M/S.jp Jai Land & Building Promoters P Ltd v. The Commissioner Of Income Tax – I, Income Tax Department

IN THE HIGH COURT OF JUDICATURE AT MADRASDated: 13.08.2021 CORAM: THE HON'BLE MR. JUSTICE S.M.SUBRAMANIAM WP No.746 of 2012and M.P.No.1 of 2012 M/s.JP Jai Land & Building Promoters P Ltd.36, Ram Nagar South, 8[th] Cross St.,Madipakkam,Chennai – 600 091. .. PetitionerVs 1. The Commissioner of Income Tax – I, Income Tax Department, 121, Nungambakkam High Road, Chennai – 600 034. 2. The Assistant Commissioner of Income Tax Company Circle II(3) Income Tax Department, 121, Nungambakkam High Road, Chennai – 600 034. 3. M/s.Sundaram and Srinivasan, Chartered Accountants, No.23, C.P.Ramaswamy Street, Alwarpet, Chennai – 600 018... Respondents PRAYER: This Writ Petition is filed under Article 226 of theConstitution of India, praying for issuance of Writ ofCertiorarified Mandamus, calling for the records of thePetitioner Company on the file of the 2[nd] respondent to quash theimpugned order dated 16.12.2011 issued in PAN: /ACIT,CO.CIRCLE II(3) for appointing Special Audit u/s 142 (2A) of theincome tax Act, 1961 pending assessment proceedings relating tothe Assessment Year 2009-10 and consequently direct the 2[nd]respondent to complete the scrutiny assessment u/s 143(3) of theIncome tax Act, 1961 for the Assessment Year 2009-10 based onthe regular audit report filed. For Petitioner : Mr.Kaushik.M for Mr.S.SridharFor Respondents 1 & 2 : Mrs.Hema Muralikrishnan Senior Standing Counsel R3 : No Appearance O R D E R The writ on hand is filed questioning the legal validity ofthe order dated 16.12.2011 passed by the 2nd respondent forappointing Special Audit under section 142(2A) of the Income TaxAct, 1961 pending assessment proceedings relating to theAssessment Year 2009-10 and consequently, direct the 2ndrespondent to complete the scrutiny assessment under Section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2009-10based on the regular audit report filed by the petitioner. 2. The petitioner company was established under theCompanies Act, 1956. They are assessed to Income Tax on thefile of the 2nd respondent and the return of Income Tax wasfiled for the Assessment Year 2007-08 on 14.11.2007, declaring'Nil' income after conduct of Statutory Audit and tax Audit ofbooks of accounts. 3. The petitioner company, for the Assessment Year 2008-09filed their return of income disclosing taxable total income atRs.65,99,372/- after subjecting their accounts to thestatutorily prescribed audit as well as tax audit. The returnof Income was taken for scrutinising the assessment underSection 143(3) of the Act dated 02.12.2010 at a taxable totalincome of Rs.1,43,61,890/-, after making certain disallowancesincluding the disallowances on the application of Section 40 (a)(ia) of the Act. 4. The fact regarding the filing of return of income,scrutinising the assessment and certain disallowances made, arenot in dispute between the parties. The issue raisedimportantly on behalf of the petitioner is that the orderimpugned dated 16.12.2011, was issued in violation of theprinciples of natural justice, in view of the fact that the 1[st]proceedings dated 09.12.2011, passed by the 2[nd] respondent cannotbe construed as a show cause notice in compliance with theprovisions of Section 142 (2A) of the Act. 4. The fact regarding the filing of return of income,scrutinising the assessment and certain disallowances made, arenot in dispute between the parties. The issue raisedimportantly on behalf of the petitioner is that the orderimpugned dated 16.12.2011, was issued in violation of theprinciples of natural justice, in view of the fact that the 1[st]proceedings dated 09.12.2011, passed by the 2[nd] respondent cannotbe construed as a show cause notice in compliance with theprovisions of Section 142 (2A) of the Act. 5. The learned counsel for the petitioner reiterated thatperusal of the order dated 09.12.2011 would reveal that theauthority competent have decided the issues, even before hearingthe petitioner on the dispute and therefore, the said orderdated 09.12.2011, cannot be considered as a show cause notice,as required under the provisions of the Act. When theinitiation itself is improper, the final order dated 16.12.2011cannot be sustained by the respondents. When the procedurescontemplated at the first instance had been violated and evenbefore receiving any objections or defence from thepetitioner/assessee, for appointing an Auditor by invokingSection 142(2A) of the Income Tax Act, then the final order which is impugned in this writ petition, is liable to be setaside. 