section 142/income-tax act

[2005] 147 Taxman 21 (All.)

High Court of Allahabad

UP Financial Corpn.

v.

Joint Commissioner of Income-tax

R.K. Agrawal and K.N. Ojha, JJ.

Civil Miscellaneous Writ Petition No. 505 of 1999

October 12, 2004

Section 142 of the Income-tax Act, 1961 - Assessment - Enquiry before assessment - Assessment year 1996-97 - Assessee, a State Financial Corporation filed its returns - Assessing Authority issued show-cause notice calling upon assessee to furnish explanation/details in respect of certain anomalies in accounts - In reply assessee stated that it would take several months in compiling required information - Assessing Officer passed an order appointing ‘KT’ as an accountant for purpose of conducting a special audit under section 142(2A) - Whether since Assessing Officer had formed opinion, on basis of material which were before her during course of assessment that nature of accounts was complex and interest of revenue would suffer if a detailed audit was not directed, it could not be said that pre-conditions for appointment of special auditor, as envisaged in section 142(2A), had not been fulfilled - Held, yes - Whether before passing order under section 142(2A), any show-cause notice or opportunity of hearing was required to be given to assessee - Held, no

Circulars and notifications - CBDT Instruction No. 1076, dated 12-7-1977

Facts

The assessee, a State Financial Corporation, had been established for the purpose of disbursing loans to various industrial units in the State in order to promote and help industrial activities and the loan was disbursed after following the requisite procedure. Its accounts were duly audited by a chartered accountant. It had submitted its return of income for the assessment year 1996-97. During the course of the assessment proceedings the assessing authority issued a show-cause notice calling upon the assessee to furnish explanation/details in respect of as many as 11 heads. The assessee submitted that it would take several months to compile and furnish the requisite information. The Assessing Officer passed an order on 19-3-1999 appointing ‘KT’ as an accountant for the purpose of conducting a special audit under section 142(2A). Pursuant to the aforesaid order, the auditor, ‘KT’, had directed the assessee to submit certain informations.

On writ, challenging order dated 19-3-1999, it was contended by the assessee, inter alia, that the twin pre-conditions mentioned in section 142(2A) viz., the satisfaction of the assessing authority regarding the nature and the complexity of the accounts and interest of the revenue, were not fulfilled in the instant case and, therefore, the action taken under the aforesaid section was without jurisdiction. On the other hand, it was submitted on behalf of the department, inter alia, that the reply to notice given by the assessee was found to be unsatisfactory and vague and, therefore, the Assessing Officer was fully justified in forming the opinion that the accounts of the petitioner were complex in nature and the interest of the revenue would be adversely affected in the event, a special audit was not made.

Held

As per section 142(2A), after taking into consideration the nature and complexity of the accounts and the interest of the revenue, if the Assessing Officer is satisfied, he can direct the assessee to get the accounts audited by an accountant, but before doing so, he has to get the previous approval of the Chief Commissioner or Commissioner. [Para 10]

From the decisions of the Supreme Court and High Courts, the following principles emerge, which have to be kept in mind while exercising the powers under section 142(2A) :—

  (1) the Assessing Officer should form an opinion that the nature of the accounts of the assessee is complex;

  (2) the interest of the revenue will be adversely affected if the special audit is not directed;

  (3) the opinion should be formed objectively on the basis of the materials before him and should be based on relevant considerations;

  (4) the Chief Commissioner or the Commissioner should grant approval to such a proposal after applying his mind to all the material placed before him;

  (5) the guidelines issued by the Central Board of Direct Taxes contained in Instruction No. 1076, dated 12-7-1977 are binding on the authorities and a special auditor can be appointed only if the case falls under any of the clauses mentioned therein, provided the conditions mentioned in section 142(2A) are fulfilled; and

  (6) no show-cause notice or opportunity of hearing is required to be given to the assessee before appointing special auditor as it does not involve civil consequences. The order appointing special auditor is an administrative order. [Para 27]

