# > [2008) 6 S.C.R. 427 SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER OF INCOME TAX, CENTRAL-I & ANR

- **Citation:** [2008] 6 S.C.R. 427
- **Court:** Supreme Court of India
- **Decided:** 2008-04-11
- **Case number:** Civil Appeal No. 2783 of 2008
- **Bench:** 8.N. Agrawal, P.P. Naolekar, D.K. Jain
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/2008-6-s-c-r-427-sahara-india-firm-lucknow-v-commissioner-of-income-tax-central-24582
- **Pages:** 29

## Headnote

Income tax Act, 1961 - s. 142(2A) - Special audit of
accounts - Pre-decisional hearing - Requirement of - Held:
A
B
Even in absence of express provision for affording or barring C
an opportunity of pre-decisional hearing to assessee, the
requirement of observance of principles of natural justice to
be read into s. 142(2A) since the order entails civil
consequences - It would apply prospectively - However, it 0
would be open to assessee to question the correctness of
material gathered on basis of audit report.
Principles of natural justice - Concept and applicability
of - Held: Rules of 'natural justice' implies duty to act fairly E
- It is to secure justice or to prevent miscarriage of justice
-
Unless statutory provision either specifically or by
necessary implication excludes its applicability,
requirement of giving reasonable opportunity of hearing F
before an order is made, is generally read into the
provisions, particularly when the order has adverse civil
consequences - Power conferred on a statutory body or
tribunal may be administrative or quasi-judicial - However,
there is no general rule of universal application as to its G
~pplicability -
With regard to its application express
language, basic scheme of the provision conferring the
power, nature of power conferred, its purpose and final effect
427
H
428
SUPREME COURT REPORTS
[2008] 6 S.C.R.
A of the exercise of that power are to be considered.
The two Judge Bench which heard the matter earlier,
doubted the correctness of Rajesh Kumar's case on the
ground that it may not be necessary to afford opportunity
B of hearing to assessee before ordering Special audit in
+
terms of S.142(2A) and referred the matter to larger Bench.
Hence, the present appeals are before the three-judge
Bench.
c
Partly allowing the appeals, the Court
HELD: 1. The exercise of power under Section 142
(2A) of the ·Income Tax Act, 1961 leads to serious civil
D consequences and, therefore, even in the absence of
express provision for affording an opportunity of predecisional hearing to an assessee and in the absence
of any express provision in Section 142 (2A) barring
the giving of reasonable opportunity to an assessee,
E the requirement of observance of principles of natural
justice is to be read into the said provision. (Para 24)
[453-E-F]
F
Rajesh Kumar and Ors. Vs. Deputy Commissioner of
Income-Tax and Ors 2006 (287) ITR 91 (SC) - explained and
reiterated.
2.1 A bare perusal of the provisions of sub-section
G (2A) of s. 142 of the Income Tax Act, 1961 Act would show
that the opinion of the Assessing Officer that it is
necessary to get the accounts of assessee audited by an
Accountant has to be formed only by having regard to: (i)
the nature and complexity of the accounts of the
H
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
429
OF INCOME TAX, CENTRAL-I & ANR.
assessee; and (ii) the interests of the Revenue. The word A
'and' signifies conjunction and not disjunction. In other
words, the twin conditions of 'nature and complexity of
the accounts' and 'the interests of the Revenue'; are
the prerequisites for exercise of power under section 8
142 (2A) of the Act. Undoubtedly, the object behind
enacting the said provision is to assist the Assessing
Officer in framing a correct and proper assessment
based on the accounts maintained by the assessee and
when he finds the accounts of the assessee to be C
complex, in order to protect the interests of the
Revenue, recourse to the said provision can be had.
[Para 6) [ 440-F, G; 441-A, B]
2.2 The word 'complexity' used in Section 142 (2A) is
D
not defined or explained in the Act. Complexity it is a
nebulous word. Its dictionary meaning is: "The state or
quality of being intricate or complex or that is difficult to
understand. However, all that is difficult to understand E
should not be regarded as complex. What is complex to
one may be simple to another. It depends upon one's level
of understanding or comprehension. Sometimes, what
appears to be complex on th

## Text

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>
[2008) 6 S.C.R. 427
SAHARA INDIA (FIRM), LUCKNOW
v
COMMISSIONER OF INCOME TAX, CENTRAL-I & ANR.
(Civil Appeal No. 2783 of 2008)
APRIL 11, 2008
[8.N. AGRAWAL, P.P. NAOLEKAR & D.K. JAIN, JJ.]
Income tax Act, 1961 - s. 142(2A) - Special audit of
accounts - Pre-decisional hearing - Requirement of - Held:
A
B
Even in absence of express provision for affording or barring C
an opportunity of pre-decisional hearing to assessee, the
requirement of observance of principles of natural justice to
be read into s. 142(2A) since the order entails civil
consequences - It would apply prospectively - However, it 0
would be open to assessee to question the correctness of
material gathered on basis of audit report.
