1962 (10) TMI 48 - SC - Income Tax

Proviso to s.35 requires show-cause before demanding penal interest; 'assessment' means total amount payable, not just tax.

Chockalingam (M.) and Meyappan (M.) Versus Commissioner of Income-tax

The SC allowed the appeal, holding that the proviso to s.35 requires giving the assessee an opportunity to show cause before demand for penal interest is ... Whether an opportunity had to be given to the appellants as required by the proviso to section 35 of the income tax act 1956 to show cause against the demand for penal interest? Held that:- Appeal allowed. The word 'assessment' is used in the proviso not as an equivalent of the tax calculated at the rate given in the Finance Act but the total amount which the assessee is required to pay. The proviso applies whenever the effect of the order is to touch the pocket of the assessee and in our opinion this was such a case. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether rectification under section 35, when it has the effect of enhancing assessment by adding penal interest under section 18A(8), can be made without giving notice to and a reasonable opportunity of being heard to the assessee as required by the proviso to section 35. 2. Whether sub-section (6) of section 18A (including its fifth proviso) is applicable mutatis mutandis to sub-section (8) so as to permit reduction or waiver of penal interest under rules (rule 48) even where sub-section (8) uses mandatory language ('shall'). 3. Whether failure to give the statutory notice and hearing under the proviso to section 35 constitutes a breach of the principles of natural justice such that orders made in consequence are amenable to judicial review by certiorari. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Necessity of notice and hearing under section 35 where rectification enhances assessment by adding penal interest Legal framework: Section 35 permits rectification of 'mistakes apparent from the record' within four years; the proviso requires that no rectification having the effect of enhancing an assessment or reducing a refund shall be made unless notice of intention and a reasonable opportunity of being heard is given to the assessee. Precedent Treatment: The High Court treated the failure to give notice as a mere procedural defect causing no prejudice and declined to quash the rectification; the judgment under review disagreed with that treatment. Interpretation and reasoning: The Court interprets 'enhancing an assessment' in the proviso as inclusive of any action that increases the total amount payable by the assessee (i.e., touches the pocket of the assessee). The addition of penal interest under section 18A(8) is such an enhancement. Hence, the proviso applies and precludes unilateral rectification without notice and hearing. Ratio vs. Obiter: Ratio - where a rectification under section 35 increases the amount payable (here by adding penal interest), the proviso mandates notice and opportunity to be heard; failure to comply is a jurisdictional defect. Conclusion: Rectification orders that have the effect of adding penal interest under section 18A(8) cannot be validly made under section 35 without giving the assessee the notice and opportunity mandated by the proviso; absence of such notice renders the order quashable. Issue 2 - Applicability of section 18A(6) provisos (and rule 48) to section 18A(8) Legal framework: Section 18A(8) directs that where no advance tax has been paid, interest 'calculated in the manner laid down in sub-section (6)' shall be added; sub-section (6) prescribes calculation and contains a fifth proviso permitting reduction or waiver of interest 'in such cases and under such circumstances as may be prescribed.' Rule 48 of the Income-tax Rules prescribes cases/circumstances allowing reduction or waiver. Precedent Treatment: A recent Supreme Court ruling (cited in the judgment) held sub-section (6) can be read with sub-section (8) despite linguistic difficulties. A Bombay High Court decision had held the fifth proviso inapplicable to sub-section (8); this Court rejects that view. Interpretation and reasoning: The Court reads sub-section (8) as importing sub-section (6) mutatis mutandis, including its provisos. The fifth proviso, read with rule 48, grants discretion to reduce or waive interest in prescribed circumstances; that discretion is available in cases arising under sub-section (8) as well as sub-sections (2) and (3). The use of 'shall' in sub-section (8) does not oust the proviso's relief; instead, 'shall' is mandatory only if relief under the proviso is not granted. The Court observes that the policy aim of section 18A is to charge interest for default but equally to allow relief in prescribed cases to mitigate rigour; rule 48 applies to part-payment and non-payment alike. Ratio vs. Obiter: Ratio - sub-section (6), including the fifth proviso, is applicable mutatis mutandis to sub-section (8), and the discretionary relief under rule 48 is available in cases where penal interest is sought to be added under sub-section (8). Conclusion: The Income-tax Officer's power to add penal interest under section 18A(8) is subject to the discretionary relief mechanisms in sub-section (6) and rule 48; therefore procedural protections (including opportunity to seek relief) must be afforded. Issue 3 - Breach of principles of natural justice and availability of writ Legal framework: Proviso to section 35 prescribes notice and reasonable opportunity where rectification enhances assessment; principles of natural justice require a person be given an opportunity to present his case before a decision adverse to him is made. Precedent Treatment: Reference is made to authorities (House of Lords decision and domestic precedent) holding quasi-judicial revenue proceedings require notice and fair hearing; failure to give such opportunity is a ground for certiorari. Interpretation and reasoning: The Court treats proceedings under section 35 (when they enhance assessment) as quasi-judicial. Where statute requires notice and hearing, omission is a breach of natural justice. The department's argument that the outcome would have been the same even if notice had been given is irrelevant - the central question is whether the statutory opportunity to be heard was provided. The Court notes special factual circumstances (delays in earlier litigation, assessments completed late) that could have justified waiver or reduction of interest, reinforcing that absence of hearing deprived the assessee of an opportunity to invoke rule 48 and the Inspecting Assistant Commissioner's discretionary relief. Ratio vs. Obiter: Ratio - failure to comply with mandatory statutory requirement of notice and hearing under the proviso to section 35 constitutes a breach of natural justice and justifies quashing the rectification by writ of certiorari. Conclusion: The rectification orders made without notice and hearing are voidable for breach of natural justice and must be quashed; the revenue remains at liberty to proceed again in accordance with statutory requirements. Cross-references and operational disposition Cross-reference: Issues 1-3 are interlinked - applicability of sub-section (6)'s proviso and rule 48 to sub-section (8) (Issue 2) makes it necessary to afford the procedural protection of section 35's proviso (Issue 1), the denial of which engages the principles of natural justice and renders the order subject to certiorari (Issue 3). Disposition: The Court quashed the rectification orders for failure to give notice and hearing, but permitted the tax authorities to take such further action as is open to them consistent with statutory procedure and principles of natural justice.