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.

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. Issues: Whether the Income-tax Officer's rectification under section 35 to add penal interest under section 18A(8) without issuing the notice and giving the assessee an opportunity of hearing as required by the proviso to section 35 breached the principles of natural justice and accordingly whether the orders adding penal interest should be quashed.Analysis: Section 35 permits rectification of mistakes apparent from the record but its proviso requires notice and a reasonable opportunity of being heard where the rectification would have the effect of enhancing an assessment or reducing a refund; addition of penal interest under section 18A(8) affects the total amount payable by the assessee. Section 18A(8) applies mutatis mutandis with sub-section (6) so that the discretionary relief under the fifth proviso to section 18A(6), exercised under rule 48 of the Income-tax Rules, 1922, is available in cases arising under sub-section (8). Where such discretion exists and the statutory proviso to section 35 mandates a hearing before enhancement, failure to issue notice and afford an opportunity to present grounds for reduction or waiver denies the assessee the statutory decision-making process and a fair hearing. The absence of notice in such circumstances is a breach of natural justice and warrants judicial review by certiorari.Conclusion: The orders of the Income-tax Officer adding penal interest without issuing the notice and affording a hearing are quashed; the Income-tax Officer is free to proceed in accordance with law after giving the required notice and opportunity to the assessee.