Principles of natural justice - Concept and applicability
of - Held: Rules of 'natural justice' implies duty to act fairly E
- It is to secure justice or to prevent miscarriage of justice
-
Unless statutory provision either specifically or by
necessary implication excludes its applicability,
requirement of giving reasonable opportunity of hearing F
before an order is made, is generally read into the
provisions, particularly when the order has adverse civil
consequences - Power conferred on a statutory body or
tribunal may be administrative or quasi-judicial - However,
there is no general rule of universal application as to its G
~pplicability -
With regard to its application express
language, basic scheme of the provision conferring the
power, nature of power conferred, its purpose and final effect
427
H
428
SUPREME COURT REPORTS
[2008] 6 S.C.R.
A of the exercise of that power are to be considered.
The two Judge Bench which heard the matter earlier,
doubted the correctness of Rajesh Kumar's case on the
ground that it may not be necessary to afford opportunity
B of hearing to assessee before ordering Special audit in
+
terms of S.142(2A) and referred the matter to larger Bench.
Hence, the present appeals are before the three-judge
Bench.
c
Partly allowing the appeals, the Court
HELD: 1. The exercise of power under Section 142
(2A) of the ·Income Tax Act, 1961 leads to serious civil
D consequences and, therefore, even in the absence of
express provision for affording an opportunity of predecisional hearing to an assessee and in the absence
of any express provision in Section 142 (2A) barring
the giving of reasonable opportunity to an assessee,
E the requirement of observance of principles of natural
justice is to be read into the said provision. (Para 24)
[453-E-F]
F
Rajesh Kumar and Ors. Vs. Deputy Commissioner of
Income-Tax and Ors 2006 (287) ITR 91 (SC) - explained and
reiterated.
2.1 A bare perusal of the provisions of sub-section
G (2A) of s. 142 of the Income Tax Act, 1961 Act would show
that the opinion of the Assessing Officer that it is
necessary to get the accounts of assessee audited by an
Accountant has to be formed only by having regard to: (i)
the nature and complexity of the accounts of the
H
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
429
OF INCOME TAX, CENTRAL-I & ANR.
assessee; and (ii) the interests of the Revenue. The word A
'and' signifies conjunction and not disjunction. In other
words, the twin conditions of 'nature and complexity of
the accounts' and 'the interests of the Revenue'; are
the prerequisites for exercise of power under section 8
142 (2A) of the Act. Undoubtedly, the object behind
enacting the said provision is to assist the Assessing
Officer in framing a correct and proper assessment
based on the accounts maintained by the assessee and
when he finds the accounts of the assessee to be C
complex, in order to protect the interests of the
Revenue, recourse to the said provision can be had.
[Para 6) [ 440-F, G; 441-A, B]
2.2 The word 'complexity' used in Section 142 (2A) is
D
not defined or explained in the Act. Complexity it is a
nebulous word. Its dictionary meaning is: "The state or
quality of being intricate or complex or that is difficult to
understand. However, all that is difficult to understand E
should not be regarded as complex. What is complex to
one may be simple to another. It depends upon one's level
of understanding or comprehension. Sometimes, what
appears to be complex on the face of it, may not be really
F
so if one tries to understand it carefully." Thus, before
dubbing the accounts to be complex or difficult to
understand, there has to be a genuine and honest attempt
on the part of the Assessing Officer to understand G
accounts maintained by the assessee; appreciate the
entries made therein and in the event of any doubt, seek
explanation from the assessee. But opinion required to
be formed by the Assessing Officer for exercise of power
under the said provision must be based on objective H
430
SUPREME COURT REPORTS
[2008) 6 S.C.R.
A criteria and not on the basis of subjective satisfaction.
There is no gainsaying that recourse to the said provision
cannot be had by the Assessing Officer merely to shift
his responsibility of scrutinizing the accounts of an
B assessee and pass on the buck to the special auditor.
Similarly, the requirement of previous approval of the Chief
Commissioner or the Commissioner in terms of the said
provision being an inbuilt protection against any arbitrary
c
or unjust exercise of power by the Assessing Officer, casts
a very heavy duty on the said high ranking authority to
see to it that the requirement of the previous approval,
envisaged in the Section is not turned into an empty ritual.
Needless to emphasise that before granting approval, the
D Chief Commissioner or the Commissioner, as the case
may be; must have before him the material on the basis
•
whereof an opinion in this behalf has been formed by the
Assessing Officer. The approval must reflect the
E application of mind to the facts of the case. (Para 6)
[441-8-G; 442-A]
Swadeshi Cotton Mills Co. Ltd. vs. C./. T 1988 (171) ITR
634 (All) - approved.
F
3.1 Rules of 'natural justice' are not embodied rules.
The phrase 'natural justice' is also not capable of a precise
definition. The underlying principle of natural justice,
evolved under the common law, is to check arbitrary
G exercise of power by the State or its functionaries.
