This article has been written by Jordi Malayil, pursuing the Certificate Course in Advanced Civil Litigation from LawSikho.
Table of Contents
Introduction
The term ‘natural justice’ is not stated in any law. It has evolved in the course of time through several judgments and decrees of courts all over the world. The idea was first introduced in the Magna Carta, a royal charter of rights, signed by King John of England, in 1215. Clause 39 of the Magna Carta said that without a lawful judgment of the equals or by the law of the land, no individual shall be seized, or imprisoned, or stripped of his rights of possessions, or outlawed, or extradited.
Natural Justice is the very foundation of any legal system. It characterizes fairness, reasonableness, equity, and equality. Natural justice, a common-law concept, represents the procedural principles developed through the interference of the courts. It must be followed by all administrative agencies in taking any decision prejudiced against the rights of an individual.
In India, natural justice or procedural due process emerged in different areas of the legal system, including tax proceedings, by way of judgments of eminent jurists. It is a practice that the taxation authorities consider tax proceedings as summary proceedings and, henceforth, want to follow the due process to ensure natural justice to an assessee. This approach is not only bad in law but also would not help the fair, equal and reasonable functioning of the taxation department. It will open Pandora’s box of litigation. Here, the article discusses at length about natural justice, its main rules, what the Indian Constitution says, the importance of natural justice in tax proceedings, and court rulings.
Principle of natural justice: a brief discussion
Primarily, natural justice revolved around two rules:
- Nemo judex in causa sua (No one should be the judge in his/her own case.
- Audi alteram partem (Each party should be given the opportunity to be heard). In the course of time, speaking order or reasoned order, the third rule of natural justice has developed. It says that the order.
A fair and impartial hearing is the root of the first principle. The judge must be impartial and decide the case objectively on account of the evidence on record. If a judge, whatever reason it may be, cannot issue an order objectively, he/she would be said to be biased in his/her decision. Biasness apparently in many ways and affects decisions in many ways. Bias can be categorized as;
- Personal bias
- Pecuniary bias
- Subject matter bias
- Preconceived notion bias
- Departmental bias.
The second rule states that the person who is likely to be affected by the decision must be heard before a decision is given. This rule gives certain rights to the aggrieved party. They are:
- Right to have notice
- Right to present case and evidence
- Right to rebut adverse evidence
- Cross-examination
- Legal representation
- Have the report of the inquiry
- Post decisional hearing.
The third rule has slowly taken the root of natural justice. It assumes the order which prejudices the rights of an individual must be a speaking order. A plain order, having no reason to support it, may be passed in an arbitrary and irresponsible manner. It will ultimately defeat the cause. The person against whom the order passed must know the reasons for such an order. On several occasions, the Supreme Court has taken the view that a non-speaking order amounts to depriving a party of a right of appeal.
There are certain exceptions to the doctrine of Audi alteram partem. In case of an emergency, authorities can take action without a hearing. Also, in cases of confidentiality, routine matters, exclusive legislative action, where no right of a person is infringed, exclusion in the case of statutory exception or necessity, exclusion of contractual arrangement, exceptions to the principles of natural justice are allowed.
In Swadeshi Cotton Mills Vs Union of India, the Supreme Court stated, “the rules of natural justice can operate only in areas not covered by any law validly made. If a statutory provision either specifically or by inevitable implication excludes the application of the rules of natural justice then the Court cannot ignore the mandate of the Legislature. Whether or not the application of the principles of natural justice in a given case has been excluded in the exercise of statutory power depends upon the language and basic scheme of the provision conferring the power, the nature of the power, the purpose for which it is conferred and the effect of that power.”
Is the principle of natural justice embodied in the Indian Constitution?
Even though the term natural justice is not mentioned anywhere in the Indian Constitution, the gist of the idea is implicitly seen in it. The principles of natural justice are embodied in Articles 14 and 21 of the Indian Constitution. Article 14 guarantees equality before the law. It states that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India. This Article act as the protector of the citizen of India against any arbitrary and discriminating state action.
In Delhi Transport Corporation Vs. DTC Mazdoor Union (1990), the Supreme Court clarified the Audi alteram partem rule that embodied in the Article 14 not only applicable to quasi-judiciary but the authorities which passed the administrative order also. In Maneka Gandhi Vs. Union of India (1978), the Supreme Court observed that the principles of natural justice are an intrinsic part of the equality offered by Article 14.
