2016-VIL-984-ITAT-PNE

Income Tax Appellate Tribunal PUNE

ITA No.447/PN/2013, ITA No s.309 & 310/PN/2013, ITA No s.448 & 449/PN/2013

Date: 21.12.2016

THE INCOME TAX OFFICER (CENTRAL) , KOLHAPUR

Vs

VILSONS PARTICLE BOARD INDUSTRIES LTD. AND VICA-VERSA

For The Assessee : S/Shri Sunil Pathak and Nilesh Baheti
For The Revenue : Shri Rajeev Kumar, CIT

BENCH

MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM

JUDGMENT

PER SUSHMA CHOWLA, JM:

Out of this bunch of appeals, two cross appeals filed by the assessee and the Revenue and another appeal filed by the Revenue are against consolidated order of CIT(A), Kolhapur, dated 27.11.2012 relating to assessment years 2005- 06, 2006-07 and 2004-05 against respective orders passed under section 143(3) r.w.s. 153A(b) of the Income Tax Act, 1961 (in short ‘the Act’).

2. This bunch of appeals relating to the same assessee on identical issue were heard together and are being disposed of by this consolidated order for the sake of convenience. However, reference is being made to the facts and issues in ITA No s.309/PN/2013 and 448/PN/2013 to adjudicate the issue. First of all, we shall take up the appeal in ITA No.309/PN/2013 relating to assessment year 2005- 06.

3. The assessee in ITA No. 309/PN/2013, relating to assessment year 2005-06 has filed abridged grounds of appeal, which read as under:-

1] The learned CIT(A) failed to appreciate that the asst. u/s 143(3) r.w.s. 153A was null and void as it is barred by limitation.

1.1] The learned CIT(A) failed to appreciate the reference u/s 142(2A) for special audit was illegal as A.O. had not given opportunity of hearing to the assessee as per section 142(2A) and consequently, the asst. is barred by limitation.

1.2] The learned CIT(A) failed to appreciate that the A.O. passed the order extending time limit for special audit after the expiry of the initial period granted and therefore, such extension was not valid in law and the asst. order is barred by limitation.

2] The CIT(A) was not justified in taxing the income as per the seized diaries in the hands of the appellant company while the said income belonged to Shri V. L. Patel. The CIT(A) failed to appreciate that the notings in the seized diaries were not pertaining to the appellant company.

3] The learned CIT(A) erred in rejecting the claim of the appellant that the income as per the diaries be computed by applying net profit rate of 15% on the total sales as per the diaries.

4] The learned CIT(A) erred in confirming the disallowance u/s 40A(3) of Rs. 1,71,10,828/- and disallowance of construction expenses of Rs. 31,26,719/- on the basis of the seized diaries.

5] The learned CIT(A) erred in confirming the addition of personal expenses of Rs. 6,16,586/-.

6] The learned CIT(A) erred in confirming the addition of Rs. 13,06,945/- on account of withdrawals for investment.

4. The Revenue is also in appeal and has raised the following grounds of appeal:-

1. Considering the facts and legal aspect of the case, the CIT(A) erred to hold that the assessee company is entitled to claim the benefit of deduction allowed u/s. 80IB(3) of the Income-tax Act, 1961, in respect of its unaccounted income too.

2. Following Roofing expenses were disallowed in assessment while computing income on profit basis.

A.Y. 2005-06	Rs.1,28,894/-
A.Y. 2006-07	Rs.1,88,79,242/-
A.Y. 2007-08	Rs.1,20,69,729/-

Considering the facts and legal aspect of the case, the CIT(A) erred in contradicting his own findings that computation of total income of the assessee company made on income basis, as well as, on the basis of accretion to net asset basis has been held appropriate.

3. In assessment, on examination of seized diaries, it was concluded that fresh advances were made to various persons relevant to assessment years under consideration are detailed hereunder:

A.Y. 2005-06	Rs.2,54,00,000/-
A.Y. 2006-07	Rs.1,96,47,800/-
A.Y. 2007-08	Rs. 30,66,720/-

Considering the facts and legal aspect of the case, the CIT(A) erred in not appreciating the fact that, while computing the income of the assessee on income basis, the AO has already considered the expenditure in question and assessed the income only on income basis.

4. On account of ‘Hawala’ entries an addition made of Rs. 53,27,500/- for AY 2005-06 is challenged in appeal

Considering the facts and legal aspect of the case, the CIT(A) erred in not appreciating the fact that, while computing the income of the assessee on income basis, the AO has already considered the hawala entries in question and assessed the income only on income basis.

5. Considering the facts and legal aspect of the case, the CIT(A) erred in not appreciating the fact that, the AO has rightly made an addition on account of seed money, because, in absence of seed money any business cannot be run.

6. The following additions on account of closing cash balances were made in assessment.

A.Y. 2005-06	Rs.8,94,114/-
A.Y. 2006-07	Rs.34,67,654/-
A.Y. 2007-08	Rs.26,66,064/-

Considering the facts and legal aspect of the case, the CIT(A) erred in not appreciating the fact that, the AO has rightly made an addition on account of actual cash found during search operations considering the books of accounts maintained by the assessee and this nothing to do with material seized during the course of search.

7. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing netting off of debit suspense entries with the credit suspense entries without appreciating the fact that the assessee did not reconcile the same during assessment.

8. The appellant prays that the Order of the learned CIT(A) be vacated and that of the AO's be restored.

5. Briefly, in the facts of the case, the assessee was a limited company and had furnished the return of income declaring total income of Rs. 74,71,360/-. Search and seizure actions under section 132(1) of the Act were conducted on 23.08.2006 at the residential as well as business premises of Patel Group, Kolhapur. The assessee company was being run by the members of Patel family and was also covered. Consequent to search action, the case was assigned to the CIT (Central), Pune. Since authorization under section 132(1) of the Act was issued in the case of assessee, notice under section 153A(a) of the Act for the year under consideration was issued by the DCIT (Central) Circle, Kolhapur on 13.03.2007. In response to the said notice, the assessee furnished the return of income on 12.04.2007 declaring income of Rs. 74,71,360/- as shown in the original return of income filed under section 139(1) of the Act. The case of the assessee was taken up for scrutiny. The Assessing Officer noted that Patel group has five main persons viz. Shri Virji Ladharam Patel and his four sons Shri Mohan Virji Patel, Shri Mahendra Virji Patel, Shri Ramji Virji Patel and Shri Ravji Virji Patel. Out of four brothers, Shri Mohan Virji Patel was a person who was looking after the accounting of total group concerns and other persons were looking after the factory works. During the course of search at the residential premises of Shri Mohan Virji Patel and Shri Mahendra Virji Patel, both Directors of the assessee company, certain documents were seized as Annexure A to Panchanama dated 24.08.2006 containing S.No.1 to 12, out of which S.No.1 contains loose papers and S.No.5 to 10 were note books containing prima facie unaccounted transactions. All these note books and loose papers of bundle No.1 were written chronologically by Shri Mohan Virji Patel in his own handwriting in Gujarati script. The figures in these note books were written in codes. The transactions pertaining to cash sales and expenditure on investment of the group concerns were found entered in these six note books. In the statement recorded on 23.08.2006, Shri Mohan Virji Patel had stated that the classic note books inventorized at S.No.9 and 10 contain consolidated receipts and payments of their business concerns with Vilson Particle Board Industries Pvt. Ltd. and Pragati Plywood Industries Ltd. and these entries were having accounted and unaccounted transactions. Both during the course of search and also during the course of post search enquiries Shri Mohan Virji Patel was asked vide question No.36 to give details of total unaccounted income reflected in the note books as these were written in Gujarati script. However, no information was given by Shri Mohan Virji Patel. Even during the course of assessment proceedings before the Assessing Officer in the case of assessee before us, specific request was made vide order sheet entry dated 16.05.2008 to do English translation of all these six diaries written in Gujarati script and to bifurcate the entries in the note books assessee-wise and date-wise. However, the assessee failed to furnish any such details. In such circumstances, the Assessing Officer was of the opinion that since the notings in these diaries were complexes in nature and were therefore required to be subjected to special audit. The complexities as noted by the Assessing Officer are enumerated at page 2 under para 5 (ii) of the assessment order.

