CONCEPT OF PRINCIPLE OF NATURAL JUSTICE IN INCOME TAX PROCEEDINGS

Compiled by
Ram Dutt Sharma. ITO Retd, Awarded by Finance Minister

Principles of natural justice are soul of an administration of justice and need to be adhered to in order to make the order as a just and fair order. The concept of speaking order is the essential part of the principles of natural justice. The principles of natural justice have come to be known as being part of the guarantee contained in Article 14 of our Constitution i.e. “The concept of equality”. Violation of a rule of natural justice results in arbitrariness and hence is equivalent to that of discrimination. Therefore, violation of principle of natural justice by a State results into violation of Article 14.

'Natural Justice' is an expression of English common law. In one of the English decisions, reported In (1915) AC 120 (138) HL, Local Government Board v. Arlidge, Viscount Haldane observed, "...those whose duty it Is to decide must act Judicially. They must deal with the question referred to them without bias and they must give to each of the parties the opportunity of adequately presenting the case made. The decision must come to the spirit and with the sense of responsibility of a tribunal whose duty it is to meet out justice."

Natural justice is a concept of common law and represents higher procedural principles developed by the courts, which every judicial, quasi-judicial and administrative agency must follow while taking any decision adversely affecting the rights of a private individual. In short, Natural justice implies fairness, equity and equality. The concept of Rule of Law would lose its validity if the instrumentalities of the State are not charged with the duty of discharging these functions in a fair and just manner.

It is now well settled proposition that an Income Tax Officer, when he conducts enquiry and makes assessments under section 143 of the Income-tax Act, 1961 is not a court nor the proceedings before him are judicial proceedings in the strict sense of the term. The proceedings are deemed to be judicial proceedings only to the extent and for the purposes indicated in section 136 of the Act.

In fact the proceedings before the Income Tax Officers are quasi-judicial in nature. A quasi-judicial function comes in between administrative and judicial function. In other words, a quasi-judicial decision is one where there is a dispute and process involving the ascertainment possibly also legal argument, but where administrative action takes the place of the normal determination based on the evidence adduced under the relevant legal rules.

Basic principles of natural justice

The principle of natural justice demands that there should be fair determination of a question by quasi-judicial authority. The natural justice further demands that the Assessing Officer should draw the assessee’s attention to the proposed additions and give the assessee an opportunity to produce evidence in rebuttal of the material on which he proposes to base his judgement.

The basis of rule of natural justice requires recording of reasons in support of the order. The order has to be self-explanatory and should not keep the higher court guessing for reasons. Reasons provide live link between conclusion and evidence, that vital link is a safeguard against arbitrariness, passion and prejudice. Reason is a manifestation of mind of adjudicator. It is a tool for judging the validity of the order under challenge. It gives opportunity to the higher court to see whether or not the adjudicator has proceeded on the relevant consideration, material and evidence.—[Shivsagar Veg. Restaurant v. ACIT and another (2009) 317 ITR 433 (Bom.)]

Adjournments

Courts grant adjournment liberally. More so, if the cause is sufficient. However, a party who has been allowed sufficiently long time to reply may not be entitled to adjournment. But the necessity to furnish an effective reply against a show cause notice cannot be overstated. Therefore, to demonstrate that justice is done, the authority has to grant adjournment where the request is for a valid reason. In such cases, granting adjournment too, therefore, could be a part of the principles of natural justice.

Situations of violation of principles of natural justice in taxation laws

The following situations warrant the assessees to seek the intervention and direction of the High Courts:—

(a) When Notice itself is not served.

(b) When arbitrary orders are passed by the department without granting opportunity of personal hearing.

(c) When relied upon documents or copies of seized documents are not provided by the department despite request letter submitted by the assessee.

(d) When cross-examination is denied.

(e) When the written submission for the Notice or for Personal Hearing is not considered.

(f) When the request of modification stay application is not considered.

(g) When fundamental rights of the petitioner guaranteed under Articles 14 & 21 of the Constitution of India are not protected.

(h) When reasonable time for reply or for adjournment is denied without notice.

(i) When the order is passed for new additional demand without issuing revised notice.

(j) And among other reasons, when speaking order is not passed. In Ashok Kumar Yadav v. State of Haryana 1985 SCR Supl (1) 657, the Apex Court held—

“It is one of the fundamental principles of jurisprudence that no man can be a judge in his own cause and that if there is a reasonable likelihood of bias it is in accordance with natural justice and common sense that the justice likely to be so biased should be incapacitated from sitting.”

The essential characteristic of ‘Natural Justice’ is known by two maxims, namely,—

(a) Nemo judex in causa sua (i.e. no man can be judge in his own cause or rule against bias)

Nemo judex in causa sua maxim means that no-one should be a judge in their own cause. It is a principle of natural justice that no person can judge a case in which they have an interest. The rule is very strictly applied to any appearance of a possible bias, even if there is actually none.