Therefore, the principle implies a duty to act fairly, i.e. fair
play in action. [Para 11] [444-C, D]
3.2 The aim of rules of natural justice is to secure
H justice or to put it negatively to prevent miscarriage of
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
431
OF INCOME TAX, CENTRAL-I & ANR.
justice. These rules can operate only in areas not covered A
by any law validly made. They do not supplant the law
but supplement it. (Para 11) [444-E]
A.K. Kraipak and Ors. Vs. Union of India and Ors. 1969
(2) SCC 262 Income Tax Officer and Ors. Vs. Mis Madnani
B
Engineering Works Ltd., Calcutta 1979 (2) SCC 455 - relied
on.
3.3 It is trite that unless a statutory provision either c
specifically or by necessary implication excludes the
application of principles of natural justice, because in that
event the Court would not ignore the legislative
mandate, the requirement of giving reasonable
opportunity of being heard before an order is made, is D
generally read into the provisions of a statute,
particularly when the order has adverse civil
consequences for the party affected. The principle will
hold good irrespective of whether the power conferred
E
on a statutory body or tribunal is administrative or
quasi-judicial. However, no general rule of universal
application can be laid down as to the applicability of
the principle audi alteram partem, in addition to the
language of the provision. Undoubtedly, there can be
F
exceptions to the said doctrine. The question whether the
principle has to be applied or not is to be considered
bearing in mind the express language and the basic
scheme of the provision conferring the power; the nature G
of the power conferred and the purpose for which the
power is conferred and the final effect of the exercis~ of
that power. It is only upon a consideration of all these
matters that the question of application of the said H
432
SUPREME COURT REPORTS
[2008] 6 S.C.R.
A principle can be properly determined. (Paras 15 and 16)
[447-C-G]
Swadeshi Cotton Mills Vs. Union of India 1981 (1) SCC
664; State ofOrissa Vs. Binapani Dei and Ors. 1967 (2) S.C.R.
B 625; Canara Bank vs. VK. Awasthy 2005 (6) SCC 321; Union
oflndia Vs. Col. J. N. Sinha and Ors. 1970 (2) SCC 458 - relied
on.
c
Mohinder Singh Gill and Anr. Vs. The Chief Election
Commissioner, New Delhi and Ors. 1978 (1) SCC 405; Olga
Tellis and Ors. vs. Bombay Municipal Corporation and Ors.
1985 (3) SCC 545; C.B. Gautam vs. Union of India and Ors.
1993 (1) sec 78 - referred to.
D
4.1 With regard to the question whether the
requirement of affording an opportunity of hearing is to
be read into section 142(2A) of the Act, in Rajesh Kumar's
case it has been held that prejudice to the assessee is
E apparent on the face of the said statutory provision. It was
observed that on account of the special audit, the
assessee has to undergo the process of further
accounting despite the fact that his accounts have been
F audited by a qualified auditor in terms of Section 44AB of
the Act. An auditor is a professional person. He has to
function independently. He is not an employee of the
assessee. In case of mis-conduct, he may become liable
G to be proceeded against by a statutory authority under
the Chartered Accountants Act, 1949. Besides, the
assessee has to pay a hefty amount as fee of the special
auditor. Moreover, during the audit of the accounts again
~
by the special auditor, he has to answer a large number
H
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
433
OF INCOME TAX, CENTRAL-I & ANR.
of questions. It was held that by virtue of an order under A
Section 142 (2A) of the Act, the assessee suffers civil
consequences and the order passed would be prejudicial
to him and, therefore, principles of natural justice must
be held to be implicit. It was further observed that if the 8
assessee was put to notice, he could show that the
nature of accounts is not such which would require
appointment of special auditors. He could further show
that what the Assessing Officer considers to be complex
is, in fact, not so. It was also open to him to show that the C
same would not be in the interest of the revenue. Thus,
the decision of this Court in Rajesh Kumar's case that an
order under Section 142 (2A) does entail civil
consequences is concurred with. (Paras 20 and 21) D
[450-D-G; 451-C-E]
State ofOrissa Vs. Binapani Dei and Ors. 1967 (2) S.C.R.
625 - referred to.
E
4.2 The proviso to section 142 (20) inserted with
effect from 1•1 June, 2007, provides that the expenses of
the auditor appointed in terms of the said provision shall,
henceforth, be paid by the Central Government. It is true
that the payment of auditor's fee is a major civil F
consequence, but it cannot be said to be the sole civil or
evil consequence flowing from directions under Section
142 (2A). Special audit has an altogether different
connotation and implications from the audit under G
Section 44AB. Unlike the compulsory audit under
Section 44AB, it is not limited to mere production of the
books and vouchers before an auditor and verification
thereof. It would involve submission of explanation and H
.,.
434
SUPREME COURT REPORTS
[2008] 6 S.C.R.
A clarification which may be required by the special
auditor on various issues with relevant data, document
etc., which, in the normal course, an assessee is required
to explain before the Assessing Officer. Therefore, special
B audit is more or less in the nature of an investigation and
in some cases may even turn out to be stigmatic.
