Rajesh Kumar v. Commissioner of Income-Tax I.T. Appeal No. 184 of 2009

Ensuring Fairness: Exploring the Role of Natural Justice and Prospective Limitation Period in Special Audit Cases under the Income Tax Act (Rajesh Kumar v. Commissioner of Income-Tax I.T. Appeal No. 184 of 2009)

AUTHOR- TANVI THAPLIYAL

1. Appellant is a proprietary concern and an assessee under the income tax Act, 1961.
2. On 18-12-2002 a raid was conducted in the premises of the appellant
3. Certain documents including books of record, hard disk and computer were seized.
4. Upon seizure all these documents remained in the possession of the respondents because assessment of the same was needed to be conducted within the time period of two years
5. From time-to-time notices were released by the deputy commissioner of income tax asking the appellant to do disclosure of undisclosed income of last 10 years and file its returns along with questionnaires were issues to the persons involved.
6. Later on, 23-22-2004 the deputy commissioner also issued a proposal for special audit under section 142(2A) of the income tax Act reason behind that several instances of transactions made outside the books were found making the assessment analysis complex which is why a thorough special audit is a necessity.
7. Later a special auditor was appointed to conduct special audit.
8. Appellants 1 to 3 were informed through a letter about the appointment of the special auditor
9. prior to this no opportunity of hearing was given to them also when they requested the commissioner to supply them a copy of reasons, same was refused.
10. The audit report by the appointed Chartered accountant was submitted on 17-01-2005 after which the appellants filed a writ petition before the court of law.

1. Because Section 142(2-A) of the Act gives authorities a great deal of power, it should be interpreted strictly. This indicates that, taking into account the seriousness of the authority's discretion and the possible effects on taxpayers, the laws should be construed narrowly and strictly.
2. Section 142(2-A)'s provisions are inherently based on the natural justice principles, which include the right to a fair trial and the right to be heard. This suggests that in order to maintain fairness and procedural regularity, all decisions made or acts conducted under this provision must adhere to the natural justice standards.
3. In accordance with Section 142(2-A) of the Act, the assessing officer must apply consideration to three pertinent criteria. In order to ensure that decisions are made based on sound reasoning and evaluation of all relevant factors, the evaluating officer shall, before exercising their authority under this section, thoroughly consider and evaluate the relevant factors.
4. The Act's Section 142(2-A) statutory authority cannot be applied in a secondary manner. This means that the authority granted by this section should only be used for the purposes for which it was intended and not for any other reasons or goals unconnected to the provision's statutory aims. It highlights how crucial it is to exercise legislative authority in a way that is both appropriate and legal.

1. The Act's Section 142(2-A) functions within the parameters of return filing and evaluation processes. Rather than being a component of the assessment order itself, it should be understood as an instrument to aid in the assessment process.
2. The assessment officer's recommendation to the deputy commissioner clarifies the complexity and makeup of the accounts in question, particularly in light of the assessee's purported maintenance of numerous sets of accounts. The fact that numerous businesses are involved emphasises how intricate the accounting are.
3. Section 142(2-A) includes sufficient protections, such as senior officer approval. In order to ensure transparency and adherence to procedural rules in the event of court review, authorities are required to submit extensive records attesting to the fact that proper thought was given.
4. Even though the provision alludes to natural justice principles, its application shall be restricted to the requirements listed therein. This suggests that although a hearing opportunity is necessary, a thorough investigation is not always required.
5. Offering a hearing helps to elucidate matters, without requiring an assessment of the accuracy of statements at that point. It is a procedural process that, rather than evaluating the correctness of accounts in advance, aims to ensure fairness and give the assessee an opportunity to offer their opinion.

1. The court in this case stated that even though a hearing is required, one need not be lengthy.
2. The evaluating officer's notice may briefly and concisely state the relevant issues without going into great detail. Even though the notice was brief, following the natural justice principles is still essential.
3. The fact that natural justice concepts aren't specifically excluded by the Parliament suggests that they are inherently applicable. Section 142(3) places restrictions on the permitted hearing, which is mostly restricted to the special auditor's conclusions. These conclusions form the basis of the final assessment order; however, their acceptance by the assessing officer is a prerequisite.
4. Crucially, an assessee cannot bring up Section 142(2-A) misapplication during the assessment appeal procedure, even if they think it has been done incorrectly. Appeals generally do not address challenges to the exercise of authority under Section 142(2-A) since the order is not regarded as an appellate one. As a result, these challenges might not be useful in the appellate procedure.
5. The court considered the nature and complexity of the accounts, as well as the interests of the Revenue, in determining whether a special audit was necessary. The court also noted that the power under section 142(2-a) of the Act was administrative in nature and did not exclude the application of principles of natural justice.
6. The court allowed the appeal and upheld the validity of the direction for a special audit under section 142(2-a) of the Act.

