[Opinion] Principles of Natural Justice in Income Tax Proceedings

D.C. Agrawal – [2025] 176 taxmann.com 425 (Article)

1. Introduction

Principles of Natural Justice are fundamental rules of fair procedure that govern all judicial, quasi-judicial, and administrative actions, including income-tax proceedings. Their objective is to ensure that decisions affecting rights, interests, or liabilities are taken in a fair, unbiased, and just manner. In the realm of taxation, where the Revenue exercises significant coercive powers, adherence to these principles becomes crucial for maintaining the legitimacy and integrity of the adjudication process.

2. Core Principles

There are three core principles of natural justice:

2.1 Nemo Judex in Causa Sua – No One Shall Be a Judge in His Own Cause

This doctrine, also known as the Doctrine of Bias, implies that decision-makers must be impartial, and any interest—pecuniary, personal, or official—that may influence their judgment must disqualify them from the adjudicatory process.In income-tax proceedings, this principle ensures that:

i. The Assessing Officer (AO) or appellate authority adjudicating the matter must not have a personal or financial stake in the outcome.

ii. The officer must not approach the case with preconceived notions or allow extraneous influences to affect their decision.

iii. Where bias, either actual or apparent, is demonstrated, the entire proceeding is vitiated, and any order passed under such influence may be quashed by appellate or judicial authorities.

iv. The test is not just whether bias existed in fact, but whether there is a reasonable apprehension of bias in the mind of a prudent person.

2.2 Audi Alteram Partem – Hear the Other Side

This principle is the bedrock of procedural fairness and is premised on the idea that no one should be condemned unheard. In the context of tax proceedings, it mandates that the assessee must be:

i. Given prior notice of the proceedings or proposed action against him.

ii. Informed of the material or evidence being relied upon by the AO to make an addition or adverse inference.

iii. Provided copies of relied-upon documents so that he can formulate his defence.

iv. Allowed to make a written representation, either personally or through a legal representative.

v. Granted adequate time to submit his reply or evidence.

vi. Given an opportunity for a personal hearing, if requested, where the assessee may explain his position orally.

vii. Allowed the right of cross-examination, especially if the AO relies on third-party statements or testimonies to frame additions under sections like Section 68.

The Supreme Court in multiple rulings has reiterated that the right to cross-examination is part of audi alteram partem, and its denial violates natural justice, rendering the assessment order invalid. In practical application, the steps required to satisfy this principle include:

i. Prior Notice of Decision Making – The assessee should be made aware in advance that a decision prejudicial to him is being contemplated.

ii. Notice of Evidentiary Basis – The AO must clearly indicate what evidence, documents, or reports are being relied upon for the proposed addition.

iii. Return of Non-Relied Upon Documents – If documents are collected during a search or inquiry but not relied upon, they must be returned or at least marked as ‘non-relied’, ensuring transparency.

iv. Right to Representation – The assessee must be allowed to respond, personally or through a legal advisor, and represent his case adequately.

v. Reasonable Time to Respond – Sufficient and reasonable time must be granted for filing replies or rebuttal material.

vi. Hearing by the Same Officer – The officer who provides the hearing should be the same who passes the final order, ensuring consistency in understanding.

vii. Cross Examination of Witnesses – Where third-party statements are used, the assessee must be given an opportunity to cross-examine those witnesses.

2.3 Speaking Orders (Reasoned Decisions)

This principle requires the concerned authority to pass reasoned and speaking orders. A reasoned decision is vital for good administration and acts as a safeguard against arbitrariness. It establishes a clear link between the facts presented and the decision reached, preventing non-application of mind and random decision-making.

Importance of Reasons – Reasons are essential as they can reveal errors of law, provide grounds for appeal, and alleviate any lingering sense of injustice for the unsuccessful party. They also ensure that discretion is exercised on relevant grounds, facilitate judicial review by superior courts, and foster public confidence in the justice delivery system. The Supreme Court has emphasized that the face of an order passed by a quasi-judicial or administrative authority affecting rights must “speak” and not be inscrutable.

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