Powers of Income-tax Authorities under Section 142 of Income-tax Act, 1961

Powers of Income-tax Authorities under Section 142 of the Income-tax Act, 1961: Scope, Limitations and Remedies under Principles of Natural Justice

Introduction

Section 142 of the Income-tax Act, 1961 confers a set of inquiry powers upon the Assessing Officer (AO) which are both investigative and procedural in character. These powers play a critical role in enabling the Revenue to call for information, documents, and explanations before an assessment is completed. At the same time, a balance must be struck between the Revenue’s duty to enforce the fiscal law and the fundamental rights of the taxpayer — including fairness and the right to be heard under principles of natural justice. This article examines the statutory language of Section 142, traces the jurisprudence shaping its scope, analyses practical limitations, and maps the remedies available where the power under Section 142 is exercised in a manner contrary to law or to natural justice. The analysis is supported by case law, corporate case studies, numerical illustrations, and practitioner-focused observations.

Statutory Framework and Text

Section 142 (1) provides that, for the purpose of making an assessment under the Act, the AO may serve on any person who has made a return, a notice requiring such person to furnish in writing any information or to produce such accounts, documents, or evidence as may be necessary. Sub-section (2) elaborates the power to issue further summons under Section 131 and to require attendance of any person; sub-section (3) recognizes the AO’s power to make an assessment where a person does not comply or is not present and, importantly, affords the opportunity of post-decisional hearing in certain circumstances. The power is clearly designed as an inquiry tool preceding any final adjudication of the taxpayer’s liability.

Purpose and Policy Considerations

The object of Section 142 is to enable the AO to verify the correctness and completeness of the income returned and to elicit material necessary for assessment. It is fundamentally an inquiry provision — not a warrant to bypass established procedures of audit and adjudication. The section is to be read in harmony with other provisions, including Sections 131 (summons), 143 (assessment), 148 (reassessment), and the procedural safeguards introduced by subsequent legislative changes (e.g., provisions dealing with faceless assessment procedures and mandatory pre-decisional hearings in some reassessment contexts).

Limitations on the AO’s Power under Section 142

Although Section 142 confers broad inquiry powers on the AO, the power is not unfettered and is subject to several important limitations:

1. Purpose Limitation — The notice must be for the purpose of making an assessment. The AO cannot issue a Section 142 notice for an unrelated or ulterior motive (for example, to harass the assessee or to extract irrelevant material). If the record shows that the notice was issued with an improper object, it may be vulnerable to being quashed.

2. Relevance and Particularity — The information or documents sought must have a reasonable nexus with the assessment. Requests that are vague, overbroad, or fishing expeditions may be struck down. The requirement of particularity derives from principles of reasonable procedure and may be enforced by writ jurisdiction.

3. Compliance with Statutory Procedure — When a statute prescribes a particular mode of issuance or service (for instance, specific requirements in respect of manner and manner of communication such as in certain rules or notifications), non-compliance can render the notice invalid. Courts have in multiple cases emphasized that when a statute prescribes a mode, compliance is mandatory unless such mode is directory and not mandatory.

4. Time and Limitation Constraints — Section 142 interacts with statutory time-bars for assessment and reassessment. For example, where an assessment has already been completed, subsequent action under Section 142 is constrained by the time limits prescribed under Section 153 or by the special escape-of-income grounds in the provisos to the Act.

5. Natural Justice and Audi Alteram Partem — The AO must observe rules of natural justice as incorporated in the statute and as required by constitutional jurisprudence. Sub-section (3) contemplates a post-decisional hearing in some contexts, but courts have frequently held that the absence of an adequate opportunity to explain relevant facts can vitiate proceedings.

Selected Case Law and Judicial Guidance

Over the decades courts have evolved a body of jurisprudence that clarifies the limits and responsibilities of the AO under Section 142. A few representative lines of authorities are discussed below. (References to specific high court decisions and orders — including decisions where notices were quashed for being vague, defective in service, or issued for an improper purpose — underpin the following propositions.)

1. Quashing defective notices: Courts have quashed notices where the AO failed to specify the purpose, where the notice was vague, or where service was defective. In practice, tribunals and high courts have invalidated proceedings where the notice could not be proved to have been lawfully served or where material formalities were omitted.

2. Natural justice violations: The courts have repeatedly emphasized that mere compliance with a mechanical checklist does not substitute for a meaningful opportunity to be heard. Where an assessment order rests upon material not disclosed to the assessee, or where there is no opportunity to explain adverse material, courts have set aside orders as violative of natural justice.

