2006 (11) TMI 135 - SC - Income Tax

Notices under s.158BC must respect natural justice; s.142(3) hearings limited to special auditor findings; s.142(2A) directions non-appealable

Rajesh Kumar And Others Versus Deputy Commissioner of Income-Tax And Others

SC held that notices under s.158BC may briefly state issues but must comply with principles of natural justice; Parliament did not exclude fair hearing. ... Interpretation and application of section 142(2A) - Seizure - notice issued under section 158BC - Principles of natural justice - No opportunity of hearing - non-application of mind - HELD THAT:- The notice issued may only contain briefly the issues which the Assessing Officer thinks to be necessary. The reasons assigned therefor need not be detailed ones. But, that would not mean that the principles of justice are not required to be complied with. Only because certain consequences would ensue if the principles of natural justice are required to be complied with, the same by itself would not mean that the court would not insist on complying with the fundamental principles of law. If the principles of natural justice are to be excluded, Parliament could have said so expressly. The hearing given is only in terms of section 142(3) which is limited only to the findings of the special auditor. The order of assessment would be based upon the findings of the special auditor subject of course to their acceptance by the Assessing Officer. Even at that stage the assessee cannot put forward a case that power under section 142(2A) of the Act had wrongly been exercised and he has unnecessarily been saddled with a heavy expenditure. An appeal against the order of assessment, as noticed hereinbefore, would not serve any real purpose as the appellate authority would not go into such a question since the direction issued under section 142(2A) of the Act is riot an appealable order. For the reasons aforementioned, the appeal is allowed. Issues Involved:1. Interpretation and application of Section 142(2A) of the Income-tax Act, 1961.2. Principles of natural justice in the context of special audit orders.3. Nature and complexity of accounts as factors for invoking special audit.4. Civil consequences and procedural safeguards.5. Judicial review and administrative vs. quasi-judicial nature of special audit orders.Detailed Analysis:1. Interpretation and Application of Section 142(2A) of the Income-tax Act, 1961:The court examined the relevant factors for invoking Section 142(2A) of the Act, which include the nature and complexity of the accounts and the interests of the Revenue. The formation of opinion by the Assessing Officer must be based on objective consideration, and all factors must be conjunctively read. The expression 'complexity' implies difficulty in understanding and not merely intricate or complex accounts.2. Principles of Natural Justice in the Context of Special Audit Orders:The court emphasized that principles of natural justice, particularly the right to a hearing, are implicit in Section 142(2A). The duty to assign reasons is imperative unless excluded by statute. The court noted the divergence in High Court opinions, with Calcutta and Kerala High Courts requiring compliance with natural justice principles, while Allahabad, Bombay, and Delhi High Courts did not.3. Nature and Complexity of Accounts as Factors for Invoking Special Audit:The court highlighted that the Assessing Officer must honestly attempt to understand the accounts before directing a special audit. The complexity of accounts must be objectively assessed, and the decision should not be based on whims or caprice. The court referred to previous judgments emphasizing the need for objective criteria and honest effort in understanding the accounts.4. Civil Consequences and Procedural Safeguards:The court recognized that an order under Section 142(2A) entails civil consequences, such as additional financial burden and inconvenience. Therefore, procedural safeguards, including the right to a hearing, are necessary to minimize arbitrariness and ensure fairness. The court cited various judgments to support the necessity of complying with principles of natural justice when civil consequences are involved.5. Judicial Review and Administrative vs. Quasi-Judicial Nature of Special Audit Orders:The court disagreed with the view that orders under Section 142(2A) are purely administrative. It held that such orders are quasi-judicial as they form part of the judicial process of assessment. The court emphasized that civil consequences necessitate compliance with natural justice principles, and judicial review cannot substitute for an internal remedy. The court also noted that the hearing need not be elaborate but must provide a fair opportunity to the assessee to present their case.Conclusion:The Supreme Court allowed the appeal, emphasizing the necessity of complying with principles of natural justice in the context of special audit orders under Section 142(2A) of the Income-tax Act, 1961. The court underscored that such orders are quasi-judicial and entail civil consequences, necessitating objective assessment and procedural safeguards to ensure fairness and minimize arbitrariness.