# RAJESH KUMAR AND ORS v. D.C.I.T. AND ORS - **Citation:** [2006] Supp. 8 S.C.R. 284 - **Court:** Supreme Court of India - **Decided:** 2006 - **Case number:** Civil Appeal No. 4633 of2006 - **Bench:** S.B Sinha, Dal Veer Bhandari - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/rajesh-kumar-and-ors-v-d-c-i-t-and-ors-21831 - **Pages:** 26 ## Headnote Income Tax Act, 1961--Section 142(2A)--Special audit-Proposed by Deputy Commissioner of Income Tax to Commissioner on grounds that for C same financial year, two sets of books of accounts found for same concern and numerous instances of transactions outside the books-Approval by Commissioner having regard to nature and complexity of accounts and interests of revenue, and firm of auditors appointed whose fees was to be paid by assessee-Assessee 's request for supply of a copy of reasons/or appointment of auditor refused, and their Writ Petition challenging the appointment, D dismissed-Correctness of-Held-As prejudice of assessee is apparent on face of order under Section 142(2A) and assessee suffers civil consequences thereby, principles of natural justice must be held to be implicit in it-It was more so as that order was not an appealable order, 'no internal remedy was prescribed, and judicial review was not an appropriate remedy-If assessee is put to notice, he could show that nature of accounts was not complex, and E appointment of auditor was not in interest of Revenue-However, hearing given to assessee need not be elaborate, notice issued may only contain briefly issues which assessing officer thinks necessary, and reasons assigned therefor need not be detailed ones-Also, approval by Commissioner was not to be mechanically granted, and same should be done having regard to F materials on record and explanation given by assessee-Order under Section 142(2A) found to be neither administrative nor quasi judicial, but judicial in nature and subject to order by higher courts. Adjudication-Reasons-Necessity of-Held-Where an authority is administrative or quasi-judicial and its orders are appeal/able or subject to G judicial review, it should be necessary for it to spell out reasons thereforHowever, while applying principles of natural justice, theory of useless formality and prejudice doctrine should be· borne in mind Words and phrases-'Complexity' 'having regard to '-Meaning of in context of Section 142(2A) of Income Tax Act, 1961. H 284 ... , RAJESH KUMAR v. D.C.I.T 285 Appellants are assessees under the Income Tax Act, 1961. A raid was A . conducted in their premises by respondents, Income Tax department Deputy Commissioner of Income Tax, mooted a proposal for special audit in terms of Section 142(2A) of the Act to the Commissioner of Income Tax on the grounds that for the same financial year, two sets of books of accounts have been found for the same concern in two separate computers, and that there have been numerous instances of transactions outside the books. The Commissioner of B Income Tax approved the said proposal having regard to the nature and complexity of the accounts and the interests of revenue. Thereupon, for purposes of special audit, a firm of auditors was appointed whose fees was to be paid by the appellants, and they were informed accordingly. Appellants requested for supply of a copy of the reasons for appointment of special auditor, C but that was refused. Thereupon, appellants challenged the appointment by way of Writ Petition before High Court, however, it was dismissed. Hence the present appeal. Appellants contended that principles of natural justice were inherent to Section 142(2A) of the Act, and application of mind on part of the assessing 'D officer on the factors enumerated therein was imperative. Respondents contended that (i) if the principles of natural justice are ' held to be implicit in Section 142(2A) of the Act, the extent thereof must be confined to the requirements of the provisions only and not a detailed hearing (ii) the complexity of accounts was evident in view of the fact that appellants ,E were maintaining two differ~nt sets of accounts and the parties being associated with various firms and companies (iii) Section 142(2A) contains sufficient safeguards including approval to be granted by a high ranking , officer and in the event an order passed thereunder is subjected to judicial r ## Text _Characters 0–39,878 of 60,914. This is a partial read: ask again with offset=39878 for what follows._ A B RAJESH KUMAR AND ORS. v. D.C.I.T. AND ORS. NOVEMBER l, 2006 [S.B SINHA AND DAL VEER BHANDARI, JJ.] Income Tax Act, 1961--Section 142(2A)--Special audit-Proposed by Deputy Commissioner of Income Tax to Commissioner on grounds that for C