Natural justice requires notice and hearing before rectification that increases liability; penal interest cannot be added without opportunity.

The text addresses whether rectification under the tax statute can add penal interest without prior notice and hearing where a proviso requires opportunity to be heard. It explains that the proviso to the rectification power mandates notice and a reasonable opportunity whenever rectification would enhance liability or reduce a refund, and that the discretionary waiver or reduction mechanism applicable to interest calculations applies mutatis mutandis to penal-interest additions. Failure to afford the opportunity to seek discretionary relief engages principles of natural justice and renders such rectification vulnerable to challenge; accordingly, rectification increasing an assessee's liability must comply with the notice-and-hearing proviso.

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Issues: Whether the Income-tax Officer, acting under section 35 of the Income-tax Act, could, without giving notice and a hearing as required by the proviso to section 35, rectify an assessment so as to add penal interest under section 18A(8) and whether the failure to give such notice and opportunity violated the principles of natural justice.

Analysis: The Court considered the statutory scheme: section 35 permits rectification of mistakes apparent from the record but contains a proviso requiring notice and a reasonable opportunity of being heard where rectification would have the effect of enhancing an assessment or reducing a refund. Section 18A(8) mandates addition of interest where advance tax has not been paid, and subsection (6) prescribes the manner of calculation including a proviso empowering reduction or waiver of interest in prescribed cases; rule 48 of the Income-tax Rules, 1922 specifies those cases. The Court held that subsection (6) and its provisos, including the discretion to reduce or waive interest under rule 48, apply mutatis mutandis to cases arising under subsection (8). Because the discretion under the proviso to subsection (6)/rule 48 can operate to reduce or waive interest, any rectification under section 35 which increases the taxpayer's liability by adding penal interest engages the proviso to section 35 and thereby requires notice and a hearing. The appellants were not given notice or an opportunity to present their case to the Inspecting Assistant Commissioner; this denial prevented consideration of discretionary relief and constituted a breach of the principles of natural justice. The Court rejected the argument that the mandatory language of subsection (8) ousted the application of the provisos and ruled that the obligation to afford a hearing stands where the rectification has the effect of enhancing the amount payable by the assessee.

Conclusion: The failure to give statutory notice and a reasonable opportunity to be heard before rectifying the assessments to add penal interest under section 18A(8) violated the principles of natural justice; the orders adding penal interest are quashed and the appeals are allowed in favour of the appellants.

Ratio Decidendi: Where a statutory proviso requires notice and an opportunity to be heard before a rectification under a tax statute can enhance an assessee's liability, that requirement must be complied with even if the substantive provision otherwise mandates addition of penal sums; failure to comply constitutes breach of natural justice and renders the rectification voidable.

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