Article 21 guarantees protection of life and personal liberty. It dictates that no person shall be deprived of his life or personal liberty except according to procedure established by law. In Maneka Gandhi Vs. Union of India, the Supreme Court made it clear that the procedure confirmed in Article 21 should be just, fair and reasonable. In this case, Justice V.R. Krishna Iyer opined that the law prescribed a procedure for deprivation of life and personal liberty in Article 21 could not be any sort of procedure, but it had to be one that was neither arbitrary nor unfair nor unreasonable. He summed up that the ‘procedure’ in Article 21 means fair, not formal procedure, and ‘Law’ is reasonable law, not any enacted piece. This interpretation makes the words of ‘procedure established by law’ mentioned in Article 21 seem to be a synonym of ‘procedural due process in the U.S. Constitution, and it attracts the right of hearing under the principle of natural justice.
Articles 22, 32, 136, 226, and 311 also guarantee natural justice. Further, glimpses of the principles of natural justice shall be seen in the preamble of the Indian constitution. In the beginning, it proclaims that the people of India solemnly constitute India into a sovereign socialist secular democratic republic. Besides, it guarantees all its citizens justice, liberty, equality, and fraternity. Here, we can see the remnants of the principles of natural justice. Moreover, the Directive principles of state policy contain subtleties of natural justice. Article 39-A advocates for socially, economically, and politically backward sections of people.
Natural justice and taxation proceedings
Rules of natural justice are not incorporated expressly in either Income Tax Act, 1961 or any other statute. The concept has undergone vast changes. The thin distinction between administrative and quasi-judicial acts has withered away. Even an administrative order that resulted in civil consequences must be conformant with natural justice.
Where the statute is silent about the observance of the principles of natural justice, such statutory silence is considered to be the implication of the principles of natural justice. As the implication of natural justice being assumed, it may be excluded by express words of the statute or by necessary intendment.
In the case of Rajesh Kumar Vs. Dy. CIT (2006), the Supreme Court held that when the action of a statutory authority results in civil or evil consequences, the principles of natural justice are required to be followed even in the absence of a statutory provision. It is well settled that the income tax authority must adhere to the principles of natural justice while acting in their quasi-judicial capacity.
In State of Kerala Vs. K.T. Shaduli Yusuf (1977), the Supreme Court remarked that the tax authorities, which are empowered to assess tax, discharge quasi-judicial functions, and they are bound to observe the principles of natural justice while passing the order.
Nemo judex in causa sua and taxation proceedings
The first rule of natural justice, Nemo judex in causa sua, is, however, practically excused in taxation proceedings when the Income Tax Officer is required to act as a judge. As an assessing authority, the Income Tax Officer conducts an investigation, collects materials, and frames assessment orders. In some cases, the officer must conduct search, seizure, and examine the assessee and relatives or other persons related in respect of search and materials seized. Sections 143 and 144 of the Income Tax Act bestow Income Tax Officer alone making the assessment. There are suggestions in section 143 (3) and section 144 that the Income Tax Officer alone has to require the assessee to produce materials. In case of penalty matters, the Assessing Officer gathers materials and issues an order imposing a penalty. On account of the specific sections in the Income Tax Act, the first rule of natural justice is practically futile to be applied.
Audi alteram partem and taxation proceedings
The rule that no decision should be given against a party without giving an opportunity to be heard is reasonably embodied in different sections of the Income Tax Act. Such statutory provisions can be found in various sections. For example, Sections 127 (1), 142 (3), and many other sections statutorily giving an opportunity to an assessee to be heard. Sections 142 (1), 148, 153 A, etc., empowers the Assessing Officer to issue notice to the assessee. In addition to the statutory provisions in the Act, in many occasions, officers are bound to take decisions in accordance with the rules of natural justice that are implied. Furthermore, various court rulings have asserted the importance of following rules of natural justice in reaching any conclusion in tax matters.
In Suraj Mall Mohta Vs. A. V. Visvanatha Sastri (1954), the Supreme Court opined that the assessment proceedings before the Income-tax Officer are judicial proceedings, and all requirements of such judicial proceedings must be observed before passing the order. The assessee has a right to examine the records and relevant documents, if any, before called upon to present evidence in rebuttal. This right has not been restricted by any express provision of the Income Tax Act. Judicial proceedings pass through various steps to reach the end of justice. Important steps are:
A. Right to have notice
This is the base of the structure of natural justice. Unless an assessee knows the subjects and issues related to the case, he/she could not properly present his/her arguments. For this, it is a prerequisite to send a notice. It must be precise and unambiguous. Further, authorities must give the assessee adequate time to respond. Absence of the notice and reasonable time for the response, the order passed will be vitiated.