Applying the aforesaid principles to the instant case, it was found that proposal submitted by the Assessing Officer to the Commissioner seeking approval for appointment of special auditor under section 142(2A) indicated that the Assessing Officer had formed the opinion, on the basis of material which were before her during the course of the assessment for the assessment year 1996-97, that the nature of the accounts was complex and the interest of the revenue would suffer if a detailed audit was not directed. The proposal and the sanction order also indicated that the Assessing Officer had pointed out certain anomalies in the accounts and had also taken into consideration the guidelines framed by the CBDT, contained in Instruction No. 1076, dated 12-7-1977. Even, according to the assessee, when it was asked by the Assessing Officer to give explanation/reply to the various points raised in the notice dated 29-1-1999, it had taken a stand that it would take several months in compiling the information. The Commissioner had applied his mind and had also come to the conclusion that it was essential to know the actual state of affairs of the Corporation as the books of account were complex and enormous anomalies and discrepancies had also been pointed out by the statutory auditors in their audit report. Thus, it could not be said that the pre-conditions for appointment of the special auditor, as envisaged under section 142(2A), had not been fulfilled. The reasons were also contained in the communication letter, and, therefore, the approval granted by the Commissioner did not suffer from any infirmity. As held by the Allahabad High Court in Jhunjhunwala Vanaspati Ltd. v. Asstt. CIT (No. 1) [2004] 266 ITR 657/137 Taxman 214 and Uttaranchal Welfare Society v. CIT [2004] 268 ITR 214/141 Taxman 560, the Court cannot sit in appeal over the decision taken by the authorities in directing the special audit. The order in the instant case was based on the objective satisfaction of the authorities and did not suffer from any legal infirmity. [Para 28]

So far as the question of giving a show-cause notice or an opportunity of hearing to the assessee before passing an order under section 142(2A) was concerned, the order under the aforesaid provision had been based on the objective satisfaction of the assessing authority. While forming the opinion, the assessing authority was acting in an administrative capacity. Following the decision of the Allahabad High Court in Jhunjhunwala Vanaspati Ltd.’s case (supra), it was clear in the instant case that before passing the order under section 142(2A), any show-cause notice or any opportunity of hearing was not required to be given to assessee. [Paras 29 and 31]

There was no merit in the writ petition and the same was to be dismissed.

Cases referred to

State of Orissa v. Dr. (Miss) Binapani Dei AIR 1967 SC 1269 [Para 6], A.K. Kraipak v. Union of India AIR 1970 SC 150 [Para 6], Chhugamal Rajpal v. S.P. Chaliha AIR 1971 SC 730 [Para 6], Siemens Engg. & Mfg. Co. of India Ltd. v. Union of India AIR 1976 SC 1785 [Para 6], Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851 [Para 6], S.N. Mukherjee v. Union of India AIR 1990 SC 1984 [Para 6], Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634 (All.) [Para 6], Peerless General Finance & Investment Co. Ltd. v. Dy. CIT [1999] 236 itr 671 (Cal.) [Para 6], U.P. State Handloom Corpn. Ltd. v. CIT [2000] 245 ITR 192 (All.)(Second case) [Para 6], Living Media Ltd. v. CIT [2002] 255 ITR 268/123 Taxman 75 (SC)[Para 7], Jhunjhunwala Vanaspati Ltd. v. Asstt. CIT (No.1) [2004] 266 ITR 657/137 Taxman 214 [Para 7], Uttaranchal Welfare Society v. CIT [2004] 268 ITR 214/141 Taxman 560 (All.) [Para 7], U.P. State Handloom Corpn. Ltd. v. CIT [1988] 171 ITR 640/39 Taxman 241 (All.) [Para 12], Narinder Singh Atwal v. Dy. CIT [1998] 231 ITR 641 (Cal.) [Para 13], Joint CIT v. ITC Ltd. [1999] 239 ITR 921/106 Taxman 373 (Cal.) [Para 15], Sahara India Ltd. v. CIT [2000] 246 ITR 475 (All.) [Para 16], Bata India Ltd. v. CIT [2002] 257 ITR 622/125 Taxman 808 (Cal.) [Para 19], Tata Cellular v. Union of India AIR 1996 SC 11 [Para 25] and S. Narayanappa v. CIT [1967] 63 ITR 219 (SC)[Para 29].

Dr. R.G. Padia and Prakash Padia for the Petitioner. Bharat Ji Agrawal and Shambhu Chopra for the Respondent.