same financial year, two sets of books of accounts found for same concern and numerous instances of transactions outside the books-Approval by Commissioner having regard to nature and complexity of accounts and interests of revenue, and firm of auditors appointed whose fees was to be paid by assessee-Assessee 's request for supply of a copy of reasons/or appointment of auditor refused, and their Writ Petition challenging the appointment, D dismissed-Correctness of-Held-As prejudice of assessee is apparent on face of order under Section 142(2A) and assessee suffers civil consequences thereby, principles of natural justice must be held to be implicit in it-It was more so as that order was not an appealable order, 'no internal remedy was prescribed, and judicial review was not an appropriate remedy-If assessee is put to notice, he could show that nature of accounts was not complex, and E appointment of auditor was not in interest of Revenue-However, hearing given to assessee need not be elaborate, notice issued may only contain briefly issues which assessing officer thinks necessary, and reasons assigned therefor need not be detailed ones-Also, approval by Commissioner was not to be mechanically granted, and same should be done having regard to F materials on record and explanation given by assessee-Order under Section 142(2A) found to be neither administrative nor quasi judicial, but judicial in nature and subject to order by higher courts. Adjudication-Reasons-Necessity of-Held-Where an authority is administrative or quasi-judicial and its orders are appeal/able or subject to G judicial review, it should be necessary for it to spell out reasons thereforHowever, while applying principles of natural justice, theory of useless formality and prejudice doctrine should be· borne in mind Words and phrases-'Complexity' 'having regard to '-Meaning of in context of Section 142(2A) of Income Tax Act, 1961. H 284 ... , RAJESH KUMAR v. D.C.I.T 285 Appellants are assessees under the Income Tax Act, 1961. A raid was A . conducted in their premises by respondents, Income Tax department Deputy Commissioner of Income Tax, mooted a proposal for special audit in terms of Section 142(2A) of the Act to the Commissioner of Income Tax on the grounds that for the same financial year, two sets of books of accounts have been found for the same concern in two separate computers, and that there have been numerous instances of transactions outside the books. The Commissioner of B Income Tax approved the said proposal having regard to the nature and complexity of the accounts and the interests of revenue. Thereupon, for purposes of special audit, a firm of auditors was appointed whose fees was to be paid by the appellants, and they were informed accordingly. Appellants requested for supply of a copy of the reasons for appointment of special auditor, C but that was refused. Thereupon, appellants challenged the appointment by way of Writ Petition before High Court, however, it was dismissed. Hence the present appeal. Appellants contended that principles of natural justice were inherent to Section 142(2A) of the Act, and application of mind on part of the assessing 'D officer on the factors enumerated therein was imperative. Respondents contended that (i) if the principles of natural justice are ' held to be implicit in Section 142(2A) of the Act, the extent thereof must be confined to the requirements of the provisions only and not a detailed hearing (ii) the complexity of accounts was evident in view of the fact that appellants ,E were maintaining two differ~nt sets of accounts and the parties being associated with various firms and companies (iii) Section 142(2A) contains sufficient safeguards including approval to be granted by a high ranking , officer and in the event an order passed thereunder is subjected to judicial review, the authorities would place the entire records to satisfy the conscience p of the court that same does not suffer from non-application of mind. Allowing the appeal, the Court HELD I.I. The following are relevant factors for invoking Section 142 (2A) of the Income Tax Act, 1961 : (i) nature of accounts (ii) complexity of G accounts and (iii) interest of the revenue. The formation of opinion of the assessing officer must be on the premise that while exercising his power regard must be had to the factors enumerated therein. The use of the word 'and' shows that it is conjunctive and not disjunctive. All the aforementioned factors are conjunctively required to be read. The formation of opinion H 286 SUPREME COURT REPORTS [2006) SUPP. 8 S.C.R. A indisputably must be based on objective consideration. (294-C-E] 1.2. The expression "complexity" would mean the state or quality of being intricate or complex or that it is difficult to understand. Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature. No order can be passed on whims or caprice. B (294-E-FJ Swadeshi Cotton Mills Company Limited v. Commissioner of IncomeTax and Anr., 171 ITR 634, approved ! 1.3. The expression "having regard to" in this context assumes some si.gnificance. An opinion must be formed strictly in terms of the factors C enumerated therein. The expression indicates that in exercising the power regard must be had also to the factors enumerated therein together with all factors relevant for exercise of that power. (306-D-E) D 1.4. The factors enumerated in Section 142(2A) of the Act, thus, are not exhaustive. (307-B) India Cement Ltd and Ors. v. Union of India and Ors., [ 1990) 4 SCC 356 and Delhi Farming and Construction (P.) Ltd v. Commissioner of Income Tax, Delhi [2003) 5 SCC 36, relied on. 2.1. The prejudice of the assesses, if an order is passed under Section E 142(2A) of the Act, is apparent on the face of the statutory provision. He has to undergo the process of further accounting despite the fact that his accounts have been 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 a mis-conduct, he may become F liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949. (298-D-E) 2.2. In this case, the fee of the special auditor has been fixed at Rs. 1.5 lakhs. The assessee during the audit of the accGunt by the speciaJ auditor had to answer large number of questions. Whether he defaulted therein or G not is a matter of little or no consequence for the purpose of construction of the said provision. It may, however, be noticed that whereas according to the Revenue the assessee was not cooperating, according to the assessee, as all the books of accounts having been seized, there was nothing it could do in the matter. [298-F.-G) H 2.3. Once it is held that the assessee suffers civil consequences and RAJESH Iks of accounts and/or the entries made therein. While exercising its power, the assessing officer has to form an opinion. It is final so far he is concerned albeit subject to approval of the Chief G Commissioner or the Commissioner, as the case may be. It is only at that stage he is requi'red to consider the matter and not at a subsequent stage, viz., after the approval is given. (307-H; 308-A-C.I 4.2. In this case itself the appellants were not made known as to what led the Deputy Commissioner to form an opinion that all relevant factors H including the ones mentioned in Section 142(2A) of the Act are satisfied. If RAJESH KUMAR v. D.C.I.T 289 even one of them was not satisfied, no order could be passed. If the attention A of the Commissioner could be drawn to the fact that the underlined purpose for appointment of the special auditor is not bona fide it might not have approved the same. (307-E-F] 4.3. Assuming that two sets of accounts were being maintained the same would not mean that the nature of accounts is difficult to understand. It could B have furthermore not been shown that the power is SQught to be exercised only for an unauthorized purpose, viz., for the purpose of extension of the period oflimitation as provided for under Explanation 2 to section 158 BE of the AcL [307-G] 5.1. Direction issued under Section 142(2A) of the Act is not administrative in nature. In view of Section 136 of the Act, the entire proceedings of assessment before the Assessing Officer being judicial, it is difficult to understand how a part thereof, which indisputably is resorted to c in aid of the ultimate order of assessment, without any statutory interdict would be called to be an administrative order. When the books of accounts D have be produced and examined, the assessing officer would be proceeding to make ultimate order of assessment. (305-F-G) Peerless General Finance & Investment Co. Ltd. v. Dy. CIT and Ors., (1999) 236 ITR 671, West Bengal Co-Op. Bank Ltd. v. Commissioner Incometax and Ors., (2004) 267 ITR 345 and Muthootu Mi>zi Kuries v. Deputy E Commissioner of Income-Tax and Anr., [250 ITR 455, approved. V.S. Samuel, Assistant Commissioner of Income-Tax and Ors., (2006) 283 ITR 56, Yum Restaurants India Pvt. Ltd. v. Commissioner of Income-Tax, (2005) 278 ITR 401 (Delhi)) overruled. 