Swatanter Kumar, J.:— Whether the Maxim Audi Alteram Partem, if at all and to what extent is applicable to the proceedings before the Assessing officer while passing a direction as contemplated under Section 142(2A) of the Income-tax Act (for short ‘the Act).
2. Shorn off unnecessary details, the necessary facts are: The petitioner claims to be part of Yum Group which was incorporated on 19th March, 1994 as a Private Limited Company in the name and style of KFC India Holding Private Limited w.e.f 28th August, 2002 commonly it is known as Yum! Restaurants (India) Pvt. Ltd. which globally operates and runs restaurants under the brand name of ‘KFC’ and ‘Pizza Hut’. The petitioner-company is regularly assessed to income-tax from the assessing year 1995-1996 onwards. The petitioner has five sources of income i.e (i) initial fee (ii) continuing fee, (iii) SCM fee, (iv) territorial fee and (v) stewardship fee. Petitioner has been following its mercantile system of accounting in carrying on its business and claims that it has been maintaining books of accounts on an universally accepted accounting package named as “BaaN”. Return declaring ‘Nil’ income accompanied by statutory audit report and test audit report was filed on 28th October, 2002 for the assessing year 2002-2003 for which assessment proceedings were taken on or about 28th October, 2003, which are still pending. During the course of hearing of assessment proceedings, certain queries were raised by the Assessing Officer after the case was taken up for scrutiny in terms of the CBDT Instructions dated 21st September, 2003 under compulsory scrutiny as the return of the assessee showed International transactions as defined under section 92(b) of the Act in excess of Rs. 5 crores.
3. Being dissatisfied with the replies filed to the questionnaire of the Assessing Officer, the Assessing Officer formed an opinion on 31st January, 2005 and submitted a proposal to the Commissioner of Income-tax, Delhi seeking his approval for issuance of direction to the assessee, in terms of section 142(2A) of the Act. The approval sought for was granted by the Commissioner of Income-tax Delhi vide his order dated 11th February, 2005. This in turn was conveyed to the petitioner, vide order dated 16th February, 2005.
4. The petitioner seeks to challenge the legality, validity and judicial propriety of this order dated 16.2.2005 passed by the Assessing Officer in exercise of the powers vested in him under section 142(2A) of the Act, mainly on the following grounds:—
(a) the impugned order is illegal and perverse because the reasons for directing special audit do not relate to nature and complexity of any accounts, but is based on certain factual assumption which are even contrary to the records?
(b) Neither opportunity of being heard was granted nor any show cause notice was served upon the petitioner before the Assessing Officer passed the impugned order in exercise of his quasi-judicial authority. Thus, the order is violative of principles of natural justice.
(c) The order is contrary to the procedure of law enunciated in various judgments including in the case of GNK Driveshafts (India) Ltd. v. Income-tax Officer & Ors. (2003) 259 ITR 19.
5. Based upon the above narrated facts and the contentions noticed above, petitioner firstly pray for a direction to the respondents, in particular to respondent No. 2 to furnish to the petitioner copy of his proposal and approval granted by authorities, leading to the issuance of the order dated 16th February, 2004. Secondly, respondent No. 2 be directed to dispose of the objections raised by the assessee in relation to the proposal under section 142(2A) by passing a speaking order and lastly that the order dated 16.2.2005 be quashed. As far as the first two reliefs are concerned, hardly anything survives in this writ petition. Petitioner has himself annexed to the writ petition, proposal made by the Assessing Officer to the Commissioner of Income-tax, Delhi-VI, as Annexure P-15 and the reply to the queries of the Assessing Officer also included the objections of assessee and which were duly dealt with by the Assessing Officer in his proposal/letter dated 10th January, 2005 and 31st January, 2005 respectively. Even the order of approval passed by the Commissioner of Income-tax, Delhi on 11th February, 2005 has also been placed on record and copy whereof has been given to the petitioner. As such nothing material survives in these two prayers. In the light of these facts, they were not even pressed before us.
6. The contention on behalf of the petitioner is that the assessee would be entitled to a pre-decisional hearing and even issuance of a show cause or a document akin thereto before an order under section 142(2A) of the Act can be passed against the petitioner. The return submitted by the petitioner was accompanied by statutory audit and tax audit reports. In face of these returns, according to the assessee, the Assessing Officer was under obligation to grant a detailed hearing to the petitioner in regard to nature and complexity of the accounts before passing the impugned order. As accounts of the petitioner are in no way complex, the proposal submitted by the Assessing Officer was without proper application of mind. The approval itself has been granted by the Commissioner of Income-tax, Delhi in a mechanical way and again without any application of mind. Further it is contended that as the provisions of section 142(2A) of the Act do not specifically exclude application of principle of natural justice to the proceedings under those provisions, the grant of hearing would be indispensable right of the petitioner. By way of ancillary arguments, it is also urged that post-decisional hearing would frustrate the legislative object, no redress to the petitioner can be granted at that stage and petitioner would have suffered prejudice by incurring expenditure in that regard. In support of this contention, reliance has been placed on various judgments of this Court as well as other High Courts.
