Full Judgment Text
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CASE NO.:
Appeal (civil) 2783 of 2008
PETITIONER:
M/S SAHARA INDIA (FIRM),LUCKNOW
RESPONDENT:
COMMISSIONER OF INCOME TAX,CENTRAL-I & ANR
DATE OF JUDGMENT: 11/04/2008
BENCH:
B.N. AGRAWAL & P.P. NAOLEKAR & D.K. JAIN
JUDGMENT:
J U D G M E N T
REPORTABLE
CIVIL APPEAL NO. 2783 OF 2008
Arising out of S.L.P. (C) No.20209 of 2006
WITH
CIVIL APPEAL NO. 2784 OF 2008
[Arising out of S.L.P.(C) NO. 20212 OF 2006]
D.K. JAIN, J.:
Leave granted.
2. These matters have been placed before the three-Judge
Bench in view of a common order dated 14th December, 2006,
passed by a two-Judge Bench of this Court. The Order reads
as follows:
"When the matter was taken up, learned
counsel for the petitioner placed reliance
on a decision of this Court in Rajesh Kr.
& Ors. Vs. Deputy Commissioner of
Income Tax & Ors. According to learned
counsel for the petitioner, before any
direction can be issued under Section
142 (2A) of the Income Tax Act, 1961 (in
short ’the Act’) for special audit of the
accounts of the assessee, there has to be
a pre-decisional hearing and an
opportunity has to be granted to the
assessee for the purpose. A close reading
of the decision shows that the
observations in this regard appear to
have been made in the context of the
assessments in terms of Section 158 BC
(Block Assessment) of the Act. Such
assessments are relatable to a case when
raid has been conducted at the premises
of an assessee. Had that been so, limited
to the facts involved in that case, we
would have negatived the contentions of
learned counsel for the petitioner. But,
certain observations of general nature
have been made. The effect of these
observations appear to be that in every
case where the Assessing Officer issues a
direction in terms of Section 142 (2A) of
the Act, the assessee has to be heard
before such order is passed. This does
not appear to us to be the correct position
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of law. Therefore, we refer the matter to a
larger Bench. The records be placed
before Hon’ble the Chief Justice of India
for constituting an appropriate Bench."
3. Although no specific question has been formulated for
determination by the larger Bench but from the afore-
extracted order it is discernible that the Bench had doubted
the correctness of the decision of this Court in Rajesh
Kumar & Ors. Vs. Deputy Commissioner of Income-Tax &
Ors. , to the extent that it tends to lay down as an absolute
proposition of law that in every case where the Assessing
Officer issues a direction under Section 142 (2A) of the
Income Tax Act, 1961 (for short the Act), the assessee has to
be heard before such an order is passed. In other words, the
Bench of two learned Judges have felt that it may not be
necessary to afford an opportunity of hearing to an assessee
before ordering special audit in terms of Section 142 (2A) of
the Act. This is the short controversy before us.
4. As a common question of law is involved in both the
cases and even the background facts are identical, these are
being disposed of by this judgment. However, before
adverting to the factual matrix, we propose to address
ourselves on the afore-noted question of law on which the
latter Bench has expressed its reservations. At the outset, we
may also note that in Rajesh Kumar (supra), while observing
that the principles of natural justice must be held to be
implicit in Section 142 (2A) of the Act, learned Judges finally
held as under:
"The hearing given, however, need not be
elaborate. 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 natural
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."
5. Sub-sections (2A), (2B), (2C), (2D) and 3 of Section 142 of
the Act run as follows:
"(2A) \026 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
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setting forth such particulars as may be
prescribed and such other particulars as
the Assessing Officer may require.
*[Provided that the Assessing
Officer shall not direct the assessee to get
the accounts so audited unless the
assessee has been given a reasonable
opportunity of being heard.]
(2B) \026 The provisions of sub-section (2A)
shall have effect notwithstanding that the
accounts of the assessee have been
audited under any other law for the time
being in force or otherwise.
(2C) \026 Every report under sub-section
(2A) shall be furnished by the assessee to
the Assessing Officer within such period
as may be specified by the Assessing
Officer.