6. The Assessing Officer thus, in the interests of Revenue made a proposal for getting the accounts audited by an Accountant as laid down in provisions of section 142(2A) of the Act. Thereafter, the CIT(C), Pune on 04.11.2008 passed an order granting approval under section 142(2A) of the Act. The special auditor was nominated by CIT(C), Pune for carrying out the special audit in assessee’s case and the assessee was directed to get the accounts audited under section 142(2A) of the Act. A time period of 90 days was given to the assessee for submitting its audit report which period was further extended at the request of assessee. The audit report was submitted on 13.04.2009. In the special audit report, the assessee during the course of audit was asked to verify, mark and sort out the entries from the seized diaries which are appearing in assessee’s regular books of account of various concerns. The explanation of assessee was that these were rough notings which do not lead to any income computation and it was not possible for the assessee to give explanation of various pages. As regards the classification of unaccounted income concern-wise, it was submitted by the assessee that total unaccounted income has been offered in the hands of Virji Ladharam Patel, being the head of family. The special auditor had prepared the audit report and the transactions in the diaries were bifurcated and categorized under various heads on the basis of prima facie meaning of the words used by the person writing the diaries. The auditor had computed the profit from sale transactions year-wise after allocating the expenses recorded in the diaries. He also pointed out that certain disallowable expenses, expenses of personal nature and expenses on capital account. On receipt of special audit report, detailed questionnaire was issued to the assessee. In response to which, various written explanations were filed and books of account were produced before the Assessing Officer. The Assessing Officer o bserved that in spite of repeated requests and opportunities given, the learned Authorized Representative for the assessee did not give any factual details regarding investment in assets, purpose and nature of expenditure and explanation in respect of running account appearing in the name of ‘NPP’ in the diaries. The explanation given by the assessee was found to be deficient and in the circumstances, the assessment proceedings were finalized on the basis of regular returns filed, seized material and report of the special auditor and the partial information furnished by the assessee. The Assessing Officer thereafter, took note of the income arising from the transactions entered in the seized diaries and the undisclosed income to be treated as income of the assessee. The Assessing Officer contended that since the assessee was a flagship company of group and the main income earning entity and all transactions in the diaries point to the fact that the transactions were predominantly made by the assessee. It was possible that the transactions had been entered into by VLP or Shri Mohan Patel. However, the said transactions were entered on behalf of assessee only. Therefore, the transactions appearing in the diaries were held to pertain to the assessee. The Assessing Officer questioned the rationale behind offering the income in the hands of Shri Mohan Virji Patel and observed that there was substantial unaccounted income and in order to pay taxes at lower rate and also to escape various obligations cast on a private limited company, income was offered in his hands. The Assessing Officer however, considered it just and proper to assess the unaccounted transactions reflected in the seized diaries as pertaining to the assessee and not Mohan Virji Patel as done by the assessee.

7. Before the CIT(A), the assessee challenged the assessment order as time barred by limitation due to the fact that the Assessing Officer had extended for getting the accounts audited on 21.01.2009, whereas initial period afforded to the assessee was getting time barred on 28.11.2008 i.e. 60 days from the date of service of the order on the assessee. According to the assessee, section 153B of the Act provides for excluding the period from the date of appointment of the auditor till the date of submission of the report of 180 days whichever is earlier and extension was granted for 90 days after expiry of initial period of 60 days, the total time available to the Assessing Officer was 150 days which would expire on 03.04.2009. The assessment order then should have been passed on or before 02.06.2009 which in fact was passed on 11.06.2009 and hence, was time barred by limitation. The second objection raised by the assessee was that no direction for special audit could be issued without affording reasonable opportunity of being heard to the assessee. Reference was made to the proviso under section 142(2A) of the Act which was inserted by the Finance Act, 2007 w.e.f. 01.06.2007. In this regard, two questions were raised as to whether the opportunity of being heard had to be given by the Assessing Officer before he forms an opinion on nature and complexity of accounts and whether the opportunity of being heard had to be given by the Assessing Officer or the opportunity of being heard if given by the superior authority to the aggrieved party prior to approving the proposal for special audit and before the directions under section 142(2A) of the Act was passed by the Assessing Officer, would constitute sufficient compliance with the rules of audi alteram partem. The CIT(A) in this regard observed as under:-

“16. A combined reading of the provisions of section 142(2A) and the observations of the Hon'ble Supreme Court in the cases of Rajesh Kumar v. DCIT (2006) 157 Taxman 168 (SC) and Sahara India (Firm) v. CIT, Central -I (2008) 300 ITR 403 (SC)makes it amply clear that the provisions of sub-section (2A) provides for an opportunity of being heard to be given to an assessee before the direction for special audit is ordered by the assessing officer. It is nowhere provided that the opportunity of being heard has to be provided by the assessing officer only. This opportunity can be given from the time the assessing officer starts the assessment proceedings till the time the Chief Commissioner or the Commissioner grants his approval to the proposal for special audit by any of the persons involved in the process of giving direction under this section. However, the assessing officer has to give the opportunity of being heard to the assessee before forming an opinion about complexity of the account. As observed by the Hon'ble Supreme Court in Sahara India Firm case (supra) the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision is an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer. In order that the requirement of the previous approval, envisaged in the section is not turned into an empty ritual, the same should be done having regard to the materials on record. The explanation given by the assessee, if any, would be a relevant factor and the approving authority is required to go through it. The approving authority must go through the explanation given by the assessee, if they are on record. He may also call the assessee to have its say in the matter so that he can form a well considered all-encompassing view in the matter of special audit referred by the assessing officer. He can also arrive at a different opinion. The Chief Commissioner or the Commissioner is placed in a situation where he could have corrected the Assessing Officer if the assessing officer was found to have adopted a wrong approach or posed a wrong question unto himself. He can overrule the opinion of the assessing officer and ask him to complete the process of the assessment within the normal specified time. 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 he might not have approved the same. Thus the role of the superior authority i.e. the Commissioner or the Chief Commissioner in the process leading to special audit is too vital to be ignored. In the matter of directions of special audit, it is the opinion of the Commissioner or the Chief Commissioner which is binding, conclusive, final and unchallengeable for all purposes. Hence, if such authority gives an opportunity of being heard to the appellant before granting an approval, there would be sufficient compliance to the rules of audi alteram partem and there would be no miscarriage of justice.