6. The arguments advanced in this regard are that in theproceedings dated 09.12.2011, the assessing authority formed acomplete opinion and decided to appoint an Auditor to conductthe special audit under Section 142 (2A) of the Act andtherefore, the objections received became an empty formality andthus, the opportunity as contemplated has not been provided, andthe objections of the petitioner/assessee were not considered inits spirit and in these circumstances, the order impugned, is tobe set aside. 7. In support of the said contention, the learned counselfor the petitioner relied on the judgment of the Hon'ble SupremeCourt in the case of Sahara India (Firm) Vs. Commissioner ofIncome-tax, Central-1, reported in [2008] 169 Taxman 328 (SC).According to him, the said judgment squarely applies to thefacts and circumstances of the present case on hand. Theprinciples laid down by the Hon'ble Apex Court in the above saidjudgment, are relied on by the learned counsel for thepetitioner. 8. It is contended that the Hon'ble Supreme Court hadelaborately considered the principles that pre-decisionalhearing is a right conferred under the Act to an assessee andsuch a valuable right cannot be taken away and must be providedin its real spirit. Though there is no specific provision underthe Income Tax Act to provide such pre-decisional hearing, theHon'ble Supreme Court has interpreted the provision by holdingthat the post-decisional hearing is no substitute for pre-decisional hearing. Even from the language of the saidprovision, it is clear that the opportunity of being heard isonly in respect of the material gathered on the basis of theaudit report submitted under sub-section (2A) and not on thevalidity of the original order directing the special audit. Itis well-settled that the principle audi alteram partem can beexcluded only when a statute contemplates a post-decisionalhearing amounting to a full review of the original order onmerits, which was not the position in the instant case. 9. Admittedly, the order appointing an auditor is not afinal order under the Income Tax Act. The Hon'ble Apex Courtmade a distinction in respect of the review of final orderpassed wherein appeals are provided which is post-decisionalhearing. As far as orders where an appointment of an auditor ispassed, then pre-decisional hearing is to be provided and suchan opportunity is considered as a valuable opportunity for theassessee to defend their case by availing the opportunity. Theassessing officer being a quasi judicial authority is not 9. Admittedly, the order appointing an auditor is not afinal order under the Income Tax Act. The Hon'ble Apex Courtmade a distinction in respect of the review of final orderpassed wherein appeals are provided which is post-decisionalhearing. As far as orders where an appointment of an auditor ispassed, then pre-decisional hearing is to be provided and suchan opportunity is considered as a valuable opportunity for theassessee to defend their case by availing the opportunity. Theassessing officer being a quasi judicial authority is not expected to determine the issues in advance. If at all somegrounds are traceable for appointment of an auditor for certainaspects, the assessing officer shall provisionally form anopinion for appointment of an auditor to conduct a special auditand said provisional decision has to be communicated to theassessee, by way of a show cause notice, seeking his explanation/ objection, on such decisions taken provisionally. 10. This Court is of an opinion that show cause notices areissued by the competent authority only on the basis of theprovisional decisions taken. Such provisional decision isnecessarily to be taken in view of the fact that, in the absenceof any such decision on certain grounds, the assessee would notbe in a position to submit their objections. Therefore, aprovisional decision containing certain reasons are alsorequired for a show cause notice for fulfilling the requirementof a show cause notice. Such decision undoubtedly, will throwlight on the issues as well as the grounds taken by thecompetent authority for initiation of any further proceedings. 