Principles of Natural Justice in Taxation Proceedings

It is a matter of grave concern that the Principles of Natural Justice are ignored in Taxation Proceedings; be it proceedings under Vat Act, Income Tax Act, Stamp Act or any other Direct or Indirect Taxes. It has to be clearly borne in mind by the Taxation Authorities that adherence to the Principles of Natural Justice are the very soul of the administration of Justice. The Taxation authorities have a universal excuse that these proceedings are ‘Summary Proceedings’ and they have a heavy backlog and they do not want to delay the proceedings by giving repeated opportunity to the assessees as they run short in time. This attitude not only makes the orders passed in violation of principles of natural justice bad in law, but they have to face the ire of the Higher Courts.

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.

The principles of natural justice are enshrined in Article 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 results in arbitrariness and therefore violation of natural justice is a violation of Equality clause of Article 14. The principle of natural justice encompasses the following two rules: –

1. Nemo judex in causa sua – No one should be made a judge in his own cause or the rule against bias.

2. Audi alteram partem – 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. This rule covers various stages through the administrative adjudication process starting from notice to the final determination of Tax liability.

Right to fair hearing includes:-

i) Right to notice

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.

Hon’ble Supreme Court in (1993) 1 SCC78, C.B. Gautam v. Union of India and others 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. Ramrshwaram Paper Mills (P) Ltd. v. State of U.P. & others, (2009) 11VLJ 33 (All); Padam Traders & others v. State of U.P. & others, (2009) 47 STJ 392 (All).

iii) Right to rebut adverse evidence

(a) Right to cross examination

The right to call and cross examine witness is an integral part of the principles of natural justice.

(b) Right to legal representation

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. The Apex Court in the said case of Ram Chander vs Union of India & Ors 1986 SCC (4) 12 held as under:

“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”.

It is relevant to refer to the case of Dhakeswari Cotton Mills Ltd. vs. CIT 1955 AIR 65, wherein 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.”

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 its 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 point’s 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 short, 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.

It would be trite to refer to the decision of the Apex Court in S.N. Mukherjee vs. Union of India 1990 AIR 1984 wherein the Court held thus:

“The recording of reasons by an administrative authority serves a salutary purpose, namely it excludes chances of arbitrariness and assures a degree of fairness in the process of decision making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions, which are subject to appeal, revision or judicial review. Therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi- judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review.”

It would be trite to refer to the decision of the Apex Court in 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, quasi-judicial 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, quasi-judicial 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 vs. 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. “

In a recent decision of Rajasthan High Court in Income Tax appeal no. 117/2004 decided on 21-01-2014 in the case of CIT v RamSingh, 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 Vs. CIT & Anr.”

Perhaps, in the frenzy of collecting revenues to achieve their pre-fixed (ambitious) targets, the Taxation Authorities completely ignore the fact that even a very good order, otherwise justifying the quantum of tax can be held as void ab-initio and would be liable to be annulled by courts if proper opportunity of being heard is not extended to the taxpayer. It is imperative for the assessing authorities to ensure that the principles of Natural Justice are strictly adhered to by them during assessment proceedings.

(Author-  Inder Chand Jain, Agra, Mobile:9319215672, Email: inderjain2007@rediffmail.com)

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