1. The facts of this case are exactly similar to the above-mentioned case wherein a raid was conducted in the premises of the petitioner, all the documents were seized and later a special audit proposal was asked by the commissioner of income tax.
2. The issue at hand concerns whether the assessee must attend a pre-decisional hearing prior to the issuance of an order for a special audit pursuant to section 142(2-A) of the Income Tax Act, 1961.
3. Citing the Rajesh Kumar v. CIT decision as precedent, the petitioner argues that any such order should be preceded by a pre-hearing and opportunity.
4. This argument is predicated on the view that, whenever an assessing officer issues a directive under section 142(2-A), a pre-hearing is required.
5. But the main issue in the Rajesh Kumar case was block assessments made in response to raids on an assessee's property under Section 158-BC.
6. The court is considering whether this interpretation is applicable generally or only to block evaluations conducted after raids.
7. A bigger Bench has been tasked with deciding whether Section 142(2-A) requires a pre-hearing in every case.
8. The larger Bench, which will be appointed by the Chief Justice of India in accordance with the filed records, will deliberate and attempt to reach a thorough resolution.

1. Order for Special Audit:If tax authorities believe that a special audit of a taxpayer's accounts is required for the accurate assessment of income, they may do so in accordance with Section 142(2-a) of the Income Tax Act. This clause gives tax officials the authority to examine a taxpayer's financial records in more detail.
2. Audi Alteram Partem Requirement: The Latin term "audi alteram partem" means "hear the other side" and sums up the idea of natural justice by suggesting that all parties impacted by a decision need to be given the chance to voice their opinions before a judgement is reached. In this regard, the decision highlights the need for tax authorities to give the taxpayer a fair hearing prior to granting an order for a special audit.
3. Reasoning of Orders: According to the finding, some orders that were issued on March 14, 2006, were vitiated since the audi alteram partem principle was not followed. Since the parties impacted by the orders were not given a chance to be heard before the orders were issued, this indicates that the orders were not fair or procedurally correct.
4. Prospective Application:The Court stated that its decision about the need for a fair hearing would only be applicable in future cases, even though it still believed the orders to be defective ("prospectively"). This implies that in the event of further orders for special audits, the procedural duty to offer a fair hearing would be upheld. Notwithstanding the procedural flaws in the particular decisions referenced, the Court pointed out that tax authorities would still have access to the extended term of limitation for assessments.

1. Natural Justice Principles:The Court stressed that the principles of natural justice must be followed in administrative processes since they may have a substantial impact on an individual's civil rights. These principles include the need for affected parties to have a legitimate opportunity to state their case, as well as the right to be heard.
2. Fair Hearing Requirement:The Court emphasised how crucial it is to make sure that the hearings that are provided to the parties involved are meaningful and not just formalities. It emphasised that everyone should be given a fair chance to submit their defenses and reasons, and that the hearing procedure need to be thorough rather than cursory.
3. Respect for the Constitutional Guarantees:The Court emphasized that the Income Tax Act's pertinent provisions should incorporate the demand for an opportunity to show cause, which is a component of the natural justice principles. Upholding broader concepts of fairness and procedural justice, as well as preventing violations of Article 14 of the Constitution, which guarantees equality before the law, depend on this interpretation.

RAJESH KUMAR V. COMMISSIONER OF INCOME-TAX I.T. appeal no. 184 of 2009

1. The appellant contends that the Supreme Court found in their favor in Rajesh Kumar v. Deputy CIT, [2006] 287 ITR 91, holding that the assessee must be given the opportunity for a hearing before proceeding under section 142(2A) of the Act.
2. According to the petitioner, the assessment made by the Assessing Officer in accordance with section 158BC of the Income-tax Act is unenforceable due to a statute of limitations.