Special bench constitution under tax law must satisfy fairness, notice, and natural justice when a pending appeal is shifted.

A special bench under Section 255(3) may be constituted by the President, but where the entire appeal of one assessee already before a regular bench is shifted at the rival party's instance, the exercise must satisfy fairness and natural justice. A private interaction between the revenue representative and the Vice President, without notice to the assessee, and reliance on political sensitivity as a factor rendered the process unfair and irrelevantly influenced. The regular bench's observations were not a clear recommendation for a special bench and could not sustain the order. The special-bench constitution order was quashed.

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Issues: (i) whether the President could, in the facts of the case, constitute a special bench under Section 255(3) of the Income-tax Act, 1961 when the regular bench was already seized of the appeal; (ii) whether the decision-making process was vitiated by breach of natural justice and unfairness, including the private interaction between the revenue representative and the Vice President and the introduction of political sensitivity as a consideration; (iii) whether the impugned order could be sustained on the basis of the regular bench's opinion.

Issue (i): whether the President could, in the facts of the case, constitute a special bench under Section 255(3) of the Income-tax Act, 1961 when the regular bench was already seized of the appeal.

Analysis: The statutory scheme permits constitution of a special bench either on a judicial reference under the Tribunal's procedure or suo motu by the President. However, the manner in which the power is exercised depends on the context. Where the reference is broad-based, aimed at settling a question of law generally, the exercise may remain administrative. Where, as here, the entire appeal of one assessee pending before a seized regular bench is singled out at the instance of the rival party, the exercise assumes a targeted character and must conform to fairness and natural justice.

Conclusion: The President was not barred from acting under Section 255(3), but the power could not validly be exercised in the manner adopted in this case.

Issue (ii): whether the decision-making process was vitiated by breach of natural justice and unfairness, including the private interaction between the revenue representative and the Vice President and the introduction of political sensitivity as a consideration.

Analysis: The private meeting between the revenue's representative and the Vice President in an ongoing contested matter, without notice to the assessee, was improper and undermined the fairness of the process. The Vice President played a substantial part in the chain of decision-making and also introduced an irrelevant consideration of political sensitivity into a tax dispute. In a matter where the entire appeal of a party is shifted to a special bench on the request of the opposite side, the affected party was entitled to be heard by the President before such an order was made. The process lacked transparency, fairness, and the appearance of impartial decision-making.

Conclusion: The decision-making process was vitiated by breach of natural justice, unfairness, and irrelevance of the considerations relied upon.

Issue (iii): whether the impugned order could be sustained on the basis of the regular bench's opinion.

Analysis: The regular bench did not unequivocally recommend constitution of a special bench. It rejected the grounds urged by the revenue and only suggested that the matter be heard outside Andhra Pradesh by an appropriate bench. That was not the same as a clear recommendation for a special bench. The President's order recorded no independent reason and could not be justified merely by reading the regular bench's observations as an implied approval of a special bench.

Conclusion: The impugned order could not be sustained on the basis of the regular bench's opinion.

Final Conclusion: The writ petition succeeded and the special-bench constitution order was quashed because the entire decision-making process was held inconsistent with fairness, transparency, and the rule of law.

Ratio Decidendi: A special bench may be constituted by the President under Section 255(3) of the Income-tax Act, 1961, but when the exercise is targeted at the entire appeal of a litigant already seized by a regular bench and is initiated at the instance of the opposing party, the affected party must be heard and the process must be fair, transparent, and free from irrelevant or tainted considerations.

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