Court dismisses university’s challenge to special audit order - hearing requirement satisfied

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Case Name

Rajiv Gandhi Proudyogiki Vishwa Vidyalaya vs Union of India and Others (High Court of Madhya Pradesh)

W.P. No. 22483 of 2021

Date: 11th November 2021

Key Takeaways

• Hearing Requirement Satisfied: Courts will uphold special audit orders under Section 142(2A) when reasonable opportunity of hearing is provided, even if the final order doesn’t contain detailed reasoning
• Procedural Compliance: The proviso to Section 142(2A) requiring “reasonable opportunity of being heard” was properly followed
• Judicial Restraint: Courts won’t interfere with tax administration decisions when statutory procedures are followed and objections are considered

Issue

Was the Income Tax Department’s order directing special audit under Section 142(2A) of the Income Tax Act invalid due to lack of proper hearing and absence of a reasoned order?

Facts

1. Initial Communication: On January 11, 2021, the tax department sent a communication about initiating special audit proceedings
2. Show Cause Notice: On April 7, 2021, a formal show cause notice was issued under Section 142(2A)
3. University’s Response: The university filed detailed objections on April 13, 2021 through the e-portal
4. Ex-parte Order: On April 29, 2021, an ex-parte order was passed approving the special audit without considering the objections
5. Final Approval: On August 24, 2021, the university was informed that the special audit proposal was approved, and a Chartered Accountant was assigned

The university felt this process was unfair and challenged it in court.

Arguments

University’s Arguments (Petitioner):

• They weren’t given a reasonable opportunity to be heard as required by Section 142(2A)
• The order lacked proper reasoning - it wasn’t a “speaking order” explaining why the special audit was necessary
• The department didn’t consider their detailed objections before passing the order

Tax Department’s Arguments (Respondents):

• Adequate opportunity was provided through multiple communications and notices
• All objections raised by the university were properly considered
• The legal requirements of Section 142(2A) were fully complied with

Key Legal Precedents

The court relied heavily on two Supreme Court cases:

1. Rajesh Kumar vs. Deputy Commissioner of Income-tax reported in 287 ITR Page 91 = [2006] 157 Taxman 168 (SC)

• This case established that hearing under Section 142(2A) need not be elaborate but must be provided
• The court noted: “The hearing given, however, need not be elaborate”
• This judgment led to the addition of the proviso to Section 142(2A) by the Finance Act, 2007, requiring “reasonable opportunity of being heard”

2. Sahara India (Firm), Lucknow vs. Commissioner of Income Tax, Central-I and another reported in (2008) 14 SCC 151

The court applied these precedents to conclude that once adequate hearing is provided, the statutory requirement is satisfied.

Judgement

Legal Reasoning:

1. Hearing Requirement Met: The court found that substantial opportunity was given through multiple communications, and the university had responded with objections
2. Consideration of Objections: The material on record showed that objections were considered, and “application of mind” occurred before passing the order
3. No Detailed Reasoning Required: While the university wanted a detailed “speaking order,” the court held that once proper hearing is provided, detailed reasoning in the final order isn’t mandatory
4. Statutory Compliance: The proviso to Section 142(2A) was properly followed

Final Order: “Consequently, we do not find any ground to interfere. Hence, the writ petition is dismissed”.

The judgment was delivered by Chief Justice Ravi Malimath and Judge Vijay Kumar Shukla.

FAQs

Q1: What is Section 142(2A) of the Income Tax Act?

A: It’s a provision that allows tax officers to direct taxpayers to get their accounts audited by a chartered accountant when they suspect irregularities. The key requirement is that reasonable opportunity of hearing must be given before such direction.

Q2: Why did the university lose despite claiming they weren’t heard?

A: The court found that they were actually given multiple opportunities - through initial communication, show cause notice, and they even filed detailed objections. The court concluded this satisfied the “reasonable opportunity” requirement.

Q3: Does the tax department need to give detailed reasons when ordering special audit?

A: Based on this judgment, no. Once proper hearing is provided and objections are considered, a detailed “speaking order” with elaborate reasoning isn’t required.

Q4: What’s the significance of the Rajesh Kumar case mentioned?

A: It’s the landmark Supreme Court case that led to the amendment requiring “reasonable opportunity of being heard” in Section 142(2A). This case established the procedural safeguards that must be followed.

Q5: Can similar challenges succeed in future?

A: This judgment suggests that as long as tax departments follow proper procedure - giving notice, allowing objections, and considering them - courts are unlikely to interfere, even if the final order isn’t elaborately reasoned.

Q6: What should taxpayers do when facing special audit directions?

A: Based on this case, they should actively participate in the hearing process, file detailed objections, and ensure they use all opportunities provided, as courts will examine whether proper procedure was followed.