[Provided that the Assessing Officer
may, 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.]
(2D) - The expenses of, and incidental to,
any audit under sub-section (2A)
(including the remuneration of the
accountant) shall be determined by the
Chief Commissioner or Commissioner
(which determination shall be final) and
paid by the assessee and in default of
such payment, shall be recoverable from
the assessee in the manner provided in
Chapter XVII-D for the recovery of arrears
of tax.
*[Provided that where any direction
for audit under sub-section (2A) is issued
by the Assessing Officer on or after the 1st
day of June, 2007, the expenses of, and
incidental to, such audit (including the
remuneration of the Accountant) shall be
determined by the Chief Commissioner or
Commissioner in accordance with such
guidelines as may be prescribed and the
expenses so determined shall be paid by
the Central Government.]
(3) The assessee shall, except where the
assessment is made under Section 144,
be given an opportunity of being heard in
respect of any material gathered on the
basis of any inquiry under sub-section (2)
or any audit under sub-section (2A) and
proposed to be utilized for the purposes
of the assessment.
[* Inserted by the Finance Act, 2007 w.e.f.
1-6-2007]."
6. A bare perusal of the provisions of sub-section (2A) of the
Act would show that the opinion of the Assessing Officer that
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it is necessary to get the accounts of assessee audited by an
Accountant has to be formed only by having regard to: (i) the
nature and complexity of the accounts of the assessee; and
(ii) the interests of the revenue. The word "and" signifies
conjunction and not disjunction. In other words, the twin
conditions of "nature and complexity of the accounts" and
"the interests of the revenue" are the prerequisites for
exercise of power under Section 142 (2A) of the Act.
Undoubtedly, the object behind enacting the said provision is
to assist the Assessing Officer in framing a correct and proper
assessment based on the accounts maintained by the
assessee and when he finds the accounts of the assessee to
be complex, in order to protect the interests of the revenue,
recourse to the said provision can be had. The word
"complexity" used in Section 142 (2A) is not defined or
explained in the Act. As observed in Swadeshi Cotton Mills
Co. Ltd. Vs. C.I.T. , it is a nebulous word. Its dictionary
meaning is: "The state or quality of being intricate or complex
or that is difficult to understand. However, all that is difficult
to understand should not be regarded as complex. What is
complex to one may be simple to another. It depends upon
one’s level of understanding or comprehension. Sometimes,
what appears to be complex on the face of it, may not be
really so if one tries to understand it carefully." Thus, before
dubbing the accounts to be complex or difficult to
understand, there has to be a genuine and honest attempt on
the part of the Assessing Officer to understand accounts
maintained by the assessee; appreciate the entries made
therein and in the event of any doubt, seek explanation from
the assessee. But opinion required to be formed by the
Assessing Officer for exercise of power under the said
provision must be based on objective criteria and not on the
basis of subjective satisfaction. There is no gainsaying that
recourse to the said provision cannot be had by the Assessing
Officer merely to shift his responsibility of scrutinizing the
accounts of an assessee and pass on the buck to the special
auditor. Similarly, the requirement of previous approval of
the Chief Commissioner or the Commissioner in terms of the
said provision being an inbuilt protection against any
arbitrary or unjust exercise of power by the Assessing Officer,
casts a very heavy duty on the said high ranking authority to
see to it that the requirement of the previous approval,
envisaged in the Section is not turned into an empty ritual.
Needless to emphasise that before granting approval, the
Chief Commissioner or the Commissioner, as the case may
be, must have before him the material on the basis whereof
an opinion in this behalf has been formed by the Assessing
Officer. The approval must reflect the application of mind to
the facts of the case.