The Supreme Court in the case of Ashok Kumar Yadav and Ors. v. State of Haryana & Ors. 1985 (4) SCC 417 observed that “It is one of the fundamental principles of our jurisprudence that no man can be a judge in his own cause and that if there is a reasonable likelihood of bias it is in accordance with natural justice and commonsense that the justice likely to be so biased should be incapacitated from sitting. The question is not whether the judge is actually biased or in fact decides partially, but whether there is real likelihood of bias. What is objectionable in such a case is not that the decision is actually tainted with bias but that the circumstances are such as to create a reasonable apprehension in the mind of others that there is a likelihood of bias affecting the decision.”

This is extended to all cases where an independent mind has to be applied in order to arrive at a fair & reasonable decision between the rival claims of two parties. The quasi judicial authorities must not forget that, Justice is not the function of the courts alone, but it is also the duty of all those who are expected to reasonably and fairly decide between two contending parties.

Rule against bias

v  Bias-operative prejudice in relation to a party or issue.

v  Requirement of this principle is that

o   the judge must be impartial and

o   must decide the case objectively on the basis of evidence.

v  Bias manifests variously and may affect the decision in a variety of ways.

v  It could be personal bias, pecuniary bias and subject-matter bias.

(b) Audi alteram partem (i.e. hear the other party or no man shall be condemned unheard or Rule of fair hearing)

Audi alteram partem maxim means that a reasonable opportunity of hearing which is sine qua non and imperative for the statutory authority to afford before passing the order or decision. Hear the other party or the rule of fair hearing or the rule that no one should be condemned unheard. This principle is the basic concept of principle of natural justice. This expression implies that a person must be given opportunity to defend himself. This principle is sine qua non of every civilized society.

In other words, it can be referred to ‘Impartiality’ and ‘Fairness’ in order to meet justice. The elementary Principle of Natural Justice in Law of Taxation is that, the assessee should have knowledge of the material which is going to be used against him so that he may be able to meet it.

The principles of natural justice are enshrined in Articles 14 & 21 of the Constitution of India. With the introduction of concept of substantive and procedural due process in Article 21, all that fairness which is included in the principles of natural justice can be read into Article 21. The violation of principles of natural justice result in arbitrariness and therefore violation of natural justice is a violation of Equality clause of Article 14.

“Justice must not only be done, but must be seen to be done”

The basic principle underlying this rule is that justice must not only be done but must also appear to be done and this rule has received wide recognition in several decisions of the Supreme Court. D.P. Mahesh v. Assistant Commissioner (CT) (Addl.), Thiruvanmiyur Assessment Circle, Chennai (2013) 58 VST 434 (Mad). The respondent has passed the impugned assessment order, which amounts to violation of the principles of natural justice. Considering the facts and circumstances of the case and in the interest of justice, the impugned assessment order dated May 18, 2012 is quashed with a direction to the respondent to consider the matter afresh after giving opportunity to the petitioner. Reasonable opportunity was not given to the petitioner since notice itself had not been served on the petitioner. The order in question was liable to be set aside and the assessing authority was to proceed and finalize the assessment in accordance with law after giving the petitioner reasonable opportunity of being heard [Palaniappa Sago Factory v. DCTO Attur Assessment Circle (2009) 24 VST 248]. Hon’ble Supreme Court in the case of Mohinder  Singh Gill v. Chief Election Commissioner AIR 1978 (SC) 851, quoted the following:—

“Natural justice is a pervasive facet of secular law where a spiritual touch enlivens legislation, administration and adjudication, to make fairness a creed of life. It has many colours and shades, many forms and shapes and, save where valid law excludes, it applies when people are affected by acts of authority. It is the bone of healthy government, recognized from earliest times and not a mystic testament of judge-made law. Indeed from the legendary days of Adam – and of Kautilya’s Arthashastra – the rule of law has had this stamp of natural justice, which makes it social justice. We need not go into these deep for the present  except to indicate that the roots of natural justice and its foliage are noble and not new-fangled. Today its application must be sustained by current legislation, case law or other extant principle, not the hoary chords of legend and history. Our jurisprudence has sanctioned its prevalence even like the Anglo-American system.”

When justice is not meted out for the assessees, they approach the High Court without exhausting the remedy of appeal. It is trite law that if the order passed by the original authority is in violation of the fundamental rights guaranteed under the Constitution of India; violation of the principles of natural justice; ultra-vires the provisions of the relevant law; grave error in the order and miscarriage of justice, then the question of waiving the appellate remedy will arise and the Court, under Articles 226 and 227 of the Constitution of India, can invoke the Writ jurisdiction and interfere with such order passed by the original authority.

