The Courts are usually flooded with writ petitions against statutory authorities over non-adherence to the principles of natural justice which has led to evolution of the principles in various dimensions. Recently, the Madras High Court thought it fit to dispose of an income-tax appeal preferred by the Revenue without extending an opportunity of being heard to the Assesee since the issue was fully covered.  

Mr. Mahesh Chhajed (Senior Partner, M.S. Chhajed & Co.) and Mr. Hem Chhajed (Partner) in their article analyse the aforesaid ruling and discuss its implications which in all probability could set a disturbing trend. They discuss the well-established principle of law enshrined in legal maxim audi alteram partem and its essential ingredients. They highlight that the principles of natural justice are not embodied rules but are evolved under common law and they check the arbitrary exercise of power by the state or its functionaries.

The authors emphasise on the importance of natural justice by referring to the provisions of the Code of Civil Procedure as well as the observations of the Apex Court in several rulings and opine that Madras High Court's order appear contrary to Article 14 of the Constitution which could lead to situation where assessees would be required to file caveats after every favourable order of ITAT. They conclude with the remark, “In the changing times of E-assessments, E-Appeals and perhaps even E-tribunals, if there is anything that needs a champion, it is the Principles of Natural Justice.”

Departure from Principles of Natural Justice - Questions Galore!

Recently the Hon’ble Madras High Court in the case of CIT v. Vinod Kumar Kundammal, [TS-6368-HC-2021(Madras)-O], has opened a Pandora’s box by not granting an opportunity of being heard and issued an adverse order against the assessee.

Brief facts of the case

The factual matrix is such that the assessee claimed exemption under Section 10(38) of the Income-tax Act, 1961 (in short 'the Act') in respect of long term capital gains arising out of sale of shares to the extent of ₹39,80,018/ - pertaining to assessment year 2014-15.. The assessee invested in shares of M/s Esaar (India) Ltd. However, the assessing officer disallowed the said exemption on the grounds stating that it has not been sufficiently proved that the assessee is involved in promoting the penny stock company and how the assessee involved in inflating the shares of the company.

According to the Assessee, the Assessing Officer mainly placed his reliance on the investigation report of Directorate of Investigation, Kolkata and a copy of the said investigation report was not furnished to the assessee.

ITAT - Chennai Order

An appeal of the assessee was directed against the order of the Commissioner of Income Tax (Appeals)-5, Chennai, dated 28.12.2018. The argument on behalf of assessee was that, an opportunity may be given to the assessee by remitting back the matter to the file of the Assessing Officer. On the contrary the argument on behalf of the revenue was, that there is sufficient reliance being placed on orders of Assessing Officer and CIT(Appeal). The Tribunal placing reliance on the case of Kanhaiyalal & Sons (HUF) v. ITO,^[1] held that the matter needs to be re-examined by the Assessing Officer. The tribunal directed to the Assessing Officer to decide the issue afresh in accordance of law, after giving a reasonable opportunity of hearing to the assessee

Madras High Court order

The Revenue appealed before the High Court of Madras, challenging the correctness of the order. The Hon’ble High Court after placing an absolute verbatim reliance on the case of CIT v. Manish D Jain^[2] disposes the appeal in favour of revenue setting the Hon’ble ITAT order.

While passing the order, the Hon’ble High Court made a surprising observation:

“Since the above legal position fully covers the issue in the case on hand, no useful purpose will be served in ordering notice to the respondent and more particularly when the above legal position attained finality and the assessee therein or any other assessee, whose case was dealt with in similar matter had filed any appeal.”[3]

Let us first analyse the principle of “Audi Alteram Partem” before coming to the observation of the Hon’ble High Court:

Audi alteram partem, common known as the Principle of Natural Justice, is a Latin Phrase meaning "listen to the other side", or "let the other side be heard as well". It is the principle that no person should be judged without a fair hearing in which each party is given the opportunity to respond to the evidence against them.

The doctrine of Audi Alteram partem has three basic essentials. Firstly, a person against whom an order is required to be passed or whose rights are likely to be affected adversely must be granted an opportunity of being heard. Secondly, the authority concerned should provide a fair and transparent procedure and lastly, the authority concerned must apply its mind and dispose of the matter by a reasoned or speaking order.[4]

Thus the essential ingredients of the Rule of 'Audi Alteram Partem' are:

1. Issuance of Notice

2. Opportunity to Present the Case

3. Opportunity to Rebut Adverse Opportunity

1.    Issuance of Notice      

The first and the foremost principle of natural justice is that no one should be condemned unheard. In the absence of notice of the kind and such reasonable opportunity, the order passed becomes non-est.[5]

2. Opportunity to Present the Case

The opportunity of being heard should be real, reasonable and effective. The same should not be for name sake. It should not be a paper opportunity.[6]  Adequate & proper opportunity of hearing should be provided to ensure fair hearing and fair deal to the assessee. [7] Where a decision is based upon a document in a proceeding, copy of the same should be provided to the affected party. Otherwise, it would violate the principles of natural justice as the opportunity of being heard should be an effective opportunity and not an empty formality.[8]

3. Opportunity to Rebut Adverse Evidences

The important facet of giving effect to one’s fair opportunity is through the right of cross-examination. The Supreme Court has held that when statements of witnesses are made basis of demand, not allowing assessee to cross-examine witnesses is a serious flaw renders order nullity, as it amounts to violation of principles of natural justice. Further the court held that  it is not for adjudicating authority or Tribunal to have guesswork as to for what purposes assessee wanted to cross-examine witnesses and what extraction assessee wanted from them.[9]

Emphasis is being made here that the principles of Natural Justice are not discretionary but required to be implemented mandatorily. The Supreme Court has observed that the principles of natural justice are those rules which have been laid down by courts as being the minimum protection of the rights of the individual against the arbitrary procedure that may be adopted by a judicial, Quasi–judicial and administrative authority while making an order affecting those rights. These rules are intended to prevent such authority from doing injustice. [10]

Attention is also drawn to section 260A of the Income Tax Act, 1961 which is produced hereunder:

260. Appeal to High Court.

…………

(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question:

…”

Hence even under the Income Tax Act, it is mandatory for the Hon’ble High Court to provide an opportunity to the Respondent.