17. The other argument of the assessee is that the section provides for an opportunity of hearing to the assessee and only thereafter, formation of opinion of the Assessing Officer as to whether reference to special audit is to be made or not. Assessee has relied on the decision given in the case of DCIT v. Muthoottu Mini Kuries [2004] 266 ITR 213 (Ker) to urge that it has been held in that case that the Assessing Officer should grant opportunity of hearing before making a reference u/s. 142(2A). This is an incorrect interpretation of the order. In fact the Hon'ble Kerala Court in the case of Muthoottu Mini Kuries (supra) was pleased to hold that "In the light of the above principles, it can safely be concluded that before passing an order under sub-section (2A) of section 142, the assessee is entitled to be heard." Thus it is clear that the while upholding in principle that "The cardinal Rule among the different rules of natural justice is that 'No one shall be condemned unheard'. An order affecting the rights of a person or having adverse consequences on him, should not be passed without affording a hearing to him", the Hon’ble Court did not suggest that the assessing officer is bound to afford an opportunity of being heard before making a reference to the Chief Commissioner or the Commissioner. Instead it was held that an opportunity of being heard should be given before passing an order under section 142(2A). A reading of the provisions for providing opportunity of being heard contained in the Proviso shows the Income-tax Act provides for an opportunity of being heard without specifying the authority who has to discharge this responsibility. The Act mandates that the assessing officer shall not pass an order of special audit unless the assessee is heard. It does not command that it is the assessing officer alone who can exercise this onerous responsibility. The scheme of the Act envisages an opportunity to be heard to the assessee before an order of special audit is passed by the assessing officer. The task of determining whether the case involves a situation where a special audit is necessary is placed on the assessing officer and the Chief Commissioner or the Commissioner simultaneously. The provisions of Section 142(2A) do not lay down that the only authority vested with the duty to afford an opportunity of being heard to the assessee is the assessing officer and no one else. Indeed, the tenor of observation of the Hon'ble Supreme Court in the cases of Pajesh Kumar (supra) and Sahara India (Firm) (supra) indicates that the Chief Commissioner or the Commissioner must consider the assessee's contention before granting approval to a proposal for special audit under section 142(2A). This would be possible only if the opportunity of being heard is provided by the Chief Commissioner or the Commissioner It is not the assessee's case that the Chief Commissioner or the Commissioner had denied this opportunity.”

8. The CIT(A) concluded by holding as under:-

“18. In any case the facts of the case indicate that the assessing officer provided the assessee with opportunity to explain the contents of the seized material containing voluminous narrations in Gujarati language of numerous entries indicating transactions running into crores of Rupees spread over a period of three - four years during the course of assessment on 16/05/2008 itself by order sheet entries. This fact is not denied by the assessee. It is equally true that this fact was recorded by the CIT (Central) while conducting the hearing for grant of approval for conducting special audit and it has not been contested by the assessee as incorrect. It is also true that the appellant had wasted the opportunity by not complying with the request made by the assessing officer. Under these circumstances I fail to understand as to how the assessee can instigate the issue of opportunity not being given by the assessing officer before forming an opinion about complexity of accounts for the purpose of invoking the jurisdiction for conducting special audit under section 142(2A). I hold therefore, in light of the factsnarrated supra, that the contention of the assessee that opportunity was not given by the assessing officer before sending the proposal of special audit for approval of the Commissioner is incorrect rather false and misleading.”

9. The CIT(A) observed that even if it is presumed for argument sake that the order under section 142(2A) of the Act was passed without affording an opportunity of hearing to the assessee and such a direction would be an infirmity which would not apply itself to make the assessment order null and avoid or illegal. He further stated that all irregular or erroneous or even illegal orders were held to be null and void, since there is fine distinction between the orders which are null and void and orders which are irregular, wrong or illegal. Applying the ratio laid down by Special Bench of Delhi Tribunal in ACIT Vs. Sushila Milk Specialties Pvt. Ltd. in ITA No.100/Del/2007, order dated 30.10.2009 (2010) 122 ITD 48 (Delhi) (SB), where the matter was restored back to the file of Assessing Officer for framing the assessment afresh by affording reasonable opportunity of hearing to the assessee, was applied to the facts of the present case.

10. Another objection raised by the assessee before the CIT(A) was in respect extension of time given by the Assessing Officer for completion of special audit. The first objection of the assessee was that the order extending the time for completion of audit was passed on 21.01.2009, whereas the initial period of sixty days for furnishing special audit report starting from 21.11.2008 expired on 20.01.2009. Secondly, it was averred that the order extending the time limit was backdated and the order was passed in the month of February, 2009 i.e. after the expiry of initial time limit given for conducting special audit. The said order extending the time limit was served upon the assessee on 27.02.2009. Referring to the provisions of section 142(2A) of the Act, it was pointed out by the CIT(A) that the report should be furnished by the assessee to the Assessing Officer, hence the duty was cast upon the assessee to furnish the report of special audit within specified time to the Assessing Officer. In case the assessee is unable to furnish report, he may seek for extension of stipulated time by making an application to the Assessing Officer and the Assessing Officer thereafter, may extend the time for such periods. The Assessing Officer may suo moto also extend the said period as he thinks fit. The CIT(A) noted that in the instant case, the said audit report was not furnished by the assessee on the assumed date i.e. 20.01.2009. The assessee also did not seek extension of initial time limit of sixty days given by the Assessing Officer. It was also a fact that the Assessing Officer extended the time for another 93 days on the next working day i.e. 21.01.2009. The CIT(A) held that extension of time limit on the next working day would tantamount to valid extension of time limit for special audit. The CIT(A) observed that under the Act, the Assessing Officer took an action suo motu to extend the time limit and he can do so provided of course, the outer limit of 180 days had not expired. The order of extension was thus, held to be not time barred by limitation. He further contended that the provisions of sub-section (2C) and the proviso thereunder should be liberally construed to enable carriage of justice to the aggrieved party. The said provisions were said to be procedural sections and the CIT(A) concluded by holding that the Assessing Officer had not committed any irregularity when he passed the order extending time for completion of special audit immediately upon presumed expiry of initial period on the next working day. He further stated that the Income-tax Act does not provide that the order extending time limit for special audit, it had to be passed before expiry of due date of filing of report, where it was the duty of the assessee to seek extension of time. He further counted the period of limitation with the date on which the assessee received direction under section 142(2A) of the Act, dated 21.11.2008 to get the special audit conducted was 28.11.2008. The initial period for submission of special audit report was given by the Assessing Officer was sixty days and extension of further period of 120 days was available. He further contended that if the report was not submitted within initial period of sixty days, then extension of further period of 120 days was hypothetically given on the date on which initial sixty days period counted from the date of order under section 142(2A) of the Act, expired. He says that if this contention of the assessee is accepted, then the limitation period of 180 days would expire on 20.05.2009. However, the proviso clarifies that the period of 180 days has to be reckoned from the date on which the directions under subsection (2A) were received by the assessee within outer limit for submission of special audit report in the case would be 27.05.2009 and consequently, in this regard, he further observed that the due date on which initial period of sixty days expires would be 27.01.2009 and not 20.01.2009 as contended by the assessee. He said harmonious reading of provisions have to be made and reading of provisions together, the same have to be interpreted as a whole and not in piece meal.

