity of being heard - The absence of an opportunity of being heard cannot be cured by reference to queries that preceded the show cause notice – thus, the order is to be set aside though department would be at liberty to proceed afresh/further and if permissible in law – Decided in favour of assessee. Issues:1. Validity of the order dated 30.03.2014 directing the petitioner to get its accounts audited under Section 142(2A) of the Income Tax Act, 1961 without affording a reasonable opportunity of being heard.Analysis:The petitioner sought to quash the order dated 30.03.2014 passed by the Deputy Commissioner of Income Tax, alleging that it was in violation of the first proviso to Section 142(2A) of the Act as it did not provide an opportunity of hearing before directing the audit. The petitioner argued that the order lacked reasoning and failed to comply with statutory requirements. On the other hand, the respondent contended that due to the complexity of the accounts and unanswered queries during a six-month examination period, the assessing officer had no choice but to order the audit without additional hearing. The respondent emphasized that a written reply from the petitioner was considered before passing the order, and no further oral hearing was deemed necessary.The court examined Section 142(2A) of the Act, which empowers the assessing officer to direct an audit if deemed necessary, subject to the first proviso requiring the assessee to be given a reasonable opportunity of being heard. The court clarified that merely asking for a written reply did not fulfill the mandatory condition of providing a reasonable opportunity of being heard. The court emphasized that this opportunity is a statutory prerequisite, and failure to adhere to it renders any resulting order null and void. The court scrutinized the interim orders leading to the impugned order and found that no oral hearing opportunity was granted to the petitioner, rendering the order invalid.The court rejected the revenue's argument that the examination period and queries served as an opportunity of hearing, stating that a hearing must follow the assessing officer's prima facie opinion before ordering an audit. Since the petitioner was not afforded this opportunity post the show cause notice, the court deemed the order a nullity. Consequently, the court allowed the writ petition, setting aside the order dated 30.03.2014 and directing the department to proceed lawfully, potentially excluding the time spent during the writ petition's pendency.