Judgment

R.K. Agrawal, J. - By means of the present writ petition filed under article 226 of the Constitution of India, the petitioner, U.P. Financial Corporation, seeks the following reliefs :—

“A - a writ, order or direction, including a writ in the nature of certiorari quashing the impugned order dated 19-3-1999 passed by the respondent No.1 (Annexure-V to the writ petition);

B - a writ, order or direction, including a writ in the nature of mandamus, declaring the provisions of section 142(2A) of the Income-tax Act as null, void, inoperative and unconstitutional;

C - any other suitable writ, order or directions which this Hon’ble Court may deem fit and proper in the circumstances of the case.

D - award costs of the writ petition.”

2. Briefly stated, the facts giving rise to the present petition are as follows:—

The petitioner, U.P. Financial Corporation (hereinafter referred to as “the Corporation”), has been created under the State Financial Corporations Act, 1951. It is an undertaking of the Government of Uttar Pradesh. Its various activities, including financial, supervisory and administrative, are directly controlled by the State Government. According to the petitioner, the Managing Director is appointed by the State Government, who happens to be a senior officer of the I.A.S. cadre. According to the petitioner, it has been established for the purposes of disbursing loans to various industrial units in the State in order to promote and help industrial activities and the loan is disbursed after following the requisite procedure. Its account is duly audited by a Chartered Accountant appointed by the Corporation. It has submitting its return of income under the provisions of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). According to the petitioner, in respect of the accounting year 1996, the auditors of the Corporation submitted an interim report pointing out certain deficiencies. However, they submitted a final report stating therein that the alleged deficiencies have been removed/rectified. During the course of the assessment proceedings for the assessment year 1996-97, the Joint Commissioner of Income-tax, Special Range, Kanpur, respondent No. 1, who is the Assessing Authority of the petitioner, issued a show-cause notice calling upon the petitioner to furnish explanation/details in respect of as many as 11 heads. The petitioner, vide its reply dated 10-2-1999, submitted that it would take several months for compilation to furnish the requisite information regarding the first three queries. So far as the fourth query is concerned, the petitioner submitted that the entertainment expenses included other expenses of the staff welfare, late sitting, and other items which are business expenditure and are allowable. The petitioner also submitted its replies to other queries. As both the notice and the reply run into several pages, instead of reproducing it here, we consider it appropriate for convenience to attach it along with the judgment as Appendices I and II, respectively. According to the petitioner, the respondent No. 1 passed an order on 19-3-1999 appointing M/s. Kapoor Tandon and Company of Kanpur, as an accountant for the purpose of conducting a special audit under section 142(2A) of the Act. Pursuant to the aforesaid order, the auditor, namely M/s. Kapoor Tandon and Company, had directed the petitioner to submit certain informations. The order dated 19-3-1999 is under challenge in the present writ petition.

3. As the counter affidavit and rejoinder affidavit have been exchanged between the parties, with the consent of the learned counsel for the parties, the writ petition is being heard finally and disposed of at the admission stage itself in accordance with the provisions of the Rules of the Court.

4. We have heard Dr. R.G. Padia, learned senior Counsel, assisted by Sri Prakash Padia, Advocate, on behalf of the petitioner, and Sri Shambhu Chopra, learned Standing Counsel appearing for the respondents.

5. At the outset, it may be mentioned here that Dr. Padia, learned counsel for the petitioner did not advance any argument relating to the constitutional validity of section 142(2A) of the Act and, therefore, we are not called upon to go into this question.

