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Tuesday, January 15, 2013

Principles of Natural Justice - Application in Law of Taxation



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.

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

(a) Nemo judex in causa sua i.e. no man can be judge in his own cause;

(b) Audi alteram partem i.e. no man shall be condemned unheard 

In simple terms, 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. 

What exactly are these principles which are necessary for making a just and fair decision-making by the assessing authority under the income tax act?

(1) 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 vs. ITO  
(2) 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.

(3) 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 vs. 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 ax Department behind the back of the appellant company, and without giving it an opportunity to rebut or explain the same.

(4) Right to inspection of recordsThe Apex Court has ruled in the case of Suraj Mall Mohta & Co. vs. A.V. Vishwanatha Sastry 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.

(5) while passing an assessment order, provisions of the Income Tax Act should be applied in a considerate manner

(6) 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. 

Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. vs. C.I.T. has emphasized the issue of applicability of "The Principle of Natural Justice". Application was filed by the assessee under the provisions of Article-136 of the Constitution, contended that, the assessment order which was passed u/s. 23 (3) of the Income Tax Act was made in violation of the principles of Natural Justice. It observed:

" 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 that statement had no relevancy whatsoever to the case of the mill in question." 

(7) Representation by a legal representative in a case - Section 288 (1) of the Income-tax Act, 1961 provides that any assessee, who is required to attend before any Income tax Authority or the Income Tax Appellate Tribunal in connection to any proceedings under the Act, otherwise than when required under section 131 to attend personally for examination on oath or affirmation, may subject to the other provisions of section 288 attend by an authorized representative. Recording of statement at the time of survey or search under the Income Tax Act, is one of such situation where presence of a legal representative is mandatory to give a fair and reasonable opportunity to  the assessee. For example - at the time of  recording of statements u/s 131 of the Income-tax Act, 1961, an assessee is entitled to a legal representative. 

(8) The assessing authority shall not be biased 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. 

The Supreme Court in Ashok Kumar Yadav vs. State of Haryana observed,-

"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's also the duty of all those who are expected to reasonably and fairly decide between two contending parties. 

(9) An Order shall be a speaking order. It should contain detailed recording of evidence presented by both the parties, explanation of both the sides and arguments raised by both sides followed by reasons for arriving at a particular view. The Supreme Court in S. N. Mukherjee vs. UOI observed:-

"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 is however not required that the reasons should be as elaborate as in the decision of a Court of law, the extent and nature of the reasons would depend on particular facts and circumstances."

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. 

To conclude, it is pertinent to mention that income tax laws are procedural and require strict compliance by assessee. Laws which are implemented, unless applied fairly, justice cannot be arrived at true sense. Further, procedural safeguards not necessarily ensure fair outcome especially while dealing with tax cases.  Failure of maintaining any one of these principles often lead to unending tax litigation. Hence, there is nothing where one can guarantee fair application of law and rules. However, authorities are expected to follow the above principles in a balanced way in relation to each given case after taking into consideration the facts and circumstances of the same. 

... Thank you ... ! 

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