7. Learned counsel for petitioner, firstly, relied upon the judgment of this Court in the case of Gurunanak Enterprises v. Commissioner of Income-tax & Anr (2003) 259 ITR 637 where the Court held that there should be formation of an opinion by the Assessing Officer in regard to nature and complexity of accounts of assessee and interest of revenue. In this regard there should be a proper application of mind by the Assessing Officer. In that case, the Court had dismissed the writ petition filed by the assessee, but it will be useful to refer to the law laid down by the Bench in that case, which reads as under:—
“A bare perusal of the provision would show that the opinion of the Assessing Officer 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 pre-requisites for exercise of power under section 142(2A). Although the object behind enacting the said provision is to assist the Assessing Officer in framing the assessment when he finds the accounts of the assessee to be complex and is to protect the interests of the Revenue recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinising the accounts of an assessee to determine his true and correct income, on to an auditor. True that an order under the said provision cannot be passed on the ipse dixit of the Assessing Officer merely because he finds some difficulty in understanding the accounts. There has to be a genuine and honest attempt on his part to understand the accounts of the assessee, appreciate the entries therein and if in doubt, seek explanation from the assessee or his representative, rather than pass on the buck to the special auditor. A cursory look at the books of account is not sufficient. It needs little emphasis that the opinion required to be formed by the Assessing Officer for exercise of power under section 142(2A) must be based on objective consideration and not on the basis of subjective satisfaction. Similarly, the requirement of the previous approval of the Chief Commissioner or the Commissioner, being an in-built protection against any arbitrary or unjust exercise of power by the Assesssing 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 add 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 to mind to the facts of the case. A bare endorsement of the proposal would not be sufficient. Peerless General Finance and Investment Co. Ltd. v. Dy. CIT [1999] 236 ITR 671 (Cal) and Muthoottu Mini Kuries v. Dy. CIT [2001] 250 ITR 455 (Ker) hold so.
It is, thus, clear from the decisions referred to supra that before exercising the power to direct special audit under section 142(2A) the Assessing Officer must form an opinion with regard to twin conditions, namely, the nature and complexity of the accounts and the interests of the Revenue, with added approval of the Chief Commissioner or the Commissioner, as the case maybe. Both these conditions would of course depend upon the facts of each case. Further, power under the section is not to be lightly exercised and has to be based on objective criteria and an honest and sincere effort should be made to understand the accounts of the assessee since an order under the provision not only entails heavy monetary burden on an assessee, it causes a lot of inconvenience to him as well.”
8. Next, the learned counsel for petitioner placed heavy reliance upon the judgment of the Calcutta High Court in the case of West Bengal Co-Op. Bank Ltd. v. Commissioner Income-tax & Ors (2004) 267 ITR 345. In that case, the Court specifically found, that undisputedly the books of accounts were never asked to be produced before the Assessing Officer. The Assessing Officer without examining the books of accounts had formed an opinion in regard to nature and complexity of books of accounts, which was mechanically approved by the approving authority. The Court held that compliance to the principles of natural justice is necessary and such a provision is presumed to be in-built in the section itself and the impugned order was set aside in that case. The Court further held that the provisions of section 142(2A) should be sparingly applied and in cases of absolutely necessary and when there is no effective alternative remedy available to the Assessing Officer.
“The learned single judge of this Court in the case of Peerless [1999] 236 ITR 671 has observed that the exercise of special audit can only be resorted to sparingly and not in a whimsical and capricious manner. This observation is also supported by the judgment rendered by the Allahabad High Court in the case of Swadeshi Cotton Mills [1988] 171 ITR 634. In my view, while respectfully agreeing with the views of the Allahabad High Court, two learned judges of this Court and the learned single judge of the Madras High Court, the Assessing Officer before sending the proposal ought to have recorded reasons in the order after having examined the accounts by himself or getting the accounts examined by his subordinate officials, in support of this findings that the nature and complexity of the accounts is such that without special audit proper assessment is not possible to protect the interest of the Revenue. In a case where the provision for special audit under the aforesaid Act is sought to be applied, the Assessing Officer concerned must record as to why the audit report if furnished by the assessee under section 44 AB is almost the same and identical except, little variation. He must also record as to why this audit report is not helpful to understand the particular accounts, or for removal of his idea of complexity in the accounts. In pursuance of this the Assessing Officer must give hearing to the assessee invariably to give opportunity to explain away his doubt. In the scheme of this Act, there is no express provision for giving a hearing in section 142(2A), but when the Assessing Officer exercises discretion under this section the right of the assessee certainly is affected in two ways, (i) the assessee has to incur expenses for the special audit, (ii) any favourable report of the auditor under section 44AB will be discarded. It is a settled position of law that whenever there arises any civil or evil consequences or affectation of right or creating any obligation compliance with principles of natural justice is necessary and such provision is presumed to be inbuilt in the section itself.
The Commissioner of Income-tax should not give any approval mechanically and if he finds that there is no examination of the books of account by the Assessing Officer before sending the proposal, he will not certainly give any approval. Under this section, the Commissioner of Income-tax does not exercise the jurisdiction of the appellate authority rather the approving authority. Approval means and connotes supporting and accepting of an act and conduct done by another person. Therefore, it would be his duty to examine on receipt of his proposal, whether the Assessing Officer has correctly done it or not, if he finds that this requirement has not been fulfilled then he must not approve of the same.”
