Natural justice in section 201 proceedings requires disclosure of liability basis and consideration of material replies before final order.

An order under section 201 must rest on a show cause notice that fairly discloses the proposed basis of liability and must deal with the assessee's material replies. Here, the authority did not consider two material replies, including the petitioner's comprehensive response, and relied on a dependency-based theory that had not been put to the petitioner in the notice. The Bombay High Court quashed the order and consequential demand notice, remanding the matter for fresh decision after hearing the petitioner, and held that any further point must be raised through a fresh show cause notice.

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Issues: Whether the order passed under section 201(1) and section 201(1A) and the consequential demand notice were liable to be quashed for breach of natural justice and for introducing a ground not covered by the show cause notice.

Analysis: The show cause process is intended to enable the noticee to meet the case made out against it. The impugned order referred to several replies, but it did not deal with two material replies, including the comprehensive reply filed by the petitioner. It also proceeded on the footing that the petitioner was a dependent agent or dependent permanent establishment, although that issue was not put to the petitioner in the show cause notice. In these circumstances, the order was passed without fairly considering the petitioner's responses and without giving notice of the basis ultimately adopted.

Conclusion: The impugned order and the consequential demand notice were quashed and the matter was remanded for fresh decision after hearing the petitioner. Any additional point proposed to be relied upon by the respondent was required to be raised by a fresh show cause notice.

Ratio Decidendi: An order under section 201 must be founded on a show cause notice that fairly discloses the basis of liability and must deal with material replies; a new ground cannot be introduced for the first time in the final order.

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