Natural justice in revision proceedings: a Section 263 order fell because the conduit-company allegation was never properly put for rebuttal.

A revisionary order under Section 263 could not be sustained where the assessee was not given an effective opportunity to rebut the core allegation that it was a conduit company used for treaty shopping. Although the show-cause notice referred to possible lack of enquiry on issues such as permanent establishment, fees for technical services, and the Singapore entity's commercial substance, the decisive conclusion of conduit status and absence of commercial substance was not specifically put to the assessee before the order was passed. An order causing material prejudice cannot stand when the affected party has not been heard on the very basis of the proposed action; the Tribunal was therefore correct in setting aside the revisionary order.

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Issues: Whether the Tribunal was justified in setting aside the revisionary order under Section 263 of the Income-tax Act, 1961 on the ground that the assessee was not afforded an opportunity to rebut the allegation that it was a conduit company engaged in treaty shopping.

Analysis: The revisionary authority had initially issued a show-cause notice alleging lack of enquiry by the Assessing Officer on matters such as permanent establishment, taxability as fees for technical services, and the commercial substance of the Singapore entity. However, the ultimate conclusion that the assessee was a conduit company used for treaty shopping, and that the arrangement lacked commercial substance, was not specifically put to the assessee for rebuttal before passing the revisionary order. A conclusion that materially prejudices the assessee cannot be sustained when the assessee has not been given an effective opportunity to answer the very basis on which the order rests.

Conclusion: The Tribunal correctly set aside the order under Section 263 because the assessee was denied an opportunity to meet the allegation of being a conduit company engaged in treaty shopping.

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