Therefore, even after the obligation to pay auditor's fees
and incidental expenses has been taken over by the
Central Government, civil consequences would still
C ensue on the passing of an order for special audit.
(Para 21) [451-D-H; 452-A]
4.3 In Rajesh Kumar it has been held that in view of
0 Section 136 of the Act, proceedings before an Assessing
Officer are deemed to be judicial proceedings. Though
having regard to the language of the provision, there are
some reservations on the said view expressed in Rajesh
Kumar's case, but having held that when civil
E consequences ensue, no distinction between quasi
judicial and administrative order survives, it is
unnecessary to dilate on the scope of Section 136 of the
Act. It is the civil consequence which obliterates the
F distinction between quasi judicial and administrative
function. Moreover, with the growth of the administrative
law, the old distinction between a judicial act and an
administrative act has withered away. Therefore, even a
purely administrative order which entails civil
G consequences, must be consistent with the rules of
natural justice. (Para 22) [452-C, D, E, F]
Mrs. Maneka Gandhi vs. Union of India and Anr. AIR 1978
,
H SC 597; S.L. Kapoor vs. Jagmohan and Ors. 1980 (4) SCC
SAHARA !NOIA (FIRM), LUCKNOW v. COMMISSIONER
435
OF INCOME TAX, CENTRAL-I & ANR.
.>
379 - relied on.
A
4.4
The
expression
'civil
consequences'
encompasses infraction of not merely property or
personal rights but of civil liberties, material deprivations
and non pecuniary damages. Anything which affects a B
citizen in his civil life comes under its wide umbrella.
Accordingly, an order under Section 142 (2A) does entail
civil consequences, the rule audi alteram partem is required
to be observed. (Para 22) [452-G; 453-A, 8]
c
4.5 It cannot be said that since a post-decisional
hearing in terms of sub-section (3) of Section 142 is
contemplated, the requirement of natural justice is fully
met. Apart from the fact that ordinarily a post-decisional D
.hearing is no substitute for pre-decisional hearing, even
..,
from the language of the said provision it is plain that the
opportunity of being heard is only in respect of the
material gathered on the basis of the audit report E
submitted under sub-section (2A) and not on the validity
of the original order directing the special audit. It is well
settled that the principle audi alteram partem can be
excluded only when a statute contemplates a post
decisional hearing amounting to a full review of the
F
original order on merit, which, is not the case here.
(Para 23) [453-8, C, D, E]
4.6 There is no denying the fact that the law on the
subject was in a flux in the sense that till the judgment G
in Rajesh Kumar was rendered, there was divergence
of opinion amongst various High Courts. Additionally,
~ even after the said judgment, another two-Judge Bench
of this Court had expressed reservation about its H
436
SUPREME COURT REPORTS
[2008) 6 S.C.R.
A correctness. Having regard to all these peculiar
circumstances and the fact that on 141h December, 2006,
this Court had declined to stay the assessment
proceedings, it is opined that this Court should be loathe
8 to quash the impugned orders. Hence, the law on the
subject, as clarified will apply prospectively and it will not
be open to the appellants to urge before the Appellate
Authority that the extended period of limitation under
Explanation 1 (iii) to Section 153 (3) of the Act was not
C available to the Assessing Officer because of an invalid
order under Section 142 (2A) of the Act. However, it will
be open to the appellants to question before the appellate
authority, if so advised, the correctness of the material
D gathered on the basis of the audit report submitted
under sub-section 2A of Section 142 of the Act. (Para 29)
[454-G-H; 455-A, 8, C, D]
Rajesh Kumar and Ors. Vs. Deputy Commissioner of
E Income-Tax and Ors 2006 (287) ITR 91 (SC) - explained and
reiterated.
F
G
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 2783
of 2008.
From the Judgment and Order dated 17 .10.2006 of the
High Court of Delhi at New Delhi in W.P. (Civil) No. 9545/
2006.
WITH
Civil Appeal No. 2784 of 2008.
P.P. Malhotra, A.S.G., Soli J. Sorabjee, Mukul Rohatgi,
H Dr. R.G. Padia, Aarohi Bhalla, Satyen Sethi, Pritesh Kapur, Sunil
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
437
OF INCOME TAX, CENTRAL-I & ANR. [D.K. JAIN, J.]
Kumar Singh, Sujata Kurdukar, T. Srinivasan Murthy, Rahul A
Kaushik, Deb Kumar, B.V. Balaram Das for the appearing
parties.
The Judgment of the Court was delivered by
D.K. JAIN, J. 1. Leave granted.
