TaxTMI 
TaxTMI 
2017 (1) TMI 263
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....ate the issue. First of all, we shall take up the appeal in ITA No.309/PN/2013 relating to assessment year 2005- 06. 3. The assessee in ITA No. 309/PN/2013, relating to assessment year 2005-06 has filed abridged grounds of appeal, which read as under:- 1] The learned CIT(A) failed to appreciate that the asst. u/s 143(3) r.w.s. 153A was null and void as it is barred by limitation. 1.1] The learned CIT(A) failed to appreciate the reference u/s 142(2A) for special audit was illegal as A.O. had not given opportunity of hearing to the assessee as per section 142(2A) and consequently, the asst. is barred by limitation. 1.2] The learned CIT(A) failed to appreciate that the A.O. passed the order extending time limit for special audit after the expiry of the initial period granted and therefore, such extension was not valid in law and the asst. order is barred by limitation. 2] The CIT(A) was not justified in taxing the income as per the seized diaries in the hands of the appellant company while the said income belonged to Shri V. L. Patel. The CIT(A) failed to appreciate that the notings in the seized diaries were not pertaining to the appellant company. 3] The learned CI....
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....egal aspect of the case, the CIT(A) erred in not appreciating the fact that, the AO has rightly made an addition on account of seed money, because, in absence of seed money any business cannot be run. 6. The following additions on account of closing cash balances were made in assessment. A.Y. 2005-06 Rs.8,94,114/- A.Y. 2006-07 Rs.34,67,654/- A.Y. 2007-08 Rs.26,66,064/- Considering the facts and legal aspect of the case, the CIT(A) erred in not appreciating the fact that, the AO has rightly made an addition on account of actual cash found during search operations considering the books of accounts maintained by the assessee and this nothing to do with material seized during the course of search. 7. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing netting off of debit suspense entries with the credit suspense entries without appreciating the fact that the assessee did not reconcile the same during assessment. 8. The appellant prays that the Order of the learned CIT(A) be vacated and that of the AO's be restored. 5. Briefly, in the facts of the case, the assessee was a limited company and had fu....
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....uring the course of post search enquiries Shri Mohan Virji Patel was asked vide question No.36 to give details of total unaccounted income reflected in the note books as these were written in Gujarati script. However, no information was given by Shri Mohan Virji Patel. Even during the course of assessment proceedings before the Assessing Officer in the case of assessee before us, specific request was made vide order sheet entry dated 16.05.2008 to do English translation of all these six diaries written in Gujarati script and to bifurcate the entries in the note books assessee-wise and date-wise. However, the assessee failed to furnish any such details. In such circumstances, the Assessing Officer was of the opinion that since the notings in these diaries were complexes in nature and were therefore required to be subjected to special audit. The complexities as noted by the Assessing Officer are enumerated at page 2 under para 5 (ii) of the assessment order. 6. The Assessing Officer thus, in the interests of Revenue made a proposal for getting the accounts audited by an Accountant as laid down in provisions of section 142(2A) of the Act. Thereafter, the CIT(C), Pune on 04.11.2008 ....
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....ter, took note of the income arising from the transactions entered in the seized diaries and the undisclosed income to be treated as income of the assessee. The Assessing Officer contended that since the assessee was a flagship company of group and the main income earning entity and all transactions in the diaries point to the fact that the transactions were predominantly made by the assessee. It was possible that the transactions had been entered into by VLP or Shri Mohan Patel. However, the said transactions were entered on behalf of assessee only. Therefore, the transactions appearing in the diaries were held to pertain to the assessee. The Assessing Officer questioned the rationale behind offering the income in the hands of Shri Mohan Virji Patel and observed that there was substantial unaccounted income and in order to pay taxes at lower rate and also to escape various obligations cast on a private limited company, income was offered in his hands. The Assessing Officer however, considered it just and proper to assess the unaccounted transactions reflected in the seized diaries as pertaining to the assessee and not Mohan Virji Patel as done by the assessee. 7. Before the CIT....
