The Supreme Court has cast an onerous duty on Assessing Officers to spell out specific reasons when they adjudicate on any administrative or quasi-judicial issue under the Income-Tax Act, 1961. This point was decided while construing the provisions of Section 142(2-A) which permits the Assessing Officer to direct a tax audit.

The apex court was resolving a conflict arising from different judicial interpretations given by several High Courts on the powers of Assessing Officers to direct a tax audit which require that the following factors should be taken into account: (i) the nature of the accounts, (ii) the complexity of accounts, and (iii) the interests of Revenue.

Conjunctive not disjunctive

The formation of the 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 "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 consideration.

Whereas the Calcutta and the Kerala High Courts have taken a view that before issuance of a direction under Section 142(2-A), it is necessary to comply with the principles of natural justice, the Allahabad, the Bombay and the Delhi High Courts have thought otherwise.

Inquiry before assessment

While deciding this controversy, the apex court observed that Section 142(2-A) is relevant in the context of an order of assessment. An order of assessment follows the filing of a return in terms of Section 139. Various other steps in that behalf are also contemplated under Sections 139-A, 140 and 141-A. An inquiry may be made before passing an order of assessment by the Assessing Officer under Section 142. Section 136 raises a legal fiction that a proceeding under the Act shall be judicial 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 the assessing authority is of wide amplitude.

According to the apex court, the principles of natural justice are based on two basic pillars: (i) nobody shall be condemned unheard (audi alteram partem), and (ii) nobody shall be judge of his own cause (nemo debet esse judex in propria sua causa).

`Useless formality'

In Rajesh Kumar v. CIT (287 I.T.R. 91), the Supreme Court held in the context of Section 142(2-A) that when an authority, be it administrative or quasi-judicial, passes an order that is appealable or subject to judicial review, it would be necessary to spell out the reasons therefor. While applying the principles for 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 presumed to be correct. When the Assessing Officer, however, intends to pass an order of assessment, he may take recourse to such steps including asking the assessee to disclose documents in his possession. He may also ask third parties to produce documents.

Section 136 of the I-T Act, by reason of a legal fiction, makes an assessment proceeding a judicial proceeding. The assessment proceeding, therefore, is part of the judicial process. When a statutory power is used 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.

Where a tax audit is directed, the assessee has to undergo the process of further accounting even if his accounts have been audited by a qualified auditor in terms of Section 44-AB. An auditor is a professional. He has to function independently. He is not an employee of the assessee. In case of misconduct, he may become liable to be proceeded against by a statutory authority under the Chartered Accountants Act, 1949.

The Supreme Court held in the Rajesh Kumar case that the factors enumerated in Section 142(2-A) of the Act, are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed by it would be prejudicial to him, principles of natural justice must be held to be implicit.

Principles of natural justice

An order directing tax audit is also not to be mechanically granted. The same should be done having regard to the materials on record. The explanation given by the assessee, if any, would be a relevant factor. The approving authority is required to go through it. He may arrive at a different opinion. He may correct the Assessing Officer if he is found to have adopted a wrong approach or posed a wrong question so as to save the Revenue from suffering any loss.

Whereas the order of assessment can be the subject matter of an appeal, a direction issued under Section 142(2-A) is not. No internal remedy is prescribed. Judicial review cannot be said to be an appropriate remedy. The appellate power under the Act does not contain any provision such as Section 105 of the Code of Civil Procedure. The power of judicial review is limited; it is discretionary. The court may not interfere with a statutory power.

The Supreme Court concluded that when an authority, be it administrative or quasi-judicial, adjudicates on a dispute and if its order is appealable or subject to judicial review, it would be necessary to spell out the reasons therefor. While, however, applying the principles of natural justice the court must also bear in mind the theory of useless formality and the prejudice doctrine.

The aforesaid decision will have a material bearing on all orders passed by Assessing Officers and other authorities under the Income-Tax Law. Every single order may be challenged on the ground that the principles of natural justice have not been adhered to.

The procedural law will, therefore, have to be overhauled by Parliament if certain principles of natural justice are to be applied and the others are to be specifically excluded by a mandate of law.

H. P. Ranina
(The author, a Mumbai-based advocate specialising in tax laws)