9. Another judgment of the Calcutta High Court in the case of Peerless General Finance & Investment Co. Ltd. v. Dy. CIT & Ors. (1999) 236 ITR 671 was also relied upon in support of the same contentions. The Assessing Officer in that case had taken into consideration several litigation between the petitioner, the Reserve Bank of India and certain findings recorded in such orders against the assessee without any application of mind. Thus, the Court quashed the order and held as under:—
“Furthermore, keeping in view the provisions of section 44AB of the income-tax Act, the provisions of section 142(2A) have to be strictly construed. The power under the aforementioned provisions should not be lightly exercised and must be based on objective criteria. The word “complexity” means the state or quality of being intricate or complex or that it is difficult to understand. However, anything which is difficult to understand need not necessarily be complex as the same would depend upon the capability of the Assessing Officer himself. He, therefore, in certain circumstances is enjoined with the duty to discuss the matter with the assessee or his representative. Furthermore, such opinion has to be formed in the proceeding itself.
No order can be passed on whims or caprice. No order can be passed on the ipse dixit of an officer. A cursory look at the books of account would not serve the purpose. In the instant case, by a notice dated November 18, 1997, received on November 24, 1997, respondent No. 1 requested the petitioner to appear before him on December 19, 1997. No hearing took place on the same day. The petitioner's contention that uptill now no further notice had been issued and no hearing had taken place and he had no occasion to look into the accounts and/or examine the accounts of the petitioner in respect of the assessment years 1995-1996 and 1996-1997 is uncontroverted. How then did the Assessing Officer form an opinion about the complexity of the accounts? These facts clearly show a total non-application of mind on the part of the Assessing Officer in making a proposal. He appears to have made the said proposal mechanically which would be evident from his impugned order dated March 20, 1998, as contained in annexure “K” to the writ application.”
10. In regard to application of principle of natural justice, in their absolute terms, the Court also held as under:—
“In this context a question arises as to whether the principles of natural justice have been excluded by reason of the said provision. As indicated hereinbefore, a proposal was made without placing the materials before the Chief Commissioner of Income-tax and an auditor has been appointed without any application of mind. Pursuant to or in furtherence of such previous approval, the Income-tax Officer passed an order which involves civil consequences to an assessee. Is he not entitled to some sort of opportunity for placing his case? The answer to the aforementioned question must be that he is so entitled at some stage before an order is passed preferably during the hearing of the proceeding itself.
This case depicts as to how a power can be abused. With a view to restrict such abuse of power, the court will presume that the principles of natural justice are required to be complied with. It is now well settled that the principles of natural justice shall be presumed to be necessary unless there exists a statutory interdict. It is true that the principle of natural justice is not static. The concept of the same varies from case to case. It is further required to be borne in mind that it should not be carried too far but the statute has to be construed in such a manner so that if any occasion arises it may be read down so that it can be declared constitutional. It may be true that although no appeal is maintainable against such order, a right of judicial review exists but a power of judicial review can be exercised only when findings are arrived at on the basis of the materials on record and upon compliance of the principles of natural justice.
11. In the celebrated case of Smt. Maneka Gandhi v. Union of India, AIR 1978 SC 597, the apex court has held (page 626):
“Now if this be the test of applicability of the doctrine of natural justice, there can be no distinction between a quasi-judicial function and an administrative function for this purpose. The aim of both administrative inquiry as well as quasi-judicial inquiry is to arrive at a just decision and if a rule of natural justice is calculated to secure justice, or to put it negatively, to prevent miscarriage of justice, it is difficult to see why it should be applicable to quasi-judicial inquiry and not to administrative inquiry. It must logically apply to both. On what principle can distinction be made between one and the other? Can it be said that the requirement of ‘fair play in action’ is any the less in an administrative inquiry than a quasi-judicial one? Sometimes an unjust decision in an administrative inquiry may have far more serious consequences than a decision in a quasi-judicial inquiry and hence the rules of natural justice must apply equally in an administrative inquiry which entails civil consequences.”
12. In Assistant Collector of Customs and Superintendent, Preventive Service Customs v. Charan Das Malhotra, AIR 1972 SC 689, the apex Court while considering the provision of sub-section (2) of section 110 of the Customs Act, observed (page 692):
“There can be no doubt that the proviso to the second sub-section of section 110 contemplates some sort of inquiry. The Collector, obviously, is expected not to pass extension orders mechanically or as a matter of routine but only on being satisfied that there exist facts which indicate that the investigation could not be completed for bonafide reasons within the time laid down in section 110(2), and that therefore, extension of that period has become necessary. He cannot, therefore extend the time unless he is satisfied on facts placed before him that there is a sufficient cause necessitating extension. The burden of proof in such an inquiry is clearly on the Customs Officer apply for extention and not on the person from whom the goods are seized.”
13. The apex court further observed (page 694):
“Since the Collector has on facts to decide on the existence of a sufficient cause, although his decision as to sufficiency of materials before him may be within his exclusive jurisdiction, it is none the less difficult to comprehend how he can come to his determination, unless as a Division Bench of the High Court has said, he has before him the pros and cons of the question. An ex parte determination by the Collector would expose his decision to be one sided and perhaps one based on an incorrect statement of facts. How, then, can it be said that his determination that a sufficient cause exists is just and fair if he has before him a one sided picture without any means to check it unless there is an opportunity to the other side to correct or controvert it.”