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....be given from the time the assessing officer starts the assessment proceedings till the time the Chief Commissioner or the Commissioner grants his approval to the proposal for special audit by any of the persons involved in the process of giving direction under this section. However, the assessing officer has to give the opportunity of being heard to the assessee before forming an opinion about complexity of the account. As observed by the Hon'ble Supreme Court in Sahara India Firm case (supra) the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision is an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer. In order that the requirement of the previous approval, envisaged in the section is not turned into an empty ritual, the same should be done having regard to the materials on record. The explanation given by the assessee, if any, would be a relevant factor and the approving authority is required to go through it. The approving authority must go through the explanation given by the assessee, if they are on record. He may also call the assessee to have its say in the matter so t....
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....ithout affording a hearing to him", the Hon'ble Court did not suggest that the assessing officer is bound to afford an opportunity of being heard before making a reference to the Chief Commissioner or the Commissioner. Instead it was held that an opportunity of being heard should be given before passing an order under section 142(2A). A reading of the provisions for providing opportunity of being heard contained in the Proviso shows the Income-tax Act provides for an opportunity of being heard without specifying the authority who has to discharge this responsibility. The Act mandates that the assessing officer shall not pass an order of special audit unless the assessee is heard. It does not command that it is the assessing officer alone who can exercise this onerous responsibility. The scheme of the Act envisages an opportunity to be heard to the assessee before an order of special audit is passed by the assessing officer. The task of determining whether the case involves a situation where a special audit is necessary is placed on the assessing officer and the Chief Commissioner or the Commissioner simultaneously. The provisions of Section 142(2A) do not lay down that the only aut....
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.... He further stated that all irregular or erroneous or even illegal orders were held to be null and void, since there is fine distinction between the orders which are null and void and orders which are irregular, wrong or illegal. Applying the ratio laid down by Special Bench of Delhi Tribunal in ACIT Vs. Sushila Milk Specialties Pvt. Ltd. in ITA No.100/Del/2007, order dated 30.10.2009 (2010) 122 ITD 48 (Delhi) (SB), where the matter was restored back to the file of Assessing Officer for framing the assessment afresh by affording reasonable opportunity of hearing to the assessee, was applied to the facts of the present case. 10. Another objection raised by the assessee before the CIT(A) was in respect extension of time given by the Assessing Officer for completion of special audit. The first objection of the assessee was that the order extending the time for completion of audit was passed on 21.01.2009, whereas the initial period of sixty days for furnishing special audit report starting from 21.11.2008 expired on 20.01.2009. Secondly, it was averred that the order extending the time limit was backdated and the order was passed in the month of February, 2009 i.e. after the expiry....
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.... special audit conducted was 28.11.2008. The initial period for submission of special audit report was given by the Assessing Officer was sixty days and extension of further period of 120 days was available. He further contended that if the report was not submitted within initial period of sixty days, then extension of further period of 120 days was hypothetically given on the date on which initial sixty days period counted from the date of order under section 142(2A) of the Act, expired. He says that if this contention of the assessee is accepted, then the limitation period of 180 days would expire on 20.05.2009. However, the proviso clarifies that the period of 180 days has to be reckoned from the date on which the directions under subsection (2A) were received by the assessee within outer limit for submission of special audit report in the case would be 27.05.2009 and consequently, in this regard, he further observed that the due date on which initial period of sixty days expires would be 27.01.2009 and not 20.01.2009 as contended by the assessee. He said harmonious reading of provisions have to be made and reading of provisions together, the same have to be interpreted as a who....
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.... Mohan Virji Patel of Rs. 7.50 crores, which was also included in his return of income. However, while completing assessment under section 153A of the Act, the entire amount was taxed in the hands of assessee company. He further pointed out that the date of search was 23.08.2006 and reference for special audit was made by the Assessing Officer under section 142(2A) of the Act on 21.11.2008. He stressed that before making reference, the Assessing Officer has to give an opportunity of hearing to the assessee as per proviso to section 142(2A) of the Act. Then the order has to be passed with the previous approval of CIT(A) directing the said audit in the case. The Assessing Officer can extend time of getting special audit report but within the original period. Reference was made to the proviso to section 142(2C) of the Act. Our attention was drawn to page 277 of the Paper Book, under which the CIT(C) vide letter dated 12.09.2008 had given opportunity to assessee, at pages 278 to 280 of the Paper Book, the proposal by the Assessing Officer to CIT(A) is placed and the learned Authorized Representative for the assessee pointed out that nowhere he refers to any show cause notice to the ass....