Attention is also drawn to Rule 6 of the Order IX of the Code of Civil Procedure, 1908 (“CPC”):

“6. Procedure when only plaintiff appears—

(1) Where the plaintiff appears and the defendant does not appear when the suit is called on for hearing, then-

(a) When summons duly served--if it is proved that the summons was duly served, the Court may make an order that the suit shall be heard ex-parte.

(b) When summons not duly served-if it is not proved that the summons was duly serve, the Court shall direct a second summons to be issued and served on the defendant;

(c) When summons served but not in due time-if it is proved that the summons was served on the defendant, but not in sufficient time to enable him to appear and answer on the day fixed in the summons, the Court shall postpone the hearing of the suit to future day to be fixed by the Court, and shall direct notice of such day to be given to the defendant.

(2) Where it is owing to the plaintiffs' default that the summons was not duly served or was not served in sufficient time, the Court shall order the plaintiff to pay the costs occasioned by the postponement.”

Thus even under the CPC, it is mandatory to provide an opportunity to the defendant/ respondent. If and only if the defendant/ respondent fails to appear before the court of law on the date fixed for hearing, then, the defendant/ respondent can be proceeded against ex-parte.

The importance of Principles of natural justice have been emphasized time and again by the Supreme Court that it is a “pervasive facet of secular law where a spiritual touch enlivens legislation, administration and adjudication, to make fairness a creed of life. It has many colors and shades, many forms and shapes and, save where valid law excludes, it applies when people are affected by acts of Authority. It is the bone of healthy government, recognized from earliest times and not a mystic testament of judge-made law.”^[11]

Natural justice principles are not embodied rules, they are evolved under the common law, and they check the arbitrary exercise of power by state or its functionaries. The primary idea is to imply the duty to act fairly, secure justice or prevent miscarriage of justice.^[12] The observance of these principles are pragmatic requirement of fair play. ^[13]

Amongst few exceptions of Principles of Natural Justice, one is statutory exclusion by the legislature. Where a statutory provision either specifically or by inevitable implication excluded the application of the rules of natural justice, then the court cannot ignore the mandate of the Legislature and extend the application of the rules even to the excluded categories.^[14] However, the requirement of giving a reasonable opportunity of being heard before an order is made, is generally read into the provisions of a statute, particularly when the order can have adverse civil consequences for the party likely to be affected. The principle will hold good irrespective of whether the power conferred on a statutory body or the Tribunal is administrative or quasi-judicial.^[15]

The author respectfully submits that the Hon’ble High Court has opened the Pandora’s box by deliberately choosing to not issue notice to the respondents. Further the observation that the other assessee’s case whose order is relied upon in the current case has not preferred any appeal before the Hon’ble Supreme Court, the High Court has held that the legal position has reached finality and thus no opportunity is required to be given, which would set a disturbing trend. The precedent, if any, unless settled by the Hon’ble Supreme Court is binding upon the Revenue and not the Assessee. The assessee are not and cannot be treated at par with the Exchequer.

These observations of the Hon’ble High Court, appear contrary to fundamental jurisprudence enshrined in Article 14 of the Constitution of India and should be treated as per incurium, as it could lead to assessees’ being mandatorily required to file caveats  after every favourable order by the Tribunals. In the changing times of E-assessments, E-Appeals and perhaps even E-tribunals, if there is anything that needs a champion, it is the Principles of Natural Justice.

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[1] Kanhaiyalal & Sons (HUF) v. ITO in I.T.A. No.1849/Chny/2018

[2] CIT v. Manish D Jain, [TS-5864-HC-2020(MADRAS)-O]

[3] CIT v. Manish D Jain, [TS-5864-HC-2020(MADRAS)-O]

[4] MP Jain & SN Jain: Principle of Administrative Law 7th Edition 2013; CHAPTER X PRINCIPLES OF NATURAL JUSTICE ORFAIRNESS

[5] Canara Bank v. Debasis Das (2003) 5 ILD 386 (SC)

[6] CIT v. Panna Devi Saraogi [TS-5077-HC-1970(Calcutta)-O].

[7] Rameshwaram paper Mills Pvt. Ltd. v. State of U.P. & others, (2009) 11VLJ 33 (All)

[8] E. Vittal v. Appropriate Authority [TS-5607-HC-1996(Andhra pradesh)-O]

[9] Andaman Timber Industries v. Commissioner of Central Excise-Kolkata-II [TS-5054-SC-2015-O]

[10] Canara Bank V. V K Awasthi, AIR 2005 6 SCC 321

[11] Mohinder Singh Gill v. Chief Election Commissioner AIR 1978 SC 851

[12] Automotive Tyre Manufacturers Association v Designated Authority 2011 (263) E.L.T 481 (SC)

[13] C.B. Gautam v. Union of India [TS-5043-SC-1992-O]

[14] Laxmandas Pranchand v. Union of India [TS-5527-HC-1997(Madhya pradesh)-O].

[15] Sahara India (Firm) v. CIT [TS-97-SC-2008-O]