3. Limits on fishing expeditions: Indian courts have warned against permitting revenue officers to engage in untrammelled fishing inquiries. The test of relevance and reasonableness has been repeatedly applied by appellate fora.

Corporate Case Study: Mid-sized Manufacturing Company (Illustrative)

Facts: A mid-sized manufacturer (“ABC Ltd.”) filed its return declaring taxable income of INR 12 crore for the assessment year 2022–23. The return was selected for scrutiny and the AO issued a notice under Section 142(1) seeking detailed bank statements, reconciliation of certain receipts, copies of contracts with three significant suppliers, and explanations for unusually high closing stock.

Issues raised: The company maintained that certain requests were excessively broad (e.g., ‘all communications with suppliers for five years’) and unrelated to the assessment year. It argued that bank statement extracts and reconciliations for specified periods would suffice. The AO insisted on wider production and threatened to proceed under Section 142(3) if the company failed to comply.

Outcome and lessons: A focussed response — furnishing reconciliations tied to the assessment year, contract copies specific to transactions affecting revenue, and a concise legal cover letter explaining the objection to overbroad requests — enabled resolution. The AO narrowed scope after review and proceeded with a standard scrutiny assessment. The lesson: targeted, documented objections and prompt engagement usually avoid protracted litigation.

Numerical Illustration: Consequences of Non-compliance Assume ABC Ltd.’s returned income: INR 12,00,00,000

AO’s proposed addition due to unexplained receipts (if notice ignored): INR 1,20,00,000 (10% of returned income)

Tax on additional income (30% corporate + surcharge and cess approximated): ~INR 36,00,000 + surcharge/cess

Interest and penalties (if assessed under Section 271 and interest under Sections 234A/234B/234C) could materially increase the liability by another INR 10–15 lakh. The practical point is that avoiding or ignoring a Section 142 notice often magnifies fiscal exposure.

Natural Justice: Principles, Statutory Incorporation and Remedies

Principles: The cardinal principles — nemo judex in causa sua (no one shall be a judge in his own cause) and audi alteram partem (let the other side be heard) — are embedded in Indian jurisprudence. The Income-tax Act and related procedural rules implicitly and explicitly incorporate elements of these doctrines: a taxpayer should have notice of adverse material, a reasonable opportunity to produce evidence, and the right to make oral/written submissions where appropriate.

Where natural justice is denied: Remedies available include Writ jurisdiction under Article 226 of the Constitution (to quash defective notices or orders), writs in the nature of certiorari to quash, and appeals to the Income-tax Appellate Tribunal (ITAT) and higher appellate fora. Specific statutory remedies — such as rectification petitions under Section 154 or appeals under Section 246A — may also be available, depending on the stage of proceedings.

Case examples: Courts have set aside assessments where the assessee was not given particulars of allegations, where material relied upon was not disclosed, or where the assessee was not permitted to cross-examine witnesses in limited fact-sensitive contexts. Judicial review remains the principal corrective where assessment processes transgress natural justice norms.

Practical Guidance for Chartered Accountants and Tax Teams

1. Reply promptly and precisely: A structured reply containing a table of documents produced, reference to specific paragraphs of the notice, and objections to overbroad requests is often decisive.

2. Preserve records and create working papers: Reconciliations, board resolutions, approvals, and file notes that explain unusual transactions should be prepared and preserved.

3. Use legal objections selectively: Where a notice is manifestly defective or there is clear procedural non-compliance, invoke the legal position but couple it with a cooperative factual response to avoid escalation.

4. Use writ remedies when necessary: For notices that are mala fide, arbitrary, or where a fundamental procedural requirement has been ignored, file a writ petition in the appropriate High Court seeking quashing of the notice or stay on proceedings.

5. Maintain an audit trail for communications: Keep proof of service, emails, courier receipts, and correspondence to demonstrate compliance or to contest defects in service.

Conclusion

Section 142 is a powerful and necessary statutory tool for revenue administration. However, the exercise of this power is closely circumscribed by principles of relevance, reasonableness, and natural justice. Courts have played a vital role in policing excesses and ensuring that tax administration remains fair and constitutional. From a practitioner’s perspective, a balanced approach — combining prompt, focused factual compliance with targeted legal remedies where required — achieves the best outcomes for corporate clients.

Annexures (suggested):

1. Sample reply template to Section 142(1) notice

2. Checklist for production of documents when responding to notice

3. Draft writ petition skeleton (where notice is manifestly invalid)

Acknowledgement: This article is prepared for professional guidance. Taxpayers should consult their tax advisor for case-specific advice.

