2008 (4) TMI 4 - SC - Income Tax

Special audit orders under s.142(2A) need pre-decisional hearing; past orders prospectively limited, audit materials challengeable

M/s SAHARA INDIA (FIRM), LUCKNOW Versus CIT, CENTRAL-I & ANR

SC held that orders directing special audit under s.142(2A) were vitiated for failure to afford a pre-decisional hearing, observing special audit is ... Necessity of a Pre-Decisional Hearing - Special audit u/s 142(2A) - prospective effect - requirement of affording an opportunity of hearing - principle of audi alteram partem - 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? HELD THAT:- We are convinced that special audit has an altogether different connotation and implications from 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 would involve submission of explanation and clarification which may be required by the special auditor on various issues with relevant data, document 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. We are, therefore, of the view that even after the 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. It is pertinent to note that by the Finance Act, 2007, a proviso to Section (2A) has been inserted with effect from 1st June, 2007, which provides that no direction for special audit shall be issued without affording a reasonable opportunity of hearing to the assessee. In the light of the afore-noted legal position, we may now advert to the facts of both the cases to consider the validity of orders dated 14th March, 2006, requiring the appellants to have their accounts for the assessment year 2003-04 audited by a chartered accountant, named in the order. Indubitably, before passing the said orders, no show cause notice was given to the appellants. On the contrary, it appears from the record that on 9th March, 2006, the appellants were required to furnish by 20th March, 2006 details/explanation in respect of queries raised vide order sheet entry dated 16th February, 2006 but in the meanwhile, the impugned orders were passed on 14th March, 2006 itself. It is manifestly clear that when the impugned orders were made, the Assessing Officer had no occasion to have even a glimpse of the accounts maintained by the appellants. Therefore, in the light of the legal position noted above, we have no option but to hold that the impugned orders dated 14th March, 2006, are vitiated by the failure to observe the principle audi alteram partem. Having regard to all these peculiar circumstances and the fact that on 14th December, 2006, this Court had declined to stay the assessment proceedings, we are of the opinion that this Court should be loathe 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 under Section 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. Issues Involved:1. Necessity of a pre-decisional hearing before directing a special audit under Section 142(2A) of the Income Tax Act, 1961.2. Civil consequences of an order under Section 142(2A).3. Prospective application of the clarified legal position.Detailed Analysis:1. Necessity of a Pre-Decisional Hearing:The core issue before the court was whether the principles of natural justice require that an assessee be given a pre-decisional hearing before an order for special audit under Section 142(2A) of the Income Tax Act, 1961 is passed. The court noted that the decision in Rajesh Kumar & Ors. Vs. Deputy Commissioner of Income Tax & Ors. had held that such a hearing was necessary. The court reaffirmed this position, emphasizing that the principles of natural justice are implicit in Section 142(2A) and that an order for special audit entails civil consequences, thus necessitating a pre-decisional hearing. The court stated, 'The exercise of power under Section 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee... the requirement of observance of principles of natural justice is to be read into the said provision.'2. Civil Consequences of an Order Under Section 142(2A):The court examined whether an order under Section 142(2A) entails civil consequences. It was argued that such an order affects the assessee due to the pecuniary burden and the inconvenience caused by the special audit. The court agreed, noting that 'special audit has an altogether different connotation and implications from the audit under Section 44AB.' The court further elaborated that special audit involves more than just verification of accounts; it includes submission of explanations and clarifications, making it akin to an investigation. Thus, the court concluded that an order under Section 142(2A) does entail civil consequences, which necessitates compliance with the principles of natural justice.3. Prospective Application of the Clarified Legal Position:Given the flux in the law and the divergence of opinions among various High Courts, the court decided that its clarification of the legal position should apply prospectively. The court stated, '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... was not available to the Assessing Officer because of an invalid order under Section 142(2A) of the Act.' This decision was made to avoid prejudicing the interests of the revenue and to provide clarity on the application of the law going forward.Conclusion:The court allowed the appeals to the extent that the impugned orders dated 14th March 2006, requiring the appellants to have their accounts audited, were vitiated by the failure to observe the principle of audi alteram partem. However, it held that the clarified legal position would apply prospectively, allowing the appellants to question the correctness of the material gathered based on the audit report but not the extended period of limitation. The parties were left to bear their own costs.