11. Presuming if no such provisional decision is taken,while issuing the show cause notice, the consequences would bethat the assessee may not be in a position to submit theirobjections. Then again the assessee has to approach theauthority to know what is the allegation against which he shouldsubmit an objection? This exactly is the problem where the showcause notices are issued without any reasoning or provisionaldecision. It is in normal practice that, if a show cause noticeis issued without any reason then writ petitions are filed bystating that the assessee is unable to submit objections as theyare not aware of the ground on which such show cause noticestood issued and writ petitions are filed to quash such notices,which do not contain any reasons or provisional decision.Equally, if any provisional decisions are communicated thenalso writ petitions are filed by taking a ground that theauthority has already pre-determined the issue and issued showcause notice and on that ground also it has to be quashed. Howto balance, is the question to be considered? 12. Provisional decision means, an authority based on thematerials available on record has to form an opinion, whetherany further action is required in any matter or not. If such anopinion is formed rightly or wrongly, as he may not be sure ofsuch reasons, since such opinion is unilateral in nature and itbecomes necessary for such authority to provide an opportunityto the aggrieved party to submit their objections and on receiptof such objections, such an authority may take a final decision,whether his opinion initially formed, is right or wrong. 13. This being the purpose for such show cause notices are 12. Provisional decision means, an authority based on thematerials available on record has to form an opinion, whetherany further action is required in any matter or not. If such anopinion is formed rightly or wrongly, as he may not be sure ofsuch reasons, since such opinion is unilateral in nature and itbecomes necessary for such authority to provide an opportunityto the aggrieved party to submit their objections and on receiptof such objections, such an authority may take a final decision,whether his opinion initially formed, is right or wrong. 13. This being the purpose for such show cause notices are issued, mere forming an opinion for initiation of certain actionby the competent authority cannot be construed, as the issueswere already pre-determined by the authority. Even in suchcase, it is to be understood that one cannot assess the mind ofthe competent authority at that juncture. However, when anorder or show cause notice is issued containing certain reasons,even if the assessee forms an opinion that the authority haspre-determined the issue then also, he gets an opportunity torebut the same by submitting his objections. However, there isa difference between a final decision arrived and forming theopinion for the purpose of issuing a show cause notice. 14. The learned Senior standing counsel appearing on behalfof the respondents contended that the proceedings dated09.12.2011 is a show cause notice, though it has not beenspecifically stated as 'show cause notice'. In order tosubstantiate the said contention, the learned Senior standingcounsel relied on the objections filed by the petitioner on15.12.2011 referring the proceedings dated 09.12.2011, which isa show cause notice. Thereafter, considering the objections,the competent authority passed an order disposing of theobjections on 16.12.2011 and the petitioner/assessee submittedfurther representation on 23.12.2011 and said objections werealso disposed of by the 2[nd] respondent on 26.12.2011, which isimpugned in this writ petition. 15. Thus the proceedings initially issued was acted upon bythe petitioner/assessee only as a show cause notice andobjections were submitted and after affording an opportunity,final decision is taken and in this case, the approval from theCommissioner of Income Tax was obtained on 15.12.2011. 16. In this regard, the learned counsel for thepetitioner/assessee raised an objection that on 09.12.2011itself such an approval would have been obtained from theCommissioner of Income Tax. Contrarily, the approval wasobtained on 15.12.2011 and thereafter, the objections weredisposed of on 16.12.2011. 17. In this regard, it is to be considered that Section 142(2A) of the Income Tax Act contemplates that if at any stage ofthe proceedings before the Assessing officer, having regard tothe nature and complexity of the accounts, volume of theaccounts, doubts about the correctness of the accounts,multiplicity of transactions in the accounts or specialisednature of business activity of the assessee and the interests ofthe revenue is of the opinion that it is necessary so to do, hemay with the previous approval of the Principal Commissioner orChief Commissioner, direct the assessee to get the accountsaudited by an accountant, as defined. 