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CASE NO.: Appeal (civil)  2783 of 2008

PETITIONER: M/S SAHARA INDIA (FIRM),LUCKNOW

RESPONDENT: COMMISSIONER OF INCOME TAX,CENTRAL-I & ANR

DATE OF JUDGMENT: 11/04/2008

BENCH: B.N. AGRAWAL & P.P. NAOLEKAR & D.K. JAIN

JUDGMENT: J U D G M E N T REPORTABLE

CIVIL APPEAL NO.  2783  OF 2008 Arising out of S.L.P. (C) No.20209 of 2006 WITH CIVIL APPEAL NO. 2784 OF 2008 [Arising out of S.L.P.(C) NO. 20212 OF 2006]

D.K. JAIN, J.:

Leave granted. 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: "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 for the petitioner, before any  direction can be issued under 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  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  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 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

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of law.  Therefore, we refer the matter to a  larger Bench.  The records be placed  before Hon’ble the Chief Justice of India  for 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 of the decision of this Court in Rajesh  Kumar & Ors. Vs. Deputy Commissioner of Income-Tax &  Ors. , 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.  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. 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 reservations.  At the outset, we  may also note that in Rajesh Kumar (supra), while observing  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 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  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 could have said  so expressly."

5.      Sub-sections (2A), (2B), (2C), (2D) and 3 of Section 142 of  the Act run as follows: "(2A) \026 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 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 accountant and

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setting forth such particulars as may be  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 being heard.] (2B) \026 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. (2C) \026 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 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, exceed one  hundred and eighty days from the date  on which the direction under sub-section  (2A) is received by the assessee.] (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 in  Chapter XVII-D for the recovery of arrears  of tax.         *[Provided that where any direction  for audit under sub-section (2A) is issued  by the Assessing Officer on or after the 1st  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 that

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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 and complexity of the accounts" and  "the interests of the revenue" are the prerequisites for  exercise of power under Section 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 complex, in order to protect the interests of the revenue,  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.I.T. , 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 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 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 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 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 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  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. 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?   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  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   Maganlal Chhaganlal (P) Ltd. Vs. Municipal  Corporation of Greater Bombay & Ors. ; Kattite Valappil  Pathumma & Ors. Vs. Taluk Land Board & Ors. ; Mishri  Lal Vs. Dhirendra Nath & Ors. .  It was contended that

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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 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 was  contended that an order requiring special audit does affect a  person because of the pecuniary prejudice as also on account  of severe inconvenience caused in his business by virtue of  the 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 Ramlal Motilal & Chhotelal Vs.  Rewa  Coalfields Ltd.  and M.K. Prasad Vs. P. Arumugam .  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. 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 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 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 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 prospective in nature as the interests of the revenue will  be seriously prejudiced by a retrospective interpretation. It is  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. , P.V. George & Ors. Vs. State  of Kerala & Ors. , M.A. Murthy Vs. State of Karnataka &  Ors. , Ram Lal, Moti Lal & Chhotelal Vs. Rewa  Coalfields Ltd. . 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 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  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

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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. , the 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. M/s  Madnani Engineering Works Ltd., Calcutta ).  12.     In Swadeshi Cotton Mills Vs. Union of India , R.S.  Sarkaria, J., speaking for the majority in a three-Judge  Bench, lucidly explained the meaning and scope of the  concept of "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.  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 the altar of administrative  convenience or celerity.  The general  principle \026 as distinguished from an  absolute rule of uniform application \026  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 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  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  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 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  reasonable opportunity of being heard  and the hearing must be a genuine  hearing and not an empty public

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relations exercise."    13.     Initially, it was the general view that the rules of natural  justice would apply only to judicial or quasi-judicial  proceedings and not to an administrative action.  However, in  State of Orissa Vs. Binapani Dei & Ors. , the distinction  between quasi-judicial 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 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. 14.     Recently, in Canara Bank Vs. V.K. Awasthy , 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  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 :   "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 on the fact and  circumstances of that case, the frame- work of the statute under which the  enquiry is held. The old distinction  between a judicial act and an  administrative act has withered away.  Even an administrative order which  involves civil consequences must be  consistent with the rules of natural  justice. Expression ’civil consequences’  encompasses infraction of not merely  property or personal rights but of civil  ’liberties, material deprivations, and non- pecuniary 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  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, 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 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