In Maruti Suzuki India Ltd. Vs. Add. CIT (2010), Delhi High Court ruled that the grounds of the case conveyed to the assessee needed to be cogent and unambiguous. It is essential that a party should be put on notice of the case before any adverse order is passed against him/her.
In Tata Tech Ltd. Vs. Commissioner of Central Excise Vs. (2008), the Supreme Court held that the show cause notice is the foundation in the matter of levy and recovery of duty, penalty, and interest, and if the point is not raised in the show cause notice, it cannot be raised at the appellate stage.
In Uma Nath Pandey Vs. State of U.P. (2009), the Supreme Court made it clear that the time given to the assessee should be adequate to make his/her representation. In CCE Vs. ITC Ltd. (1995), the Supreme Court held that the authority should ask the assessee to show cause, why he/she should not be imposed higher tax before any decision.
B. Right to present case and evidence
The assessee can present his/her representation either in writing or oral. Unless giving the opportunity for the assessee to represent, the requirements of natural justice could not meet. In Dhakeshwari Cotton Mills Ltd. Vs. Commissioner of Income Tax (1954), the Supreme Court ordered that the authorities should give enough opportunity to the assessee to place any relevant material as evidence.
In Padam Traders Vs. The State of U.P., the Supreme Court observed that the authorities should give a reasonable opportunity to the petitioner for hearing before passing the order. The Court emphasized that the power should be exercised in conformity with the principles of natural justice, equity, and good conscience.
C. Right to rebut adverse evidence
It is prudent that the assessee must be informed about the evidence against him/her. There is no need to give the adverse material to the assessee in all cases. It is adequate giving the summary of adverse evidence, provided it must be clear and unambiguous. If the assessee does not get the adverse material, he/she could not defend his/her case.
In-State of Kerala Vs. K.T. Shaduli Yusuf (1977), the Supreme Court held that the tax authority could even rely on private opinion or assessment provided for its conclusion, the same would be revealed to the assessee, and the assessee should give an opportunity to rebut the same. The bench, headed by Justice P.N. Bhagwati, also stated that whether demanding cross-examination of witnesses or not, would depend upon the nature of the materials relied upon by the tax authorities, the manner in which the assessee can rebut those materials, facts, and circumstances of each case.
In Dhakeswari Cotton Mills Ltd. Vs. CIT (1955), the Supreme Court held that every person has the right to know the evidence to be used against him/her, and nothing should be used against a person that has not been brought to his/her notice.
D. Cross-examination
Cross-examination is the most effective weapon to elicit evidence from the other side’s witness. In the absence of cross-examination, the person against whom the assessment process started cannot put up an effective defense. Once the witness has deposed, refusing cross-examination would definitely amount to the violation of natural justice.
In Andaman Timber Industries Vs. CCE (2015), the Apex Court opined that refusing the assessee to cross-examine the witness on whose deposition the order framed was a serious drift from justice that made the order void. In Kishinchand Chellaram Vs. CIT (1980), the Supreme Court made it clear that the authorities cannot use the statement without giving an opportunity of cross-examination. In the case of Lakshman Exports Ltd. Vs. CCE (2005), the Supreme Court held that the denial of the right to cross-examination would amount to a denial of the right to be heard.
E. Legal representation
The opportunity to rebut adverse evidence involves reliance on legal representation. Normally representation through a lawyer is not considered as an indispensable part in administrative proceedings. The legal representation is denied on the ground that lawyer’s interference shall complicate the matter, prolong the procedure, and destroy the desired informality of the proceedings. However, the Income Tax Act permits legal representation, as a matter of fact. The assessee can be represented by an advocate or a local public accountant before the tax tribunal. As per the provisions of Section 288 of the Income Tax Act, the assessee can engage a legal practitioner or an accountant before tax authority or appellate tribunal.
F. Have the report of the inquiry
As the legal right to inspect and take copies of all relevant documents, the assessee has a right to see the report of the inquiry so that he/she shall present his/her claims. Several sections of the Income Tax Act, including 142 A (6), 269 F (8), provide copies of the reports to the assessee.
In I.E. Vittal Vs. Appropriate Authority (1996), Andhra Pradesh High Court ruled that the copy of the document, on which a decision has been made, should be provided to the affected party, otherwise, it would violate the principles of natural justice.
Section 144 C of the Income Tax Act necessitates the Assessing Officer to issue a draft assessment order to the assessee that enables him/her to file an objection before the Dispute Resolution Panel. There are many instances wherein the Assessing Officer has proceeded to issue final order without issuing a draft order, forcing the assessee to approach the court for justice.