7. However, the question for adjudication is 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?
8. Mr. Soli J. Sorabjee, learned senior counsel appearing on
behalf of the appellants vehemently submitted that the
decision of this Court in Rajesh Kumar (supra) lays down the
correct proposition of law and, therefore, does not require
reconsideration. In support of the proposition that previous
pronouncements should not be lightly dissented from,
learned counsel placed reliance on the decisions of this Court
in Maganlal Chhaganlal (P) Ltd. Vs. Municipal
Corporation of Greater Bombay & Ors. ; Kattite Valappil
Pathumma & Ors. Vs. Taluk Land Board & Ors. ; Mishri
Lal Vs. Dhirendra Nath & Ors. . It was contended that
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even an administrative order, assuming one under Section
142 (2A) of the Act to be so, if it operates to the prejudice of
an assessee and entails civil consequences, the elementary
principles of natural justice and fair play have to be applied
and consequently, an opportunity of hearing has to be
afforded to the assessee before an order under the said
provision is passed. Learned counsel, however, conceded that
the extent and ambit of the opportunity of hearing may not
require a complete comprehensive hearing or inquiry but the
bare modicum of natural justice has to be observed. It was
contended that an order requiring special audit does affect a
person because of the pecuniary prejudice as also on account
of severe inconvenience caused in his business by virtue of
the intrusion of the special auditor. Besides, even the vested
right of limitation is affected by the appointment of special
auditor inasmuch as the period of limitation thereby stands
extended. In this behalf, reference is made to the decisions of
this Court in Ramlal Motilal & Chhotelal Vs. Rewa
Coalfields Ltd. and M.K. Prasad Vs. P. Arumugam . In
nutshell, the stand of the learned counsel was that an order
under Section 142 (2A) of the Act entails serious civil
consequence and, therefore, the principles of natural justice
have to be complied with before an order under the said
provision is made.
9. Mr. P.P. Malhotra, learned Additional Solicitor General of
India appearing on behalf of the respondent/revenue, on the
other hand, has contended that the power under the said
provision, which is found in Chapter XIV of the Act,
prescribing procedure for assessment, relates to the inquiry
before the assessment and the special audit is to facilitate the
assessment to protect the interests of the revenue, which is of
paramount consideration and cannot be defeated or delayed
by affording a hearing to the assessee to decide the question
whether there should be a special audit or not. The stand of
the learned senior counsel is that since order of special audit
is only a step towards the assessment and is an inquiry
before assessment, no liability in terms of the said order is
created and, therefore, such an order does not lead to any
civil consequences. Learned counsel submitted that the
assumption of prejudice and civil consequence to the
assessee on account of an order for special audit, on the
basis whereof the case of Rajesh Kumar (supra) has been
decided, is erroneous and, therefore, the said decision
requires reconsideration. Lastly, it was submitted that any
interpretation which may now be given by this Court should
be prospective in nature as the interests of the revenue will
be seriously prejudiced by a retrospective interpretation. It is
pleaded that while interpreting the said provision, the decided
cases should not be disturbed. In support of the plea,
reliance has been placed on the decisions of this Court in
Steel Authority of India Ltd. & Ors. Vs. National Union
Waterfront Workers & Ors. , P.V. George & Ors. Vs. State
of Kerala & Ors. , M.A. Murthy Vs. State of Karnataka &
Ors. , Ram Lal, Moti Lal & Chhotelal Vs. Rewa
Coalfields Ltd. .
10. Before dealing with the rival submissions to determine
whether the principles of natural justice demand that an
opportunity of hearing should be afforded to an assessee
before an order under Section 142 (2A) of the Act is made, we
may appreciate the concept of "natural justice" and the
principles governing its application.
11. Rules of "natural justice" are not embodied rules. The
phrase "natural justice" is also not capable of a precise
definition. The underlying principle of natural justice,
evolved under the common law, is to check arbitrary exercise
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of power by the State or its functionaries. Therefore, the
principle implies a duty to act fairly, i.e. fair play in action.
As observed by this Court in A.K. Kraipak & Ors. Vs. Union
of India & Ors. , the aim of rules of natural justice is to
secure justice or to put it negatively to prevent miscarriage of
justice. These rules can operate only in areas not covered by
any law validly made. They do not supplant the law but
supplement it. (Also see: Income Tax Officer & Ors. Vs. M/s
Madnani Engineering Works Ltd., Calcutta ).