Right to fair hearing

In M. Chockalingam and M. Meyyappan v. CIT, Madras, (1963) 48 ITR 34 (SC), Hidayatullah, J, speaking for the court observed that the authorities acting under the Income-tax Act have to act judicially and one of the requirements of judicial action is to give a fair hearing to a person before deciding against him.

Right to fair hearing includes:—

(i) Right to notice

Derived from the Latin word notitia, which means being known, notice is the starting of any hearing. Unless a person knows the issues of the case in which he is involved, he cannot defend himself. For a notice to be adequate it must contain-

(a)Time, place and nature of hearing

(b)Legal authority under which hearing has to be held

(c)The specific charges, grounds and proposed actions the accused has to meet.

This is the very edifice of the principle of natural justice. There is mandatory requirement of reasonable opportunity of being heard. This pre-requires issuance of a proper notice. The authority has to issue Show Cause to the party/assessee to explain and produce evidence before an adverse inference may be drawn against him. The notice should be specific and unambiguous so that proper compliance can be made by the assessee. Any order passed by the assessing authorities without giving notice is violative of the principles of natural justice.

In the case of Maruti Suzuki India Ltd. v. Addl. CIT (2010) 192 Taxman 317 (Delhi), it was held that a cryptic order sheet noting would not amount to a proper show cause notice to a party to defend his case. It would amount to failure to adhere to the principles of natural justice.

The importance of a show cause notice has been reiterated by Supreme Court in the case of Umanath Pandey v. State of UP (2009) 12 SCC 40-43 as under:

“Notice is the first limb of this principle. It must be precise and unambiguous. It should appraise the party determinatively the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him.”

In the case of Biecco Lawrie Ltd v. State of West Bengal (2009) 10 SCC 32, the Supreme Court observed as under:

“One of the essential ingredients of fair hearing is that a person should be served with a proper notice, i.e. a person has a right to notice. Notice should be clear and precise so as to meet and make an effective defence. Denial of notice and opportunity to respond result in making the administrative decision as vitiated. The adequacy of notice is a relative term and must be decided with reference to each case. But generally a notice to be adequate must contain the following: (a) time, place and nature of hearing; (b) legal authority under which hearing is to be held; (c) statement of specific charges which a person has to meet.”

In CCE v. ITC Ltd. (1995) 2 SCC 38 (SC), it has been held that an assessee should be asked to show cause as to why he should not be visited with higher tax before such levy. He must be given an opportunity of meeting those grounds. This is a requirement of the principles of natural justice.

The test of adequacy ensures that the person concerned has sufficient information to prepare an effective defence. It is not a mere technical formality but a mandatory requirement for a free and fair trial.  In Maharashtra State Financial Corporation v Suvarna Board Mill 1994 AIR 2657 ,  the court held that a notice calling upon the party to repay dues within 15 days failing which factory would be taken over is sufficient for taking over the factory and no fresh notice is required for pulling down an unauthorised structure when notice for removing such structure has already been given. Where a statute expressly provides that a notice must be given, failure to give notice makes the act void.

NEED FOR SHOW CAUSE NOTICE

The person proceeded against is required to be informed about the exact nature of charges leveled against him. The authority taking a decision must apply his mind to the explanation furnished. Application of mind must be apparent from the order as held by the Supreme Court in the case of Tar Lochan Dev Sharma v. State of Punjab (2001) 6 SCC 260.

Hon’ble Supreme Court in C.B. Gautam v. Union of India and others (1993) 1 SCC 78, invoked the same principle and held that even though it was not statutorily required, yet the authority was liable to give notice to the affected parties while purchasing their properties under Section 269-UD of the Income Tax Act, namely, the compulsory purchase of the property. It was observed that though the time frame within which an order for compulsory purchase has to be made is fairly tight one but urgency is not such that it would preclude a reasonable opportunity of being heard. A presumption of an attempt to evade tax may be raised in case of significant under-valuation of the property but it would be rebuttable presumption, which necessarily implies that a party must have an opportunity to show cause and rebut the presumption.

(ii) Right to present case and evidence

An opportunity of being heard is the most important component of the Principle of Natural Justice. It implies a proper opportunity of hearing. The Courts have consistently held that where a Show Cause Notice has been issued requiring the assessee to reply within a short period (say 1-3 days), such a notice is against the principles of natural justice, equity & good conscience. Undue haste is against the principle of fairness and such a conduct of the assessing officer deserves to be deprecated.

Adequate & proper opportunity of hearing should be provided to ensure fair hearing and fair deal to the assessee.—[Rameshwaram Paper Mills (P) Ltd. v. State of U.P. & others (2009) 11 VLJ 33 (All); Padam Traders & others v. State of U.P. & others (2009) 47 STJ 392 (All)]

In Union of India v. J. P. Mitter  1971 AIR 1093 the court refused to quash the order of the President of India in a dispute relating to the age of high Court judge on the ground that the President didn’t allow an oral hearing. The court was of the view that when the person has been given an opportunity to provide his submissions in writing, there is no abrogation of the principles of natural justice even when an oral hearing is not granted. The administrative authority too must provide full opportunity to testimonial or documentary evidence.