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....d. Reliance was placed on the ratio laid down by the Apex Court in Rajesh Kumar and Others Vs. DCIT (2006) 287 ITR 91 (SC). The learned Authorized Representative for the assessee pointed out that where the Hon'ble Supreme Court in Rajesh Kumar and Others Vs. DCIT (supra) has laid down the proposition that the direction for special audit to be given before assessment was not an administrative direction and was of quasi-judicial nature and hence, notice had to be given to the assessee. He further pointed out that the Commissioner had applied the ratio laid down by Three Judge Decision of Apex Court in Sahara India (Firm) Vs. CIT and Another (2008) 300 ITR 403 (SC), which was relied upon by the learned Authorized Representative for the assessee and pointed out that the said decision was relevant for position of law pre-amendment in 2007. He also pointed out that Special Bench of Delhi Tribunal in ACIT Vs. Sushila Milk Specialties (P.) Ltd. (2010) 122 ITD 48 (Delhi) (SB) applied by the Commissioner was also on provisions which were on Statute pre 2007. 14. The learned Departmental Representative for the Revenue during the course of hearing was directed to file order sheet entries to....
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....letter of AO for special audit 20.01.2009 60 days to get the accounts audited expired 21.01.2009 AO suo moto extended the time 17. Referring to the assessment records, it was pointed out that the assessee makes representation on 15.11.2009 and copy of letter dated 21.01.2009 given to auditor on 26.01.2009. The learned Departmental Representative for the Revenue pointed out that the proviso makes it obligatory the Assessing Officer to give opportunity of bearing heard to the assessee before makes the proposal for special audit under section 142(2A) of the Act. He said that the question which arises is whether such an opportunity can be given by CIT(C). In the facts of present set of case, CIT(C) had given proper opportunity before passing whether special audit is to be done or not. He referred to the decision of Hon'ble Supreme Court in Sahara India (Firm) Vs. CIT (2008) 169 TAXMAN 328 (SC) and the Hon'ble Bombay High Court in Atlas Copco (India) Ltd. Vs. ACIT (2006) 154 Taxman 307 (Bom) in this regard. He further stated that it can at best an irregularity and not illegality as held by the Special Bench of Delhi Tribunal in ACIT Vs. Sushila Milk Specialties ....
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....o laid down by Hon'ble Bombay High Court in B.R. Bamasi Vs. CIT (1972) 83 ITR 223 (Bom). He stressed that as the facts and issue raised in assessment year 2004-05 are same as in assessment year 2005-06 and hence, it was pleaded that the assessment completed in the case for non-allowing of opportunity of hearing to the assessee before issue of notice under section 142(2A) of the Act and in not passing consequent order of extending time, the assessment was time barred. He then pointed out that in assessment year 2006- 07, cross appeals have been filed by the assessee and Revenue and the first issue raised is jurisdictional issue as to the assessment being time barred. 20. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the provisions of section 142(2A) of the Act i.e. looking at the nature and complexity of the accounts and volume and multiplicity of transactions and interest of revenue, then the procedure to be followed by the Assessing Officer in making reference for special audit and applying the report of special auditor for carrying out the assessment in the case of concerned assessee. Section 142(2A) of th....
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....er. The proviso under section 142 (2C) of the Act reads as under:- "Provided that the Assessing Officer may, suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit ; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee." 23. The proviso deals with the extension of period for completion of special audit and it is provided that the Assessing Officer may suo motu, which is inserted by the Finance Act, 2008 w.e.f. 01.04.2008 , or on an application made by the assessee and for any good and sufficient reason, extend the period for such further period or periods as he thinks fit. However, there is a cap that the aggregate of the period originally fixed and extended in no case shall exceed 180 days from the date on which direction under sub-section (2A) is received by the assessee. Reading the above said provisions, it is clear that where the Assessing Officer has soug....