18. The above provision unambiguously stipulates that havingregard to the nature and complexity of the accounts, volume ofthe accounts, doubts about the correctness of the accounts,multiplicity of transactions in the accounts or specialisednature of business activity of the assessee and the interests ofthe revenue, if the assessing officer is of the opinion that itis necessary to appoint an accountant / auditor, he could do so.Therefore, only if the Assessing officer arrive at a conclusionthat an appointment of auditor is required, then it is mandatoryto obtain approval from the Commissioner of Income Tax. 18. The above provision unambiguously stipulates that havingregard to the nature and complexity of the accounts, volume ofthe accounts, doubts about the correctness of the accounts,multiplicity of transactions in the accounts or specialisednature of business activity of the assessee and the interests ofthe revenue, if the assessing officer is of the opinion that itis necessary to appoint an accountant / auditor, he could do so.Therefore, only if the Assessing officer arrive at a conclusionthat an appointment of auditor is required, then it is mandatoryto obtain approval from the Commissioner of Income Tax. 19. In the present case, at the time of issuing proceedingsdated 09.12.2011, the assessing officer had not formed anopinion however, he had some reasons to appoint an auditor inthe case of the petitioner. Therefore, this Court is of anopinion that the very contention that the respondent has pre-determined the issue while issuing the order dated 09.12.2011,is doubtful. The assessing officer at the time of issuance ofproceedings dated 09.12.2011 had not obtained the prior approvalas at that point of time, he has not received the objections ofthe petitioner/assessee. Only after receiving the objectionsfrom the petitioner, on 15.12.2011, the assessing officer formedan opinion that the case of the petitioner is a fit case forappointment of an auditor by invoking Section 142(2A) of theIncome Tax Act and accordingly, obtained the prior permissionfrom the Commissioner of Income Tax and disposed of theobjection in proceedings dated 16.12.2011. 20. In the order dated 16.12.2011, the assessing officercategorically considered the nature of accounts and thecomplexities involved in the accounts and few such complexitiesinvolved in the accounts are narrated, which reads as under: “(a) The company is not in a position to explainproperly the whole activity done by the Land agents /power of attorney holders and its accounting in thebooks of the company.(b) All the entries are not properly accounted in thebooks of accounts.(c) Transactions made through Bank accounts of POAholders are not commented in the Audit Report u/s44AB.(d) Cash payments made are not entered in the booksand whether the vouchers were produced in Audit isnot known. Column No.17(A) of 3CD report annexed toReturn of Income shows that cash payments were made.But there is no annexure enclosed nor disallowancemade in the computation memo. (e) Cash payments made during the FY 2008-09, (AY:09-10) are per Survey Report works out toRs.55,54,700/-. But there is no qualification of such payment in the Audit Report. Through a letterdated 20.10.2011, the company asked to reconcile, itis unable to reconcile. (f) Transactions in the name of Shri D. Arul Muthiahof Rs.1,29,00,000/- routed through Axis Bank AccountNo.258010200007070 and admitted as done for thecompany. However, audit report does not qualify suchtransactions done through intermediaries.” 21. In paragraph no.3 of the said order dated 16.12.2011,the assessing officer has given reasons for the rejection of theobjections filed by the writ petitioner, which reads as under: (e) Cash payments made during the FY 2008-09, (AY:09-10) are per Survey Report works out toRs.55,54,700/-. But there is no qualification of such payment in the Audit Report. Through a letterdated 20.10.2011, the company asked to reconcile, itis unable to reconcile. (f) Transactions in the name of Shri D. Arul Muthiahof Rs.1,29,00,000/- routed through Axis Bank AccountNo.258010200007070 and admitted as done for thecompany. However, audit report does not qualify suchtransactions done through intermediaries.” 