2014 (12) TMI 853 - HC - Income Tax

Court quashes order for lack of natural justice; directs restart of proceedings.

The court quashed the impugned order due to non-compliance with principles of natural justice and inadequacy of show-cause notices. Respondents were ... Justification of transfer of cases - Validity of show cause notice – Principles of natural justice – assessees were not provided necessary material during the course of investigation and inquiry – revenue relied upon extraneous material in order to justify the transfer of the cases - Whether at the time of issuance of show-cause notices and passing of impugned order, the requirements of natural justice have been complied with because non-observance of natural justice is itself prejudice to any man and proof of prejudice independently of proof of denial of natural justice is unnecessary – Held that:- Once show cause notice has been sought to be issued, then it was incumbent upon the respondent to have set out in detail and with precision the various acts of commission and omission to the notice of the petitioner so as to afford him an effective opportunity to meet the case of the department - the show cause notice is the foundation on which the department has to build up its case, therefore, if the allegations in the show cause notice are not specific and are on the contrary vague, lack details and/ or unintelligible or do not disclose the real material upon which a proposed action is contemplated to be drawn, then it is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice - the fundamental principle of law is that adjudication has to be within the four corners of the allegations set out in the show cause notice - Any finding given beyond the terms of show cause notice will be hit by violation of principles of natural justice. The requirement for recording of reasons in the order and making the reasons known to the assessee is to enable an opportunity to the assessee to approach the High Court under its writ jurisdiction under article 226 of the Constitution so as to enable him to challenge the order, inter alia, either on the ground that it is mala fide or arbitrary or that it is based on irrelevant and extraneous considerations - furnishing of specific and intelligible reasons for the proposed transfer of the case is only a concomitant of the concept of reasonable opportunity enshrined in section 127 (1) and (2) - unless the assessee knows the precise reasons for the transfer, he would be handicapped in putting forth his objections effectively and in case the transfer of case is based on extraneous considerations then issuance of show cause notice becomes meaningless and is reduced to an idle formality. If prejudicial allegations are to be made against a person, he must be given particulars of that before hearing, so that he can prepare his defence - The fair procedure and principle of natural justice are inbuilt into the rules - show cause proceeding is meant to give a person proceeded against a reasonable opportunity of making his objection against the proposed charges indicated in the notice - statutory authority must exercise its jurisdiction within the four corners of the law - unless a party is informed of the reasons for the proposed action, it would be impossible for the noticee to put-forth its point of view with regard to reasons for the proposed action of show-cause notice - It must be adequate so as to enable a party to effectively object/respond to the same - the show cause notices issued to the assessees were only an empty formality as the basis and foundation of the transfer of the cases is not the one for which the petitioners in fact had been asked to show-cause - The impugned order has been passed after taking into consideration the extraneous material which had never been brought to the notice of the petitioners prior to passing of the impugned order - Therefore, the action of the respondents is violative of principles of natural justice and fair play and therefore not sustainable in the eyes of law. Revenue had the jurisdiction to decide the case, but omitted to confront the assessees with the material in his possession and proceeded to pass impugned order which was founded on grounds at variance from the one in the show-cause notices which however, does not affect the ab-initio, jurisdiction enjoyed by the respondent in respect of the proceedings – thus, the order passed by respondent is not sustainable – Decided in favour of assessee. Issues Involved:1. Validity of the transfer of cases to DCIT, Central Circle, Chandigarh.2. Compliance with principles of natural justice.3. Adequacy of show-cause notices.4. Jurisdiction and procedural irregularities.Detailed Analysis:1. Validity of the Transfer of Cases:The petitioners, all income tax assessees, challenged the transfer of their cases to DCIT, Central Circle, Chandigarh. They contended that they were entitled to a fair hearing and that the principles of natural justice were not complied with, as the material forming the basis of the show-cause notices was not disclosed to them. The respondents argued that the transfer was necessary for coordinated investigation and assessment, involving financial dealings interlinked with other assessees.2. Compliance with Principles of Natural Justice:The court examined whether the principles of natural justice were adhered to during the transfer process. It was found that the reasons provided in the impugned order were not the same as those in the show-cause notices. The court emphasized that every person has the right to know the case they are required to meet, and any material used against them must be disclosed. The respondents failed to provide the relevant material during the investigation and inquiry, causing serious prejudice to the petitioners.3. Adequacy of Show-Cause Notices:The court scrutinized the show-cause notices issued to the petitioners. It was found that the notices did not mention certain allegations that were later included in the impugned order. The court held that the show-cause notices must set out in detail the various acts of commission and omission to afford the petitioners an effective opportunity to respond. The notices issued were deemed inadequate and an empty formality, as they did not disclose the real material upon which the proposed action was based.4. Jurisdiction and Procedural Irregularities:The court distinguished between lack of jurisdiction and irregular exercise of jurisdiction. It was held that while the respondent had the jurisdiction to decide the case, the omission to confront the assessees with the material in possession and the reliance on extraneous material rendered the impugned order procedurally irregular. The court referenced several precedents emphasizing the necessity of providing specific and intelligible reasons in show-cause notices to ensure compliance with principles of natural justice.Conclusion:The court quashed the impugned order dated 14.07.2014, citing non-compliance with principles of natural justice and the inadequacy of the show-cause notices. The respondents were directed to commence the proceedings afresh, strictly in accordance with the law, and provide the petitioners with an opportunity to respond to all relevant material and allegations. The petitions were disposed of, with parties bearing their own costs.