6. The learned counsel for the petitioner submitted that in the order dated 19-3-1999 there is no reference to the notice dated 29-1-1999 issued by respondent No.1 as also to the reply submitted by the petitioner on 10-2-1999. The said order has been passed mechanically without any application of mind. According to him, the twin preconditions mentioned in section 142(2A) of the Act, viz., the satisfaction of the Assessing Authority regarding the nature and complexity of the account and interest of the Revenue, are not fulfilled in the present case and, therefore, the action taken under the aforesaid section is wholly without jurisdiction. He submitted that the word “and” occurring between “the nature and complexity of the account of the assessee” on the one hand and “the interest of the Revenue” on the other, is conjunctive and both the conditions are to be fulfilled before any action under section 142(2A) of the Act can be taken. According to him, the petitioner is a State Government undertaking and is a statutory Corporation. Its accounts have been audited by reputed Chartered Accountant, namely Parikh & Jain of Kanpur and there was neither any complexity in the account nor the interest of the Revenue was at stake so as to warrant scrutiny and audit of the account once again by the auditor appointed by the Income-tax Department. According to him, no reasons have been assigned in the order dated 19-3-1999 and, therefore, it is bad. He further submitted that the Central Board of Direct Taxes have issued instructions regulating the discretion conferred by section 142(2A) of the Act, being Instruction No. 1076 dated 12-7-1977, which is binding on all the Income-tax Authorities. The case of the petitioner does not fall under any of the clauses relating to the company and, therefore, the special audit is not justified. Dr. Padia further submitted that remuneration of the special auditor has been fixed at Rs. 5,00,000. It is very excessive and unjustified. In support of his aforesaid submissions, he has relied upon the following decisions :—

   (i)  State of Orissa v. Dr. (Miss) Binapani Dei AIR 1967 SC 1269;

  (ii) A.K. Kraipak v. Union of India AIR 1970 SC 150 ;

(iii) Chhugamal Rajpal v. S.P. Chaliha AIR 1971 SC 730;

(iv)  Siemens Engg. & Mfg. Co. of India Ltd. v. Union of India AIR 1976 SC 1785;

  (v)  Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851;

(vi)  S.N. Mukherjee v. Union of India AIR 1990 SC 1984;

(vii)  Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634 (All.);

(viii) Peerless General Finance & Investment Co. Ltd. v. Dy. CIT [1999] 236 ITR 671 (Cal.);

(ix)  U.P. State Handloom Corpn. Ltd. v. CIT [2000] 245 ITR 192 (All.)(Second case);

7. Sri Shambhu Chopra, learned Standing Counsel for the Revenue, however, submitted that the respondent No.1 had issued a notice on 29-1-1999 seeking details/information/explanation in respect of various heads. The reply given by the petitioner was found to be unsatisfactory and vague and, therefore, the respondent No. 1 was fully justified in forming the opinion that the accounts of the petitioner were complex in nature and the interest of the revenue would be adversely affected in the event, a special audit is not made. He submitted that the Commissioner of Income-tax, Kanpur, respondent No. 2, on the basis of the proposal made by respondent No.1, after application of mind, had accorded his approval and, therefore, the order dated 19-3-1999 does not call for any interference. He further submitted that this Court while exercising jurisdiction under article 226 of the Constitution of India should decline to sit in appeal over the decision taken by the authorities. In support of his aforesaid submissions, he has relied upon the following decisions :

   (i)  Living Media Ltd. v. CIT [2002] 255 ITR 268,

  (ii)  Jhunjhunwala Vanaspati Ltd. v. Asstt. CIT (No. 1) [2004] 266 ITR 657, and

(iii)  Uttaranchal Welfare Society v. CIT [2004] 268 ITR 214 (All).

8. Having heard the learned counsel for the parties, we find that even though the account of the petitioner has been audited by a Chartered Accountant yet in reply to the notice dated 29-1-1999, which is Appendix I to the judgment, the petitioner had submitted a vague reply on 10-2-1999. In fact, from the perusal of the reply, Appendix II to the judgment, we find that in respect of item Nos. 1, 2 and 3 the petitioner itself had stated that furnishing of the details about the list of defaulters would take several months in compilation. As the order dated 19-3-1999 only stated that the nature of accounts was found complex and having regard to the nature and complexity of the account and the interest of the Revenue approval for audit under section 142(2A) of the Act has been obtained with certain directions to the special auditor, the Court directed the learned Standing Counsel for the respondents to produce the record containing the proposal made by the Assessing Officer and the sanction given by the Commissioner of Income-tax, which records have been produced before the Court. On a perusal of the proposal and the sanction order, we find that the respondent No.1 in her letter dated 1-3-1999 and 3-3-1999 had pointed out certain anomalies in the accounts and has also taken into consideration the complexity of the accounts and the interest of the Revenue as also the guidelines framed by the Central Board of Direct Taxes, contained in Instruction No. 1076, dated 12-7-1977. On the basis of the proposal contained in the aforementioned two letters, the Commissioner of Income-tax had granted his approval to the appointment of an auditor under the provisions of section 142 (2A) of the Act. Instead of reproducing the proposals and the sanction which runs into several pages, we are attaching them as Appendices III, IV and V respectively.