B
if
2. These matters have been placed before the three-Judge
Bench in view of a common order dated 14th December, 2006,
passed by a two-Judge Bench of this Court. The Order reads
as follows:
c
"When the matter was taken up, learned counsel for the
petitioner placed reliance on a decision of this Court in
Rajesh Kr. & Ors. Vs. Deputy Commissioner of
Income Tax & Ors. According to learned counsel forthe
petitioner, before any direction can be issued under D
'i
Section 142 (2A) of the Income Tax Act, 1961 (in short 'the
Act') for special audit of the accounts of the assessee,
there has to be a pre-decisional hearing and an
opportunity has to be granted to the assessee for the
purpose. A close reading of the decision shows that the E
observations in this regard appear to have been made in
the context of the assessments in terms of Section 158
BC (Block Assessment) of the Act. Such assessments
are relatable to a case when raid has been conducted at
the premises of an assessee. Had that been so, limited
F
to the facts involved in that case, we would have negatived
the contentions of learned counsel for the petitioner. But,
certain observations of general nature have been made.
The effect of these observations appear to be that in every
case where the Assessing Officer issues a direction in G
terms of Section 142 (2A) of the Act, the assessee has to
be heard before such order is passed. This does not
appear to us to be the correct position of law. Therefore,
we refer the matter to a larger Bench. The records be
placed before Hon'ble the Chief Justice of India for H
438
SUPREME COURT REPORTS
[2008] 6 S.C.R.
A
constituting an appropriate Bench."
3. Although no specific question has been formulated for
determination by the larger Bench but from the afore-extracted
order it is discernible that the Bench had doubted the correctness
B
of the decision of this Court in Rajesh Kumar & Ors. Vs.
Deputy Commissioner of Income-Tax & Ors. 1 , to the extent
that it tends to lay down as an absolute proposition of law that in
...
every case where the Assessing Officer issues a direction under
Section 142 (2A) of the Income Tax Act, 1961 (for short the Act),
the assessee has to be heard before such an order is passed.
c In other words, the Bench of two learned Judges have felt that it
may not be necessary to afford an opportunity of hearing to an
assessee before ordering special audit in terms of Section 142
(2A) of the Act. This is the short controversy before us.
D
4. As a common question of law is involved in both the
cases and even the background facts are identical, these are
being disposed of by this judgment. However, before adverting
to the factual matrix, we propose to address ourselves on the
afore-noted question of law on which the latter Bench has
expressed its reseNations. At the outset, we may also note that
E in Rajesh Kumar (supra), while obseNing that the principles
of natural justice must be held to be implicit in Section 142 (2A)
of the Act, learned Judges finally held as under:
"The hearing given, however, need not be elaborate. The
F
notice issued may only contain briefly the issues which the
Assessing Officer thinks to be necessary. The reasons
assigned therefor need not be detailed ones. But, that
would not mean that the principles of natural justice are
not required to be complied with. Only because certain
consequences would ensue if the principles of natural
G
justice are required to be complied with, the same by
itself would not mean that the court would not insist on
complying with the fundamental principles of law. If the
principles of natural justice are to be excluded, Parliament
H
1 [2006] .287 ITR 91 (SC)
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
439
OF INCOME TAX, CENTRAL-I & ANR. [D.K. JAIN, J.]
could have said so expressly."
A
5. Sub-sections (2A), (28), (2C), (20) and 3 of Section
142 of the Act run as follows:
"(2A) - If, at any stage of the proceedings before him, the
Assessing Officer having regard to the nature and
B
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 c
the Explanation below sub-section (2) of Section 288,
nominated by the Chief Commissioneror 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
0
prescribed and such other particulars as the Assessing
Officer may require.
*[Provided that the Assessing Officer shall not direct the
assessee to get the accounts so audited unless the
assessee has been given a reasonable opportunity of E
being heard.]
(28) - The provisions of sub-section (2A) shall have effect
notwithstanding that the accounts of the assessee have
been audited under any other law for the time being in
force or otherwise.
F
(2C) -
Every report under sub-section (2A) shall be
furnished by the assessee to the Assessing Officer within
such period as may be specified by the Assessing Officer.
[Provided that the Assessing Officer may, on an G
application made in this behalf by the assessee and for
any good and sufficient reason, extend the said period by
such further period or periods as he thinks fit; so, however,
that the aggregate of the period originally fixed and the
period or periods so extended shall not, in any case,
H
A
B
c
D
E
F
440
SUPREME COURT REPORTS
(2008] 6 S.C.R.
exceed one hundred and eighty days from the date on
which the direction under sub-section (2A) is received by
the assessee.]
(20) - The expenses of, and incidental to, any audit under
sub-section (2A} (including the remuneration of the
accountant) shall be determined by the Chief
Commissioner or Commissioner (which determination
shall be final) and paid by the assessee and in default of
such payment, shall be recoverable from the assessee in
the manner provided in Chapter XVll-D for the recovery of
arrears of tax.
*[Provided that where any direction for audit under subsection (2A) is issued by the Assessing Officer on or after
the 151 day of June, 2007, the expenses of, and incidental
to; such audit (including the remuneration of the Accountant)
shall be determined by the Chief Commissioner or
Commissioner in accordance with such guidelines as may
be prescribed and the expenses so determined shall be
paid by the Central Government.]
