Natural justice in tax assessment led to setting aside a belated disallowance and remand for fresh hearing.

Disallowance under Section 40(a)(iib) of the Income-tax Act was set aside because the specific allegation was introduced only in the final show-cause notice, leaving the assessee without a timely or effective opportunity to respond. The assessment order also failed to address the detailed reply and legal objections, instead repeating the notice without meaningful consideration. The court held that the procedural fairness required in such an assessment was not satisfied and remitted the matter to the Assessing Officer for fresh consideration after granting a proper hearing.

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Issues: Whether the assessment order sustaining the disallowance under Section 40(a)(iib) of the Income-tax Act, 1961 was liable to be set aside for violation of natural justice and for want of adequate opportunity.

Analysis: The disallowance was introduced only in the final show-cause notice, after a prolonged gap in the assessment proceedings, and the assessee had not been given a timely or effective opportunity to meet the specific allegation. The impugned order merely repeated the show-cause notice and did not engage with the detailed reply or the legal objections raised by the assessee. In view of the sequence of notices, replies, and the belated crystallisation of the issue, the procedural fairness required in an assessment of this magnitude was not satisfied.

Conclusion: The disallowance under Section 40(a)(iib) was set aside and the matter was remitted for fresh consideration by the Assessing Officer after granting the assessee an opportunity of hearing.

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