Natural justice in tax assessment: undisclosed investigative material and inadequate hearing led to quashing and remand.

An adverse input tax credit disallowance based on Investigation Branch findings could not stand where those findings were not disclosed to the assessee, no meaningful opportunity was given to respond, and the assessment order did not record adequate reasons. The Court held that reliance on undisclosed material and an inadequate hearing breached the principles of natural justice. The impugned assessment was quashed and set aside, and the matter was remanded for fresh consideration after supplying the investigative material, permitting a reply, and granting a personal hearing.

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Issues: Whether the disallowance of input tax credit and the assessment order were liable to be set aside for breach of natural justice and whether the matter required de novo consideration.

Analysis: The assessment order disclosed only that the input tax credit was disallowed on the basis of findings from the Investigation Branch, without indicating what those findings were, whether they had been supplied to the assessee, or whether any opportunity was given to explain them. Where material adverse to an assessee is proposed to be relied upon, fairness requires prior disclosure of that material and a meaningful opportunity of response. The order also failed to record reasons sufficient to explain the disallowance. In these circumstances, the hearing granted to the petitioner was held to be inadequate and the procedure adopted contrary to the principles of natural justice.

Conclusion: The impugned order was quashed and set aside and the matter was remanded for fresh consideration after supply of the Investigation Branch findings, filing of reply, and grant of personal hearing. The remand was ordered in favour of the assessee.

Ratio Decidendi: An adverse tax assessment based on undisclosed investigative material, without prior supply of that material and an effective opportunity to respond, violates the principles of natural justice and cannot be sustained.

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