11. The next contention of assessee that as per the provisions of Explanation appended to section 153B of the Act, the period of 150 days to complete the special audit by 03.04.2009 was found to be not correct. He reiterated that the period of limitation has to be counted from the day when the directions under section 142(2A) of the Act were received by the assessee and not from the date of appointment of special audit. He concluded by saying that under these circumstances, I hold that the provisions of sub-section (2C) in the proviso thereto has to be read into the provisions of section 153B of the Act as omission to make the reference would lead to consequences not intended or material to be intended. The other contention of the assessee that the letter was dispatched late was also brushed aside by the CIT(A), in view of reference number appended to the letter of assessee which preceded i.e. 1207 which precedes other numbers 1208 to 1213 which were dated 18.02.2009. The contention of assessee that it had received extension letter dated 21.01.2009 on 27.02.2009 i.e. after lapse of more than one month, and the order extending the time limit was backdated was held to be not correct, in the absence of any evidence. The CIT(A) thereafter, decided the issue on merits.

12. The ground of appeal No.1 raised by the assessee is jurisdictional issue of validity of assessment order passed under section 143(3) r.w.s. 153A(b) of the Act. The issue vide ground of appeal No.1.1 raised by the assessee is against reference made for special audit under section 142(2A) of the Act being illegal as the Assessing Officer had not given opportunity of hearing to the assessee. Under the proviso to section 142(2A) of the Act and consequently, the assessment order passed being barred by limitation. The issue vide ground of appeal No.1.2 is assessee being aggrieved by the order passed by the Assessing Officer in extending the time limit for completion of special audit after expiry of initial period and the extension being not valid in law, the consequent assessment order passed by the Assessing Officer was barred by limitation.

13. The learned Authorized Representative for the assessee after taking us through the factual aspects of the case pointed out that certain diaries were found during the course of search and declaration was made in the hands of Mohan Virji Patel of Rs. 7.50 crores, which was also included in his return of income. However, while completing assessment under section 153A of the Act, the entire amount was taxed in the hands of assessee company. He further pointed out that the date of search was 23.08.2006 and reference for special audit was made by the Assessing Officer under section 142(2A) of the Act on 21.11.2008. He stressed that before making reference, the Assessing Officer has to give an opportunity of hearing to the assessee as per proviso to section 142(2A) of the Act. Then the order has to be passed with the previous approval of CIT(A) directing the said audit in the case. The Assessing Officer can extend time of getting special audit report but within the original period. Reference was made to the proviso to section 142(2C) of the Act. Our attention was drawn to page 277 of the Paper Book, under which the CIT(C) vide letter dated 12.09.2008 had given opportunity to assessee, at pages 278 to 280 of the Paper Book, the proposal by the Assessing Officer to CIT(A) is placed and the learned Authorized Representative for the assessee pointed out that nowhere he refers to any show cause notice to the assessee. He then, referred to page 267 of the Paper Book i.e. order giving permission to conduct special audit which talks of show cause notice given by the CIT(C). He stressed that no show cause notice was given by the Assessing Officer, whereas under the proviso to section 142(2A) of the Act, it is incumbent upon the Assessing Officer to give notice to the assessee before seeking approval. In the absence of any notice being given, he pointed out that the provisions of section 292B of the Act cannot cure the mistake or the defect in the alleged notice. Referring to the provisions of section 292BB of the Act, he pointed out that the same is regarding improper service of notice but when no notice has been issued, there is no question of any service of notice. He placed reliance on the ratio laid down by Hon’ble Bombay High Court in Nickunj Eximp Enterprises Pvt. Ltd. Vs. ACIT (2012) 346 ITR 6 (Bom) for the proposition that for conducting special audit, condition precedent was to give an opportunity to the assessee to be heard. He then, referred to the ratio laid down by the Hon’ble High Court of Allahabad in Kaka Carpets Vs. CIT (2014) 266 CTR 485 (All), wherein similar proposition was laid down that the Assessing Officer has to consider the objections raised by the assessee to the special audit and afford reasonable opportunity of being heard and only thereafter, the Commissioner as approving authority would consider whether special audit is required or not. He further referred to the ratio laid down by Mumbai Bench of Tribunal in Rajendra C. Singh Vs. JCIT (2008) 117 TTJ 885 (Mum-Trib)m wherein it was held that where the Assessing Officer simply forwarded the recommendations of Additional Director of Income Tax to CIT to seek approval for special audit and did not apply any mind, then the audit under section 142(2A) being invalid, extended time under Explanation to section 158BE of the Act was not available and hence, the assessment order passed was barred by limitation and invalid. He further placed heavy reliance on the ratio laid down by Mumbai Bench of Tribunal in ACIT Vs. Claridges Investments & Finances (P) Ltd. (2007) 18 SOT 390 (Mum-Trib) for the proposition that where the order of special audit was passed without giving an opportunity of hearing to the assessee, was vitiated in law and consequent assessment order passed was to be nulled as time barred. Reliance was placed on the ratio laid down by the Apex Court in Rajesh Kumar and Others Vs. DCIT (2006) 287 ITR 91 (SC). The learned Authorized Representative for the assessee pointed out that where the Hon’ble Supreme Court in Rajesh Kumar and Others Vs. DCIT (supra) has laid down the proposition that the direction for special audit to be given before assessment was not an administrative direction and was of quasi-judicial nature and hence, notice had to be given to the assessee. He further pointed out that the Commissioner had applied the ratio laid down by Three Judge Decision of Apex Court in Sahara India (Firm) Vs. CIT and Another (2008) 300 ITR 403 (SC), which was relied upon by the learned Authorized Representative for the assessee and pointed out that the said decision was relevant for position of law pre-amendment in 2007. He also pointed out that Special Bench of Delhi Tribunal in ACIT Vs. Sushila Milk Specialties (P.) Ltd. (2010) 122 ITD 48 (Delhi) (SB) applied by the Commissioner was also on provisions which were on Statute pre 2007.

14. The learned Departmental Representative for the Revenue during the course of hearing was directed to file order sheet entries to establish whether any show cause notice was given to the assessee before reference made to special audit.

15. The learned Authorized Representative for the assessee pointed out that the CIT(A) refers to the order sheet entries, to point out that show cause notice was given to the assessee. However, in case the order sheet entries are perused, then only there is a direction for translation of diaries in Gujrati but no show cause notice has been given to the assessee before seeking approval of Commissioner to conduct special audit. He stressed that based on this, assessment orders passed by the Assessing Officer are time barred. The next contention raised by the learned Authorized Representative for the assessee was that the Assessing Officer had extended the time limit for completion of special audit after lapse of original time. In this regard, he says that the provisions of Limitation Act had to be directly applied as held in M.K. Srikanta Setty Vs. CIT (1986) 160 ITR 517 (Kar) and the equitable provisions were within place while determining the period of limitation. Another point raised by the learned Authorized Representative for the assessee was that the order extending time limit was received on 27.02.2009, where the dispatch number mentioned as 1207. He pointed out that the documents at 1208 to 1213 were also extension letters for other group concerns, which are all dated 18.02.2009. He stressed that between dispatch No.1207 which is claimed to be on 21.01.2009 and 1208 which is dispatched on 18.02.2009, there is gap of one month and no single letter has been issued in between. He further stressed that where all the extension orders were received dated 27.02.2009 by group concerns, the presumption is that the extension letter in the case of assessee was backdated.