5.2. If an assessee files a return the same is not presumed to be incorrect. When the assessing officer, however, intends to pass an order of assessment, he may take recourse to such steps including the one of asking F the assessee to disclose documents which are in his power or possession. He may also ask third parties to produce documents. Section 136 of the Act by G reason of a legal fiction makes an assessment proceeding, a judicial proceeding. The assessment proceeding, therefore, is a part of judicial process. When a statutory power is exercised by the assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature. It stricto sensu is also not quasi judicial. They are judicial orders and subject to the order which may passed H 290 SUPRE.ME COURT REPORTS [2006] SUPP. 8 S.C.R. A by higher courts in regard thereto. (298-B-D) A.K. Kraipak and Ors. v. Union of India and Ors., [1969) 2 SCC 262 and Chandra Bhawan Boarding and Lodging, Bangalore v. State of Mysore and Anr., AIR (1970) SC 2042 and S.L. Kapoor v. Jagmohan and Ors., AIR (1981) SC 136 and V.C Banaras Hindu University v. Shrikant, (2006) 6 B SCALE 66, referred to 6. Ordinarily unless excluded by operation of a statute, the superior courts while exercising power of judicial review shall proceed on the basis that assignment of reasons is imperative in character. When an authority be it administrative or quasi-judicial adjudicates on a dispute and ifits order is C appealable or subject to judicial review, it would be necessary to spell out the reasons therefor. While applying the principles of natural justice, however, the court must also bear in mind the theory of useless formality and the prejudice doctrine. [297-G-H; 298-A) D S.N Mukherjee v. Union of India, [1990) 4 SCC 594, Reliance Industries Ltd. v. Designated Authority and Ors., 2006 AIR SCW 4911); Raipur Development Authority and Ors. v. Mis. Chokhamal Contractors and Ors., [1989) 2 SCC 721; Rajendra Construction Co. v. Maharashtra Housing and Area Development Authority and Ors., [2005) 6 SCC 678; Bala India Limited v. CIT, (2002) 257 ITR 622; Joint Commissioner of Income Tax v. /. T. C. Ltd E and Anr., 239 ITR 921 and Muthootu Mini Kuries v. Deputy Commissioner of Income - Tax and Anr., [250 ITR 455), referred to. F Peerless General Finance and Investme1:t CO. Ltd v. Dy. CIT and Ors., (1999) 236 ITR 671 and West Bengal Co-op. Bank Ltd v. Commissioner Income - Tax and Ors., (2004) 267 ITR 345, approved. R. v. Kensington and Chelsea Rent Tribunal, exp. MacFarlane, (1974) 1WLR1486, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4633 of2006. G From the Judgment and Final Order dated ii2005 of the High Court of Delhi in W.P. (C) Nos. 921-924/2005. · K. Sampath, Lakshmi Iyengar and Rani Chhabra for the Appellant. Gopal Subramanium, A.S.G., Asheesh Jain, Arijit Prasad and B.V. H Balaramdas for the Respondents and Dhanesh Chander-Respondent No. 3 in RAJESHKUMAR v. D.C.I.T [S.B. SINHA, J.) · 291 Person. A The Judgment of the Court was delivered by S.B. SINHA, J. Leave granted. Appellant No. 1 is a proprietory concern. It is an assessee under the B Income Tax Act, 1961 (for short "the Act"). A raid was conducted in their premises on 18.12.2002. Some documents including their books of accounts were seized; a few of which were in the hard disk of the computer. They upon seizure all through remained in possession of the respondents. Assessment was under the law required to be completed within a period of two years. A notice was issued under Section l 58BC of the Act by the Deputy Commissioner C of Income Tax, Central Circle - 18 requiring the appellants to submit return of undisclosed income for the block period often years pursuant whereto returns were filed. A notice was issued under Section 142(1) of the Act. Questionnaire was issul!d on 1.11.2004. On 22.11.2004, the Deputy Commissioner decided to proceed first with the assessment pn,ceedings under Section 158BC of the D Act in the case of three individuals, viz., Smt. Sushila Rani, Smt. Sunayana Prabhakar and Smt Sunanda Prabhakar as also two companies, viz., Mis. Daily Agro Milk Food (P) Ltd. and Mis. Sushila Milk Specialities (P) Ltd. The said questionnaire was responded to. Affidavits were also filed before the Deputy Commissioner on behalf of Mis. Sushila Milk Specialities (P) Ltd. By a letter dated 23.11.2004, the Deputy Commissioner mooted a proposal for special audit in terms of Section 142(2A) of the Act to the Commissioner of Income Tax stating: "There is no link between the business conducted by the assessee E and books of account prepared for the purpose . of filing return of F' • 1· income. Two sets of books of accounts have been found for the same concern for the same financial year in two separate computers. There have been numerous instances of transactions outside the books. Few of them are listed as under: ... " Several instances therefor were given. It was furthennore stated: "There are. many more instances like these listed above. The above analysis makes it clear that the. account of the assessee involves complication and requires an expert