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exceptions to the said doctrine.  Therefore, we refrain from  giving an exhaustive catalogue of the cases where the said  principle should be 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 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.     In Mohinder Singh Gill & Anr. Vs. The Chief Election  Commissioner, New Delhi & Ors. , 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 Municipal Corporation & Ors.  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: "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 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. There are situations which demand  the exclusion of the rules of natural  justice by reason of diverse factors like  time, place the apprehended danger and  so on. The ordinary rule which regulates  all procedure is that persons who are  likely to be affected by the proposed  action must be afforded an opportunity of  being heard as to why that action should  not be taken. The hearing may be given  individually or collectively, depending  upon the facts of each situation. A  departure from this fundamental rule of  natural justice may be presumed to have  been intended by the Legislature only in  circumstances which warrant it. Such  circumstances must be shown to exist,  when so required, the burden being upon  those who affirm their existence."

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19.     Again in C.B. Gautam Vs. Union of India & Ors.  a  question arose whether in the absence of a provision for  giving the concerned parties an opportunity of being heard  before an order is passed under the provisions of Section 269  \026UD of the Act, for purchase by the Central Government of an  immovable property agreed to be sold on an agreement to  sell, an opportunity of being heard before such an order could  be passed should be given or not.  Relying on the decision of  this Court in Union of India Vs. Col. J.N. Sinha  and Olga  Tellis (supra) it was held that: "Although Chapter XX-C does not contain  any express provision for the affected  parties being given an opportunity to be  heard before an order for purchase is  made under Section 269-UD, not to read  the requirement of such an opportunity  would be to give too literal and strict an  interpretation to the provisions of  Chapter XX-C and in the words of Judge  Learned Hand of the United States of  America "to make a fortress out of the  dictionary." Again, there is no express  provision in Chapter XX-C barring the  giving of a show cause notice or  reasonable opportunity to show cause  nor is there anything in the language of  Chapter XX-C which could lead to such  an implication. The observance of  principles of natural justice is the  pragmatic requirement of fair play in  action. In our view, therefore, the  requirement of an opportunity to show  cause being given before an order for  purchase by the Central Government is  made by an appropriate authority under  Section 269-UD must be read into the  provisions of Chapter XX-C. There is  nothing in the language of Section 269- UD or any other provision in the said  Chapter which would negate such an  opportunity being given. Moreover, if  such a requirement were not read into  the provisions of the said Chapter, they  would be seriously open to challenge on  the ground of violations of the provisions  of Article 14 on the ground of non- compliance with principles of natural  justice. The provision that when an order  for purchase is made under Section 269- UD-reasons must be recorded in writing  is no substitute for a provision requiring  a reasonable opportunity of being heard  before such an order is made."

20.     Dealing with the question whether the requirement of  affording an opportunity of hearing is to be read into Section  142 (2A), in Rajesh Kumar (supra) it has been held that  prejudice to the assessee is apparent on the face of the said  statutory provision.  It has been 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 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

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assessee.  In case of mis-conduct, he may become liable 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 of questions.  Referring to  the decision of this Court in Binapani Dei (supra) wherein it  was observed that when by reason of an action on the part of  a statutory authority, civil or evil consequences ensue, the  principles of natural justice are required to be followed and in  such an event, although no express provision is laid down in  this behalf, compliance with the principles of natural justice  would be implicit, the learned Judges held that by virtue of  an order under 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.  The Court has further observed  that if the 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 same would  not be in the interest of the revenue. 21.     In the light of the aforenoted legal position, we are in  respectful agreement with the decision of this Court in  Rajesh Kumar (supra) that an order under Section 142 (2A)  does entail civil consequences.  At this juncture, it would be  relevant to take note of the insertion of proviso to Section 142  (2D) with effect from 1st June, 2007.  The proviso provides  that the expenses of the auditor appointed in terms of the  said provision shall, henceforth, be paid by the Central  Government.  In view of the said amendment, it can be  argued that the main plank of the judgment in Rajesh  Kumar (supra) to the effect that direction under Section 142  (2A) entails civil consequences because the assessee has to  pay substantial fee to the special auditor is knocked off.  True  it is that the payment of auditor’s fee is a major civil  consequence, but it cannot be said to be the sole civil or evil  consequence flowing from directions under Section 142 (2A).   We are convinced that special audit has an altogether  different connotation and implications from the audit under  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 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 audit is more or less in the nature of an  investigation and in some cases may even turn out to be  stigmatic.  We are, therefore, of the view that even after the  obligation to pay auditor’s fees and incidental expenses has  been taken over by the Central Government, civil  consequences would still ensue on the passing of an order for  special audit. 22.     We shall now deal with the submission of learned  counsel appearing for the revenue that the order of special  audit is only a step towards assessment and being in the  nature of an inquiry before assessment, is purely an  administrative act giving rise to no civil consequence and,  therefore, at that stage a pre-decisional hearing is not  required.  In Rajesh Kumar (supra) it has been held that in  view of Section 136 of the Act, proceedings before an  Assessing Officer are deemed to be judicial proceedings.   Section 136 of the Act, stipulates that any proceeding before

