Muthoottu Mini Kuries Vs. Deputy Commissioner of Income-tax and anr. - Court Judgment

Excerpt:
direct taxation - audit - sections 142, 142 (1), 142 (2a), 142 (2d) and 144 of income tax act, 1961 - petition challenging order requiring audit of assessee's accounts under section 142 (2a) - objective examination of accounts pre-condition as to determine that accounts are complex before order for compulsory audit of accounts could be made - accounts not seen at all - impugned decision not justified as it could have been made only after seeing accounts - under section 142 hearing was essential at pre-assessment stage - held, impugned order set aside. - code of civil procedure, 1908.[c.a. no. 5/1908]. section 100-a [as substituted by c.p.c. amendment act, 2002]: [v.k. bali, cj, kurian joseph & k. balakrishnan nair, jj] applicability held, section is not retrospective. all appeals filed prior to 1.7.2002 are competent. but subsequent to 1.7.2002 intro court appeals against judgment of single judge is not maintainable. provisions of section 100-a, c.p.c., will prevail over the provisions contained in the kerala high court act, 1959. - balakrishnan, in his reply, submitted that whether there were best judgment assessments for the past years or whether there was appropriation of funds by way of overdraft did not justify the proceedings under section 142(2a). it spoke of only two pre-conditions, namely, the nature and complexity of the accounts and the interests of the revenue. according to the petitioner, the accounts would have very well shown that there was no complexity as there was only the business of kuri and the .income constituted commission therefrom.m. ramachandran, j.1. exhibit p-7 order passed by the deputy commissioner of income-tax, central circle-i, ernakulam (first respondent herein), is subjected to challenge by the petitioner, a partnership firm engaged in the chitty business, having its registered office at bangalore.2. in respect of the assessment years 1998-99 and 1999-2000, the petitioner, muthoottu mini kuries, had filed returns. as per notices dated march 22, 2000, and march 28, 2000, the petitioner had been directed by the second respondent to appear before him on a specified day and to produce the documents, accounts and other details on which he relied in support of the returns filed. it is averred that the petitioner's authorised representative had presented himself with the connected records and as the second respondent was not available on that day, no hearing had been held. thereafter no opportunity for hearing had been given, but exhibit p-7 had followed. the said order passed under section 142(2a) of the income-tax act, 1961 required the petitioner to get their accounts, pertaining to the previous years relevant to the assessment years, audited by a chartered accountant nominated. it had been claimed that such direction has been issued taking note of the nature and complexity of the accounts maintained by the assessee, the interests of the revenue and with prior approval of the commissioner of income-tax. the commissioner had determined the expenses of the auditor at rs. 50,000 for each year and 10 per cent. thereof as incidentals. he had been directed to co-operate with the proceedings. the submission of the petitioner is that exhibit p-7 order was issued not in consonance with the principles of natural justice and there had been no proper application of mind and the circumstances did not justify an audit being conducted by a person nominated by the commissioner of income-tax. according to the petitioner, the expenses and incidentals directed to be paid was exorbitant and if the order is allowed to remain, the firm was liable to be subjected to great prejudice. in the aforesaid circumstances, it is prayed that exhibit p-7 may be set aside.3. elaborating his contentions, it was submitted that the petitioner was conducting the business of chits and the only earning derived from the business was commission. there was no complexity of accounts that had been maintained by the assessee and the observation to that effect in exhibit p-7 was without application of mind. it had been submitted that the returns had been filed and it had been supported by profit and loss accounts and the details had been submitted facilitating an assessment. on getting notice, the authorised representative had presented before the second respondent, but no hearing took place and the appointment of an auditor did not satisfy the requirements of fairness. according to him, the statute postulated not a subjective satisfaction of the officer but an objective assessment. the assessing officer had not bothered to examine the returns or to understand the nature of the accounts that had been presented before him. the petitioner had also relied on the decision reported in swadeshi cotton mills company ltd. v. cit : [1988]171itr634(all) as also the decision of the calcutta high court in peerless general finance and investment co. ltd. v. deputy cit : [1999]236itr671(cal) . it had been highlighted, with reference to the above two decisions, that an objective assessment was mandatory and an opinion has to be formed, in definite terms, before adopting the procedure prescribed by section 142(2a) of the act.4. a statement had been filed by standing counsel for the income-tax department, based on the instructions received from the department. highlighting the points, standing counsel submitted that it was found, that the petitioner had not been co-operating in the completion of assessments during the past years. for the immediate past three years, the assessments had been completed under section 144 of the act. it had been stated that even when the cases were posted on march 22, 2000 and march 28, 2000, the assessee had not appeared in response to the notices issued and it was in that context the proposal had been forwarded to the commissioner of income-tax on june 12, 2000. this proposal had been approved and it was in that context exhibit p-7 had been passed. it had also been submitted that the statement of accounts filed along with the returns showed that the material facts disclosed were not sufficient to reach a true and complete picture of the business. the details concerning auction discounts, forfeited kuries, fixed deposits, etc., which were relevant, were not available. it had also been found that the details of the non-prized kuries, amounts due from prized subscriptions, and interest on defaulted kuries were not given nor were the accounts audited, of course on the plea that they were not liable to audit under section 44ab of the act. it had also been shown that the current accounts of the partners showed a debit balance of rs. 1,36,47,472 as on march 31, 1997, and this was unreasonable. it was in the above circumstances that the proposal had been made for getting the accounts audited. it was only after recording the suggestion and fitness of the case that exhibit p-7 had been passed and therefore it did not suffer from any infirmity. it is stated that the assessee appeared before the commissioner of income-tax on november 7, 2000, and as there was no cash book or ledger forthcoming a query had been put to him and the answer was that such documents were not maintained. the system of accounting was complicated and in the absence of primary documents the decision was found to be most appropriate, and are in the interests of the revenue. it was also submitted that the assessing officer may be inexperienced in the complicated accounting procedure of an assessee and therefore it was in the interests