In Dwarkeshwari Cotton Mills Ltd. v. CIT (1955) 27 ITR 126, the SC quashed the decision of the administrative authority on the ground that not allowing the assessee to produce material evidence violates the rule of fair hearing.

(iii) Right to rebut adverse evidence

 This right presupposes that the person has been informed about the evidence against him. The opportunity to rebut evidence necessarily involves consideration of two factors-

(a)     Right to cross-examination- It is the most powerful weapon to elicit and establish truth. The right to call and cross-examine witness is an integral part of the principles of natural justice.

(b)     Right to Legal Representation- Normally representation through a lawyer in any administrative proceeding is not considered an indispensable part of the rule of natural justice as oral hearing is not included in the minima of fair hearing.

(iv) Disclosure of evidence/material to assessee

The elementary Principle of Natural Justice in the Law of Taxation is that the assessee should have knowledge of the material which is being used against him by the assessing officer so that he may be able to meet it. In an Income-tax case of Ram Chander, the Income Tax Tribunal relied on certain data supplied by the Income Tax Department behind the back of the assessee and without giving an opportunity to the assessee to rebut the same.

It was held that in principle, there ought to be an observance of natural justice called equally at both stages......If natural justice is violated at the first stage, the right to appeal is not so much a true right of appeal as a corrected initial hearing, instead of fair trial followed by appeal, the procedure is reduced to unfair trial followed by fair trial.—[Ram Chander v. Union of India & Ors. 1986 SCC (4) 12 (SC)]

In the case of Dhakeswari Cotton Mills Ltd. v. CIT AIR 1955 (SC) 65 : 27 ITR 126 (SC), the Apex Court emphasizing the requirement of application of principles of natural justice, observed thus:

“It is surprising that the Tribunal took from the representative of the department statement of gross profit rates of other cotton mills without showing the statement to the assessee and without giving him an opportunity to show that the statement had no relevancy whatsoever to the case of the mill in question.”

Every person has the right to know the evidence to be used against him. The appellant income tax tribunal didn’t disclose the information supplied to it by the department. In the case of Dhakeswari Cotton Mills Ltd. v. CIT AIR 1955 (SC) 65 : 27 ITR 126 (SC), the Apex Court held that the assessee was not given a fair trial. A person may be allowed to take notes, inspect files, etc. Whatever the method be the fundamental principle remains the same, i.e. nothing should be used against a person that has not been brought to his notice.

(v) Records/Report of enquiry to be shown to the assessee

The assessee has a legal right to inspect and take copies of all relevant documents before he is called upon to lead evidence in rebuttal. Similarly, the report of enquiry has to be shown to the assessee so that he can adduce evidence against it.

(vi) Reasoned decisions or speaking orders

The concept of speaking order is the essential part of the principles of natural justice. Reasons are the link between the order and mind of the maker. Any decision of the authority affecting the rights of the people without assigning any reasons tantamount to violation of principles of natural justice. The requirement of stating the reasons cannot be under-emphasized as it serves the following purpose:—

(a) It ensures that the administrative authority will apply its mind and objectively look at the facts and evidence of the case.

(b) It ensures that all the relevant factors have been considered and that the irrelevant factors have been left out.

(c) It satisfies the aggrieved party in the sense that his view points have been examined and considered prior to reaching a conclusion.

(d) The appellate authorities and courts are in a better position to consider the appeals on the question of law.

In other words, reasons reveal the rational nexus between the facts considered and the conclusions reached. However, mere recording of reasons serves no purpose unless the same are communicated either orally or in writing to the parties.

The Apex Court in the case of Kranti Associates (P) Ltd. v. Masood Ahmed Khan (2010) 9 SCC 496 wherein the Court while dealing with the requirement of passing reasoned order by an authority whether administrative, quasijudicial or judicial, has after applying the earlier declarations of law in this regard, summarized as under:—

Summarizing the above discussion, this Court holds:

“(a) In India the judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially. (b) A quasi-judicial authority must record reasons in support of its conclusions.

(c) Insistence on recording of reasons is meant to serve the wider principle of justice that justice must not only be done it must also appear to be done as well.

(d) Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quasi-judicial or even administrative power.

(e) Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations.

(f) Reasons have virtually become as indispensable a component of a decision making process as observing principles of natural justice by judicial, quasijudicial and even by administrative bodies.

(g) Reasons facilitate the process of judicial review by superior Courts.

(h) The ongoing judicial trend in all countries committed to rule of law and constitutional governance is in favour of reasoned decisions based on relevant facts. This is virtually the life blood of judicial decision making justifying the principle that reason is the soul of justice.