9. For a proper appreciation of the issues raised in the present petition, we reproduce below the provisions of section 142(2A) of the Act which reads as follows :—

“142. Inquiry before assessment -

(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.”

10. From a reading of the aforesaid provision it is seen that after taking into consideration the nature and complexity of the account and the interest of the Revenue, if the Assessing Authority is satisfied, he can direct the assessee to get the accounts audited by an Accountant, but before doing so, he has to get the previous approval of the Chief Commissioner or Commissioner of Income-tax.

11. This Court in the case of Swadeshi Cotton Mills Co. Ltd. (supra) has held as under :

“9. The exercise of the power to direct special audit under section 142(2A) of the Income-tax Act, 1961, depends upon the satisfaction of the Income-tax Officer with the added approval of the Commissioner. But he must be satisfied that the accounts of the assessee are of a complex nature, and, in the interests of the Revenue, the accounts should be audited by a special auditor. The special auditor is also an auditor like the company’s auditor, but he has to be nominated by the Commissioner and not by the company. The accounts are again to be audited at the cost of the company.

10. The power under section 142(2A) cannot be exercised lightly. The satisfaction of the authorities should not be subjective satisfaction. It would be based on objective assessment regard being had to the nature of the accounts.” (p. 634).

12. The aforesaid case has been followed by this Court in the case of U.P. State Handloom Corpn. Ltd. v. CIT [1988] 171 ITR 640. This court has held that where the accounts maintained by the assessee were very complex as more than 150 sets of accounts for different units had been maintained showing enormous inter-unit transactions and the explanation given by the assessee regarding the accounts were not reliable and creditworthy and the assessee also filed a provisional balance sheet and profit and loss account, necessitating a direction for special audit by the Inspecting Assistant Commissioner (Assessment) was justified.

13. In the case of Narinder Singh Atwal v. Dy. CIT [1998] 231 ITR 641, the Calcutta High Court has held that section 142(2A) of the Act enables the Assessing Authority to direct the accounts to be audited in the event of complexity of account. The power under section 142(2A) of the Act can be invoked when the Assessing Authority finds that the accounts are complicated.

14. In the case of Peerless General Finance and Investment Co. Ltd. (supra), the Calcutta High Court has held as under :—

“A bare perusal of sub-section (2A) of section 142 leaves no manner of doubt that an opinion has to be formed only having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue. The word “and” signifies conjunction and not disjunction. Thus, both nature and complexity of the accounts as also interest of the Revenue are necessary ingredients for exercise of the said power. Thus, the opinion required to be formed by the Assessing Officer must be based on objective consideration and not on the basis of his subjective satisfaction. Even where a power is conferred on a public authority to exercise the same when “they are satisfied” or when “it appears to them” or when in their opinion “a certain state of affairs exists” or when powers enable public authorities to take “such action as they think fit” in relation to a subject-matter, the courts will not readily defer to the conclusiveness of an executive authority’s opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated. Administrative decisions are required to be made in good faith on relevant considerations....” (p. 676)

15. In the case of Joint CIT v. ITC Ltd. [1999] 239 ITR 921, the Calcutta High Court has held as under :—

“In fact this is meant for the purpose in cases where the “nature and complexity” of the accounts is such that it is not possible to the Assessing Officer to justify the correct assessment of the income and not possible to him to examine the correctness of the accounts. In that case, the Legislature has conferred power on the Assessing Officer for appointment of the special auditor with the approval of the Commissioner or Chief Commissioner. The interest of the assessee has been protected that no assessee should unnecessarily be harassed by the Assessing Officer, that is why the duty has been cast on the senior officers of the Department, i.e., the Commissioner or Chief Commissioner, that without approval of either the Commissioner or Chief Commissioner, the Assessing Officer has no power to appoint the special auditor to look into the accounts of the assessee. Therefore, in our view, the power conferred on the Assessing Officer, and the approval of the Commissioner and Chief Commissioner is not confined to any turnover, in business or profession. There is no limit or any bar on account of amount of receipts either in business or profession. This power has been conferred on the Assessing Officer to do justice with the assessee and also to protect the interests of the Revenue.” (p. 930)

