TaxTMI 
TaxTMI 
2017 (3) TMI 1314
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....o.543/PUN/2014 are being referred to. 3. The assessee in ITA No. 543/PUN/2014 has raised the following grounds of appeal :- 1] The learned CIT(A) erred in holding that the asst. order passed u/s 153A r.w.s. 143(3) was not barred by limitation and thus, the same was valid in law. 1.1 ] The learned CIT(A) erred in holding that the reference for special audit u/s 142(2A) made in the case of the assessee was valid in law without appreciating the correct facts of the case. 1.2 ] The learned CIT(A) failed to appreciate that the reference for compulsory audit u/s 142(2A) was not valid in view of the Rajasthan H.C. decision in the case of Bajarang Textiles [294 ITR 561] and hence, the time limit for completion of asst. could not be extended by the period of special audit allowed u/s 153B of the Act and thus, the asst. was time barred and void. 1.3 ] The learned CIT(A) ought to have appreciated that the reference u/s 142(2A) for special audit was an illegal one as the A.O had not given an opportunity of hearing to the assessee as required under proviso to section 142(2A) and hence, the time limit for completion of asst. could not be extended by the per....
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....extent of Rs. 4,50,000/- out of the total disallowance of Rs. 6 lacs made by the learned A.O. in respect of director's remuneration paid to Shri Navinkumar Yadav. 4.1] The learned CIT (A) failed to appreciate that the payment made to Shri Navinkumar Yadav was quite reasonable considering the services rendered by him as a director of the appellant company and therefore, the disallowance made u/s 40A(2)(b) was not justified on facts of the case. 5] The learned CIT (A) erred in confirming the disallowance of Rs. 1,35,279/- made in respect of various expenses on the ground that the assessee could not establish that the said expenses were incurred for business purposes of the assessee and thus, the addition made was justified. 5.1 ] The learned CIT (A) further erred in holding that there was no reasonable cause on part of the assessee for furnishing additional details in respect of the said expenses in the course of appellate proceedings and hence, the same could not be admitted as additional evidence u/r 46A and therefore, the said addition was justified. 5.2 ] The learned CIT (A) failed to appreciate that all the said expenses were incurred for busi....
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....2.2016 and the copy of the said order was filed on record. 6. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the order of CIT(A). 7. Briefly, in the facts of the case, the assessee had filed the return of income declaring total income of Rs. 21,52,360/- on 01.11.2004. Search and seizure action under section 132 of the Act was conducted in Yadav group of cases on 20.07.2005 and the assessee was member of Yadav group; the assessee was also searched. In response to notice issued under section 153A of the Act, the assessee filed return of income declaring total income at Rs. 21,52,855/-. The assessee was rendering consultancy services and was also deriving income from consultancy charges and commission. The case of the assessee was selected for scrutiny. The Assessing Officer noted the modus operandi of services provided by the assessee for securing seats in colleges for students and also noted various aspects of the assessee's business and the reasons for Investigation Wing of the Income Tax Department, Pune to conduct search and seizure operation against the assessee group. Various books of account and documents were seized, wherei....
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....ing for audit under section 142(2A) of the Act. The Assessing Officer notes that after due satisfaction, recorded in writing, the CIT, Central, Pune ordered for the audit to be conducted under section 142(2A) of the Act. The Assessing Officer also noted that requisite information and records were called from the assessee. Several opportunities were given to the assessee to reply. However, the assessee failed to comply with the notices satisfactorily and fully and in view thereof, the Assessing Officer went through the records and submitted the proposal under section 142(2A) of the Act. The Assessing Officer further notes that in order to be fair, the assessee was asked to produce books of account along with bills and vouchers for examination by him and the Addl. CIT, CR-1, Pune and explained all the complexities to them, so that doubts could be cleared. It was further pointed out to the representative of the assessee that in case the assessee fails to clear the doubts, compulsory audit shall be ordered. However, the assessee did produce the books only, without any supporting documents before the Assessing Officer. On this basis, the Assessing Officer prepared note and submitted it ....
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.... 12.08.2008 11. The issue which arises in the present appeal is against the reference made under section 142(2A) of the Act. Search was conducted at the premises of assessee on 20.07.2005 and the time limit for completing assessment under section 143(3) r.w.s. 153A of the Act in such case was 31.12.2007 . Even for search year i.e. where the assessment had to be completed under section 143(3) of the Act, the time limit for completion of assessment was 31.12.2007. The assessment order for all the years was passed by the Assessing Officer on 12.08.2008. The case of assessee before us is that the said order passed by the Assessing Officer was time barred since the reference made for special audit under section 142(2A) of the Act was incorrect as no opportunity of hearing was given at the pre-decisional stage. The perusal of record reflects that the show cause notice was issued on 02.11.2007 by the CIT (Central), Pune after receiving proposal from the Assessing Officer recommending compulsory audit under section 142(2A) of the Act. The said notice itself mentioned that the assessee was being given an opportunity in view of proviso to section 142(2A) of the Act as to why co....
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....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 the Act reads as under:- "142..... (2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require: Provided that the Assessing Offi....