16. The learned Departmental Representative for the Revenue on the other hand, referring to the order sheet notings pointed out that the list of events were as under:-

Date	Event
23.08.2008	Date of search
11.09.2008	Assessing Officer sent proposal to CIT
12.09.2008	CIT(C) gave opportunity of hearing to assessee
22.09.2008	None attended on behalf of assessee
08.10.2008	Assessee submitted objections
04.11.2008	CIT(C) accorded approval
21.11.2008	Assessing Officer directed for special audit
28.11.2008	Assessee received the letter of AO for special audit
20.01.2009	60 days to get the accounts audited expired
21.01.2009	AO suo moto extended the time

17. Referring to the assessment records, it was pointed out that the assessee makes representation on 15.11.2009 and copy of letter dated 21.01.2009 given to auditor on 26.01.2009. The learned Departmental Representative for the Revenue pointed out that the proviso makes it obligatory the Assessing Officer to give opportunity of bearing heard to the assessee before makes the proposal for special audit under section 142(2A) of the Act. He said that the question which arises is whether such an opportunity can be given by CIT(C). In the facts of present set of case, CIT(C) had given proper opportunity before passing whether special audit is to be done or not. He referred to the decision of Hon’ble Supreme Court in Sahara India (Firm) Vs. CIT (2008) 169 TAXMAN 328 (SC) and the Hon’ble Bombay High Court in Atlas Copco (India) Ltd. Vs. ACIT (2006) 154 Taxman 307 (Bom) in this regard. He further stated that it can at best an irregularity and not illegality as held by the Special Bench of Delhi Tribunal in ACIT Vs. Sushila Milk Specialties (P) Ltd. (supra).

18. The learned Authorized Representative for the assessee in rejoinder pointed out that the learned Departmental Representative for the Revenue has relied on the decision of Hon’ble Bombay High Court in Atlas Copco (India) Ltd. Vs. ACIT (supra), which decision relates to the position prior to 2007. It also not applies to the decision of the Hon’ble Supreme Court in Rajesh Kumar and Others Vs. DCIT (supra). He further pointed out that factually, the Department wanted paras to be translated in English and for that time, was sought to explain the details, but the Assessing Officer made reference for special audit. He also pointed out that the learned Departmental Representative for the Revenue has relied on Special Bench of Tribunal in ACIT Vs. Sushila Milk Specialties (P) Ltd. (supra), which was also for the period prior to amendment. With regard to issue of notice being mere irregularity, he referred to the ratio laid down by the Hon’ble Supreme Court in ACIT & Anr. Vs. Hotel Blue Moon (2010) 321 ITR 362 (SC), where it was held that where the notice is to be issued within time frame provided in the Statute and in case no such notice, then the assessment framed thereunder is invalid. He further referred to the explanatory notes of the Finance Bill while introducing the proviso to section 142(2A) of the Act. Another distinction drawn was that the issue before the Apex Court in ACIT & Anr. Vs. Hotel Blue Moon (supra) was with regard to framing of block assessment with the approval of Addl. CIT. He further pointed that there is difference between the approving authority and assessing authority and the assessing authority has compulsorily to give notice before initiating any action against the assessee. Since no such opportunity was given to the assessee, the special audit completed under section 142(2A) of the Act was not valid and the provisions of section 153B of the Act does not come into play and hence, the assessment was time barred.

19. With regard to assessment year 2004-05, the learned Authorized Representative for the assessee pointed out that the assessee is not in appeal but the Revenue has filed an appeal against the order of CIT(A). He relied on Rule 27 of ITAT Rules to say that though the assessee was not in appeal, it can support the order of CIT(A) on different point of view. In this regard, reliance was placed on the ratio laid down by Hon’ble Bombay High Court in B.R. Bamasi Vs. CIT (1972) 83 ITR 223 (Bom). He stressed that as the facts and issue raised in assessment year 2004-05 are same as in assessment year 2005-06 and hence, it was pleaded that the assessment completed in the case for non-allowing of opportunity of hearing to the assessee before issue of notice under section 142(2A) of the Act and in not passing consequent order of extending time, the assessment was time barred. He then pointed out that in assessment year 2006- 07, cross appeals have been filed by the assessee and Revenue and the first issue raised is jurisdictional issue as to the assessment being time barred.

20. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the provisions of section 142(2A) of the Act i.e. looking at the nature and complexity of the accounts and volume and multiplicity of transactions and interest of revenue, then the procedure to be followed by the Assessing Officer in making reference for special audit and applying the report of special auditor for carrying out the assessment in the case of concerned assessee. Section 142(2A) of the Act reads as under:-

“142…..

(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require:

Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.”

21. As per provisions of said section if at any stage during the course of assessment proceedings, the Assessing Officer in view of the nature and complexity of the accounts, its volume, doubts about correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of assessee and the interests of revenue, is of the opinion that it is necessary to do so, he may, with previous approval of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner as the case may be, direct the assessee to get the accounts audited by an accountant, and to furnish a report of such data in the prescribed form duly signed and verified by such accountant setting forth such particulars as may be prescribed, and such other particulars as may be required. The proviso thereunder stipulates that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given reasonable opportunity of being heard.

22. Sub-section (2B) thereunder provides that 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. Sub-section (2C) provides the time limit i.e. 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. The proviso under section 142 (2C) of the Act reads as under:-

“Provided that the Assessing Officer may, suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit ; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received by the assessee.”

23. The proviso deals with the extension of period for completion of special audit and it is provided that the Assessing Officer may suo motu, which is inserted by the Finance Act, 2008 w.e.f. 01.04.2008 , or on an application made by the assessee and for any good and sufficient reason, extend the period for such further period or periods as he thinks fit. However, there is a cap that the aggregate of the period originally fixed and extended in no case shall exceed 180 days from the date on which direction under sub-section (2A) is received by the assessee. Reading the above said provisions, it is clear that where the Assessing Officer has sought special audit report, then it is incumbent upon the assessee to submit the said report within such period which is specified by the Assessing Officer. However, if the said audit has not been completed within such fixed period, then the Assessing Officer has power on his own motion or on an application moved by the assessee or for any other reasons, to extend the period for furnishing the special audit report within such extended period.

24. Section 142(2A) of the Act in the first instance talks about the period which is specified by the Assessing Officer i.e. the period given to assessee to conduct special audit by issue of notice in this behalf. When the period is extended then, the cap is placed on aggregate period in which the report is to be given wherein, it is provided that the same shall not exceed 180 days from the date on which the direction under sub-section (2A) is received by the assessee. If we consider the main provisions of sub-section (2C) and proviso thereunder, then the reference is made to different periods. In the main provision, the reference is made to the period which has been specified by the Assessing Officer in the notice issued to the assessee. However, in order to reckon the period of 180 days, then from the date on which direction under sub-section (2A) is received by the assessee.

25. The relevance of dates and the time period within which special audit is to be taken note of is to be applied while calculating the time limit for completion of assessment under section 153A of the Act. The provisions at the relevant time provided that while computing the period of limitation for the purpose of completion of assessment, the period commencing from the date on which the Assessing Officer direct the assessee to get his accounts audited under section 142(2A) of the Act and ending with last date on which the assessee is required to furnish report of such audit under that sub-section or where such direction is challenged before the Court ending with date on which the order setting aside the order is received, by the Principal Commissioner or Commissioner, is to be excluded. This is as per Explanation under section 153B clause (ii). The provisions of section 142(2A) of the Act have been the subject matter of various judicial rulings.