(3) The assessee shall, except where the assessment is
made under Section 144, be given an opportunity of being
heard in respect of any material gathered on the basis of
any inquiry under sub-section (2) or any audit under sub-·
section (2A) and proposed to be utilized for the purposes
of the assessment.
[* Inserted by the Finance Act, 2007 w.e.f. 1-6-2007]."
6. A bare perusal of the provisions of sub-section (2A) of
the Act would show that the opinion of the Assessing Officer
G that it is necessary to get the accounts of assessee audited by
an Accountant has to be formed only by having regard to: (i) the
nature and complexity of the accounts of the assessee; and (ii)
the interests of the revenue. The word "and" signifies conjunction
and not disjunction. In other words, the twin conditions of "nature
H and complexity of the accounts" and "the interests of the revenue"
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
441
'
OF INCOME TAX, CENTRAL-I & ANR. [D.K. JAIN, J.]
are the prerequisites for exercise of power under Section 142 A
(2A) of the Act. Undoubtedly, the object behind enacting the said
provision is to assist the Assessing Officer in framing a correct
and proper assessment based on the accounts maintained by
the assessee and when he finds the accounts of the assessee
to be complex, in order to protect the interests of the revenue,
B
)
recourse to the said provision can be had. The word "complexity"
used in Section 142 (2A) is not defined or explained in the Act.
As observed in Swadeshi Cotton Mills Co. Ltd. Vs. C.l.T. 2, it
is a nebulous word. Its dictionary meaning is: "The state or
quality of being intricate or complex or that is difficult to c
understand. However, all that is difficult to understand should
not be regarded as complex. What is complex to one may be
simple to another. It depends upon one's level of understanding
or comprehension. Sometimes, what appears to be complex
on the face of it, may not be really so if one tries to understand it D
carefully." Thus, before dubbing the accounts to be complex or
difficult to understand, there has to be a genuine and honest
attempt on the part of the Assessing Officer to understand
accounts maintained by the assessee; appreciate the entries
made therein and in the event of any doubt, seek explanation
E
from the assessee. But opinion required to be formed by the
Assessing Officer for exercise of power under the said provision
must be based on objective criteria and not on the basis of
subjective satisfaction. There is no gainsaying that recourse to
the said provision cannot be had by the Assessing Officer merely
.,.
to shift his responsibility of scrutinizing the accounts of an
F
assessee and pass on the buck to the special auditor. Similarly,
the requirement of previous approval of the Chief Commissioner
or the Commissioner in terms of the said provision being an
inbuilt protection against any arbitrary or unjust exercise of power
by the Assessing Officer, casts a very heavy duty on the said G
high ranking authority to see to it that the requirement of the
'
previous approval, envisaged in the Section is not turned into
..
an empty ritual. Needless to emphasise that before granting
2 (1988)171 ITR634 (All)
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A approval, the Chief Commissioner or the Commissioner, as the
case may be, must have before him the material on the basis
whereof an opinion in this behalf has been formed by the
Assessing Officer. The approval must reflect the application of
mind to the facts of the case.
B
7. However, the question for adjudication is whether in view
of the fact that the said provision does not postulate the
requirement of a hearing before an order for special audit is
passed, a pre-decisional hearing is required to be given to the
assessee or not?
c
8. Mr. Soli J. Sorabjee, learned senior counsel appearing
on behalf of the appellants vehemently submitted that the
decision of this Court in Rajesh Kumar (supra) lays down the
correct proposition of law and, therefore, does not require
D reconsideration. In support of the proposition that previous
pronouncements should not be lightly dissented from, learned
counsel placed reliance on the decisions of this Court in
Magan/al Chhaganla/ (P) Ltd. Vs. Municipal Corporation
of Greater Bombay & Ors. 3 ; Kattite Valappil Pathumma &
E Ors. Vs. Ta/uk Land Board & Ors. 4 ; Mishri Lal Vs. Dhirendra
Nath & Ors. 5 • It was contended that even an administrative
order, assuming one under Section 142 (2A) of the Act to be
so, if it operates to the prejudice of an assessee and entails
civil consequences, the elementary principles of natural justice
and fair play have to be applied and consequently, an opportunity
F of hearing has to be afforded to the assessee before an order
under the said provision is passed. Learned counsel, however,
conceded that the extent and ambit of the opportunity of hearing
may not require a complete comprehensive hearing or inquiry
but the bare modicum of natural justice has to be observed. It
G was contended that an order requiring special audit does affect
a person because of the pecuniary prejudice as also on account
~
3 (1974) 2 sec 402 at 427
4 (1997) 4 sec 114 at 120
H s (1999) 4 sec 11 a120
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
443
OF INCOME TAX, CENTRAL-I & ANR. [D.K. JAIN, J]
of severe inconvenience caused in his business by virtue of the
A
intrusion of the special auditor. Besides, even the vested right
of limitation is affected by the appointment of special auditor
inasmuch as the period of limitation thereby stands extended.