In Zuari Cement Ltd. Vs. ACIT (2013), the Andhra Pradesh High Court ruled that the failure to pass a draft assessment order would result in the final assessment order ‘without jurisdiction, null and void and unenforceable.’ In Turner International India Pvt. Vs. Deputy Commissioner of Income Tax (2017), the Delhi High Court took the same position.
G. Post decisional hearing
When natural justice is the underlying tool of impartial and unbiased court orders, the pre-decisional hearing is the standard norm of Audi alteram partem. If there is any procedural deficiency in pre-decisional hearing, it can be resolved by using post decisional hearing. Though pre-decisional hearing must be the rule, post decisional hearing only be applied in exceptional circumstances. It must be applied judiciously. Post decisional hearing mechanisms may be resorted to only when pre-decisional hearing may not be possible and the only choice to have either no hearing or post decisional hearing.
The post-decisional hearing has been introduced in India by the Supreme Court in the case of Maneka Gandhi Vs. Union of India. In Sahara India Vs. Commissioner of Income Tax (2008), the Supreme Court observed that the person affected must have a reasonable chance of being heard, and the hearing must be genuine and not an empty public relations exercise. The post-decisional hearing is not a substitute for a pre-decisional hearing. The Apex Court further added that the principle of Audi alteram partem can be excluded only when a statute contemplates a post decisional hearing amounting to a full review of the original order on merit.
Need for speaking orders
Speaking order, the third principle of natural justice, developed through years, ensures that the due process is followed with awarding the order. A speaking order reduces arbitrariness, speaks itself for the principles of natural justice. In Asst. Commissioner Commercial Tax Department Vs. M/S. Shukla (2010), the Supreme Court opined that the administrative authority and tribunals are obliged to give reasons, without it, the order would be liable to judicial scrutiny. A reasoned order helps the appellate or higher court to exercise its jurisdiction appropriately and in accordance with the law. To serve the justice delivery system, it is essential that the courts record the reasons for its conclusions, either disposing of cases at the admission stage or after the regular hearing.
In Kishan Lal Vs. Union of India (1998), the Supreme Court stated that every quasi-judicial order must be supported by reasons. In the case of Rasiklal Ranchhodbhai Patel Vs. Commissioner of Wealth Tax (1978), the Supreme Court observed that orders without supporting reasons violate the principles of natural justice. The Court continued that the reasons must be substantial and cogent. It must not be an apology for reasons. It is a necessary requirement for the compliance of the principle of Audi alteram partem.
Conclusion
The Constitution of India is the fundamental law in India. All laws enacted by the parliament and state assemblies must be consistent with the provisions of the Constitution. Even though the principles of natural justice are not expressly mentioned in the Constitution, they are embedded in different articles in the Constitution, especially in Articles 14 and 21.
Article 265 declares that no tax shall be levied or collected, except by the authority of law. Therefore, Article 265 read with Article 14 of the Constitution of India guaranteeing the right to equality. In this scenario, it is peremptory that orders and decisions of the Income Tax Authorities are taken not only in compliance with the provisions of the law but also following the principle of natural justice.
The concept of natural justice has made great strides and invariably read into administrative actions involving civil consequences, unless the statute, conferring power, excludes its application by express language. Sheer negligence and laxity of the tax authority to follow the procedure established by law should not be made on the ground that the law is unjust or excessive. But the application of the law must be correct. It is a matter of public interest that the taxpayers are protected against the unlawful decisions and actions of the taxing authorities.
References
- https://legislative.gov.in/sites/default/files/A1961-43.pdf.
- https://itatonline.org/articles_new/principles-of-natural-justice/.
- https://www.mondaq.com/india/tax-authorities/1068270/the-faceless-assessment-principle-of-natural-justice-.
- http://docs.manupatra.in/newsline/articles/Upload/C64E2EB3-321D-470D-A4C8-0EE5E55BA21A.pdf.
- http://incometaxparaskochar.com/Image/CROSS%20EXAMINATION%2026-11-2019.pdf.
- https://cavinaymittal.com/resource/Updates_Concept_Principle_Natural_Justice.aspx
- https://www.taxmann.com/bookstore/bookshop/bookfiles/Law%20Relating%20to%20Search%20%20Seizure–GC%20Das–Page%20Number%20256%20to%20268-sample%20chapter.pdf.
- https://nios.ac.in/media/documents/SrSec338New/338_Introduction_To_Law_Eng/338_Introduction_To_Law_Eng_L6.pdf.
- https://cleartax.in/s/income-tax-notice.
- http://www.legalservicesindia.com/article/1519/Principles-of-Natural-Justice-In-Indian-Constitution.html.
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