audit to bring out the financial G results which can be relied upon at the time of assessment" H 292 SUPREME COURT REPORTS [2006) SUPP. 8 S.C.R. A The Commissioner of Income Tax approved the said proposal of the B c Deputy Commissioner of Income Tax by a letter dated 29th February, 2004 stating: "After carefully considering the matter and discussing the same with the Assessing Officer at length I am of the opinion that having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, it is necessary to carry out special audit in this case u/s 142(2A). In particular, it has been kept in mind that a sizeable amount of the purchases and sales of the assessee are outside the books of accounts. Also the trading account and financial statements of this concern would have to be prepared after thoroughly analyzing the two sets of books of accounts maintained by the assessee, as well as the seized material, which shows clear evidence of huge unaccounted transactions. Keeping in view the above you are required to have the special audit of the assessee conducted u/s l42(2A) by Mis Dhanesh Gupta & Co., CA, 1-1/16, Ansari Road, D Shanti Mohan House, Darya Ganj, New Delhi. He should be asked to furnish a report of such audit in the prescribed manner, i.e., in Form No. 6B, within 120 days of the order u/s 142(2A) to be issued by the Assessing Officer. The terms ofreference of this audit should include E F G the following:- To prepare final accounts and draw-up a statement of accounts for each assessment year falling within the Block period, i.e., 1.4.96 to 18.12.2002, after auditing the two sets of books of account maintained by the assessee and after keeping in view all the unaccounted transactions revealed by the seized material, which are outside the books of account. The fees to be paid to the Special Auditor by the assessee will be determined subsequently, as per norms." Pursuant thereto one M/s. Dhanesh Gupta & Co. was appointed as a special auditor. Only on 7.12.2004, Appellant Nos. l to 3 were informed by a Jetter in regard to appointment of an auditor for special audit of their accounts in terms of Section 142(2A) of the Act. Indisputably, prior thereto no opportunity of hearing was given to them. The Deputy Commissioner was requested by the appellants herein to supply a copy of the reasons therefor by a letter dated 11.12.2004 which was refused by a letter dated 13.12.2004. H The Chartered Accountant submitted its audited report on 17. l.2005. RAJESH KUMAR v. D.C.I.T [S.B. SINHA, J.] 293 A Writ Petition was filed by the appellants before the Delhi High Court A raising inter a/ia a question that the order impugned therein was vitiated in Jaw having been passed without giving an opportunity of hearing to them as also on the ground that the same suffers from total non-application of mind. Mala fide on the part of the Deputy Commissioner was also alleged. By the impugned judgment, the said writ petition has been dismissed. Submissions of Mr. K. Sam path, learned counsel appearing on behalf of the appellants are: (i) Section 142(2A) of the Act having regard to the enormity of power deserves a strict construction. (ii) Principles of natural justice inhere in the said provisions. (iii) Application of mind on the part of the assessing officer on three • ! relevant factors is imperative . (iv) Statutory power contained in Section 142(2A) of the Act cannot be used for collateral purposes. Submissions of Mr. Gopal Subramanium, learned Additional Solicitor General, on the other hand, are: (i) As Section 142(2A) of the Act is juxtaposed between the provisions for filing return and assessment, the said provision must be interpreted to be in aid of assessment and not as a part of the order of assessment. (ii) The proposal mooted by the assessing officer to the Deputy Commissioner would show the nature of accounts as also the complexity thereof, particularly, in view of the fact that the assessee was said to have been maintaining two different sets of accounts. The complexity of the accounts was also evident as the parties were associated with various firms and companies. (iii) Section 142(2A) contains sufficient safeguards including the approval to be granted by a high ranking officer and in the event an order passed thereunder is subjected to judicial review the authorities would place the entire records to satisfy the conscience of the court that the same does not suffer from non-application of mind. (iv) If the principles of natural justice are held to be implicit in the B c D E F G H 294 SUPREME COURT REPORTS'(2(}06] SUPP. 8 S.C.R. A said provision, the extent thereof must be confined to the requirements of the provisions only and not a