14. Reference in this connection may also be made to Harbans Lal v. Collector of Central Excise, AIR 1993 SC 2487; [1993] 67 ELT 20 (SC).
15. This aspect of the matter has also been considered by this court in Sri Hanuman Steel Rolling Mill v. CESC Ltd., AIR 1996 Cal 449 and Jenson and Nicholson (India) Ltd. v. Union of India, AIR 1997 Cal 308; [1997] 3 ICC 621. In that decision it was noticed (page 318):
“In Wade's Administrative Law, 6th edition, page 497, the learned author observed:
‘The hypothesis on which the courts built up their jurisdiction was that the duty to give every victim a fair hearing was just as much a cannon of good administration as of good legal procedure. Even where an order or determination is unchallenged as regards its substance, the court can at least control the preliminary procedure so as to require fair consideration of both sides of the case. Nothing is more likely to conduce to good administration.’
Apart from the rules of audi alteram partem, which means that no one shall be condemned unheard, corollary of which is that he should be given reasonable notice of the nature of the case to be met, there are other rules of common law to the same effect. (see Franklin v. Minister of Town and Country Planning [1948] AC 87; [1947] 2 All ER 289 (HL); John v. Rees [1970] 1 Ch D. 345. In case any person has acquired any right in any property or his right is being affected by the process he would be afforded reasonable opportunity of hearing and also to meet the cause against him.”
16. Reliance was also placed upon the judgment of the Kerala High Court in the case of Dy. Income-tax Commissioner v. Muthoottu Mini Kuries (2004) 266 ITR 213 that post-decisional hearing would be of no consequence and pre-decisional hearing was necessary. Further it was also held by the Court that expenses to which the assessee is exposed as a result of the order passed under section 142(2A), is apparently an adverse consequence against the assessee.
17. On the other hand, learned counsel appearing for the Revenue relied upon the judgments of different courts to contend that there is no requirement of law making it obligatory for the Assessing Officer to grant pre-decisional hearing or serve any show cause notice upon the assessee before passing an order under section 142(2A) of the Act. It is also contended that no prejudice is caused to the assessee by the impugned order as it is merely a procedural order in finalisation of the assessment proceedings. In support of his contentions, he relied upon the cases of Living Media Ltd. v. Commissioner of Income-tax (2002) 255 ITR 268, Super Cassettes Industries Ltd. v. Assistant Commissioner of Income-tax (1999) 102 Taxman 202 (Delhi).
18. As a proposition of law, it cannot be disputed that the distinction between an administrative order and a quasi-judicial order is very fine one, wherever an order is made adverse to the interest of a party or which prejudicially affects the person, adherence to the principles of natural justice would be mandatory. The principles of natural justice take in their ambit two facets; firstly grant of hearing to the person likely to be prejudiced by the order of the authority and secondly adherence to standards of fairness, both substantive and procedural, in decision making process. The only exception to this rule is where a provision of a statute specifically excludes application of principles of natural justice. The cases and even statute of this kind are very few.
19. Natural justice is a term, which could have different connotations and dimensions depending on the facts of a case while keeping in view the provisions of law applicable thereto. It is not a codified concept but as the Supreme Court said in the case of Canara Bank & Ors v. Debasis Das & Ors 2003 (4) SCC 557, these principles are ingrained into the conscience of a man. Natural justice is the administration of justice in a common-sense/liberal way. Justice is based on substantially natural idles and human values. The administration of justice is to be freed from the narrow and restricted considerations which are usually associated with a formulated law involving linguistic technicalities and grammatical niceties. They are integral part of the procedure that may be adopted by judicial, quasi-judicial and administrative authorities while making an order effecting rights. Their Lordships of the Supreme Court while clearly defining applicability of this principle to the quasi-judicial and administrative proceedings held as under:—
“The expression “natural justice” and “legal justice” do not present a watertight classification. It is the substance of justice which is to be secured by both, and whenever legal justice fails to achieve this solemn purpose, natural justice is called in aid of legal justice. Natural justice relieves legal justice from unnecessary technicality, grammatical pedantry or logical prevarication. It supplies the omissions of a formulated law. No form or procedure should ever be permitted to exclude the presentation of a litigant's defence.
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 facts and circumstances of that case, the framework of the statute under which the enquiry is held. The old distinction between a judicial act and an administrative act has withered away. The adherence to principles of natural justice as recognized by all civilized States is of supreme importance when a quasi-judicial body embarks on determining disputes between the parties, or any administrative action involving civil consequences is in issue. Even an administrative order which involves civil consequences must be consistent with the rules of natural justice. The 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.”
20. Reliance was rightly placed upon the judgment of the Full Bench of this Court by the petitioners in the case of J.T India Export & Anr. v. Union of India and Anr (2003) 262 ITR 269 where the Court stated the same principles as in the case of Canara Bank (supra) by the Supreme Court and held as under:—
“Even if grant of an opportunity is not specifically provided for it has to be read into the unoccupied interstices and unless specifically excluded the principles of natural justice have to be applied. Even if a statute is silent and there are no positive words in the Act or the Rules spelling out the need to hear the party whose rights and interests are likely to be affected, the, requirement to follow fair procedure before taking a decision must be read into the statute, unless the statute provides otherwise.”