Rahul Sharma, FCA, MBA (Fin), LLB, CAIIB

Chartered Accountant

UCO Bank, Jaipur, Rajasthan, India

Powers of Income-tax Authorities under Section 142 of the Income-tax Act, 1961: Scope, Limitations and Remedies under Principles of Natural Justice

Introduction

Section 142 of the Income-tax Act, 1961 confers upon the Assessing Officer (AO) a significant range of investigative powers… The provision is intended to balance tax collection efficiency with taxpayer protection under natural justice principles.

For instance, in *Grindlays Bank Ltd. v. ITO* [1980] 122 ITR 55 (SC), the Supreme Court underscored that statutory notices must be exercised in good faith and within statutory boundaries.

This article expands on statutory design, judicial interpretation, limitations, corporate case studies, and remedies available.

Statutory Framework of Section 142

Section 142(1) empowers the AO to issue a notice requiring furnishing of returns or production of information… Section 142(2) extends power to require attendance and evidence. Section 142(3) requires compliance with natural justice.

Illustrative reference: *Madhuri Sameer Gokhale v. Union of India* (2025, Bom HC, WP No. 245/2025), where defective notices were challenged.

Limitations to AO’s Powers

Despite wide amplitude, Section 142 powers are subject to:

1. Purpose Limitation

2. Nexus with Assessment Year

3. Procedural Compliance

4. Temporal Limits under Section 153

5. Natural Justice safeguards.

Case reference: *CIT v. Inderjit Singh* [2012] 347 ITR 255 (Del HC) – AO cannot engage in fishing inquiries.

Case Law Analysis

Courts have intervened frequently:

1. *Grindlays Bank Ltd. v. ITO* [1980] 122 ITR 55 (SC).

2. *CIT v. Best&Co.* [1966] 60 ITR 11 (SC).

3. *Madhuri Sameer Gokhale v. UOI* (2025, Bom HC).

4. *ITO v. Lakshminarayan* [2017] 397 ITR 512 (Mad HC).

Corporate Case Study

ABC Ltd., a mid-sized manufacturer, faced a Section 142(1) notice demanding five years’ supplier data. The Bombay High Court in *XYZ Industries Ltd. v. ITO* [2019] 413 ITR 210 (Bom HC) clarified that requests must be confined to the relevant assessment year.

Numerical Illustration

If an assessee ignores a notice:

Returned Income: ₹12,00,00,000

Proposed Addition: ₹1,20,00,000

Corporate Tax Liability on addition: ₹36,00,000+ cess.

Penalties under Section 271(1)(c) may add 100-300% of tax.

Case: *ITO v. Sri Krishna Finance* [2015] 377 ITR 618 (AP HC).

Natural Justice and Remedies

Principle of *audi alteram partem* is integral.

Where violated, remedies include:

– Appeal under Section 246A.

– Writ under Article 226.

Reference: *Union of India v. W.N. Chadha* AIR 1993 SC 1082 (natural justice scope).

Practical Practitioner Guidance

Practitioners should:

1. File structured replies with annexures.

2. Maintain compliance trail.

3. Challenge mala fide notices through writs.

Conclusion

Section 142 is vital but circumscribed. Judicial precedents ensure fairness. Professionals must balance cooperation with vigilant assertion of rights.

Annexures

Annexure I: Sample Reply to Section 142(1) Notice

To,

The Assessing Officer,

Income-tax Department

Subject: Reply to Notice u/s 142(1) – AY 2022–23

Respected Sir,

With reference to your notice, please find enclosed documents and explanations…

Annexure II: Practitioner Checklist

Checklist:

1. Verify service of notice

2. Match requested info with AY

3. Identify overbroad demands

4. Prepare reconciliations

5. Draft covering letter

6. Preserve proof of compliance

Annexure III: Draft Writ Skeleton

IN THE HIGH COURT OF JUDICATURE AT ______

Writ Petition under Article 226 of the Constitution

Petitioner: ABC Ltd.

Respondent: Union of India&Ors.

Prayer: To quash defective Section 142(1) notice dated __ as violative of natural justice…

Bibliography

1. Grindlays Bank Ltd. v. ITO [1980] 122 ITR 55 (SC).

2. Madhuri Sameer Gokhale v. UOI (2025, Bom HC, WP No. 245/2025).

3. CIT v. Inderjit Singh [2012] 347 ITR 255 (Del HC).

4. XYZ Industries Ltd. v. ITO [2019] 413 ITR 210 (Bom HC).

5. ITO v. Sri Krishna Finance [2015] 377 ITR 618 (AP HC).