26. The Apex Court in Rajesh Kumar and Others Vs. DCIT (supra) vide judgment dated 01.11.2006 has laid the proposition that direction issued under section 142(2A) of the Act for special audit of the accounts of assessee was not administrative in nature but was quasi-judicial order. Referring to the expression having regard to in section 142(2A) of the Act, the Apex Court held that the same was significant and the opinion must be formed strictly in terms of factors enumerated therein. The Apex Court held that where once it is held that the assessee suffers civil consequences and any order passed would be prejudicial to him, then the principles natural justice must be held to be implicit, which was required to be applied inter-alia to minimize arbitrariness. It was further observed by the Apex Court that if the assessee is put to notice he could show that the nature of accounts was not such as would require appointment of special auditor. He could also show that what the Assessing Officer considers complex is in fact not so. It was further held that formation of opinion under section 142(2A) of the Act that the accounts of assessee requires an expert audit should indisputably be based on objective considerations and no order can be passed on whims or caprice. The Hon’ble Supreme Court concluded by holding as under:-

“55. The factors enumerated in section 142(2A) of the Act, thus, are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed by it would be prejudicial to him, principles of natural justice must be held to be implicit. The principles of natural justice are required to be applied, inter alia, to minimize arbitrariness.

56. It is trite, even if there is a possibility that the Tribunal would correctly follow the statutory provisions, still compliance with principles of natural justice would be required. [See R. v. Kensington and Chelsea Rent Tribunal, Ex p. MacFarlane [1974] 1 WLR 1486 (QB)].

57. Justice, as is well known, is not only to be done but 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.

58. 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 underlying purpose for appointment of the special auditor is not bona fide it might not have approved the same.”

27. The Hon’ble Supreme Court further held as under:-

“60…..….While exercising its power, the Assessing Officer has to form an opinion. It is final so far as 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.

61……

62. Whereas the order of assessment can be the 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.”

28. The Three Judge decision of Hon’ble Supreme Court in Sahara India (Firm) Vs. CIT and Another (supra) while deciding the issue of scope and nature of Assessing Officer’s and Commissioner’s responsibility held that the order entails civil consequences and the assessee has to be given a reasonable opportunity of being heard before passing the order. The Hon’ble Supreme Court took note of insertion of proviso to section 142(2A) of the Act w.e.f. 01.04.2007, under which it is provided that the Assessing Officer shall not direct the assessee to get the accounts so audited, unless the assessee has been given reasonable opportunity of being heard. The Court observed that exercise of power under section 142(2A) of the Act leads to serious civil consequences and therefore, even in the absence of any express provision for affording an opportunity of pre-decisional hearing to the assessee and in the absence of any express provision in section 142(2A) of the Act barring giving of reasonable opportunity to the assessee, the requirement of observance of principles of natural justice is to be read into said provisions. The Apex Court re-affirmed earlier decision of Apex Court in Rajesh Kumar and Others Vs. DCIT (supra). It may be pointed out herein itself that pursuant to decision in Rajesh Kumar and Others Vs. DCIT (supra) by the Apex Court, Larger Bench was affirmed on the point that whether in every case where the Assessing Officer issued directions in terms of section 142(2A) of the Act, the assessee has to be heard before such order is passed. The Division Bench was of the view that it does not appear to be correct position of law. The Three Judge Bench thereafter, took note of the provisions of section 142(2A) to (2D) of the Act and section 142(3) of the Act and observed that the twin conditions of the nature and complexity of accounts and interest of revenue were the pre-requisite for exercise of power under section 142(2A) of the Act. It was further observed the word ‘complexity’ used in section 142(2A) of the Act was not defined or explained in the Act but what may be complex to one, may not be complex as far as the understanding of other. So, there has to be genuine and honest attempt on the part of Assessing Officer to understand the accounts maintained by the assessee, entries 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, was the proposition laid down by the Hon’ble Supreme Court. Further, even the requirement of previous approval of Chief Commissioner or Commissioner was held to be an inbuilt protection against arbitrary and unjust exercise of power by the Assessing Officer. It also casted a heavy duty on the high ranking authority , to say that the requirement of previous approval, envisaged in section is not turned into empty ritual. It was further laid down by the Hon’ble Supreme Court that before granting the approval, the Chief Commissioner or Commissioner as the case may, must have before him the material on the basis whereof an opinion in this behalf has been formed by the Assessing Officer and the approval must reflect the application of mind to the facts of the case. Then the requirement of hearing or not before the order for special audit was taken up by the Hon’ble Supreme Court and the concept of natural justice and the principles governing the said application were referred to. The Apex Court referred to the earlier decision of the Court in Rajesh Kumar and Others Vs. DCIT (supra) observed as under:-

“20. Dealing with the question whether the requirement of affording an opportunity of hearing is to be read into section 142(2A), in Rajesh Kumar(1) it has been held that prejudice to the assessee is apparent on the face of the said statutory provision. It has been observed that on account of the special audit, the assessee has to undergo the process of further accounting despite the fact that his accounts have been audited by a qualified auditor in terms of section 44AB of the Act. An auditor is a professional person. He has to function independently. He is not an employee of the assessee. In case of misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949. Besides, the assessee has to pay a hefty amount as fee of the special auditor. Moreover, during the audit of the accounts again by the special auditor, he has to answer a large number of questions. Referring to the decision of this court in Binapani Dei wherein it was observed that when by reason of an action on the part of a statutory authority, civil or evil consequences ensue, the principles of natural justice are required to be followed and in such an event, although no express provision is laid down in this behalf, compliance with the principles of natural justice would be implicit, the learned judges held {1.[2006] 287 ITR 91 (SC) 2.[1967] AIR 1967 SC 1269.} that by virtue of an order under section 142(2A) of the Act, the assessee suffers civil consequences and the order passed would be prejudicial to him and, therefore, the principles of natural justice must be held to be implicit. The court has further observed that if the assessee was put to notice, he could show that the nature of accounts 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 interests 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 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 the proviso to section 142(2D) with effect from June 1, 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 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.”

(Emphasis supplied by us)

29. Then dealing with the issue at hand that whether the pre-decisional hearing is required or not, the Apex Court held as under:-

“22. We shall now deal with the submission of learned counsel appearing for the Revenue that the order of special audit is only a step towards assessment and being in the nature of an inquiry before assessment, is purely an administrative act giving rise to no civil consequence and, therefore, at that stage a pre-decisional hearing is not required. In Rajesh Kumar(1) it has been {1.[2006] 287 ITR 91 (SC)} held that in view of section 136 of the Act, proceedings before an Assessing Officer are deemed to be judicial proceedings. Section 136 of the Act stipulates that any proceeding before an income-tax authority shall be deemed to be judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code, 1860, and also for the purpose of section 196 of the Indian Penal Code and every income-tax authority is a court for the purpose of section 195 of the Code of Criminal Procedure, 1973. Though having regard to the language of the provision, we have some reservations on the said view expressed in Rajesh Kumar's case, but having held that when civil consequences ensue, no distinction between quasijudicial 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 v. Union of India and S. L. Kapoor v. Jagmohan. 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 of 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.”

(Emphasis supplied by us)

30. The Apex Court thus, laid down that the principles of audi alteram partem could be excluded only when the Statute contemplates a post decisional hearing amounting to a full review of the original order on merit i.e. the decision to make a reference for getting special audit done under section 142(2A) of the Act. Where they recognized the procedure that after the special audit report is submitted under section 142(2A) of the Act, the assessment proceedings would give an opportunity of hearing to the assessee on the said findings of the said auditor and the predecisional hearing i.e. whether said audit is required in the facts and circumstances of the case, is not open for discussion. Upholding the views expressed in Rajesh Kumar and Others Vs. DCIT (supra), the Apex Court held as under:-

“24. The upshot of the entire discussion is that the exercise of power under section 142(2A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of predecisional hearing to an assessee and in the absence of any express provision in section 142(2A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of the principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar's (1) case.”