21. There can be no dispute that provisions of section 142(2A) do not exclude application of principles of natural justice by use of specific words or by necessary implications. It is an order which certainly would vest the assessee with civil consequences. An independent auditor would go into accounts of the assessee who but for such an order would have no right to intrude into internal management of the Company and it would also be exposed to serious expenditures as a result of passing of such order. In face of these consequences which are obviously in addition to the manpower and time spend by the assessee to face such an audit, we are unable to hold that the order under section 142(2A) does not vest the assessee with any civil consequences as contended on behalf of the respondents before us.
22. The principles of natural justice would have to be read into the provisions of section 142(2A) of the Act, but what is the extent of their applicability, is the material question which we are called upon to consider. The Supreme Court in the case of Canara Bank (supra) clearly stated that rules of natural justice would apply and may have to be read into the provisions of statute but extent of their application would depend upon the nature of the duty to be performed by the authority under a statute. Decision in this regard is in fact the panacea to the rival contentions raised by the parties in the present writ petition.
23. Therefore, next we would proceed to discuss the nature of the proceedings before the authorities under section 142(2A) of the Act. Every person is required to file return of income under section 139 of the Act. Once such a return is filed, the Assessing Officer may conduct an inquiry before the assessment, in consonance with the provisions of section 142 of the Act. Thereupon under section 143 of the Act, the Assessing Officer would pass an order of assessment requiring the assessee to pay the tax in terms thereof. All these powers are vested in the Assessing Officer under Chapter XIV relating to “procedure for assessment”. Section 142(2A) of the Act forms part of this procedure and mandates that if at any stage of the proceedings before the Assessing Officer, having regard to the nature and complexity of accounts of the assessee and interest of the Revenue, is of the opinion that it is necessary so to do, he may with the previous approval of the Chief Commissioner direct the assessee to get the accounts audited by an accountant as defined in the explanation of sub-section 2 of section 288 and nominated in this regard. Exercise of power by the Assessing Officer under this provision is subject to satisfaction of the limitations specified in the section itself. The Assessing Officer must form an opinion that having regard to the nature and complexity of the accounts, it could be in the interest of Revenue to direct special audit under this provision. Formation of this opinion cannot be strictly equated to an order. This is merely a formation of an opinion during the course of assessment proceedings and is not a final order in itself. The direction for special audit under this provision could be issued only with the previous approval of the Chief Commissioner. The provisions of section 142 of the Act under its various sub-sections and provisos provide more than needed, checks and counter-checks for the purposes of providing a fair opportunity to an assessee to contest the report made out by the accountant in furtherance to such an order. Section 142(2C) imposes an obligation upon the Assessing Officer to furnish a copy of the report received by him under section 142(2A) to the Assessee within the period specified. Thereafter the Department is obliged to give an opportunity and assessee has a right of being heard in regard to the material gathered on the basis of the audit conducted by the Special Auditors. The law was amended and by Taxation Laws (Amendment) Act, 1974 post hearing was specifically provided to the assessee w.e.f 1.4.1996 The law has specifically contemplated an effective post-decisional hearing to the assessee and require the authorities to comply with these provisions prior to passing of final order of assessment. It is necessary for us to discuss these provisions primarily to indicate as to what would be the scope in pre-decisional hearing. The assessee would have to be put to a notice by appropriate procedure permissible under the provisions of the Act before an order under Section 142(2A) can be passed requiring the assessee to go through the special audit. At the same time, it cannot be in the form of a show cause or a prolonged and multi-facet hearing at the pre-decisional stage. The scope of the pre-decisional hearing would be very limited and should be confined to proper interaction and confrontation, of complexity of accounts as understood by the Assessing Officer to the assessee and requiring him to explain. In the event of Assessing Officer is not satisfied, he would be at liberty to form an opinion and pass a direction under section 142(2A) subject to the approval of the Commissioner for a special audit of the accounts of the assessee. The Assessing Officer should form the required opinion upon examining of books of accounts, after making sincere effort to understand the books of accounts and after putting the assessee at notice. Inability on the part of the assessee to provide the requisite clarifications to the satisfaction of the Assessing Officer would normally be a sufficient ground for the Assessing Officer to exercise his jurisdiction under this provision and to record the opinion on a subjective satisfaction recorded objectively. The Assessing Officer is not required to loose sight of the provisions of the Act and the objects sought to be achieved thereunder. The orders should be founded on application of mind relatable to the nature and complexity of the accounts and in the interest of the Revenue. Once these ingredients are satisfied, the scope of judicial review of such a direction would normally be not possible, as the High Court in exercise of its' powers under section 226 of the Constitution of India does not sit as a Court of Appeal over such orders particularly when they are interim orders and post-decisional protection and remedy is available to the assessee under the same very provisions.
