Natural justice in tax rectification: notice and hearing are mandatory before assessment enhancement or penal interest relief is denied.

Rectification that enhances an income-tax assessment requires notice and a reasonable opportunity of hearing to the assessee; without that safeguard, the enhancement is vitiated by breach of natural justice. The same hearing requirement applies where penal interest is increased through rectification, because the assessee must be able to meet the proposed liability. The discretionary power to reduce or waive interest under the proviso to section 18A(6) read with rule 48 was also treated as applicable to penal interest cases under section 18A(8), including default situations where no advance tax was paid. Denial of hearing wrongly excluded consideration of that relief.

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Issues: (i) Whether rectification under section 35 of the Income-tax Act, 1922 enhancing the assessment could be made without notice and a hearing to the assessee. (ii) Whether the discretion to reduce or waive interest under the proviso to section 18A(6) read with rule 48 applied to cases of penal interest under section 18A(8).

Issue (i): Whether rectification under section 35 of the Income-tax Act, 1922 enhancing the assessment could be made without notice and a hearing to the assessee.

Analysis: Section 35 permitted rectification of mistakes apparent from the record, but where the rectification had the effect of enhancing the assessment, the statute itself required notice and a reasonable opportunity of being heard. The levy of penal interest increased the amount payable and therefore attracted that safeguard. Denial of notice deprived the assessee of a fair opportunity to meet the proposed enhancement and to place relevant grounds before the authority.

Conclusion: The rectification order was vitiated for breach of the principles of natural justice, and notice and hearing were mandatory.

Issue (ii): Whether the discretion to reduce or waive interest under the proviso to section 18A(6) read with rule 48 applied to cases of penal interest under section 18A(8).

Analysis: Section 18A(8) required interest to be added in the case of default in advance tax, but section 18A(6), together with its proviso and rule 48, was held applicable mutatis mutandis. The discretionary power to reduce or waive interest was not confined to part-payment cases and could also arise where no advance tax had been paid. Since the assessee was denied a hearing, the possibility of invoking that discretion was wrongly excluded.

Conclusion: The discretionary relief under the proviso to section 18A(6) read with rule 48 was applicable to section 18A(8) cases.

Final Conclusion: The assessments could not be sustained in the form made, because the assessee was denied the statutory hearing that could affect the imposition of penal interest and the available discretion for relief.

Ratio Decidendi: Where a rectification or consequential tax enhancement is proposed under the Income-tax Act, 1922, the assessee must be given the statutory notice and hearing mandated by the provision, and discretionary relief against interest may be considered even in default cases under section 18A(8) when section 18A(6) and rule 48 are attracted.

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