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an Income Tax Authority shall be deemed to be judicial  proceedings within the meaning of Sections 193 and 228 of  Indian Penal Code, 1860 and also for the purpose of Section  196 of I.P.C. and every Income Tax Authority is a court for  the purpose of Section 195 of Code of Criminal Procedure,  1973.  Though having regard to the language of the provision,  we have some reservations on the said view expressed in  Rajesh Kumar’s case (supra), but having held that when  civil consequences ensue, no distinction between quasi  judicial and administrative order survives, we deem it  unnecessary to dilate on the scope of Section 136 of the Act.   It is the civil consequence which obliterates the 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, it hardly needs reiteration that  even a purely administrative order which entails civil  consequences, must be consistent with the rules of natural  justice.  (Also see: Mrs. Maneka Gandhi Vs. Union of India  & Anr.  and S.L. Kapoor Vs. Jagmohan & Ors. .   As  already noted above, 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 citizen in his  civil life comes under its wide umbrella.  Accordingly, we  reject the argument and hold that since an order under  Section 142 (2A) does entail civil consequences, the rule audi  alteram partem is required to be observed. 23.     We are also unable to persuade ourselves to agree with  the proposition canvassed by learned counsel for the revenue  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 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 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 original order on merit, which, as  explained above, is not the case here. 24.     The upshot of the entire discussion is that the exercise of  power under Section 142 (2A) of the Act leads to serious civil  consequences and, therefore, even in the absence of express  provision for affording an opportunity of pre-decisional  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, the requirement of observance of  principles of natural justice is to be read into the said  provision.  Accordingly, we reiterate the view expressed in  Rajesh Kumar’s case (supra). 25.     It is pertinent to note that by the Finance Act, 2007, a  proviso to Section (2A) has been inserted with effect from 1st  June, 2007, which provides that no direction for special audit  shall be issued without affording a reasonable opportunity of  hearing to the assessee.  26.     In the light of the afore-noted legal position, we may now  advert to the facts of both the cases to consider the validity of  orders dated 14th March, 2006, requiring the appellants to  have their accounts for the assessment year 2003-04 audited  by a chartered accountant, named in the order. 27.     Indubitably, before passing the said orders, no show  cause notice was given to the appellants.  On the contrary, it

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appears from the record that on 9th March, 2006, the  appellants were required to furnish by 20th March, 2006  details/explanation in respect of queries raised vide order  sheet entry dated 16th February, 2006 but in the meanwhile,  the impugned orders were passed on 14th March, 2006 itself.   It is manifestly clear that when the impugned orders were  made, the Assessing Officer had no occasion to have even a  glimpse of the accounts maintained by the appellants.  Therefore, in the light of the legal position noted above, we  have no option but to hold that the impugned orders dated  14th March, 2006, are vitiated by the failure to observe the  principle audi alteram partem.   28.     The next crucial question is that keeping in view the fact  that the time to frame fresh assessment for the relevant  assessment year by ignoring the extended period of limitation  in terms of explanation 1 (iii) to sub-section (3) of Section 153  of the Act is already over, what appropriate order should be  passed.  As noted above, the learned Additional Solicitor  General had pleaded that if we were not inclined to agree with  him, the interpretation of the provision by us may be given  prospective effect, otherwise the interest of the revenue will  be greatly prejudiced.   29.     There is no denying the fact that the law on the subject  was in a flux in the sense that till the judgment in Rajesh  Kumar (supra) 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 correctness.  Having regard to  all these peculiar circumstances and the fact that on 14th  December, 2006, this Court had declined to stay the  assessment proceedings, we are of the opinion that this Court  should be loathe to quash the impugned orders.  Accordingly,  we hold that the law on the subject, clarified by us, 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 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  gathered on the basis of the audit report submitted under  sub-section 2A of Section 142 of the Act. 30.     In the result, both the appeals are allowed to the extent  indicated above leaving the parties to bear their own costs.