detailed hearing. (v) Giving a~ opportunity of hearing sometimes would lead to assess1J1ent of reasons as the assessing officer is not required to go into the correctness or otherwise of the accounts at that B stage. Interpretation a:nd application of Section 142(2A) of the Act, thus, falls for our consideration. We may at the outset notice that the following are the relevant factors C for invoking Section 142(2A) of the Act: D (i) The nature of accounts (ii) Complexity of accounts and (iii) Interest of the revenue. The formation of opinion of the assessing officer must be on the premise that while exercising his power regard must be had to the factors enumerated therein. The use of the word 'and' shows that it is conjunctive and not disjunctive. All the aforementioned factors are conjunctively required to be read. The formation of opinion indisputably must be based on objective E consideration. F G H The expression ;•complexity" would mean the state or quality of being intricate or complex or that it is difficult to understand. Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature. No order can be passed on whims or caprice. It is also not in dispute that whereas the Calcutta High Court and the Kerala High Court have taken a view that before issuance of a direction under Section I 42(2A) of the Act, it is necessary to comply with the principles of natural justice, the Allahabad High Court, the Bombay High Court and the Delhi High Court have thought it otherwise. When a raid is conducted on the premises of an assessee, block assessment is pennissible, procedures wherefor have been laid down under Section I 58BC of the Act. Section I 58BE(b) of the Act contemplates that the order thereunder is .. RAJESHKUMAR v. D.C.l.T [S.B. SINHA, J.) 295 ,-· necessary to be passed within two years from the end of the month in whi~h A the last of the authorizations for search under Section 132 or for requisition under Section 132A, as the case may be, was executed in cases where a search is initiated or books of accounts or other documents or any assets are requisitioned. Statute of limitation is a statute of repose. Indisputably the same, B subject to the exceptions contained in the explanation appended to Section 158BE, is imperative. Having regard to the aforementioned, we may have to construe Sub~ section (2A) of Section 142 of the Act. Before, however, we do so, it may be noticed that the said provision is meant to be applied for passing an order C of assessment. An order of assessment is to precede filing of a return in, terms of Section 139 ofthe Act. Various other steps in that behalf are also, contemplated under Sections 139 A, 140 and 141 A of the Act. An inquiry may . be made prior to passing of an order of assessment by the assessing officer under Section 142 of the Act. Section 136 raises a legal fiction that proceeding' D under the Act shall be a judicial proceeding and every income tax authority shall be deemed to be a civil court for the purposes of Section 195 of the · Code of Criminal Procedure. The power of inquiry conferred upon th~ assessing authority is of wide amplitude. Sub-sections (2A), (28), (2C), (2D) and (3) of Section 142 of the Act E read as under: "(2A) If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is. of the opinion that it is necessary so to do, he may, with the previous approval of 'F the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, nominated by the Chief Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such p accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require. (28) The provisions of sub-section (2 A) 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. B 296 SUPREME COURT REPORTS (2006] SUPP. 8 S.C.R. A (2C) No. Every report under sub-section (2 A) 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 application made in this behalf by the assessee and for any good and sufficient reason, B 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, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is received. by the assessee. C (2D) 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 D in Chapter XVII-D for the recovery of arrears of tax. (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 (2 A) and proposed to be utilised for the E purposes of the assessment." F G H Principles of natural justice are based on two basic pillars: (i) Nobody shall be condemned unheard (audi alteram partem) (ii) Nobody shall be judge of his own cause (nemo debet esse judex in propria sua causa) Duty to assign reasons is, however, a judge made law. There is dispute as to whether it comprises of a third pillar of natural justice. [See SN. Mukherjee v. Union of India, [1990] 4 SCC 594 and