(i) Judicial or even quasi-judicial opinions these days can be as different as the judges and authorities who deliver them. All these decisions serve one common purpose which is to demonstrate by reason that the relevant factors have been objectively considered. This is important for sustaining the litigants’ faith in the justice delivery system.

(j) Insistence on reason is a requirement for both judicial accountability and transparency.

(k) If a Judge or a quasi-judicial authority is not candid enough about his/ her decision making process then it is impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism.

(l) Reasons in support of decisions must be cogent, clear and succinct. A pretence of reasons or ‘rubber-stamp reasons’ is not to be equated with a valid decision-making process.

(m) It cannot be doubted that transparency is the sine qua non of restraint on abuse of judicial powers. Transparency in decision making not only makes the judges and decision makers less prone to errors but also makes them subject to broader scrutiny. (See David Shapiro in Defence of Judicial Candor (1987) 100 Harward Law Review 731-737).

(n) Since the requirement to record reasons emanates from the broad doctrine of fairness in decision making, the said requirement is now virtually a component of human rights and was considered part of Strasbourg Jurisprudence. See (1994) 19 EHRR 553, at 562 para 29 and Anya v. University of Oxford, 2001 EWCA Civ 405, wherein the Court referred to Article 6 of European Convention of Human Rights which requires, adequate and intelligent reasons must be given for judicial decisions.

(o) In all common law jurisdictions judgments play a vital role in setting up precedents for the future. Therefore, for development of law, requirement of giving reasons for the decision is of the essence and is virtually a part of Due Process.“

The Rajasthan High Court in Income Tax Appeal No. 117/2004 decided on 21-01-2014 in the case of CIT v. Ram Singh, the Court laid the importance of giving reasons in the orders and held as under:—

“Recording of reasons is part of fair procedure and reasons are harbinger between the mind of the maker of the decision in the controversy and the decision or conclusion arrived at and they always substitute subjectivity with objectivity and as observed in Alexander Machinery (Dudley) Ltd. Crabtree, 1974 L.C.R. 120, failure to give reasons amounts to denial of justice and this is what was also observed by the Apex Court in 2005 (2) SC 329 Mangalore Ganesh Beedi Works v. CIT & Anr.”

The approach of the income-tax authorities shall not be unreasonable

In administering a tax law irritation to the assessee is inevitable; an officer is bound to do his duty irrespective of the susceptibilities of the assessees or even at the risk of hurting their amour propre. However, it would not justify the officers functioning under the Act doing things in an unreasonable way. This was observed by Hon’ble High Court of Andhra Pradesh in the case of K. Rudra Rao v. ITO (1951) 34 ITR 216 (AP).

Maxwell on the Interpretation of Statutes, Tenth Edition, page 123 points out

“Where, as in a multitude of Acts, something is left to be done according to the discretion of the authority on whom the power of doing it is conferred, the discretion must be exercised honestly and in the spirit of the statute, otherwise the act done would not fall within the statute.’According to his discretion’ means,  it has been said, according to the rules of reason and justice, not private opinion:  according to law and not humour; it is to be, not arbitrary, vague and fanciful, but legal and regular; to be exercised, not capriciously, but on judicial grounds and for substantial reasons.”

In other words, all public officers in whom powers are vested by statutes must exercise those powers “within the limits to which an honest man competent to discharge of his office ought to confine himself, that is, within the limits and for the objects intended by the legislature.”

Proper service of notice

Proper service of notice within due time is one of the mandatory principles of Natural Justice. For effective compliance by an assessee, notice of hearing must be served on time, providing reasonable opportunity to the assessee.

Hence, before any action is taken, the assessee should be given a show cause notice against any proposed action and seek his explanation towards the same. Therefore, any order passed without giving notice is against the principles of natural justice. Further, the affected party shall be served with specific and unambiguous notice as the very objective of serving notice is to provide a  reasonable opportunity for compliance.

The Apex Court in Pannalal Binjraj v. Union of India, (1957) SCR 223 mandating the observance of the rules of natural justice in income tax proceedings held that the Income Tax authorities should follow the rules of natural justice and, where feasible, give notice of the intended transfer to the assessee concerned in order that he may represent his view of the matter and record the reasons of the transfer, however briefly, to enable the court to judge whether such transfer was mala fide or discriminatory, if and when challenged.

Opportunity of being heard

An opportunity of being heard is one of the most important component of “principle of Natural Justice”. The right to call and cross-examine witnesses is a part of natural justice. In the matter of practice of Tax Law, giving an opportunity to a person of being heard must necessarily depend on the facts and circumstances of each case. Hon’ble Supreme Court in the case of Ram Chandran v. Union of India has observed the following:—

“In principle, there ought to be an observance of natural justice called equally at both stages ..... If natural justice is violated at the first stage, the right of appeal is not so much a true right of appeal as a corrected initial hearing, instead of fair trial followed by appeal, the procedure is reduced to unfair trial followed by fair trial.”