12. In Swadeshi Cotton Mills Vs. Union of India , R.S.
Sarkaria, J., speaking for the majority in a three-Judge
Bench, lucidly explained the meaning and scope of the
concept of "natural justice". Referring to several decisions,
his Lordship observed thus (SCC p.666; Headnote):
"Rules of natural justice are not
embodied rules. Being means to an end
and not an end in themselves, it is not
possible to make an exhaustive catalogue
of such rules. But there are two
fundamental maxims of natural justice
viz. (i) audi alteram partem and (ii) nemo
judex in re sua. The audi alteram partem
rule has many facets, two of them being
(a) notice of the case to be met; and (b)
opportunity to explain. This rule cannot
be sacrificed at the altar of administrative
convenience or celerity. The general
principle \026 as distinguished from an
absolute rule of uniform application \026
seems to be that where a statute does
not, in terms, exclude this rule of prior
hearing but contemplates a post-
decisional hearing amounting to a full
review of the original order on merits,
then such a statute would be construed
as excluding the audi alteram partem rule
at the pre-decisional stage. Conversely if
the statute conferring the power is silent
with regard to the giving of a pre-
decisional hearing to the person affected
and the administrative decision taken by
the authority involves civil consequences
of a grave nature, and no full review or
appeal on merits against that decision is
provided, courts will be extremely
reluctant to construe such a statute as
excluding the duty of affording even a
minimal hearing, shorn of all its formal
trappings and dilatory features at the
pre-decisional stage, unless, viewed
pragmatically, it would paralyse the
administrative process or frustrate the
need for utmost promptitude. In short,
this rule of fair play must not be
jettisoned save in very exceptional
circumstances where compulsive
necessity so demands. The court must
make every effort to salvage this cardinal
rule to the maximum extent possible,
with situational modifications. But, the
core of it must, however, remain, namely,
that the person affected must have
reasonable opportunity of being heard
and the hearing must be a genuine
hearing and not an empty public
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relations exercise."
13. Initially, it was the general view that the rules of natural
justice would apply only to judicial or quasi-judicial
proceedings and not to an administrative action. However, in
State of Orissa Vs. Binapani Dei & Ors. , the distinction
between quasi-judicial and administrative decisions was
perceptively mitigated and it was held that even an
administrative order or decision in matters involving civil
consequences, has to be made consistently with the rules of
natural justice. Since then the concept of natural justice has
made great strides and is invariably read into administrative
actions involving civil consequences, unless the statute,
conferring power, excludes its application by express
language.
14. Recently, in Canara Bank Vs. V.K. Awasthy , the
concept, scope, history of development and significance of
principles of natural justice have been discussed in extenso,
with reference to earlier cases on the subject. Inter alia,
observing that the principles of natural justice are those rules
which have been laid down by the Courts as being the
minimum protection of the rights of the individual against the
arbitrary procedure that may be adopted by a judicial, quasi-
judicial and administrative authority while making an order
affecting those rights, the Court said :
"Concept of natural justice has
undergone a great deal of change in
recent years. Rules of natural justice are
not rules embodied always expressly in a
statute or in rules framed thereunder.
They may be implied from the nature of
the duty to be performed under a statute.
What particular rule of natural justice
should be implied and what its context
should be in a given case must depend to
a great extent on the fact and
circumstances of that case, the frame-
work of the statute under which the
enquiry is held. The old distinction
between a judicial act and an
administrative act has withered away.
Even an administrative order which
involves civil consequences must be
consistent with the rules of natural
justice. Expression ’civil consequences’
encompasses infraction of not merely
property or personal rights but of civil
’liberties, material deprivations, and non-
pecuniary damages. In its wide umbrella
comes everything that affects a citizen in
his civil life."
15. Thus, it is trite that unless a statutory provision either
specifically or by necessary implication excludes the
application of principles of natural justice, because in that
event the Court would not ignore the legislative mandate, the
requirement of giving reasonable opportunity of being heard
before an order is made, is generally read into the provisions
of a statute, particularly when the order has adverse civil
consequences for the party affected. The principle will hold
good irrespective of whether the power conferred on a
statutory body or tribunal is administrative or quasi-judicial.
