2017 (2) TMI 921 - AT - Income Tax

Assessment Order Invalidated: Procedural Lapses in Special Audit Decision

The Tribunal allowed the appeal raised by the assessee, declaring the assessment order invalid and bad in law due to procedural lapses in conducting the ... Special audit under section 142(2A) of the Income tax Act - principle audi alteram partem - pre decisional hearing - invalidity of proceedings for want of jurisdiction - time barred assessment - application of precedent in Vilsons Particle Board Industries Ltd.Special audit under section 142(2A) of the Income tax Act - principle audi alteram partem - pre decisional hearing - invalidity of proceedings for want of jurisdiction - time barred assessment - Validity of direction for special audit and consequent validity of assessment where the Assessing Officer did not afford pre decisional opportunity to the assessee before referring the matter for special audit. - HELD THAT: - The Tribunal applied the ratio of the Pune Bench in Vilsons Particle Board Industries Ltd. and binding principles laid down by the Supreme Court that an order directing special audit under section 142(2A) entails civil consequences and the rule of audi alteram partem requires that the assessee be given a reasonable opportunity of being heard at the pre decisional stage. In the present case the Assessing Officer made the proposal for special audit before giving the assessee an opportunity to show cause against the requirement of special audit; the Commissioner's subsequent approval after affording hearing did not cure the initial failure of the adjudicating authority to give a pre decisional hearing. Because the direction for special audit was thus vitiated by non compliance with natural justice, the period excluded on account of the special audit could not be validly excluded while computing limitation; consequently the assessment completed after the expiry of the statutory period (by virtue of the invalid reference) is barred by limitation and is invalid. The Tribunal therefore allowed the additional legal ground and held the assessment order bad in law, rendering the merits of the substantive additions academic. [Paras 8]The direction for special audit was invalid for want of pre decisional hearing; the consequent assessment, being time barred, is invalid and the appeal is allowed.Final Conclusion: The Tribunal allowed the appeal for AY 2008-09, holding that failure by the Assessing Officer to afford a pre decisional opportunity before referring the assessee for special audit under section 142(2A) vitiated the reference and rendered the assessment (completed after exclusion for the special audit) time barred and invalid; consequential merits were not adjudicated. Issues Involved:1. Addition of Rs. 6,30,000 on account of difference in closing balance between Hotel Division and Construction Division.2. Addition of Rs. 5,00,000 on account of difference in cash balance.3. Addition of Rs. 50,000 on account of cash purchases.4. Addition of Rs. 6,70,000 on account of other contract receipts.5. Addition of Rs. 20,54,754 on account of negative cash balance on various dates under section 68.6. Addition of Rs. 1,00,000 on account of disallowance of expenses out of Rs. 3,53,350.7. Validity of assessment order based on the limitation period as per Section 153 of the Act with reference to special audit under section 142(2A).Issue-wise Detailed Analysis:1. Addition of Rs. 6,30,000 on account of difference in closing balance between Hotel Division and Construction Division:The assessee contested the addition of Rs. 6,30,000 due to discrepancies in the closing balance of the Hotel and Construction Divisions. The Tribunal did not provide a specific ruling on this issue as the primary focus was on the validity of the assessment order.2. Addition of Rs. 5,00,000 on account of difference in cash balance:Similarly, the addition of Rs. 5,00,000 for differences in cash balance was contested. However, detailed analysis or judgment on this specific issue was not provided due to the overarching decision on the validity of the assessment.3. Addition of Rs. 50,000 on account of cash purchases:The assessee challenged the addition of Rs. 50,000 for cash purchases. The Tribunal did not delve into the merits of this issue due to the primary concern regarding the legality of the assessment process.4. Addition of Rs. 6,70,000 on account of other contract receipts:The addition of Rs. 6,70,000 relating to other contract receipts was contested. Again, the Tribunal did not address this specific issue directly, focusing instead on the procedural validity of the assessment.5. Addition of Rs. 20,54,754 on account of negative cash balance on various dates under section 68:The assessee disputed the addition of Rs. 20,54,754 for negative cash balances. The Tribunal's decision did not specifically address this issue but focused on the procedural aspects of the assessment.6. Addition of Rs. 1,00,000 on account of disallowance of expenses out of Rs. 3,53,350:The addition of Rs. 1,00,000 due to disallowance of expenses was also contested. The Tribunal did not provide a detailed ruling on this issue due to the primary focus on the validity of the assessment order.7. Validity of assessment order based on the limitation period as per Section 153 of the Act with reference to special audit under section 142(2A):The primary issue addressed was whether the assessment order was within the limitation period as per Section 153, considering the special audit under section 142(2A). The Tribunal found that the Assessing Officer (AO) did not provide a pre-decisional hearing to the assessee before making a reference for a special audit. This was a violation of the principles of natural justice as established by the Supreme Court in the cases of Rajesh Kumar and Others Vs. DCIT and Sahara India (Firm) Vs. CIT and Another. The Tribunal held that the special audit conducted without giving the assessee an opportunity to be heard was invalid. Consequently, the assessment order passed beyond the stipulated date, due to the time taken for the special audit, was deemed invalid and bad in law.Conclusion:The Tribunal allowed the additional ground of appeal raised by the assessee regarding the invalidity of the assessment order due to procedural lapses in conducting the special audit. As a result, the grounds of appeal on merits became academic and were dismissed. The appeal of the assessee was allowed, and the assessment order was declared invalid and bad in law due to being passed beyond the period of limitation.