21. In paragraph no.3 of the said order dated 16.12.2011,the assessing officer has given reasons for the rejection of theobjections filed by the writ petitioner, which reads as under: “3. Your reply dt. 15.12.2011 is gone through. Aftercareful consideration of the submissions theexplanation is rejected for the reasons infra:4 – The fact of using companies funds through poweragents is admitted and whether Memorandum of Articlesauthorize such transactions and the details ofownership as on date and violation of any statutoryrules should fine a mention in the auditor's report.-amounts in admissible u/s 40 (a)(ia) and amountsinadmissible u/s 40A(3) r.w.r.6DD if I.T.Rules werenot given separately even though there is commentregarding 40A(3) violations in the audit report.-difference in cash payments as per investigationwing report based on loose papers, and copies thereofwere provided to the assessee and such expensesshould be correlated with books. After all entriesin the books are made based on vouchers and in theinstant case loose papers also. -transactions done through Arul Muthiah whether ornot authorized by memo of articles etc ought to havebeen commented by the Auditors.” 22. In paragraph No.5, it is stated that the Commissioner ofIncome Tax, Chennai – 1 has nominated M/s.Sundaram & Srinivasan,CAs, No.23, C.P.Ramaswamy Street, Alwarpet, Chennai – 18Tel.No.24988762, 24988463 as Special Auditors, for this purpose. 23. Not satisfied with the above order disposing of theobjections filed by the writ petitioner, once again thepetitioner submitted further objections on 23.12.2011 and thesaid objections were also disposed of by the 2[nd] respondent inproceeding dated 26.12.2011, which is impugned in the presentwrit petition. 24. The impugned order reveals that the assessment was givenin paragraph Nos.2 and 3, and the same reads as under: https://hcservices.ecourts.gov.in/hcservices/ “2. Taking into complexities of the accounts asdetailed in by a show cause notice u/s.142(2A) dated09/12/2011 and served on you on 10/12/2011, thecompany was directed to get accounts audited u/s.142(2A) of the Act as approved by the Hon'ble CIT-1,Chennai vide approval in C.No.278/50/CIT-I/2011-12dated 15/12/2011. 3. The assessee was given an opportunity toexplain its case. Assessee's objections areconsidered before issuing a direction for specialaudit u/s.142(2A). Information furnished by theassessee was carefully gone through, defects noticedin the accounts were communicated to the assessee.As the law requires an opportunity u/s.142(2A) theAssessing Officer has given a reasonable opportunityof being heard. After due deliberation of facts onrecord an objective decision was taken in passingorders u/s.142(2A). Hence, you are required tocomply with the terms of the said notice u/s.142(2A)dated 16/12/2011.” 25. In this background, let us now consider the judgmentrelied on by the petitioner. The principles regarding the pre-decisional hearing is the ruling of the Hon'ble Apex Court ofthe India. By applying the principles laid down in the case ofSahara India's case [cited supra], the facts in the present writpetition is to be considered. As far as the case before theSupreme Court is concerned, paragraph No.27 of the judgmentrecords the same which reads as under: 25. In this background, let us now consider the judgmentrelied on by the petitioner. The principles regarding the pre-decisional hearing is the ruling of the Hon'ble Apex Court ofthe India. By applying the principles laid down in the case ofSahara India's case [cited supra], the facts in the present writpetition is to be considered. As far as the case before theSupreme Court is concerned, paragraph No.27 of the judgmentrecords the same which reads as under: “27. Indubitably, before passing the said orders,no show-cause notice was given to the appellants. Onthe contrary, it appears from the record that on 9-3-2006, the appellants were required to furnish by 20-03-2006 details/explanation in respect of queriesraised vide order sheet entry dated 16-2-2006 but inthe meanwhile, the impugned orders were passed on 14-3-2006 itself. It is manifestly clear that when theimpugned orders were made, the Assessing Officer hadno occasion to have even a glimpse of the accountsmaintained by the appellants. Therefore, in the lightof the legal position noted above, we have no optionbut to hold that the impugned orders dated 14-3-2006,are vitiated by the failure to observe the principleaudi alteram partem.” 