16. We may, however, hasten to add that no general rule of
universal application can be laid down as to the applicability
of the principle audi alteram partem, in addition to the
language of the provision. Undoubtedly, there can be
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exceptions to the said doctrine. Therefore, we refrain from
giving an exhaustive catalogue of the cases where the said
principle should be applied. The question whether the
principle has to be applied or not is to be considered bearing
in mind the express language and the basic scheme of the
provision conferring the power; the nature of the power
conferred and the purpose for which the power is conferred
and the final effect of the exercise of that power. It is only
upon a consideration of all these matters that the question of
application of the said principle can be properly determined.
(See: Union of India Vs. Col. J.N. Sinha & Ors. )
17. In Mohinder Singh Gill & Anr. Vs. The Chief Election
Commissioner, New Delhi & Ors. , explaining as to what is
meant by expression ’civil consequence’, Krishna Iyer, J.,
speaking for the majority said:
"’Civil Consequences’ undoubtedly cover
infraction of not merely property or
personal rights but of civil liberties,
material deprivations and non-pecuniary
damages. In its comprehensive
connotation, everything that affects a
citizen in his civil life inflicts a civil
consequence." (emphasis supplied)
18. The question in regard to the requirement of opportunity
of being heard in a particular case, even in the absence of
provision for such hearing, has been considered by this Court
on a number of occasions. In Olga Tellis & Ors. Vs.
Bombay Municipal Corporation & Ors. while dealing with
the provisions of Section 314 of the Bombay Municipal
Corporation Act, 1888, which confers discretion on the
Commissioner to get any encroachment removed with or
without notice, a Constitution Bench of this Court observed
as follows:
"It must further be presumed that, while
vesting in the Commissioner the power to
act without notice, the Legislature
intended that the power should be
exercised sparingly and in cases of
urgency which brook no delay. In all
other cases, no departure from the audi
alteram partem rule (’Hear the other side’)
could be presumed to have been
intended. Section 314 is so designed as to
exclude the principles of natural justice
by way of exemption and not as a general
rule. There are situations which demand
the exclusion of the rules of natural
justice by reason of diverse factors like
time, place the apprehended danger and
so on. The ordinary rule which regulates
all procedure is that persons who are
likely to be affected by the proposed
action must be afforded an opportunity of
being heard as to why that action should
not be taken. The hearing may be given
individually or collectively, depending
upon the facts of each situation. A
departure from this fundamental rule of
natural justice may be presumed to have
been intended by the Legislature only in
circumstances which warrant it. Such
circumstances must be shown to exist,
when so required, the burden being upon
those who affirm their existence."
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19. Again in C.B. Gautam Vs. Union of India & Ors. a
question arose whether in the absence of a provision for
giving the concerned parties an opportunity of being heard
before an order is passed under the provisions of Section 269
\026UD of the Act, for purchase by the Central Government of an
immovable property agreed to be sold on an agreement to
sell, an opportunity of being heard before such an order could
be passed should be given or not. Relying on the decision of
this Court in Union of India Vs. Col. J.N. Sinha and Olga
Tellis (supra) it was held that:
"Although Chapter XX-C does not contain
any express provision for the affected
parties being given an opportunity to be
heard before an order for purchase is
made under Section 269-UD, not to read
the requirement of such an opportunity
would be to give too literal and strict an
interpretation to the provisions of
Chapter XX-C and in the words of Judge
Learned Hand of the United States of
America "to make a fortress out of the
dictionary." Again, there is no express
provision in Chapter XX-C barring the
giving of a show cause notice or
reasonable opportunity to show cause
nor is there anything in the language of
Chapter XX-C which could lead to such
an implication. The observance of
principles of natural justice is the
pragmatic requirement of fair play in
action. In our view, therefore, the
requirement of an opportunity to show
cause being given before an order for
purchase by the Central Government is
made by an appropriate authority under
Section 269-UD must be read into the
provisions of Chapter XX-C. There is
nothing in the language of Section 269-
UD or any other provision in the said
Chapter which would negate such an
opportunity being given. Moreover, if
such a requirement were not read into
the provisions of the said Chapter, they
would be seriously open to challenge on
the ground of violations of the provisions
of Article 14 on the ground of non-
compliance with principles of natural
justice. The provision that when an order
for purchase is made under Section 269-
UD-reasons must be recorded in writing
is no substitute for a provision requiring
a reasonable opportunity of being heard
before such an order is made."