24. It was also contended on behalf of the petitioner that the impugned order is not within the contemplation of the provisions of section 142(2A) of the Act and suffers from legal infirmity inas much as the accounts of the petitioner-Company were accompanied by statutory audit report and test audit report prescribed under the provisions of the Act itself. Thus according to them, there was no occasion and the law does not permit passing of such an order. This contention is without any merit. No doubt the provisions of section 44AB of the Act require an assessee to submit his accounts of the previous year with statutory audit reports before the specified date and submit the said report in the prescribed form, duly signed and verified by the accountant, if the turn over or the gross receipt of the assessee was in excess of Rs. 40 lacs. It is stated before us that annual turn over of the assessee for the relevant year was more than Rs. 20 lacs and as such they had submitted the audit report as required under section 44 AB of the Act. Petitioner-Company also have submitted their audit report by the Chartered Accountant under the relevant provisions of the Income-tax Act as well as the Companies Act. Despite the fact that the petitioner-Company has furnished accounts accompanied by statutory audit as well as test audit reports, still it cannot be argued that the assessing officer would have no jurisdiction to pass a direction under section 142(2A) of the Act. The legislature itself provided for furnishing of statutory audit and audit reports under different provisions of the taxation laws, but at the same time incorporated the provisions of section 142(2A) of the Act empowering the assessing officer to pass a direction for special audit in consonance with the said provisions. This itself indicates that the legislature did not put any fatals or restriction on the power of the Assessing Officer for issuing such directives. On the contrary, sub-section 2b of section 142 clearly states that provisions of sub-section 2A shall have the effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. This non-obstantive clause clearly shows that the contentions raised on behalf of the respondent is without any merit. In the case of Super Cassettes Industries Ltd. (supra) a Division Bench of this Court had rejected similar plea and held that the specific object behind enacting section 2A to section 142 is to assist the officer in framing an assessment when he finds the accounts of the assessee to be complex by getting the service of a special auditor in the interest of the Revenue. Merely, because the format of the reports prescribed under section 44 AB or 142 (2A) of the Act are similar, would per se would be no ground for doubting the jurisdiction of the Assessing Officer. It is for the reason that the information furnished by the assessee in the statutory audit report may not be sufficient and satisfactory, and may be provided by the accountants nominated under section 142(2A), upon detailed and comprehensive examination of assessee's books of accounts. Accountants so nominated are obliged to examine the books of accounts particularly in regard to the matters or doubts raised by the Assessing Officer in regard to nature and complexity of such account books. This object may not be achieved by submission of statutory audit report submitted by the assessee under section 44 AB of the Act. In the case of Super Cassette Industries Ltd. (supra), the Court also took the view that provisions of section 142(2A) contemplates more intensive information being made available to the Assessing Officer than what is done by the assessee in terms of section 44 AB of the Act.
25. The nature and scope of the duty which the Assessing Officer is required to discharge in terms of the provisions of Section 142 (2A) evidently is of limited nature. Its a part and parcel of the assessment proceedings which the Assessing Officer is required to complete under the provisions of Chapter XVI of the Act. An order under Section 142 (2A) is not a final order and does not finally determine the obligations and liability of the assessee. In fact, it is a step towards completion of assessment proceedings which is taken by the Assessing Officer in order to completely and fully understand the accounts of the assessee, if in the opinion of the said officer and keeping in view the nature and complexity of the accounts of the assessee, a special audit in terms of these provisions was required. It is a settled principle of law that the intentment behind these provisions primarily is to assist the Assessing Officer in a proper, fair determination, and scrutiny of the return filed by the assessee. The assessee is even otherwise under legal obligation to provide complete assistance to the Assessing Officer in finalisation of assessment proceedings. The object of these provisions, is more to facilitate completion of the assessment proceedings effectively by the Assessing Officer and upon due understanding of the books of accounts of the assessee. There could be and in fact, there are cases where despite the statutory audit report, the assessee's account still may not be clear to the Assessing Officer because of their nature and complexity.
26. Having regard to such situations and the attendant circumstances, the Assessing Officer may direct special audit in the interest of the Revenue.
27. The direction under section 142(2A) is more of an administrative action than a quasi-judicial function. It is not an order which is adjudicatory in nature. In exercise of its powers, all that the Assessing Officer can do is to direct special audit of books of the assessee. The prejudice to the assessee resulting from such an order is again of a very limited nature and to that extent the Assessing Officer may protect the assessee. Keeping in view the nature of the duty to be performed by the Assessing Officer, it is clear that a regular lengthy hearing or a show cause notice is not contemplated to the assessee under section 142(2A) of the Act. To impose unnecessary restrictions on the scope of the power vested in the authority under section 142(2A) would not be in consonance with the object of the section. In the case of Gurunanak Enterprises (supra), the Bench of this Court had dealt in great detail the essential ingredients of section 142 (2A) and had held that the Assessing Officer upon application of mind should form an opinion with regard to the nature and complexity of accounts of the assessee and the interest of the Revenue which are the pre-requisite for exercise of power under this provision. The Division Bench had not deliberated upon the application of principles of natural justice, its extent and scope in relation to exercise of power by the Assessing Officer. The judgment of the Calcutta High Court in the case of Peerless General Finance (supra) and West Bengal State Cooperative Bank Ltd. (supra) had spelled out the principle that orders under section 142(2A) could be passed by the officer only in strict compliance with the principles of natural justice. However, the scope of the kind of hearing that an assessee would be entitled to, was not discussed even in these judgments, primarily for the reason that in one case the Assessing Officer had taken into consideration irrelevant material like litigation pending between the Reserve Bank of India and the assessee while in other cases, the Assessing Officer had not even asked for books of accounts of the assessee before passing an order of special audit under section 142(2A). These judgments have no application to the facts of the case in hand on any known canon of ratio decidendi. Respectfully we would defer with the view taken by the Calcutta High Court in the above noticed judgment only with regard to the extent of application of principles of natural justice at a pre-decisional stage in exercise of powers under section 142(2A) by the Assessing Officer. The expression used in these judgments “reasonable opportunity of hearing and also to meet the cause against him’ cannot apply in stricto senso to a direction for a special audit during the pendency of the assessment proceedings. Pre-decisional hearing in this regard would fall within a very restricted and limited scope. The purpose would be sufficiently achieved if the assessee is questioned or confronted with his accounts in relation to nature and complexity thereof.