Reliance Industries Ltd. v. Designated Authority and Ors, (2006) AIR SCW 4911] However, the other view is that the question as to whether reasons are required to be assigned is a matter of legislative policy which should be left to the decision of Parliament. In Raipur Development Authority and Ors. v. Mis. Chokhama/ Contractors and Ors., [1989] 2 SCC 721, a Constitution Bench opined: ' _.,. RAJESH KUMAR v. D.C.I.T [S.B. SINHA, J.] 297 "It is no doubt true that in the decisions pertaining to Administrative A Law, this Court in some cases has observed that the giving o~ reasons in an administrative decision is a rule of natural justice by an extension of the prevailing rule. It would be in the interest of the world of commerce that the said rule is confined to the area of Administrative Law. We do appreciate the contention, urged on behalf B of the parties who contend that it should be made obligatory on the, part of the arbitrator to give reasons for the award, that there is no. justification to leave the small area covered by the law of arbitration out of the general rule that the decision of every judicial and quasijudicial body should be supported by reasons. But at the same time it has to be borne in mind that what applies generally to settlement C of disputes by authorities governed by public law need not be extended to all cases arising under private law such as those arising under the law of arbitration which is intended for settlement of private disputes. As stated elsewhere in the course of this judgment if the parties to the dispute feel that reasons should be given by the arbitrators for the awards it is within their power to insist upon such reasons being given at the time when they enter into arbitration agreement or sign the deed of submission. It is significant that although nearly a decade ago the Indian Law Commission submitted its report on the law of arbitration specifically mentioning therein that there was no necessity to amend the law of arbitration requiring the arbitrators to give reasons, Parliament has not chosen to take any step in the direction of the amendment of the law of arbitration. Even after the passing of the English Arbitration Act, 1979 unless a court . requires the arbitrator to give reasons for the award [vi de subsections (5) and (6) of Section 1 of the English Arbitration Act, 1979], an award is not liable to be set aside merely on the ground that no reasons have been given in support of it." [See also Rajendra Construction Co. v. Maharashtra Housing & Area Development Authority and Ors., [2005] 6 SCC 678] D E F We, however, need not dilate on the said question being not very G necessary for the purpose of this case. But it is beyond any cavil that ordinarily unless excluded by operation of a statute, the superior courts while exercising power of judicial review shall proceed on the basis that assignment of reasons is imperative in character. When an authority be it administrative or quasi-judicial adjudicates on a dispute and if its order is appealable or H 298 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R. A subject to judicial review, it would be necessary to spell out the reasons therefor. While, however, applying the principles of natural justice, however, the court must also bear in mind the theory of useless formality and the prejudice doctrine. If an assessee files a return the same is .not presumed to be incorrect. B When the assessing officer, however, intends to pass an order of assessment, he may take recourse to such steps including the one of asking the assessee to disclose documents which are in his power or possession. He may also ask third parties to produce documents. Section 136 of the Act by reason of a legal fiction makes an assessment proceeding, a judicial proce~ding. The C assessment proceeding, therefore, is a part of judicial process. When a statutory power is exercised by the assessing authority in exercise of its judicial function which is detrimental to the assessee, the same is not and cannot be administrative in nature. It stricto sensu is also not quasi judicial. By way of example, although it may not be very apposite, we may state that orders passed under Order XII of the Code of Civil Procedure by a court D cannot be held to be administrative in nature. They are judicial orders and subject to the order which may be passed by higher courts in regard thereto. Indisputably, the prejudice of the assessee, if an order is passed under Section l42(2A) of the Act, is apparent on the face of the statutory provision. He has to undergo the process of further accounting despite the fact that his E accounts have been 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 