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....has laid the proposition that direction issued under section 142(2A) of the Act for special audit of the accounts of assessee was not administrative in nature but was quasi-judicial order. Referring to the expression having regard to in section 142(2A) of the Act, the Apex Court held that the same was significant and the opinion must be formed strictly in terms of factors enumerated therein. The Apex Court held that where once it is held that the assessee suffers civil consequences and any order passed would be prejudicial to him, then the principles natural justice must be held to be implicit, which was required to be applied inter-alia to minimize arbitrariness. It was further observed by the Apex Court that if the assessee is put to notice he could show that the nature of accounts was not such as would require appointment of special auditor. He could also show that what the Assessing Officer considers complex is in fact not so. It was further held that formation of opinion under section 142(2A) of the Act that the accounts of assessee requires an expert audit should indisputably be based on objective considerations and no order can be passed on whims or caprice. The Hon'ble Supr....
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.... is discretionary. The court may not interfere with a statutory power." 28. The Three Judge decision of Hon'ble Supreme Court in Sahara India (Firm) Vs. CIT and Another (supra) while deciding the issue of scope and nature of Assessing Officer's and Commissioner's responsibility held that the order entails civil consequences and the assessee has to be given a reasonable opportunity of being heard before passing the order. The Hon'ble Supreme Court took note of insertion of proviso to section 142(2A) of the Act w.e.f. 01.04.2007, under which it is provided that the Assessing Officer shall not direct the assessee to get the accounts so audited, unless the assessee has been given reasonable opportunity of being heard. The Court observed that exercise of power under section 142(2A) of the Act leads to serious civil consequences and therefore, even in the absence of any express provision for affording an opportunity of pre-decisional hearing to the assessee and in the absence of any express provision in section 142(2A) of the Act barring giving of reasonable opportunity to the assessee, the requirement of observance of principles of natural justice is to be read into said provisions. ....
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.... the said application were referred to. The Apex Court referred to the earlier decision of the Court in Rajesh Kumar and Others Vs. DCIT (supra) observed as under:- "20. Dealing with the question whether the requirement of affording an opportunity of hearing is to be read into section 142(2A), in Rajesh Kumar(1) it has been held that prejudice to the assessee is apparent on the face of the said statutory provision. It has been observed that on account of the special audit, the assessee has to undergo the process of further accounting despite the fact that his accounts have been audited by a qualified auditor in terms of section 44AB of the Act. An auditor is a professional person. He has to function independently. He is not an employee of the assessee. In case of misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949. Besides, the assessee has to pay a hefty amount as fee of the special auditor. Moreover, during the audit of the accounts again by the special auditor, he has to answer a large number of questions. Referring to the decision of this court in Binapani Dei wherein it was observed that when by reason ....
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....quired 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." (Emphasis supplied by us) 29. Then dealing with the issue at hand that whether the pre-decisional hearing is required or not, the Apex Court held as under:- "22. We shall now deal with the submission of learned counsel appearing for the Revenue that the order of special audit is only a step towards assessment and being in the nature of an inquiry before assessment, is purely an administrative act giving rise to no civil consequence and, therefore, at that stage a pre-decisional hearing is not required. In Rajesh Kumar(1) it has been {1.[2006] 287 ITR 91 (SC)} held that in view of section 136 of the Act, proceedings before an Assessing Officer are deemed to be judicial proceedings. Section 136 of the Act stipulates that any proceeding before an income-tax authori....
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....eview of the original order on merit, which, as explained above, is not the case here." (Emphasis supplied by us) 30. The Apex Court thus, laid down that the principles of audi alteram partem could be excluded only when the Statute contemplates a post decisional hearing amounting to a full review of the original order on merit i.e. the decision to make a reference for getting special audit done under section 142(2A) of the Act. Where they recognized the procedure that after the special audit report is submitted under section 142(2A) of the Act, the assessment proceedings would give an opportunity of hearing to the assessee on the said findings of the said auditor and the predecisional hearing i.e. whether said audit is required in the facts and circumstances of the case, is not open for discussion. Upholding the views expressed in Rajesh Kumar and Others Vs. DCIT (supra), the Apex Court held as under:- "24. The upshot of the entire discussion is that 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 predecisional hearing to an assessee and in th....