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....ssessee 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 sought special audit report, then it is incumbent upon the assessee to submit the said report within such period which is specified by the Assessing Officer. However, if the said audit has not been completed within such fixed period, then the Assessing Officer has power on his own motion or on an application moved by the assessee or for any other reasons, to extend the period for furnishing the special audit report within such extended period. 24. Section 142(2A) of the Act in the first instance talks about the period which is specified by the Assessing Officer i.e. the period given to assessee to conduct special audit by issue of notice in this behalf. When the period is extended then, the cap is placed on aggregate period in which the report is to be given wherein, it is....
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....t 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 Supreme Court concluded by holding as under:- "55. The factors enumerated in section 142(2A) of the Act, thus, are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed by it would be prejudicial to him, principles of natural justice must be held to be implicit. The principles of natural justice are required to be applied, inter alia, to minimize arbitrariness. 56. It is trite, even if there is a possibility that the Tribunal would correctly follow the statutory provisions, still compliance with principles of natural justice would be required. [See R. v. Kensington and Chelsea Rent Tribunal, Ex p. MacFarlane [1974] 1 WLR 1486 (QB)]. 57. Justice, as is well known, is not only to be done but mani....
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....ard. 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. The Apex Court re-affirmed earlier decision of Apex Court in Rajesh Kumar and Others Vs. DCIT (supra). It may be pointed out herein itself that pursuant to decision in Rajesh Kumar and Others Vs. DCIT (supra) by the Apex Court, Larger Bench was affirmed on the point that whether in every case where the Assessing Officer issued directions in terms of section 142(2A) of the Act, the assessee has to be heard before such order is passed. The Division Bench was of the view that it does not appear to be correct position of law. The Three Judge Bench thereafter, took note of the provisions of section 142(2A) to (2D) of the Act and section 142(3) of the Act and observed that the twin conditions of the nature and complexi....
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....endently. 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 of an action on the part of a statutory authority, civil or evil consequences ensue, the principles of natural justice are required to be followed and in such an event, although no express provision is laid down in this behalf, compliance with the principles of natural justice would be implicit, the learned judges held {1.[2006] 287 ITR 91 (SC) 2.[1967] AIR 1967 SC 1269.} that by virtue of an order under section 142(2A) of the Act, the assessee suffers civil consequences and the order passed would be prejudicial to him and, therefore, the principles of natural justice must be held to be implicit. The court has further observed that if the assessee was put to notice, he could show that the nature of accounts ....
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....ecial 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 authority shall be deemed to be judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code, 1860, and also for the purpose of section 196 of the Indian Penal Code and every income-tax authority is a court for the purpose of section 195 of the Code of Criminal Procedure, 1973. Though having regard to the language of the provision, we have some reservations on the said view expressed in Rajesh Kumar's case, but having held that when civil consequences ensue, no distinction between quasi-judicial and administrative order survives, we deem it unnecessary to dilate on the scope of section 136 of the Act. It is the civil consequence which obliterates the distinctio....
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....itor and the pre- decisional 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 pre-decisional hearing to an assessee and in the absence of any express provision in section 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar's (1) case." 31. The Apex Court further recognized the insertion of proviso under section 142(2A) of the Act w.e.f. 01.06.2007 which provided that no direction for special audit shall be issued without affording reasonable opportunity of hearing to the assessee. In the facts of the case before the Apex Court before passing the order requiring the assessee to have the....
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....rtunity 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 reconsider the issue as to whether a direction should be issued under section 142(2A) of the Act after considering the objections of the assessee and affording a reasonable opportunity of being heard, in terms of Section 142(2A) of the Act. It is only after the A.O. reaches to a fair conclusion after considering the reply given by the petitioner, and affording an opportunity of hearing, the CIT as approving authority will consider whether the special audit is required to be carried out for the purposes of understanding the accounts maintained by the assessee. The opinion must be formed reflecting the application of mind based on obje....
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....o 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 getting the special audit under section 142(2A) of the Act is to be excluded for working out the limitation period for passing the assessment order. In this regard, the communication and correspondence before permission given to special audit need to be looked into. The learned Departmental Representative for the Revenue has filed on record copy of order sheet entries, wherein the assessee was asked to file English translation of the seized note books after assignment of case upon the DCIT, Central Circle, the order sheet entry is dated 16.05.2008. Thereafter, there was proposal to centralize Patel group....
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....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 question which arises for adjudication before us is that in the present set of facts, where the Assessing Officer before sending a proposal for conducting special audit under section 142(2A) of the Act has not given an opportunity of being heard to the assessee and in view of the proviso to section 142(2A) of the Act, is the said proposal made without affording pre-decisional hearing to the assessee valid and can the proceedings conducted thereafter be held to be vitiated in law. The Hon'ble Supreme Court in Three Judge decision in Sahara India (Firm) Vs. CIT and Another (supra) had decided the is....
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....on 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 opportunity of hearing to the assessee before making the proposal for conducting special audit under section 142(2A) of the Act at the pre-decisional stage, then such proposal made by the Assessing Officer to the CIT(C), Pune is against the principles of natural justice and suffers from infirmity. The case of Revenue before us is that the CIT(C), Pune before passing his order of giving permission to the Assessing Officer to ask the assessee to get the special audit conducted had given fair opportunity of hearing to the assessee. The role of CIT(C) is the role of approving authority. The role is n....