Law is the mechanism of the justice and the mechanical, the human component of this great machine is the natural justice. Natural justice is the soul of the machine of justice. Natural justice is the very foundation, upon which is based the dispensation of justice. Justice, to be true has to be arrived at by a process which must have been behind it, the sanction of good conscience, equity and fair play.
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 facts 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.
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.
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.
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.
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.
It may be mentioned at this stage that the principles of natural justice are varied and cannot be imprisoned in a code or in set of rules, as the jurists say, they cannot be put into a “straitjacket formula”. However, the principles find expression mainly in two broad rules. So far as our Income-tax Law is concerned it may however, be noted that the first rule of a natural justice that no one shall be judge in his own cause is statutorily excluded, for the Income Tax Officer is required to act as judge in his own case. The Income Tax Officer is the assessing authority, he conducts investigation into the business affairs of the assessee, collects materials against the assessee and finally frames the assessment order in which such adverse materials are relied upon for making an assessment. This also applies to penalty proceedings. In some cases, he also conducts search and seizure under the Act and examines the assessee and his relatives or the other person in respect of seizure and other materials. Sections 143 and 144 provide for Income Tax Officer alone making the assessment. There is indication in section 143(3) and section 144 that the Income Tax Officer alone has to require the assessee to produce materials. As regards penalty matter too, the Income Tax Officer (and other authorities) is to gather the materials and to frame an order imposing penalty. In view of the specific provisions in the Income-tax Act, 1961, the first rule of natural justice cannot be said to be applicable.
The second rule is that no decision should be given against a party without affording reasonable opportunity of being heard or the rule as is expressed by the maxim ‘audi alteram partem’. The Act itself provides for an opportunity of being heard in express terms and this salutary principle is statutorily recognised under the Income Tax Laws. Examples of such statutory provisions are to be found in section 127 (1) and section 142(3) and various other sections of the 1961 Act. Beside the statutory recognition, there may arise the circumstances under which the taxing authorities are bound to follow the rules of natural justice by implication. In fact it can be said in all proceedings it would be the safest and most ideal to observe rules of natural justice except where the statutory provisions are clearly to the contrary. Further, vast discretionary powers are given to the various Income Tax Authorities under the Income tax Act, 1961. Such powers are to be exercised not capriciously but on judicial grounds and for substantial reason.
Taxation is the prerogative of the legislature. Article 265 of the Constitution declares that “no tax shall be levied or collected except by the authority of law”. Therefore, in view of the Article 265 read with Article 14 of the Constitution of India guaranteeing the right, equality, it is very much imperative that orders and decisions of the Income Tax Authorities are taken not only with due observance of the mandatory provisions of law, but the same are also taken by scrupulously following the principle of natural justice. The right to impose taxes and to determine the circumstances under which these would be done is the privilege of the legislative power. The administration of the tax laws is however, the responsibility of the executive. A legal attack on the tax laws cannot be made on the ground that the same is unjust or excessive. But the application of the law must be correct. It is matter of public interest that the tax- payers are protected against unlawful decisions and actions of the taxing authorities.
The principles of natural justice form an integral part of procedural fairness and justness, thereby excluding the scope of arbitrariness. Even though the right of hearing, which forms a part of the principles of natural justice, before an order is passed under some of the provisions of the Income-tax Act, 1961, is not specifically provided by the Act, compliance with at least the minimal rules of natural justice as expressed by the maxim ‘audi alteram partem’ is necessary. Recording of reasons, as well as their communication to the affected party is a must for a valid order. The various High Courts as well as the Supreme Court of India has consistently held in many cases that such a right forms an integral part of a proceeding under the provisions of the Income Tax Laws and the denial thereof would vitiate the entire proceeding, which is liable to be set aside. It has been held consistently that the rules of natural justice must be complied with by the appropriate authority by giving a fair and adequate opportunity of hearing to the affected party before an order involving civil consequences is passed under the Income Tax Laws.
Taxing statute provides three stages in the imposition of tax. First, there is a declaration of liability that is the part of the statute which determines that persons in respect of what property are liable. Next, there is assessment. Liability does not depend on assessment, which particularises the exact sum which a person has to pay. Lastly, comes the method of recovery of the taxes person does not voluntarily pay. The Income-tax Act, 1961 though contains various provisions embodying the principles of natural justice, yet there are certain areas where the non-compliance of the statutory provisions in its true spirit has been held to be violative of the principles of natural justice. Again there are certain provisions under the Income Tax Laws wherein, though no specific provisions have been made incorporating the principle of natural justice, yet these principles have been held to be a part of a proceeding initiated and concluded under the Income Tax Laws.
Rules of natural justice are embodied in the provision of service of notice on the party likely to be affected by a proceeding conducted and concluded under the provision of Income-tax Act, 1961. Notice is knowledge of facts which would lead a person to make enquiry.
‘Due process’ clause in the Constitution of the United States of America includes the concept of natural justice as substantively understood, but its procedural technique has been secured in the Administrative Procedure Act, 1946. The four essentials of due process concept are
1) Notice of hearing
2) Opportunity of hearing
3) Impartiality of Tribunal, and
4) Orderly course of procedure.
A notice of hearing is in fact, the prerequisite of the other three essentials, as it will be difficult for any person to avail himself of the opportunity of hearing or sticking to claim impartiality of a Tribunal or of the orderly course of procedure unless he knows that a hearing is going to take place.
Service of notice is a condition precedent for the making of an order of assessment by the authorities under the Income-tax Act, 1961. The assessee in law is entitled to rebut the material placed before him, if he so chooses and any material placed on record without notice to the assessee cannot be relied upon by the Revenue being violative of the principles of natural justice. The importance of issuing notice in income tax proceedings is so much so that even an order of rectification which has the effect of enhancing the income tax liability of an assessee becomes invalid in law, if passed without issuing a valid notice and affording opportunity of hearing.
Principles of natural justice demand a service of valid notice to the assessee before any adverse action is to be taken against the assessee by Income Tax Authorities.
If the Income Tax Officer desires to pass assessment under section 143(3), he must serve notice under section 143(2) on the assessee and the service of the notice to the representative to whom no authority to receive notice is given is not valid. The same is true about hearing notice to be given for appeal. Similarly, appeal cannot be decided ex parte.
Rules of natural justice are embodied in the provisions of service of notice in the Indian Income Tax laws. When these rules are not followed while serving notice on the assessee, there is the violation of the principle of natural justice and it is therefore now, trite law that rules of natural justice must be followed by Income Tax Authorities.
In a plethora of judicial pronouncements the Supreme Court has held that the tax authority is entrusted with the power to make assessment of tax liability of a person discharging quasi- judicial functions, and such officers are bound to observe the principle of natural justice in reaching their conclusion as regards the tax liability. This observation by the Apex Court makes it amply clear that assessing officer under the Income-tax Act, 1961, while making assessment, discharge quasi-judicial functions, and is bound to follow the principle of natural justice. A duty to act fairly, that is in consonance with the fundamental principle of substantive justice is generally implied upon them because the presumption is that in a democratic polity wedded to the rule of law, the State or the legislature doesn’t intend that in the exercise of their statutory powers, its functionaries should act unfairly and unjustly.