ofa misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949. F In this case, the fee of the special auditor has been fixed at Rs. l.5 lakhs. The assessee during the audit of the account by the special auditor had to answer large number of questions. Whether he defaulted therein or not is a matter of little or no consequence for the purpose of construction of the said provision. We may, however, notice that whereas according to the Revenue the assessee was not cooperating, according to the assessee, as all the books G of accounts having been seized, there was nothing it could do in the matter. Effect of civil consequences arising out of determination of lis under a statute is stated in State of Orissμ v. Dr. (Miss) Binapani Dei and Ors., AIR (1967) SC 1269: [1967] 2 SCR 625]. It is an authority for the proposition when H by reason of an action on the part of a statutory authority, civil or evil RAJESH KUMAR v. D.C.I. T [S.B. SINHA, J.] 299 consequences ensue, principles of natural justice are required to be followed. A In such an event, although no express provision is laid down in this behalf compliance of principles of natural justice would be implicit. In case of denial . of principles of natural justice in a statute, the same may also be held ultra vires Article 14 of the Constitution. K.J. Shetty, J. in Swadeshi Cotton Mills Company Limited v .. B Commissioner of Income-Tax and Anr., 171 ITR 634 succinctly laid down the import of the said provision in the following terms: "The exercise of power to direct special audit depends upon the satisfaction of the Income-tax Officer with the added approval of the C Commissioner. But he must be satisfied that the accounts of the assessee are of a complex nature, and, in the interests of the Revenue, the accounts should be audited by a special auditor. The special. auditor is also an auditor like the company's auditor, but he has to be nominated by the Commissioner and not by the company. The accounts are again to be audited at the cost of the company. D This is the substance of the statutory provisions. The power thereunder cannot, in our opinion, be lightly exercised. The satisfaction of the authorities should not· be subjective satisfaction. It should be based on objective assessment regard being had to the nature of the accounts. The nature of the accounts must indeed be of a complex E nature. That is the primary requirement for directing a special audit. But the word " complexity " used in Sub-section (2A) 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 are difficult to understand should not be regarded F 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 carefully. Therefore, special audit 0 should not be directed on a cursory look at the accounts. There should be an honest attempt to understand the accounts of the assessee." We may, however, notice that the learned Judge referred to the guidelines of the Central Board of Direct Taxes and having regard to the facts and H 300 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R. A circumstances of the case opined that the exercise of the power was not arbitrary. The applicability of the principles of natural justice, on the other hand, has been highlighted in Peerless General Finance & Investment Co. Ltd. (supra), West Bengal Co-Op. Bank Ltd (supra) Bata India Limited v. CIT, B (2002) 257 ITR 622,Joint Commissioner of Income Tax v. I.T.C. Ltd andAnr., [239 ITR 921] andMuthootu Mini Kuries v. Deputy Commissioner of IncomeTax and Anr., 250 ITR 455. In Swadeshi Cotton Mills v. Union of India, [1981] 1 SCC 664, Chinnappa C Reddy, J., in his dissenting judgment summarized the legal position in the following terms: D E F "The principles of natural justice have taken deep root in the judicial coRscience of our people, nurtured by Binapani, Kraipak, Mohinder Singh Gill, Maneka Gandhi etc. etc. They are now considered so fundamental as to be 'implicit in the concept of ordered liberty' and, therefore, implicit in every decision making function, call it judicial, quasi-judicial or administrative. Where authority functions under a statute and the statute provides for the observance of the prir.ciples ofnatural justice in a particular manner, natural justice wil! have to be observed in that manner and in no other. No wider right than that provided by statute can be claimed nor can the right be narrowed. Where the statute is silent about the observance of the principles of nattn:al justice, such statutory silence is taken to imply compliance ;with the principles of natural justice. The implication of natural justice being presumptive it may be excluded by express words of statute or by necessary intendment.