It was further said that the Tribunal acted without jurisdiction in relying on the data supplied by the Income-tax Department behind the back of the appellant-company, and without giving it an opportunity to rebut or explain the same.

In Smt. Ritu Devi v. CIT (2004) 141 Taxman 559 (Mad.), time of just one day was given to the assessee to furnish reply. This was held as denial of opportunity.

As held in E. Vittal v. Appropriate Authority (1996) 221 ITR 760 (AP), where a decision is based upon a document in a proceeding, copy of the same should be provided to the affected party. Otherwise, it would violate the principles of natural justice as the opportunity of being heard should be an effective opportunity and not an empty formality. Denial of opportunity may make an order void. Limitation of time cannot stand in the way of not giving adequate opportunity. The principle is inviolable.

The opportunity of being heard should be real, reasonable and effective. The same should not be for name sake. It should not be a paper opportunity. This was so held in CIT v. Panna Devi Saraogi (1970) 78 ITR 728 (Cal.).

In Mahadayal Premchandran v. Commercial Tax Officer, Calcutta, (1959) SCR 551, the procedure adopted by the Sales Tax Authorities was pronounced to be unfair and contrary to the principles of natural justice in that it had failed to afford to the appellant an opportunity of being heard. On these very principles the Income Tax Authorities were held to be judicial or quasi-judicial bodies in Suraj Mall Mohta & Co. v. A. V. Visvanath Sastry, (1954) 26 ITR 2 (SC) and it was observed by the Supreme Court that under the provision of Section 37 (corresponding to section 131 of the Income-tax Act, 1961) the proceedings before the Income Tax Officer are judicial proceedings and all the incidents of such judicial proceedings have to be observed before the result is arrived at. In other words, assessee would have a right to inspect the records and all relevant documents before he is called upon to lead evidence in rebuttal. This right has not been taken away by any express provision of the Income-tax Act.

Opportunity not a rigid doctrine

Where nothing unfair can be discerned from the act of not giving opportunity, the rule may not be attracted. It is not a rigid doctrine. In the case of Union of India v. W. N. Chadha AIR 1993 SC 1082, the Supreme Court observed as overleaf:

“The rule of audi alteram partem is not attracted unless the impugned order is shown to have deprived a person of his liberty or his property. The rule of audi alteram partem is a rule of justice and its application is excluded where the rule will itself lead to injustice. There is exclusion of the application of audi alteram partem rule to cases where nothing unfair can be inferred by not affording an opportunity to present and meet a case. This rule cannot be applied to defeat the ends of justice or to make the law ‘lifeless, absurd, stultifying and self-defeating or plainly contrary to the common sense of the situation’ and this rule may be jettisoned in very exceptional circumstances where compulsive necessity so demands.” (paras 80 to 88)

In Chairman Mining Board v. Ramjee 1977 AIR 965 SC, the Supreme Court observed as under:

“Natural justice is no unruly horse, no lurking landmine, nor a judicial cure-all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamentals of such essential procedural propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice without reference to the administrative realities and other factors of a given case can be exasperating. Courts cannot look at law in the abstract or natural justice as a mere artefact… If the totality of circumstances satisfies the Court that the party visited with adverse order has not suffered from denial of reasonable opportunity the Court will decline to be punctilious or fanatical as if the rules of natural justice were sacred scriptures.”

In the case of S. N. Mukherjee v. Union of India, the Supreme Court has observed as follows:

“Keeping in view the expanding horizon of the principles of natural justice, we are of the opinion, that the requirement to record reason can be regarded as one of the principles of natural justice which govern exercise of power by administrative authorities. The rules of natural justice are not embodied rules. The extent of their application depends upon the particular statutory framework where under jurisdiction has been conferred on the administrative authority. With regard to the exercise of a particular power by an administrative authority including exercise of judicial or quasi-judicial functions the legislature, while conferring the said power, may feel that it would not be in the larger public interest that the reasons for the order passed by the administrative authority be recorded in the order and be communicated to the aggrieved party and it may dispense with such a requirement…. it must be concluded that except in cases where the requirement has been dispensed with expressly or by necessary implication, an administrative authority exercising judicial or quasi-judicial functions is required to record the reasons for its decision.” – [S. N. Mukherjee v. Union of India AIR 1990 SC 1984 (SC)]

Right to inspection of records

The Apex Court in the case of Suraj Mall Mohta & Co. v. A.V. Vishwanatha Sastry AIR 1954 545, 1955 SCR 448 that, assessment proceedings conducted by the Income-tax Officers are quasi-judicial proceedings and all the incidents of such quasi-judicial proceedings have to be observed before the result is arrived at. The assessee has a right to inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal. That, the said right has not been taken away by any express provision of the Income-tax Act.