26. Regarding the facts in the present case admittedly,proceedings dated 09.12.2011 is issued. But, in the saidproceedings, the Assessing Officer has not mentioned as 'showcause notice'. However, the proceedings dated 09.12.2011 reveals that the accounts of the petitioner relevant to the FinancialYear 2008-09 (Assessment Year 2009-10) is to be audited by aSpecial Auditor to be appointed by the respondents. The natureof accounts and the complexities involved in the accounts arenarrated in paragraph No.2 of the proceedings dated 09.12.2011.What is missing in the said proceeding is that in the concludingparagraph the respondent has not stated that the assessee shallsubmit their objection or explanations with reference to thegrounds raised in paragraph No.2 of the said proceedings. Thatexactly is the reason why the petitioner has contended that itis not a show cause notice. 27. Though the petitioner argued before this Court that itis not a show cause notice, it was construed as a show causenotice by the petitioner themselves. The reason would be thatpursuant to the proceedings dated 09.12.2011 neither an Auditorwas appointed immediately nor an Auditor went to the premises ofthe petitioner and even the approval at that point of time fromthe Commissioner of Income Tax, was not obtained. But thepetitioner submitted their objections on 15.12.2011 in detailand thereafter, on receipt of the objections the assessingofficer obtained approval from the Commissioner of Income Taxand disposed of the objections on 16.12.2011. The assessee hasonce again submitted an objection on 23.12.2011 and the saidobjections were also disposed of on 26.12.2011. Thus, theopportunity to defend the case by way of pre-decisional hearingwas provided as no final order was passed based on theproceedings dated 09.12.2011 directly. Further, the petitionerhas not challenged the said order dated 09.12.2011, as if thesaid proceedings is a final order. 28. As considered in the aforementioned paragraphs, thereasons stated in the proceedings dated 09.12.2011 regarding thecomplexities involved in the accounts cannot be construed as afinal decision taken by the competent authority. In the absenceof recording such reasons, the assessee may not be in a positionto file their objections and therefore, even while issuing theshow cause notice, the provisional decision or allegations, areto be stated enabling the assessee to defend their caseeffectively. 28. As considered in the aforementioned paragraphs, thereasons stated in the proceedings dated 09.12.2011 regarding thecomplexities involved in the accounts cannot be construed as afinal decision taken by the competent authority. In the absenceof recording such reasons, the assessee may not be in a positionto file their objections and therefore, even while issuing theshow cause notice, the provisional decision or allegations, areto be stated enabling the assessee to defend their caseeffectively. 29. The facts involved in the case decided by the Hon'bleSupreme Court of India i.e. Sahara India's case cannot becompared with the facts involved in the present case. In thepresent case, the proceedings dated 09.12.2011 was treated as ashow cause notice for all purposes both by the Assessing Officerand by the Assessee/petitioner and the petitioner submitted hisobjections in detail on 15.12.2011 and thereafter, the approvalfrom the Commissioner of Income Tax was obtained and theobjections were disposed of on 16.12.2011. The further objections raised on 23.12.2011, were also disposed of by theAssessing Officer on 26.12.2011. This being the admitted factsbetween the parties, there is no reason to disbelieve theproceedings dated 09.12.2011, though it was not aptly worded, asrightly stated by the learned Senior counsel appearing on behalfof the respondents. 30. In respect of the impugned order, the petitioner isbound to cooperate for the earlier completion of the SpecialAudit, enabling the authority to proceed in accordance with law. 31. Accordingly, writ petition stands dismissed. No Costs.Consequently, the connected Miscellaneous Petition is closed. Sd/- Assistant Registrar(CS VI) //True Copy// ars Sub Assistant Registrar To 1. The Commissioner of Income Tax – I, Income Tax Department, 121, Nungambakkam High Road, Chennai – 600 034. 2. The Assistant Commissioner of Income Tax Company Circle II(3) Income Tax Department, 121, Nungambakkam High Road, Chennai – 600 034. +1CC to Ms.Hema Muralikrishnan, Advocate, Sr.No.40597 GSM (CO)K.RK. (16.09.2021)