During the pendency of the assessment proceedings a show cause was issued under Section 142(2A) of the Income Tax Act (for short “the Act”) dated 07.04.2021 by respondent No.3 for the purposes of initiation of special audit for the Assessment Year 2018-2019. The petitioner filed its detailed objections on 13.04.2021 through e-portal. However, the respondent No.3, without even considering the objections, straightaway made referral for special audit/approval of respondent No.4. Thereafter on 29.04.2021 an

ex-parte order was passed approving such special audit under Section

142(2A) of the Act. The petitioner being prejudiced by such an order, has

filed the instant petition.

2. Learned counsel for the petitioner contends that the provisions of

Section 142(2A) of the Act provides a reasonable opportunity of being heard

be given to the petitioner before an order is to be passed. It is contended that whenever an order of special audit is to be made by the respondents, the same should be through a speaking order which is lacking in the instant case. That there is no such speaking order passed by the respondents with regard to compliance of the provisions of the law. Hence, the action of the respondents is liable to be set aside. In support of his case, he relies on the judgments of Hon’ble Supreme Court in the case of Rajesh Kumar vs. Deputy Commissioner of Income-tax reported in 287 ITR Page 91 = [2006] 157

Taxman 168 (SC). He further places reliance on the judgment of the Hon’ble

Supreme Court in the case of Sahara India (Firm), Lucknow vs. Commissioner of Income Tax, Central-I and another reported in (2008) 14 SCC 151. Hence, he contends that the order is vitiated and is liable to be set aside.

3. The same is disputed by the learned counsel appearing for the

respondents contending that an opportunity of hearing has been given to the

petitioner and that the provisions of Section 142(2A) of the Act have been

complied with. Not only adequate opportunity has been given, but all the

objections raised by the petitioner have been considered. Hence, he pleads

that the petition be dismissed.

4. Heard learned counsels.

5. The Hon’ble Supreme Court in Rajesh Kumar’s case came to the

conclusion that even though hearing need not be elaborate, the same has to be given to the petitioner. It held in para 53 as follows:-

“53. The hearing given, however, need not be elaborate.

The 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 justice are not required to be

complied with. Only because certain consequences would

ensue if the principles of natural 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, the Parliament could have said so expressly. The

hearing given is only in terms of section 142(3) which is

limited only to the findings of the special auditor. The order

of assessment would be based upon the findings of the

special auditor subject of course to its acceptance by the

Assessing Officer. Even at that stage the assessee cannot put

forward a case that power under section 142(2A) of the Act

had wrongly been exercised and he has unnecessarily been

saddled with a heavy expenditure. An appeal against the

order of assessment, as noticed hereinbefore, would not serve

any real purpose as the appellate authority would not go into

such a question since the direction issued under section

142(2A) of the Act is not an appellate order.”

As a consequence whereof, the proviso to Section 142(2A) of the Act

was added by the Finance Act, 2007 (22 of 2007) w.e.f. 01.06.2007, which

provided as follows:-

“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

being heard.”

6. To this, learned counsel for the respondents places various material to

indicate that adequate opportunity was given to the petitioner. Firstly; is the communication vide Annexure P-7 dated 11.01.2021 with regard to the

initiation of special audit proceedings under Section 142(2A) of the Act;

thereafter, a show cause notice under Section 142(2A) of the Act dated

07.04.2021 was issued to the petitioner. He has accordingly replied to the

same. Various material were produced by the petitioner in support of his case.

Thereafter, in terms of the communication vide Annexure P-13 dated

24.08.2021, the petitioner was intimated that the proposal for special audit

under Section 142(2A) of the Act was approved by the concerned PCIT(AU).

Subsequently, Shri A.K. Sharma, Chartered Accountant was assigned to

conduct special audit under Section 142(2A) of the Act. Therefore, it is

contended that since adequate opportunity of hearing was given to the

petitioner and he having availed the same, the necessary order has been

passed. Therefore, it cannot be said that no opportunity was given.

7. We do not find any reason to interfere in this petition. In terms of the

proviso to Section 142(2A) of the Act, opportunity of hearing was afforded to the petitioner. There is no grievance with regard to the same. However, what is being contended, is that when an order is passed under Section 142(2A) of the Act, necessary reasons have to follow which will enable the petitioner to know as to the circumstances on which the order was passed. On considering the same, we do not deem it appropriate to accept the contention. What was provided by the judgment of the Hon’ble Supreme Court in Rajesh Kumar’s case, culminated into the proviso being added that an adequate opportunity be granted. Admittedly, even according to the petitioner, adequate opportunity has been given. That only presupposes, that the objections as raised by the petitioner with regard to the notice issued, have been duly considered by the respondents. It is only after such application of mind, the order has been passed. The material on record would clearly indicate that substantial opportunity has been given as well as the reply to objections filed by the petitioner. Therefore, to contend that none of them has been considered by the respondents, in our considered view, may run opposite to the record produced before us. The material clearly indicates that the provisions of law have been complied with. The contention of the petitioner regarding non-application of mind or non-granting of any reasons for passing order, therefore, would not be sustainable.

8. Consequently, we do not find any ground to interfere. Hence, the writ

petition is dismissed.

(RAVI MALIMATH) (VIJAY KUMAR SHUKLA)

CHIEF JUSTICE JUDGE