In this behalf, reference is made to the decisions of this Court
in Ram/a/ Motila/ & Chhotelal Vs. Rewa Coalfields Ltd. 6
B
)
and M.K. Prasad Vs. P. Arumugam7 . In nutshell, the stand of
the learned counsel was that an order under Section 142 (2A)
of the Act entails serious civil consequence and, therefore, the
principles of natural justice have to be complied with before an
order under the said provision is made.
c
9. Mr. P.P. Malhotra, learned Additional Solicitor General
of India appearing on behalf of the respondent/revenue, on the
other hand, has contended that the power under the said
provision, which is found in Chapter XIV of the Act, prescribing
procedure for assessment, relates to the inquiry before the D
assessment and the special audit is to facilitate the assessment
to protect the interests of the revenue, which is of paramount
consideration and cannot be defeated or delayed by affording
a hearing to the assessee to decide the question whether there
should be a special audit or not. The stand of the learned senior E
counsel is that since order of special audit is only a step towards
the assessment and is an inquiry before assessment, no liability
in terms of the said order is created and, therefore, such an
order does not lead to any civil consequences. Learned counsel
)
submitted that the assumption of prejudice and civil
F
consequence to the assessee on account of an order for special
audit, on the basis whereof the case of Rajesh Kumar (supra)
has been decided, is erroneous and, therefore, the said decision
requires reconsideration. Lastly, it was submitted that any
interpretation which may now be given by this Court should be G
prospective in nature as the interests of the revenue will be
seriously prejudiced by a retrospective interpretation. It is
6 1962 (2) S.C.R. 762
7 (2001) 6 sec 176
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A
pleaded that while interpreting the said provision, the decided
cases should not be disturbed. In support of the plea, reliance
has been placed on the decisions of this Court in Steel
Authority of India Ltd. & Ors. Vs. National Union Waterfront
Workers & Ors. 8 , P. II. George & Ors. Vs. State of Kera/a &
B Ors. 9 , M.A. Murthy Vs. State of Karnataka & Ors. 10 , Ram
Lal, Moti Lal & Chhotelal Vs. Rewa Coalfields Ltd. 11 .
10. Before dealing with the rival submissions to determine
whether the principles of natural justice demand that an
opportunity of hearing should be afforded to an assessee before
C an order under Section 142 (2A) of the Act is made, we may
appreciate the concept of "natural justice" and the principles
governing its application.
11. Rules of "natural justice" are not embodied rules. The
0 phrase "natural justice" is also not capable of a precise
definition. The underlying principle of natural justice, evolved
under the common law, is to check arbitrary exercise of power
by the State or its functionaries. Therefore, the principle implies
a duty to act fairly, i.e. fair play in action. As observed by this
Court in A.K. Kraipak & Ors. Vs. Union of India & Ors. 12 , the
E aim of rules of natural justice is to secure justice or to put it
negatively to prevent miscarriage of justice. These rules can
operate only in areas not covered by any law validly made. They
do not supplant the law but supplement it. (Also see: Income
Tax Officer & Ors. Vs. Mis Madnani Engineering Works Ltd.,
F Ca/cutta13 ).
12. In Swadeshi Cotton Mills Vs. Union of/ndia14 , R.S.
Sarkaria, J., speaking for the majority in a three-Judge Bench,
a (2001) 7 sec 1
G
9 (2007) 3 sec 557
10 (2003) 7 sec 517
11 (1962) 2 S.C.R. 762
12 (1969) 2 sec 262
13 (1979) 2 sec 455
H
' 4 (1981)1sec664
'
SAHARA INDIA (FIRM), LUCKNOW v. COMMISSIONER
445
OF INCOME TAX, CENTRAL-I & ANR. [D.K. JAIN. J)
lucidly explained the meaning and scope of the concept of A
"natural justice". Referring to several decisions, his Lordship
observed thus (SCC p.666; Headnote):
"Rules of natural justice are not embodied rules. Being
means to an end and not an end in themselves, it is not
possible to make an exhaustive catalogue of such rules.
B
But there are two fundamental maxims of natural justice
viz. (i) audi alteram partem and (ii) nemo judex in re sua.
The audi alteram partem rule has many facets, two of
them being (a) notice of the case to be met; and (b)
opportunity to explain. This rule cannot be sacrificed at C
the altar of administrative convenience or celerity. The
general principle - as distinguished from an absolute rule
of uniform application - seems to be that where a statute
does not, in terms, exclude this rule of prior hearing but
contemplates a post-decisional hearing amounting to a D
full review of the original order on merits, then such a
statute would be construed as excluding the audi alteram
partem rule at the pre-decisional stage. Conversely if the
statute conferring the power is silent with regard to the
giving of a pre-decisional hearing to the person affected
E
and the administrative decision taken by the authority
involves civil consequences of a grave nature, and no full
review or appeal on merits against that decision is
provided, courts will be extremely reluctant to construe
such a statute as excluding the duty of affording even a
F
minimal hearing, shorn of all its formal trappings and
dilatory features at the pre-decisional stage, unless, viewed
pragmatically, it would paralyse the administrative process
or frustrate the need for utmost promptitude. In short, this
rule of fair play must not be jettisoned save in very G
exceptional circumstances where compulsive necessity
so demands. The court must make every effort to salvage
this cardinal rule to the maximum extent possible, with
situational modifications. But, the core of it must, however,
remain, namely, that the person affected must have
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reasonable opportunity of being heard and the hearing
must be a genuine hearing and not an empty public
relations exercise."