KEY NOTE

While passing an assessment order, provisions of the Income Tax Act should be applied in a considerate manner.

The government authorities must act in a fair and not partisan manner

It is a fact that, the taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and partisan manner. It may be that, their part of the duty is to ensure that no tax which is legitimately due from an assessee should remain uncovered, however, at the same time they must not act which may indicate that the scales are weighted against the assessee. They should be deemed to have exercised in a proper and judicious manner.

The assessing authority shall not be biased

Quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonably while arriving at a reasonable conclusion in a case. The word ‘Bias’ means prejudice, show of favour or disfavour, antagonism, spite, hostility, that sways the mind. The basic principle underlying this rule is that, justice must not only be done but must also appear to be done.

It was held that natural justice demands that the decision should be based on some evidence of probative value.—[R v. Dy. Industrial Injuries Commr. Exp. Moore; Mahon v. New Zealand Ltd.]

An Order shall be a speaking order

A speaking order ensures that the principles of natural justice are followed. To give reasons for the decision is a requirement of the principles of natural justice. The order would show which particular circumstance received due consideration while arriving at the decision. As held in Kishan Lal v. UOI (1998) 97 Taxman 556 (SC), a speaking order reduces arbitrariness. A reasoned order speaks for itself. It embodies in itself the principles of natural justice.

In the case of Asstt. Commissioner Commercial Tax Department, Works Contract and Leasing Quota v. Shukla & Bros. (2010) (4) JT 35, the Supreme Court observed that it shall be obligatory on the part of the judicial or quasi-judicial authority to pass a reasoned order while exercising statutory jurisdiction. In the absence of a reasoned order, it would become a tool for harassment.

In the case of Santosh Hazari v. Purushottam Tiwari (2001) (2) JT 407, the Supreme Court held as under: “The appellate Court has jurisdiction to reverse or affirm the findings of the trial Court. First appeal is a valuable right of the parties and unless restricted by law, the whole case is therein open for hearing both on questions of fact and law. The judgment of the Appellate Court must, therefore, reflect its conscious application of mind, and record findings supported by reasons, on all the issues arising along with the contentions put forth, and pressed by the parties for decision of the Appellate Court.”

In the case of Baidya Nath Sarma v. CWT (1983) 11 Taxman 158 (Gau.), the Court observed as under: “...The duty to give reasons is a safety-valve against arbitrary exercise of discretionary power. If such quasi-judicial authorities are permitted to render order without reason, apart from arbitrariness there might be potent danger of non-consideration of the application and would encourage mechanical exercise of the power.”

In Rasiklal Ranchhodbhai v. CWT, the Court struck down the order of the Commissioner by observing that passing a cryptic order without giving reasons violates the principles of natural justice. It was observed that reasons must be substantial and cogent. It must not be an apology for reasons. This order was passed in the context of waiver of penalty. – [Rasiklal Ranchhodbhai v. CWT (1980) 121 ITR 219 (Guj.)]

In the case of Woolcombers of India Ltd. v. Woolcombers Workers’ Union AIR 1973 SC 2758, the Supreme Court held as under: “...The giving of reasons in support of their conclusions by the judicial and quasi-judicial authorities when exercising initial jurisdiction is essential for various reasons. First, it is calculated to prevent unconscious unfairness or arbitrariness in reaching the conclusions. The very search for reasons will put the authority on the alert and minimise the chances of unconscious infiltration of personal bias or unfairness in the conclusion. The authority will adduce reasons which will be regarded as fair and legitimate by a reasonable man and will discard irrelevant or extraneous considerations. Second, it is a well-known principle that justice should not only be done but should also appear to be done. Unreasoned conclusions may be just but may not appear to be just to those who read them. Reasoned conclusions, on the other hand, will also have the appearance of justice. Third, it should be remembered that an appeal generally lies from the decisions of judicial and quasi-judicial authorities to this Court by special leave granted under article 136. A judgment which does not disclose the reasons will be of little assistance to the Court. The Court will have to wade through the entire record and find for itself whether the decision in appeal is right or wrong. In many cases this investment of time ... will be saved if reasons are given in support of the conclusions...” (p. 2761)

In view of the above, if any order is made in violation of principles of natural justice, it would be void ab-initio and would be liable to be annulled & cancelled.