16. This Court in the case of Sahara India Ltd. v. CIT [2000] 246 ITR 475 has held as under :

“13. Section 142(2A) of the Act ordains the Assessing Officer that before directing the assessee to get the accounts audited by an accountant, as defined in the Explanation before sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in that behalf, he should form an informed objective opinion that it is necessary so to do, keeping in view the nature and complexity of accounts of the assessee and the interests of the Revenue. It also mandates the Assessing Officer to obtain approval of the Chief Commissioner or Commissioner before directing the assessee to get the accounts audited by an accountant. The twin requirements of forming of an informed objective opinion by the Assessing Officer and prior approval of the Chief Commissioner or Commissioner are conditions precedent for passing an order in exercise of powers under section 142(2A) of the Act. In the absence of any of the two conditions the order of the Assessing Officer will be contrary to law.” (p. 479)

17. In the second case of U.P. State Handloom Corpn. Ltd. (supra), this Court has held as under :—

“... that an audit places a very heavy burden on the person whose accounts are to be audited, particularly an organization like the U.P. State Handloom Corporation. Its employees and officers have to assist the auditors who have to dig out the old records for the purpose. Further, in terms of section 142(2D) of the Income-tax Act, 1961, the expenses of the audit have to be borne by the assessee. Therefore, the audit is likely to place substantial financial burden on the assessee. The mere fact that the stocks could not be reconciled by the then auditors, could not be a justification for ordering an audit when the audit had subsequently been completed and the Assessing Officer could examine the accounts and ask for necessary information....” (p. 192)

18. In the case of Living Media Ltd. (supra) the Apex Court has affirmed the decision of the Delhi High Court in a case where a special audit under section 142(2A) of the Act was directed on the basis that the explanation of the assessee to the queries raised by the Assessing Officer was in voluminous details running into approximately 500 pages and further details running into 1,000 pages were filed, which prima facie supports the formation of the opinion of the Assessing Authority for directing special audit under section 142(2A) of the Act.

19. In the case of Bata India Ltd. v. CIT [2002] 257 ITR 622, the Calcutta High Court has held as under:—

“The twin pre-conditions justifying the special audit under section 142(2A) of the Income-tax Act, 1961, are the nature and complexity of the accounts and the interests of the Revenue. Before an approval is sought for, the Assessing Authority must form an opinion as regards the said twin conditions. There should be an honest attempt to understand the books of account of the assessee. There has to be an application of mind on the part of the Assessing Authority. Complexity of the accounts cannot be equated with doubts being entertained by the Assessing Authority either with regard to the correctness thereof or the need for obtaining certain vital information not ascertainable from the accounts. The satisfaction is to be based upon objective considerations.” (p. 622)

20. In the case of Dr. (Miss) Binapani Dei (supra), the Apex Court has held that even administrative order which involves civil consequences has to be passed consistently with the rules of natural justice.

21. In the cases of the Siemens Engg. and Mfg. Co. of India Ltd. (supra), A.K. Kraipak (supra) and S.N. Mukherjee (supra), the Apex Court has held that the requirement to record reasons can be regarded as one of the principles of natural justice which governs the exercise of powers by the administrative authorities.

22. In the case of Mohinder Singh Gill (supra), the Apex Court has held that when the statutory functionary makes an order based on certain ground, its validity must be judged by the reason so mentioned and cannot be supplemented by fresh reason in the shape of the affidavit or otherwise. Otherwise, an order bad in the beginning, may by the time it comes to the Court on account of challenge, get validated by additional ground brought out.