13. Initially, it was the general view that the rules of natural
justice would apply only to judicial or quasi-judicial proceedings
8 and not to an administrative action. However, in State ofOrissa
Vs. Binapani Dei & Ors. 15 , the distinction between quasijudicial and administrative decisions was perceptively mitigated
and it was held that even an administrative order or decision in
matters involving civil consequences, has to be made
C consistently with the rules of natural justice. Since then the
concept of natural justice has made great strides and is
invariably read into administrative actions involving civil
consequences, unless the statute, conferring power, excludes
its application by express language.
D
14. Recently, in Canara Bank Vs. V.K. Awasthy16 , the
concept, scope, history of development and significance of
principles of natural justice have been discussed in extenso,
with reference to earlier cases on the subject. Inter alia,
observing that the principles of natural justice are those rules
E which have been laid down by the Courts as being the minimum
protection of the rights of the individual against the arbitrary
procedure that may be adopted by a judicial, quasi-judicial and
administrative authority while making an order affecting those
rights, the Court said :
F
G
"Concept of natural justice has undergone a great deal of
change in recent years. Rules of natural justice are not
rules embodied always expressly in a statute or in rules
framed thereunder. They may be implied from the nature
of the duty to be performed under a statute. What particular
rule of natural justice should be implied and what its context
should be in a given case must depend to a great extent
•5 (1967) 2 S.C.R. 625
H ·s (2005) 6 sec 321
t
SAHARA !NOIA (FIRM), LUCKNOW v. COMMISSIONER
447
OF INCOME TAX, CENTRAL-! & ANR [D.K JAIN, J.j
on the fact and circumstances of that case. the frameA
work of the statute under which the enquiry is held. The old
distinction between a judicial act and an administrative
ad has withered away. Even an administrative order which
involves civil consequences must be consistent with the
rules of natural justice. Expression 'civil consequences'
B
encompasses infraction of not merely property or personal
rights but of civil 'liberties, material deprivations, and nonpecuniary damages. In its wide umbrella comes everything
that affects a citizen in his civil life."
15. Thus, it is trite that unless a statutory provision either C
specifically or by necessary implication excludes the application
of principles of natural justice, because in that event the Court
would not .ignore the legislative mandate, the requirement of
giving reasonable opportunity of being heard before an order
is made, is generally read into the provisions of a statute,
D
particularly when the order has adverse civil consequences for
the party affected. The principle will hold good irrespective of
whether the power conferred on a statutory body or tribunal is
administrative or quasi-judicial.
16. We may, however, hasten to add that no general rule
E
of universal application can be laid down as to the applicability
of the principle audi alteram partem, in addition to the language
of the provision. Undoubtedly, there can be exceptions to the
said doctrine. Therefore, we refrain from giving an exhaustive
catalogue of the cases where the said principle should be
F
'
applied. The question whether the principle has to be applied
or not is to be considered bearing in mind the express language
and the basic scheme of the provision conferring the power;
the nature of the power conferred and the purpose for which the
power is conferred and the final effect of the exercise of that G
power. It is only upon a consideration of all these matters that
the question of application of the said principle can be properly
determined. (See: Union of India Vs. Col. J.N. Sinha & Ors. 17)
11 (1970)2 sec 458
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17. In Mohinder Singh Gill & Anr. Vs. The Chief Election
Commissioner, New Delhi & Ors. 18 , explaining as to what is
meant by expression 'civil consequence', Krishna Iyer, J.,
speaking for the majority said:
"'Civil Consequences' undoubtedly cover infraction of not
merely property or personal rights but of civil liberties,
material deprivations and non-pecuniary damages. In its
comprehensive connotation, everything that affects a
citizen in his civil life inflicts a civil consequence."
(emphasis supplied)
18. The question in regard to the requirement of opportunity
of being heard in a particular case, even in the absence of
provision for such hearing, has been considered by this Court
on a number of occasions. In Olga Tellis & Ors. Vs. Bombay
D Municipal Corporation & Ors. 19 while dealing with the
provisions of Section 314 of the Bombay Municipal Corporation
Act, 1888, which confers discretion on the Commissioner to
get any encroachment removed with or without notice, a
Constitution Bench of this Court observed as follows:
E
"It must further be presumed that, while vesting in the
Commissioner the power to act without notice, the
Legislature intended that the power should be exercised
sparingly and in cases of urgency which brook no delay.
In all other cases, no departure from the audi alteram
F
partem rule ('Hear the other side') could be presumed to
have been intended. Section 314 is so designed as to
exclude the principles of natural justice by way of exemption
and not as a general rule.