31. The Apex Court further recognized the insertion of proviso under section 142(2A) of the Act w.e.f. 01.06.2007 which provided that no direction for special audit shall be issued without affording reasonable opportunity of hearing to the assessee. In the facts of the case before the Apex Court before passing the order requiring the assessee to have their accounts audited by Chartered Accountant, no show cause notice was given to the assessee. The assessee in the said case was required to furnish by March 20, 2006 the detailed explanation in respect of queries raised vide order sheet entries but in the meantime impugned order asking the assessee to get the accounts audited by the special auditor were passed on 14.03.2006. The Apex Court held that 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 March 14, 2006, are vitiated by the failure to observe the principle of audi alteram partem.

32. The next question which was decided by the Apex Court was whether the assessment order passed in the case is barred by limitation. The Apex Court admitted that the law on subject was not clear till the judgment in Rajesh Kumar and Others Vs. DCIT (supra) was rendered and there was divergent opinions amongst various High Courts. The Apex Court held that the law on the subject clarified by the Apex Court would apply prospectively and it would be open to the assessee to urge before appellate authorities that the extended period of limitation was not available to the Assessing Officer because an invalid order was passed under section 142(2A) of the Act. However, it would be open to the assessee to question before appellate authorities if so advised the correctness of material gathered on the basis of audit report submitted under section 142(2A) of the Act.

33. Both the learned Authorized Representatives have relied on several decisions of different courts and the Tribunals on the issue which have been taken note and the proposition laid down by the Apex Court is being applied to decide the present issue. The learned Departmental Representative for the Revenue and CIT(A) placed reliance on ACIT Vs. Sushila Milk Specialties (P.) Ltd. (supra), which related to pre-amended provisions and hence, the said issue cannot be applied to the present set of facts. However, we find that the Mumbai Bench of Tribunal in ACIT Vs. Claridges Investments & Finances (P) Ltd. (supra) on similar facts, wherein the order initiating special audit was passed without allowing the assessee an opportunity of being heard was held to be vitiated in law. It was further held that the extended time limit laid down in Explanation (1)(iii) to section 153A of the Act was not available to him for want of validity and proper reference under section 142(2A) of the Act and the assessment order being passed after the statutory time limit makes the assessment to be bad in law and was annulled.

34. The Hon’ble High Court of Allahabad in Kaka Carpets Vs. CIT (supra) vide judgment dated 17.01.2014 had also held as under:-

“23. Thus, A.O. should reconsider the issue as to whether a direction should be issued under section 142(2A) of the Act after considering the objections of the assessee and affording a reasonable opportunity of being heard, in terms of Section 142(2A) of the Act. It is only after the A.O. reaches to a fair conclusion after considering the reply given by the petitioner, and affording an opportunity of hearing, the CIT as approving authority will consider whether the special audit is required to be carried out for the purposes of understanding the accounts maintained by the assessee. The opinion must be formed reflecting the application of mind based on objective criteria and not on the basis of subjective satisfaction.”

35. The Hon’ble High Court of Allahabad in Kaka Carpets Vs. CIT (supra) thus, has distinguished between the adjudicating authority and approving authority and held that the first decision is to be made by the Assessing Officer, the adjudicating authority of giving the approval after considering the objections of assessee and affording reasonable opportunity of hearing in terms of provisions of the said section. The approval given by the Commissioner was as an approving authority and that also should be passed after application of mind to the facts of the case and the reply given by the assessee.

36. The Hon’ble Bombay High Court in Nickunj Eximp Enterprises Pvt. Ltd. (supra) taking note of amended provisions of insertion of proviso to section 142(2A) of the Act w.e.f. 01.06.2007 held 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. Where the Parliament had specifically incorporated requirement of reasonable opportunity of being heard, the said requirement could not be a meaningless formality and the whole object and purpose of such opportunity was to be applicable to the assessee to demonstrate before the Assessing Officer that the ingredients of section 142(2A) of the Act were not fulfilled. In the facts of the case before the Hon’ble Bombay High Court, the Assessing Officer had given notice to the assessee but had not dealt with submissions made by the assessee in this behalf and hence, the Assessing Officer was directed to consider the objections raised by the assessee.

37. It may be pointed out herein itself that the learned Departmental Representative for the Revenue has placed reliance on the ratio laid down by the Hon’ble Bombay High Court in earlier decision dated 07.03.2006 in Atlas Copco (India) Ltd. Vs. ACIT (supra), wherein it was held that before passing an order under section 142(2A) of the Act whether an opportunity of hearing is to be given to the assessee and it was held that the said decision of Hon’ble Bombay High Court is prior to the amendment in the Act and also prior to the decision passed by the Apex Court in Rajesh Kumar and Others Vs. DCIT (supra) and Three Judge Decision in Sahara India (Firm) Vs. CIT and Another (supra) and also later decision of Hon’ble Bombay High Court in Nickunj Eximp Enterprises Pvt. Ltd. Vs. ACIT (supra).

38. Now, coming to the facts of the present case, search and seizure on the premises of group concerns was carried out on 23.08.2006. As per proviso to section 153B of the Act, the assessment proceedings in such case had to be completed by 31.12.2008, whereas the assessment order in the present case was passed on 11.06.2009. The Revenue emphasized that the assessment order passed in the case is within time frame as reference was made for special audit and time allowed for getting the special audit under section 142(2A) of the Act is to be excluded for working out the limitation period for passing the assessment order. In this regard, the communication and correspondence before permission given to special audit need to be looked into. The learned Departmental Representative for the Revenue has filed on record copy of order sheet entries, wherein the assessee was asked to file English translation of the seized note books after assignment of case upon the DCIT, Central Circle, the order shee t entry is dated 16.05.2008. Thereafter, there was proposal to centralize Patel group cases with Addl. CIT, Circle-1, Pune. Vide order sheet entry dated 11.09.2008 itself, a proposal for audit under section 142(2A) of the Act in the case of Patel was submitted to CIT, Central, Pune through proper channel. The cases of Patel group were assigned to the ITO, Central-I, Pune on 13.10.2008. On 22.10.2008, a proposal for audit under section 142(2A) of the Act in the case of Patel group was submitted to CIT(C), Pune through proper channel. Thereafter, letter dated 21.11.2008 in respect of special audit under section 142(2A) of the Act was served upon the assessee as per order sheet entry dated 25.11.2008. On 16.12.2008, the Counsel filed a letter requesting for copies of seized note books and diaries which were supplied to him on 17.12.2008. On 30.03.2009, the cases were assigned to ITO, Central, Kolhapur and the records were handed over on 17.04.2009. Thereafter, the assessment proceedings were taken.

