2006 Supreme(SC) 1041

2006(9) Supreme 566
SUPREME COURT OF INDIA
(From Delhi High Court)
S.B. Sinha and Dalveer Bhandari, JJ.
Rajesh Kumar & Ors. - Appellants
versus
D.C.I.T. & Ors. - Respondents
Civil Appeal No. 4633 of 2006
(Arising out of SLP (Civil) No. 9427-9430 of 2005)
Decided on 1-11-2006
Counsel for the Parties :
For the Appellant : K. Sampath, Mrs. Lakshmi Iyengar and Mrs. Rani Chhabra, Advocates.
For the Respondents : Gopal Subramanium, A.S.G., Asheesh Jain, Arijit Prasad and B.V. Balaramdas Advocates.
For the Respondent No.3 : In-Person Dhanesh Chander.

IMPORTANT POINT
Before issuance of a direction under Section 142(2A) of the Income Tax Act, it is necessary to comply with the principles of natural justice.

Headnote:(i) Income Tax Act, 1961 - Sections 142(2A), 158 BC - Appointment of an auditor for special audit of accounts in terms of Section 142(2A) of the Act - Requirement to follow principles of natural justice - An order of approval is also not to be mechanically granted - Appellant, a proprietory concern was an assessee - A raid was conducted in their premises and some documents including their books of accounts were seized - A notice was issued u/s 158 BC of the Act by the Deputy Commissioner requiring appellants to submit return of undisclosed income for the block period of ten years pursuant whereto returns were filed - By a letter, Deputy Commissioner mooted a proposal for special audit in terms of Section 142(2A) of the Act - Commissioner of Income Tax approved the said proposal of the Deputy Commissioner of Income Tax - Pursuant thereto a special auditor was appointed and appellants were informed about appointment of special auditor for special audit - Prior thereto no opportunity of hearing was given to them - Deputy Commissioner was requested by appellants to supply a copy of reasons which was refused - Writ petition filed by- appellants challenging order of appointment of special auditor as vitiated in law having been passed without giving an opportunity of hearing to them - Mala fide on the part of Deputy Commissioner was also alleged - Whether before issuance of a direction u/s 142(2A) of the Act, it is necessary to comply with principles of natural justice - (Yes).

       Held : We may at the outset notice that the following are the relevant factors for invoking Section 142(2A) of the Act:

       (i)The nature of accounts

       (ii)Complexity of accounts and

       (iii)Interest of the revenue.

       The formation of opinion of the assessing officer must be on the premise that while exercising his power regard must be had to the factors enumerated therein. The use of the word and shows that it is conjunctive and not disjunctive. All the aforementioned factors are conjunctively required to be read. The formation of opinion indisputably must be based on objective consideration.(Paras 10 and 11)

       Principles of natural justice are based on two basic pillars:

       (i)Nobody shall be condemned unheard (audi alteram partem)

       (ii)Nobody shall be judge of his own cause (nemo debet esse judex in propria sua causa)

       Duty to assign reasons is, however, a judge made law. There is dispute as to whether it comprises of a third pillar of natural justice.(Paras 19 and 20)

       If an assessee files a return the same is not presumed to be incorrect. When the assessing officer, however, intends to pass an order of assessment, he may take recourse to such steps including the one of asking the assessee to disclose documents which are in his power or possession. He may also ask third parties to produce documents. Section 136 of the Act by reason of a legal fiction makes an assessment proceeding, a judicial proceeding. The assessment proceeding, therefore, is a part of judicial process. When a statutory power is exercised by the assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature.(Para 23)

       In this case, the fee of the special auditor has been fixed at Rs. 1.5 lakhs. The assessee during the audit of the account by the special auditor had to answer large number of questions. Whether he defaulted therein or not is a matter of little or no consequence for the purpose of construction of the said provision. We may, however, notice that whereas according to the Revenue the assessee was not cooperating, according to the assessee, as all the books of accounts having been seized, there was nothing it could do in the matter.(Para 24)