Cross-examination is one part of the principles of natural justice

A Constitution Bench of this Court in State of M. P. v. Chintaman Sadashiva Vaishampayan AIR 1961 SC 1623, held that the rules of natural justice, require that a party must be given the opportunity to adduce all relevant evidence upon which he relies, and further that, the evidence of the opposite party should be taken in his presence, and that he should be given the opportunity of crossexamining the witnesses examined by that party. Not providing the said opportunity to cross-examine witnesses, would violate the principles of natural justice.—[CIT v. Sunita Dhadda – Date of Judgement : 28.03.2018 (SC)]

It was held that when the action of a statutory authority results in civil or evil consequences, the principles of natural justice are required to be followed even in the absence of a statutory provision. This can be taken as implicit in a statutory provision. – [Rajesh Kumar v. DCIT (2006) 157 Taxman 168 (SC)]

Technicalities and irregularities do not occasion failure of justice

In State Bank of Patiala v. K Sharma, the Supreme Court has observed as follows: “Justice means justice between both the parties. The interests of justice equally demand that the guilty should be punished and that technicalities and irregularities which do not occasion failure of justice are not allowed to defeat the ends of justice. Principles of natural justice are but the means to achieve the ends of justice. They cannot be perverted to achieve the very opposite end. That would be a counterproductive exercise.” – [State Bank of Patiala v. K Sharma (1996) 3 SCC 364 (SC)]

Principles of natural justice do not supplant law but supplement it

In Thakur V. Hariprasad v. CIT, the High Court held as follows: “The doctrine of natural justice is a facet of fair play in action. No person shall be saddled with a liability without being heard. In administrative law, this doctrine has been extended when a person is made liable in an action without being heard. The principles of natural justice do not supplant the law but merely supplement the law or even humanise it. If a statutory provision can be read consistent with the principles of natural justice, the court could do so, for the Legislature is presumed to intend to act according to the principles of natural justice.” – [Thakur V. Hariprasad v. CIT (1987) 32 Taxman 196 (AP)]

Principles of natural justice are not immutable and rigid

In the case of Satyabir Singh v. UOI, the Supreme Court observed as under: “The principles of natural Justice must be confined within their proper limits and not allowed to run wild. The concept of natural justice is a magnificent thoroughbred on which this nation gallops forwards towards its proclaimed and destined goal of JUSTICE, social, economic and political. This thoroughbred must not be allowed to turn into a wild and unruly horse, careering off where it lists, unsaddling its rider, and bursting into fields where the sign no pasaran is put up.” – [Satyabir Singh v. UOI AIR 1986 SC 555]

The principle is well settled in law that unless a hearing is statutorily excluded any administrator taking a decision affecting the rights of a citizen, is bound to hear him.

The Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Union of has held as follows: “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.” – [Swadeshi Cotton Mills Co. Ltd. v. Union of India (1981) 51 Comp. Cas. 210 : AIR 1981 SC 818]

Silence of the statute not to be construed as exclusion of opportunity

Where the statute is silent as to whether or not the assessee should be heard before an order is passed, it does not mean that opportunity of being heard is excluded. The principle is that unless a hearing is statutorily excluded, an administrator taking a decision affecting the rights of a citizen is bound to hear him as held in Smt. Maneka Gandhi v. Union of India AIR 1978 SC 597.

In Chairman Mining Board v. Ramjee, the Supreme Court observed that : “Natural justice is no unruly horse, no lurking landmine, nor a judicial cure-all. If fairness is shown by the decision-maker to the man proceeded against, the form, features and the fundamentals of such essential procedural propriety being conditioned by the facts and circumstances of each situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice without reference to the administrative realities and other factors of a given case can be exasperating. Courts cannot look at law in the abstract or natural justice as a mere artefact… If the totality of circumstances satisfies the Court that the party visited with adverse order has not suffered from denial of reasonable opportunity the Court will decline to be punctilious or fanatical as if the rules of natural justice were sacred scriptures.” – [Chairman Mining Board v. Ramjee 1977 AIR 965 SC]

Principles of natural justice apply even where not expressly provided

In the case of Peerless General Finance & Investment Co. Ltd. v. DCIT (1999) 236 ITR 671 (Cal.) it was observed that the principles of natural justice can be presumed as necessary unless there exists a statutory prohibition.

In Sahara India (Firm) v. CIT (2008) 169 Taxman 328 (SC), the Supreme Court held 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.

In Rajesh Kumar v. DCIT (2006) 157 Taxman 168 (SC), the Supreme Court observed that when civil consequences ensue, there is hardly any distinction between an administrative order and a quasi-judicial order. The Supreme Court further held that there might have been difference of opinions at one point of time, but it is now well-settled that a thin demarcated line between an administrative order and quasi-judicial order now stands obliterated.

In case of conflict between a statutory provision and natural justice, the former should prevail. But where there is no such exclusion in the statute, the application of the principles can be assumed in cases where in exercise of administrative jurisdiction the rights of citizens are affected to their prejudice. This was so held in the case of Asiatic Oxygen Ltd. v. STO (1982) Tax LR (NOC) 200 (Ori).

With regards
CA. Vinay Mittal
Ghaziabad- 201001