23. In the case of Chhugamal Rajpal (supra), the Apex Court was consi-dering the validity of the proceeding for reassessment initiated by the Income-tax Officer under section 147 of the Act. Under section 147 of the Act, the proceeding for reassessment can be initiated if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year. In the aforesaid case, the reasons which were recorded by the Income-tax Officer, as contained in his report, was to the following effect:—

“7. During the year the assessee has shown to have taken loans from various parties of Calcutta. Form D. L.’s Inv. No. A/P/Misc. (5) DL/63-64/5623, dated 13-8-1965, forwarded to this office under C.I.T. Bihar and Orissa. Patna’s letter No. Inv. (Inv.) 15/65-66/1053-2017 dated Patna 24-9-1965, it appears that these persons are name-lenders and the transactions are bogus. Hence proper investigation regarding these loans is necessary. The names of some of the persons from whom money is alleged to have taken on loan on Hundis are :

    1.  Seth Bhagwan Singh Sricharan

    2.  Lakha Singh Lal Singh

    3.  Radhakissan Shyam Sunder.

The amount of escapement involved amounts to Rs. 1,00,000.” (p. 732)

24. On the aforesaid materials, the Apex Court has come to the conclusion that the Income-tax Officer has not set out any reason for coming to the conclusion that it is a fit case to issue notice under section 148. The material he has before him for issuing notice, had not been mentioned in the report and what he said is that from those communications it appears that these persons are name-lenders and the transactions are bogus. The Income-tax Officer has not come even to a prima facie conclusion that the transactions to which he referred, are not genuine transactions and has had only a vague feeling that they may be bogus transactions. The Apex Court on the material placed before it came to the conclusion that the Income-tax Officer has no reasons to believe that the income chargeable to tax has escaped assessment. The aforesaid decision is of no help to the petitioner inasmuch as the present case is not of escaped assessment and there is no question of any reason to believe.

25. In the case of Jhunjhunwala Vanaspati Ltd. (supra), this Court has held that it is not necessary for the Assessing Officer to give a show-cause notice or to give a hearing to the assessee before issuing the direction under section 142(2A). The direction under section 142(2A) of the Act is purely administrative in nature and not quasi-judicial and such a direction does not have civil consequences. It also does not affect the assessee’s rights or liabilities. This Court has distinguished the decision of the Apex Court in the case of Dr. (Miss) Binapani Dei (supra). In the aforesaid case, this Court by following the decision of the Apex Court in Tata Cellular v. Union of India AIR 1996 SC 11, has held that it cannot sit in appeal over the decision of the Income-tax Officer in directing special audit under section 142(2A) of the Act.

26. In the case of Uttaranchal Welfare Society (supra) this Court has reiterated the view taken in the case of Jhunjhunwala Vanaspati Ltd. 2004 Tax LR 660 (supra).

27. From the above decisions, the following, principles emerge which have to be kept in mind while exercising the powers under section 142(2A) of the Act :

  (1)  The Assessing Officer should form an opinion that the nature of the accounts of the assessee is complex.

  (2)  The interest of the Revenue will be adversely affected if the special audit is not directed.

  (3)  The opinion should be formed objectively on the basis of materials before him and should be based on relevant consideration.

  (4)  The Chief Commissioner of Income-tax or the Commissioner of Income-tax should grant approval of such a proposal after applying his mind to all the materials placed before him.

  (5)  The guidelines issued by the Central Board of Direct Taxes contained in Instruction No. 1076 dated 12-7-1977 is binding on the authorities and a special auditor can be appointed only if the case falls under any of clauses mentioned therein provided the conditions mentioned in section 142(2A) of the Act are fulfilled.

  (6)  No show-cause notice or opportunity of hearing is required to be given to the assessee before appointing special auditor as it does not involve civil consequences. The order appointing special auditor is an administrative order.