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 (supra) 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
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assessee. In case of mis-conduct, 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 (supra) 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 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, 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 is not such which would require
appointment of special auditors. He could further show that
what the Assessing Officer considers to be complex is, in fact,
not so. It was also open to him to show that the same would
not be in the interest of the revenue.
21. In the light of the aforenoted legal position, we are in
respectful agreement with the decision of this Court in
Rajesh Kumar (supra) that an order under Section 142 (2A)
does entail civil consequences. At this juncture, it would be
relevant to take note of the insertion of proviso to Section 142
(2D) with effect from 1st June, 2007. The proviso provides
that the expenses of the auditor appointed in terms of the
said provision shall, henceforth, be paid by the Central
Government. In view of the said amendment, it can be
argued that the main plank of the judgment in Rajesh
Kumar (supra) to the effect that direction under Section 142
(2A) entails civil consequences because the assessee has to
pay substantial fee to the special auditor is knocked off. True
it is that the payment of auditor’s fee is a major civil
consequence, but it cannot be said to be the sole civil or evil
consequence flowing from directions under Section 142 (2A).
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.
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 (supra) it has been 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
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an Income Tax Authority shall be deemed to be judicial
proceedings within the meaning of Sections 193 and 228 of
Indian Penal Code, 1860 and also for the purpose of Section
196 of I.P.C. and every Income Tax Authority is a court for
the purpose of Section 195 of 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 (supra), 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 distinction
between quasi judicial and administrative function.
Moreover, with the growth of the administrative law, the old
distinction between a judicial act and an administrative act
has withered away. Therefore, it hardly needs reiteration that
even a purely administrative order which entails civil
consequences, must be consistent with the rules of natural
justice. (Also see: Mrs. Maneka Gandhi Vs. Union of India
& Anr. and S.L. Kapoor Vs. Jagmohan & Ors. . As
already noted above, the expression "civil consequences"
encompasses infraction of not merely property or personal
rights but of civil liberties, material deprivations and non
pecuniary damages. Anything which affects a citizen in his
civil life comes under its wide umbrella. Accordingly, we
reject the argument and hold that since an order under
Section 142 (2A) does entail civil consequences, the rule audi
alteram partem is required to be observed.
23. We are also unable to persuade ourselves to agree with
the proposition canvassed by learned counsel for the revenue
that since a post-decisional hearing in terms of sub-section
(3) of Section 142 is contemplated, the requirement of natural
justice is fully met. Apart from the fact that ordinarily a post-
decisional hearing is no substitute for pre-decisional hearing,
even from the language of the said provision it is plain that
the opportunity of being heard is only in respect of the
material gathered on the basis of the audit report submitted
under sub-section (2A) and not on the validity of the original
order directing the special audit. It is well settled that the
principle audi alteram partem can be excluded only when a
statute contemplates a post decisional hearing amounting to
a full review of the original order on merit, which, as
explained above, is not the case here.
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
principles of natural justice is to be read into the said
provision. Accordingly, we reiterate the view expressed in
Rajesh Kumar’s case (supra).
25. 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.
26. 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.
27. Indubitably, before passing the said orders, no show
cause notice was given to the appellants. On the contrary, it
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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.
28. The next crucial question is that keeping in view the fact
that the time to frame fresh assessment for the relevant
assessment year by ignoring the extended period of limitation
in terms of explanation 1 (iii) to sub-section (3) of Section 153
of the Act is already over, what appropriate order should be
passed. As noted above, the learned Additional Solicitor
General had pleaded that if we were not inclined to agree with
him, the interpretation of the provision by us may be given
prospective effect, otherwise the interest of the revenue will
be greatly prejudiced.
29. There is no denying the fact that the law on the subject
was in a flux in the sense that till the judgment in Rajesh
Kumar (supra) was rendered, there was divergence of opinion
amongst various High Courts. Additionally, even after the
said judgment, another two-Judge Bench of this Court had
expressed reservation about its correctness. 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.
30. In the result, both the appeals are allowed to the extent
indicated above leaving the parties to bear their own costs.