39. The first communication of Assessing Officer to the assessee is vide letter dated 21.11.2008, under which reference is made to the CIT (Central), Pune’s order granting approval under section 142(2A) of the Act dated 01.11.2008, wherein the assessee was asked to get the accounts audited through nominated auditor within period of sixty days and submit the audited accounts along with audit report. He was also asked to get additional particulars as verified by the nominated auditor and submit the same; copy of the said letter is placed at pages 251 to 252 of the Paper Book. The assessee has also placed on record the order granting permission under section 142(2A) of the Act by the CIT (Central), Pune which is dated 04.11.2008, under which it is mentioned that proposal dated 11.09.2008 for conducting special audit in the group cases of Patel group was received. The detailed reasons for special audit as given in the proposal are mentioned which were forwarded to the Addl. CIT, Pune. Further, show cause notice was issued to the assessee on 12.09.2008 by the CIT and he was asked to explain as to why special audit should not be ordered. The CIT in the said order mentions that along with notice of hearing, detailed proposal as received from the DCIT, Central, Kol hapur was also enclosed. The assessee was again sent another show cause notice and the assessee appeared thereafter. The CIT(C) noted that notices were inadvertently issued for compulsory audit for assessment year 2008-09 while the cases to be audited were for assessment years 2001-02 to 2007-08, hence, therefore, notices were issued to the assessee and the CIT passed the order granting permission for special audit under section 142(2A) of the Act recording the reasons for the same. The said order is placed at pages 267 to 273 of the Paper Book. The assessee has also enclosed various notices received from CIT(C) and the replies filed therein at pages 274 to 285 of the Paper Book. Thereafter, special auditor was appointed and he conducted the special audit.

40. The question which arises for adjudication before us is that in the present set of facts, where the Assessing Officer before sending a proposal for conducting special audit under section 142(2A) of the Act has not given an opportunity of being heard to the assessee and in view of the proviso to section 142(2A) of the Act, is the said proposal made without affording pre-decisional hearing to the assessee valid and can the proceedings conducted thereafter be held to be vitiated in law. The Hon’ble Supreme Court in Three Judge decision in Sahara India (Firm) Vs. CIT and Another (supra) had decided the issue of show cause notice to be given on pre-decisional stage and post-decisional stage of starting the proceedings under section 142(2A) of the Act and had also referred to the earlier decision of Apex Court in Rajesh Kumar and Others Vs. DCIT (supra). The principles laid down by the Hon’ble Supreme Court are that the principle of audi alteram partem cannot be ignored even at the stage of pre-decisional hearing. In other words, in case the Assessing Officer is of the view that having regard to the nature and complexity of the accounts and interests of revenue, it is necessary to get the accounts audited by an accountant, with previous approval of Principal Chief Commissioner, then he can do so. However, the proviso inserted by the Finance Act, 2007 w.e.f. 01.06.2007 has very categorically provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given an opportunity of being heard. In other words, the principles of natural justice that a person could not be condemned unheard, have been incorporated in section itself w.e.f. 01.06.2007. The Apex Court in Rajesh Kumar and Others Vs. DCIT (supra) had deliberated on the provisions of the Act before insertion of said proviso but had laid down the proposition that nobody could be unheard even at the stage of forming an opinion that in view of the nature and complexity of accounts and interest of revenue, special audit is to be conducted under section 142(2A) of the Act. The Apex Court in Sahara India (Firm) Vs. CIT and Another (supra) have upheld the said proposition laid down by the Hon’ble Supreme Court and has also taken note of the amendment w.e.f. 01.06.2007 and have held that the principles of natural justice have to be fulfilled even at the pre-decisional stage. In conclusion, the Apex Court directed that the said proposition would be applicable prospectively. The case of the assessee before us relates to the period which is prospective to the decision of the Apex Court and is also after insertion by the Finance Act, 2007 w.e.f. 01.06.2007. Reasonable opportunity of being heard on pre-decisional stage to be allowed by the Assessing Officer to the assessee was on Statute when the proceedings were taken up against the assessee. However, as the facts reveal before submitting the proposal dated 11.09.2008 for conducting special audit under section 142(2A) of the Act to the CIT(C), no opportunity of hearing was given to the assessee. The requirement of the Act is that the Assessing Officer has to give finding that there is complexity of accounts and the interests of revenue would be affected, and in such circumstances, show cause notice needs to be given to the assessee to explain its case. Where the assessee was able to explain the nature of entries and also justify that the same are not complex, then there is no need to put the assessee to such hardship of conducting special audit. The Assessing Officer having failed to give any opportunity of hearing to the assessee before making the proposal for conducting special audit under section 142(2A) of the Act at the pre-decisional stage, then such proposal made by the Assessing Officer to the CIT(C), Pune is against the principles of natural justice and suffers from infirmity. The case of Revenue before us is that the CIT(C), Pune before passing his order of giving permission to the Assessing Officer to ask the assessee to get the special audit conducted had given fair opportunity of hearing to the assessee. The role of CIT(C) is the role of approving authority. The role is not that of adjudicating authority which had to be carried out by the Assessing Officer. The adjudicating authority in the present set of facts has failed to give any opportunity to the assessee before making proposal for special audit and the opportunity allowed by the approving authority, who in any case is enshrined with the duties of checking whether there is no arbitrariness in functioning of adjudicating authority, has to be satisfied before giving approval. Hence, the opportunity allowed by the CIT(C), Pune after proposal was made by the adjudicating authority does not absolve the non-allowance of reasonable opportunity of hearing by the Assessing Officer.

41. Applying the principles laid down by the Apex Court in Sahara India (Firm) Vs. CIT and Another (supra), we hold that where no show cause notice was given to the assessee before making the order proposing conduct of special audit under section 142(2A) of the Act, in the present case and the CIT having approved the said proposal though after giving opportunity of hearing to the assessee is vitiated because of non-compliance with the principles of natural justice. Accordingly, the assessment order passed in the facts of present case is beyond the period of limitation and hence, the same is invalid and bad in law.

42. Another point raised by both the authorities was in respect of extension granted. We are not going into the said factual aspects, in view of our holding that the initial order at the pre-decisional stage passed by the Assessing Officer without show causing the assessee as to whether any special audit should be conducted in his case under section 142(2A) of the Act is bad in law. Hence, consequential orders of extension, if any become of no consequence. Since, we have decided the jurisdictional issue on merits, the other grounds of appeal becomes academic.

43. The grounds of appeal raised by the Revenue on certain reliefs given by the CIT(A) on certain additions made by the Assessing Officer also becomes academic in view of our quashing the assessment order and in holding the assessment order to be null and void. Accordingly, ground of appeal No.1 raised by the assessee is allowed and all other grounds of appeal become academic. The appeal of Revenue is dismissed as the grounds of appeal become academic.

44. In assessment year 2004-05, the Revenue is in appeal before us, but the learned Authorized Representative for the assessee referred to Rule 27 of ITAT Rules and pointed out that though the assessee is not in appeal, but it could support the order of CIT(A) on different points. In this regard, he stressed that the assessment order passed is time barred because of no show cause notice being given by the Assessing Officer at the pre-decisional stage on proposing special audit under section 142(2A) of the Act. The plea of learned Authorized Representative for the assessee is admitted and the assessee in view of Rule 27 of ITAT Rules, can support the order of CIT(A) on a point other than the point on which relief has been given by the CIT(A) as held by the Hon’ble Bombay High Court in B.R. Bamasi Vs. CIT (supra). The issue on merits is otherwise covered by our decision in the paras hereinabove relating to assessment year 2005-06 and applying the same, we hold that the assessment framed in the case is time barred and hence, invalid. The appeal of Revenue on merits is thus, dismissed being infructuous.

45. Further, cross appeals are filed by the assessee and the Revenue in assessment year 2006-07 and applying the ratio of our decision in assessment year 2005-06, the ground of appeal raised by the assessee against the validity of assessment order is allowed and other grounds of appeal on merit becomes academic as the assessment order is held to be bad in law. Similarly, the appeal of Revenue is also dismissed.

46. In the result, all the appeals of assessee are allowed and the appeals of Revenue are dismissed.

Order pronounced on this 21st day of December, 2016.

 

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