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....of different courts and the Tribunals on the issue which have been taken note and the proposition laid down by the Apex Court is being applied to decide the present issue. The learned Departmental Representative for the Revenue and CIT(A) placed reliance on ACIT Vs. Sushila Milk Specialties (P.) Ltd. (supra), which related to pre-amended provisions and hence, the said issue cannot be applied to the present set of facts. However, we find that the Mumbai Bench of Tribunal in ACIT Vs. Claridges Investments & Finances (P) Ltd. (supra) on similar facts, wherein the order initiating special audit was passed without allowing the assessee an opportunity of being heard was held to be vitiated in law. It was further held that the extended time limit laid down in Explanation (1)(iii) to section 153A of the Act was not available to him for want of validity and proper reference under section 142(2A) of the Act and the assessment order being passed after the statutory time limit makes the assessment to be bad in law and was annulled. 34. The Hon'ble High Court of Allahabad in Kaka Carpets Vs. CIT (supra) vide judgment dated 17.01.2014 had also held as under:- "23. Thus, A.O. should reconsi....
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....ative for the Revenue has placed reliance on the ratio laid down by the Hon'ble Bombay High Court in earlier decision dated 07.03.2006 in Atlas Copco (India) Ltd. Vs. ACIT (supra), wherein it was held that before passing an order under section 142(2A) of the Act whether an opportunity of hearing is to be given to the assessee and it was held that the said decision of Hon'ble Bombay High Court is prior to the amendment in the Act and also prior to the decision passed by the Apex Court in Rajesh Kumar and Others Vs. DCIT (supra) and Three Judge Decision in Sahara India (Firm) Vs. CIT and Another (supra) and also later decision of Hon'ble Bombay High Court in Nickunj Eximp Enterprises Pvt. Ltd. Vs. ACIT (supra). 38. Now, coming to the facts of the present case, search and seizure on the premises of group concerns was carried out on 23.08.2006. As per proviso to section 153B of the Act, the assessment proceedings in such case had to be completed by 31.12.2008, whereas the assessment order in the present case was passed on 11.06.2009. The Revenue emphasized that the assessment order passed in the case is within time frame as reference was made for special audit and time allowed for g....
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....as received. The detailed reasons for special audit as given in the proposal are mentioned which were forwarded to the Addl. CIT, Pune. Further, show cause notice was issued to the assessee on 12.09.2008 by the CIT and he was asked to explain as to why special audit should not be ordered. The CIT in the said order mentions that along with notice of hearing, detailed proposal as received from the DCIT, Central, Kol hapur was also enclosed. The assessee was again sent another show cause notice and the assessee appeared thereafter. The CIT(C) noted that notices were inadvertently issued for compulsory audit for assessment year 2008-09 while the cases to be audited were for assessment years 2001-02 to 2007-08, hence, therefore, notices were issued to the assessee and the CIT passed the order granting permission for special audit under section 142(2A) of the Act recording the reasons for the same. The said order is placed at pages 267 to 273 of the Paper Book. The assessee has also enclosed various notices received from CIT(C) and the replies filed therein at pages 274 to 285 of the Paper Book. Thereafter, special auditor was appointed and he conducted the special audit. 40. The ques....
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....al stage. In conclusion, the Apex Court directed that the said proposition would be applicable prospectively. The case of the assessee before us relates to the period which is prospective to the decision of the Apex Court and is also after insertion by the Finance Act, 2007 w.e.f. 01.06.2007. Reasonable opportunity of being heard on pre-decisional stage to be allowed by the Assessing Officer to the assessee was on Statute when the proceedings were taken up against the assessee. However, as the facts reveal before submitting the proposal dated 11.09.2008 for conducting special audit under section 142(2A) of the Act to the CIT(C), no opportunity of hearing was given to the assessee. The requirement of the Act is that the Assessing Officer has to give finding that there is complexity of accounts and the interests of revenue would be affected, and in such circumstances, show cause notice needs to be given to the assessee to explain its case. Where the assessee was able to explain the nature of entries and also justify that the same are not complex, then there is no need to put the assessee to such hardship of conducting special audit. The Assessing Officer having failed to give any opp....