28. Applying the aforesaid principles to the facts in the present case, we find that from a perusal of Appendices III and IV, which are proposals dated 1-3-1999 and 3-3-1999 submitted by the respondent No. 1 to the Commissioner of Income-tax seeking approval for appointment of special auditor under section 142(2A) of the Act, the respondent No. 1 who is the Assessing Authority of the petitioner had formed the opinion on the materials which were before her during the course of the assessment for the assessment year 1996-97, that the nature of the accounts were complex and the interest of the Revenue would suffer if a detailed audit is not directed. Even, according to the own showing of the petitioner, when it was asked to give explanation/reply to the various points raised in the notice dated 29-1-1999, it had taken a stand that it would take several months in compiling the information. The Commissioner of Income-tax had applied his mind and had also come to the conclusion that it is essential to know the actual state of affairs of the Corporation as the books of account are complex and enormous anomalies and discrepancies have also been pointed out by the statutory auditors in their audit report. Thus, it cannot be said that the preconditions for appointment of the special auditor, as envisaged under section 142(2A) of the Act, have not been fulfilled. The reasons are also contained in the communication letter dated 8-3-1999, Appendix V, and therefore, the approval granted by the Commissioner of Income-tax does not suffer from any infirmity. As held by this Court in the cases of Jhunjhunwala Vanaspati Ltd. (supra) and Uttaranchal Welfare Society (supra), this Court cannot sit in appeal over the decision taken by the authorities in directing the special audit. The order is based on the objective satisfaction of the authorities and does not suffer from any legal infirmity.

29. So far as the question of giving a show-cause notice or an opportunity of hearing to the petitioner before passing an order under section 142(2A) of the Act is concerned, it may be mentioned here that the order under the aforesaid provision had been based on the objective satisfaction by the Assessing Authority. While forming the opinion the Assessing Authority is acting in an administrative capacity. The Apex Court in the case of S. Narayanappa v. CIT [1967] 63 ITR 219 : has held that the proceeding for assessment or reassessment under section 34(1)(a) of the Indian Income-tax Act, 1922 starts with the issue of a notice and it is only after the service of the notice that the assessee whose income is sought to be assessed or reassessed, becomes a party to those proceedings. The earlier stage of the proceeding for recording the reasons of the Income-tax Officer and for obtaining the sanction of the Commissioner, are administrative in character and are not quasi-judicial.

30. This Court in the case of Jhunjhunwala Vanaspati Ltd. (supra) has repelled such an argument. This Court has held as follows : (at pp. 663-664 of Tax LR).

“In our opinion, it is not necessary for the Assessing Officer to give a show-cause notice or give a hearing to the assessee before issuing the directions under section 142(2A). In our opinion, the direction under sub- section (2A) of section 142 is purely administrative in nature and not quasi-judicial. Moreover, in our opinion, such a direction does not have civil consequences. It does not affect the assessee’s rights or liability. Hence, the decision of the Supreme Court in State of Orissa v. Dr. Binapani Dei AIR 1967 SC 1269 does not apply. No doubt an administrative order if it has civil consequences can only be passed after giving opportunity of hearing, but in our opinion a direction under sub-section (2A) of section 142 does not have civil consequences because it does not affect his rights and does not create any liability against the assessee. It is only the assessment order which will create a liability. The purpose of the direction under sub-section (2A) of section 142 is to ensure that a correct assessment order is passed so that the Revenue is not deprived of its dues. Hence, we do not agree with learned counsel for the petitioner that an opportunity of hearing or show-cause notice has to be given to the assessee before passing the direction under section 142(2A).” (p. 662)

31. We are in respectful agreement with the view taken by this Court in the aforesaid case and hold that before passing the order under section 142(2A) of the Act and show-cause notice or any opportunity of hearing is not required to be given to the petitioner.

32. It may be mentioned here that the guidelines framed by Central Board of Direct Taxes as contained in Instruction No. 1076 dated 12-7-1977 empower the Income-tax Officer under sub-clause (vii) of clause (2) for an audit under section 142(2A) of the Act where he has any other information necessitating special audit. These guidelines have been complied with by the Assessing Authority. There is no question of any addition of the ground on the affidavit in reply filed by the respondents inasmuch we have taken into consideration the original proposal and the order of approval in this regard.

33. So far the arguments that the remuneration of the special auditor is excessive, it may be mentioned here that looking to the nature of the activities carried on by the petitioner and the voluminous documents and the books of the number of branches maintained by it, which are required to be gone into by the Special Auditor, the amount of Rs. 5,00,000 fixed as remuneration for the special auditor cannot be said to be excessive or unjustified.

34. In view of the foregoing discussion, we do not find any merit in the writ petition which fails and is hereby dismissed. There shall be no order as to costs.

Petition dismissed.

nn