28. As far as the judgment of the Kerala High Court in the case of Muthootu Mini Kurries v. Deputy Commissioner of Income Tax 250 ITR 455 is concerned, it was held that the assessee should be heard before the order under sub-section 2A of Section 142 is passed, as hearing was not statutorily excluded. It was also stated on facts that no emergency had existed justifying passing of the said order.
29. The Bench of this Court in the case of Ramesh Chand Industries Ltd. v. Union of India [1998] 100 TAXMAN 570 (DELHI) spelled out the facts in regard to which the Assessing Officer should record his satisfaction and take approval of the Chief Commissioner or the Commissioner as the case may be. The view accepted in that judgment was that intervention of such a high ranking authority is an inbuilt protection to the assessee against any arbitrary or unjust exercise of power by the Assessing Officer. Thus, jurisdiction of the High Court to interfere in such order or satisfaction, in exerqise of such jurisdiction would be very limited. The High Court would not sit in appeal over the formation of opinion by the Assessing Officer. In the case of Super Cassettes Industries Ltd. v. Assistant Commissioner of Income Tax [1999] 102 TAXMAN 202 (DELHI) in relation to nature and complexity of accounts based on the fact that having profit of Rs. 7.18 crores and filing of return declaring nil income after claiming deduction under various provisions, was a fair and proper order. It was also stated in these judgments that the provisions of Section 142 (2A) are to be primarily invoked for proper assistance and help of the Assessing Officer in coming to a final conclusion.
30. In the case of Living Media Ltd. v. Commissioner of Income Tax and Anr. 255 ITR 268 it was specifically held while upholding the order by the High Court that an order directing special audit of accounts because the assessee himself had filed voluminous details running into number of pages, and in answer to the Assessing Officer's questions another 1000 pages were filed, the prima facie formation of opinion by the assessing authority for conducting the special audit was proper.
31. In light of the above decisions, the post-decisional obligations placed upon the Revenue Department in regard to a report received by them in furtherance to an order under Section 142 (2A) of the Act, intervention of a higher authority, who is to give approval for passing of such a direction, are some relevant consideration for defining or explaining the scope of pre-decisional hearing. provisions of Section 142 (2A), in our view, do not contemplate or even imply by necessary implication a kind of regular hearing or issuance of a detailed notice to the assessee at that stage. The scope of duty casted upon the officer cannot be rendered negatory by imposition of unnecessary directions or impediments which are not postulated in the plain language of the Section itself. Equally true is that the provisions do not indicate complete exclusion of the principles of natural justice as well. It is difficult to provide any straight-jacket formula which without variations can be applied to the cases universally. Every case would have to be decided on its own merits and with reference to the judgments which are squarely applicable to that case.
32. Stating exhaustively the principles which would have a uniform application to cases of all kind would neither be proper nor permissible. In any case, it is impossible to state legislatively or by judge-made law, any tenets or factors which would be applicable to all situations and circumstances. Suffices it to say that we make an attempt to re-state the principles which would be applicable to the process and decision of the Assessing Officer in passing a direction under Section 142 (2A) of the Act. All the hereunder stated principles are not exhaustive and merely state the general guidelines deduceable from the various judgments afore-referred and/or settled cannons of administrative jurisprudence:—
(a) provisions of Section 142 (2A) of the Act do not contemplate by specific language or necessary implication, issuance of a show cause notice or grant of comprehensive hearing to the assessee by the Assessing Officer.
(b) Limited to the extent indicated hereinafter, principles of natural justice would be read into the principles of Section 142 (2A) of the Act. It is for the reason that the directions issued under this provision are bound to vest the assessee with civil consequences of compulsive expenditure and audit of its books by an accountant, who but for such a direction would have no right to such examination. This would, to some extent, be an interference in the internal management of a company related to its accounts.
(c) Before the Assessing Officer seeks an approval of the competent authority under Section 142 (2A) of the Act, it would be obligatory upon him to call upon the assessee during the course of assessment proceedings for a ‘purposeful interaction and confrontation’ in regard to nature and complexity of the assessee's accounts.
(d) Such interaction with and confrontation of, the assessee with his account books should be with an object to attain better clarity and understanding of the accounts by the Assessing Officer. There has to be serious attempt on the part of the Assessing Officer to seek clarification of his doubts in regard to nature and complexity of assessee's accounts for better comprehension.
(e) The formation of opinion by the Assessing Officer should be directly relatable to the nature and complexity of the assessee's accounts and should also be in the interest of the Revenue.
(f) Formation of opinion by the Assessing Officer and grant of approval by the Commissioner, Income Tax, application of mind is sine qua non. Whereupon the concerned authorities should record their satisfaction based upon examination of books of accounts and records produced by the assessee, in regard to nature and complexity of accounts of the assessee and that it is in the interest of Revenue.