of the revenue that properly audited accounts were made available before final orders were passed on the returns. finding that the petitioner's returns were not leading to proper appreciation of the working of the institution for the relevant years it was only proper that an audit has to be made and as an independent auditor was sought to be appointed the petitioner's right could not have been in any way affected and only the correct position would have emerged from such an enquiry. sri george k. george, counsel appearing for the revenue, had justified the orders on the facts of the case and also referred to the decision in pradeep maheswari v. cit : [2001]250itr453(ker) , whereunder fixing of remuneration of an auditor was in the discretion of the commissioner while deciding the cases. adverting to the decision reported in peerless general finance and investments co. ltd. v. deputy cit : [1999]236itr671(cal) , especially paragraph 2, he distinguished the decision on the facts of this case. shri george also submitted that there was no specific averment in the original petition to the effect that there was violation of principles of natural justice. no principles of hearing or adverse order had been there, in the case at hand, since no rights 'of the parties had been decided but only a statutory audit was contemplated. the authority of the decision reported in aligarh muslim university v. mansoor alikhan : air2000sc2783 , which laid down that the principles of natural justice were not so absolute, so as to compel in every case a hearing irrespective of the facts that were to be gatherable, also had been cited in support of his submission. he also drew the distinction between sections 142(2a) and 142(3) contending that there was a specific directive in the latter, which showed that a right of hearing was not there as far as the present stage of enquiry is concerned.5. counsel appearing on behalf of the petitioner, sri p. balakrishnan, in his reply, submitted that whether there were best judgment assessments for the past years or whether there was appropriation of funds by way of overdraft did not justify the proceedings under section 142(2a). it spoke of only two pre-conditions, namely, the nature and complexity of the accounts and the interests of the revenue. according to him, the department could not substantiate that this circumstance was there. he refuted the allegation that on the appointed day there was no representation for the asses-see. it was indicated that at least in the initial stages the assessing officer was aware of his duties to be followed before initiating action under section 142(2a). he referred to the admission in the statement and in exhibit p-7 order that it was a case where the officer had not seen the accounts at all. the question as to whether in a given case the accounts were complex or otherwise can be formed only after seeing the accounts and it was highlighted that the objective examination of the accounts was a pre-condition before passing an order whereunder compulsory audit was proposed. according to the petitioner, the accounts would have very well shown that there was no complexity as there was only the business of kuri and the . income constituted commission therefrom. this applied to all entries pertaining to the transactions with the subscribers.6. referring to the issue of overdraft in the profit and loss account, it had been shown that there was a progressive decrease in the amount of overdraft and this was also a matter that could be explained, if opportunity had been granted. according to him, there was no necessity for expending a large sum for auditing the accounts and as the orders had caused disability on the petitioner and would have led to civil consequences and un-affordable expenditure, the principles of natural justice demanded that he should have been heard. he has also submitted that the first respondent had not given an opportunity to examine the matter in a full fledged manner and had acted on the report of the assessing officer.7. after hearing the arguments on both sides, on the facts of the case, i am of the opinion that exhibit p-7 had been passed without proper justification. when the statute prescribed an audit by a third party, it required that the assessing officer should have a satisfaction that the accounts of the assessee were complex in nature. this decision could have come to be made only after seeing the accounts. i cannot accept the contention of counsel for the revenue that the assessing officer is a lay man and who has no experience in dealing with the accounts. while deciding as to the tax that has to be assessed, in respect of an assessee, he may have acquaintance with the method of accounting as also comprehensive knowledge regarding the matters that are to be enquired into. the petitioner had only presented the profit and loss accounts and as per the assessments they were given an opportunity to produce the relevant records. as to section 142, which spoke of the enquiry before the assessment, the assessing officer was obliged to serve a notice on the assessee to produce or cause to be produced such accounts or documents as the assessing officer may require and of furnishing in the prescribed manner information in such form and on such points or matters as the assessing officer required. this sufficiently clarified that a hearing was essential, at the pre-assessment stage. the opportunity given to the petitioner would have facilitated them to satisfy the assessing officer and dispel doubts, if any. only if the records are produced and the accounts examined, the complexity or otherwise of the accounts would have become apparent, and not before. even if there was difficulty in appeciating the entries in every case, it was not healthy to refer the matter to a chartered accountant as an explanation could have been obtained from the assessee or from his authorised representative under section 142(1) of the act. this sufficiently safeguards the interests of the assessee and it is in evidence that the assessing officer was aware of it and notice was served on the assessee, and according to him, only because there was no response he had come to the conclusion that permission from the commissioner of income-tax has to be obtained for a fresh audit. this in fact shows that it was not because of the complexity of accounts that such a decision was taken. and it is not a contingency referred to in section 142(2a) of the act. even though it was suggested, as regards the remuneration element, that the petitioner can make a representation to the commissioner, it has been pointed out that the decision of the commissioner is final and it is not liable to be reviewed or reopened. the petitioner has substantial grievance in this region also. he has to spend a sizable amount for such an audit and it was overlooking the circumstance that he was prepared to explain the accounts to an officer who was expected to be competent to deal with such matters. the expressions used in section 142(2a) indeed show that there should be sufficient reasons and this itself posulates a right of hearing.8. in the above facts and circumstances, i am of the view that the proceedings leading to exhibit p-7 were not justified and a decision could have been taken only after hearing the petitioner in the matter. i hereby set aside exhibit p-7. the assessing officer will be free to hear the petitioner on every point of doubt and come to a fresh decision, as authorised by the statute.9. the original petition is allowed. parties will bear the respective costs.