       The factors enumerated in Section 142(2A) of the Act, thus, are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed by it would be prejudicial to him, principles of natural justice must be held to be implicit. The principles of natural justice are required to be applied inter alia to minimize arbitrariness. It is trite, even if there is a possibility that the Tribunal would correctly follow the statutory provisions, still compliance of principles of natural justice would be required. (Paras 49 and 50)

       Justice, as is well known, is not only be done but manifestly seem to be done. If the assessee is 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.(Para 51)

       In this case itself the appellants were not made known as to what led the Deputy Commissioner to form an opinion that all relevant factors including the ones mentioned in Section 142(2A) of the Act are satisfied. If even one of them was not satisfied, no order could be passed. If the attention of the Commissioner could be drawn to the fact that the underlined purpose for appointment of the special auditor is not bona fide it might not have approved the same.(Para 52)

       An order of approval is also not to be mechanically granted. The same should be done having regard to the materials on record. The explanation given by the assessee, if any, would be a relevant factor. The approving authority was required to go through it. He could have arrived at a different opinion. He in a situation of this nature could have corrected the assessing officer if he was found to have adopted a wrong approach or posed a wrong question unto himself. He could have been asked to complete the process of the assessment within the specified time so as to save the Revenue from suffering any loss. The same purpose might have been achieved upon production of some materials for understanding the books of accounts and/or the entries made therein. While exercising its power, the assessing officer has to form an opinion. It is final so far he is concerned albeit subject to approval of the Chief Commissioner or the Commissioner, as the case may be. It is only at that stage he is required to consider the matter and not at a subsequent stage, viz., after the approval is given. (Para 54)

       Whereas the order of assessment can be subject matter of an appeal, a direction issued under Section 142(2A) of the Act is not. No internal remedy is prescribed. Judicial review cannot be said to be an appropriate remedy in this behalf. The appellate power under the Act does not contain any provision like Section 105 of the Code of Civil Procedure. The power of judicial review is limited. It is discretionary. The court may not interfere with a statutory power.(Para 56)

       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 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, the Parliament could have said so expressly. The hearing given is only in terms of Section 142 (3) which is limited only to the findings of the special auditor. The order of assessment would be based upon the findings of the special auditor subject of course to its acceptance by the assessing officer. Even at that stage the assessee cannot put forward a case that power under Section 142(2A) of the Act had wrongly been exercised and he has unnecessarily been saddled with a heavy expenditure. An appeal against the order of assessment, as noticed hereinbefore, would not serve any real purpose as the appellate authority would not go into such a question since the direction issued under Section 142(2A) of the Act is not an appellate order.(Para 57)

       (ii) Income Tax Act, 1961 - Sections 142(2A) and 136 - Assessment proceeding is a part of judicial process - When a statutory power is exercised by assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature - It stricto sensu is also not quasi judicial.(Para 23)

       (iii) ADMINISTRATIVE LAW - Principles of Natural Justice - When by reason of an action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice are required to be followed - In such an event, although no express provision is laid down in this behalf compliance of principles of natural justice would be implicit - In case of denial of principles of natural justice in a statute, the same may also be held ultra vires Article 14 of the Constitution - In any event, when civil consequences ensue, there is hardly any distinction between an administrative order and a quasi judicial order.(Para 46)

       (iv) WORDS AND PHRASES - Expression ‘having regard to’ - Meaning - The expression indicates that in exercising the power regard must be had also to the factors enumerated therein together with all factors relevant for exercise of that power.(Para 48)

       (v) WORDS AND PHRASES - Expression ‘complexity’ - It would mean the state or quality of being intricate or complex or that it is difficult to understand - Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature - No order can be passed on whims or caprice - Income Tax Act, 1961 - Section 142(2A).(Para 12)

       (vi) WORDS AND PHRASES - Word ‘and’ - Use of the word ‘and’ shows that it is conjunctive and not disjunctive - Income Tax Act, 1961 - Section 142(2A).(Para 11)