(g) Recourse to provisions of Section 142 (2A) should not be made in a mechanical manner and the opinion should also be not formed on certain assumptions or presumptions.
(h) The fact that accounts of the assessee are accompanied by tax audit report and statutory audit report (under Section 44 A and 44B) would no way debar the Assessing Officer from taking recourse to the power vested in him under Section 142 (2A) of the Act. At best it can be a relevant factor to be considered by the Assessing Officer at the time of formation of opinion.
33. Reverting back to the facts of the present case, the assessee had filed statutory audit report as contemplated under the provisions of Section 44 A and 44 B of the Act as well as the Tax audit report. These accounts were subjected to scrutiny by the Assessing Officer. The Assessing Officer had expressed serious doubts in relation to the accounts of the assessee and had called upon the assessee to render clarifications in regard thereto. Since the matters were not clarified to the satisfaction of the Assessing Officer, he had submitted a detailed proposal/report for approval of the Commissioner of Income tax which was granted by the said authority vide its order dated 11th February, 2005.
34. The only question that now remains to be answered by the Court is whether the Assessing Officer had put the assessee at notice and had made a sincere attempt to understand the accounts of the assessee? Further, whether the direction was made after due application of mind? In this regard, we may refer to the order sheet enteries recorded by the Assessing Officer during the course of assessment proceedings. On 18th November, 2004 it was recorded that the CA of the petitioner-company had produced computer printouts of ledgers, trial balance without any supporting bills and vouchers. The narration in the print outs was found to be not self-speaking. It was further specifically noticed that that the assessee's representative was not conversant with the accounting package used by the assessee-company in which accounts of the company had been maintained. We may also notice here that on 10th November, 2004, the Assessing Officer had recorded that books of accounts in terms of the order dated 3rd November, 2004 were not produced. In these circumstances, the books of accounts of the assessee were impounded with a specific direction to the assessee to produce relevant vouchers etc. Again on 22nd November, 2004, in presence of the CA of the Company, the Assessing Officer had noticed “No person with the knowledge of accounting package produced as required vide order sheet entry dated November 18, 2004. No bills or vouchers produced.” and the matter was adjourned. Again on 30th November, 2004, the Assessing Officer passed an order which reads as under:—
“Shri Amit Aggarwal, CA appeared with Shri Amit Jain, CA and Shri Suhit working for P.R Mehra and Co. to explain the accounting package.
They have filed copy of Trial Balance as on 31/3/2002. The balances against each entry are credits as well as debits that too for previous period and for current period i.e there are 2 sets of double entry.
Shri Amit Aggarwal has stated that the accounting package or trial balance presentation is perfectly alright. Filed letter dated 30/11/2004. Statement of Suhit Aggarwal recorded under oath u/s 131.
The AR was required to produce complete set of books of accounts with all bills and vouchers in the forenoon session so that adequate time could be given to verify genuineness of its books of accounts and accounting results.”
35. On 4th January, 2005 the following order was made:—
“Shri Amit Aggarwal, Amit Jain & Suhit Aggarwal appeared. Produced ledger accounts.
1. It is seen that the assessee has claimed certain amounts received from its franchise for brand promotion is not being shown as income for the year, a part of it is being shown as liability under the head “Accrued Marketing”. To file justification & to explain why the amounts received should not be treated as income for the year under consideration. Further explain on what basis this amount has been bifurcated as “income” and as “accrued marketing”. Whether such a system is acceptable to approve by standard practices adopted in India.”
36. Thereafter, the matter was adjourned and vide order dated 21st February, 2005, the assessee was directed to produce ledger accounts and transactions with all the franchises during the year and also to show whether they were shown in the profit and loss accounts. These clarifications were not given by the assessee to the satisfaction of the Assessing Officer whereafter the Assessing Officer had made a detailed proposal referring to various facts and formed the opinion that keeping in view the nature and complexity of the accounts of the assessee, it was necessary to direct special audit in the interest of the Revenue. Copy of the proposal submitted by the Assessing Officer has been placed on record and this report by itself sufficiently demonstrates that there was due application of mind by the Assessing Officer. This proposal was considered, discussed and then approval granted by the Commissioner. From the order sheet as well as the voluminous records produced by the assessee, it is clear that the books of accounts and records of the assessee, subject matter of the assessment proceedings, is a voluminous one and the clarifications sought for by the Assessing Officer cannot be termed as ‘irrelevant’. Even in the case of Living Media Ltd. (supra) the Supreme Court held that voluminous details submitted by the assessee would justify passing of an order under Section 142 (2A) of the Act. It is not in dispute before us that the annual turn over of the assessee for the relevant assessment period is more than Rs. 20 crores, while the return submitted by them shows ‘nil’ income. Formation of opinion on the part of the Assessing Officer in the facts and circumstances of the case cannot be stated to be unreasonably made in a mechanical manner or without proper application of mind. The proposal and grant of approval by the concerned authorities is in conformity with the spirit of the provisions of Section 142 (2A) of the Act. The order was passed after due interaction with the assesse.
37. For the reasons aforestated, we are unable to find any legal or other infirmity in the impugned order. Thus, the writ petitions is dismissed, while leaving the parties to bear their own costs.
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