Sunday, March 06, 2011



By K P C Rao.,
Practising Company Secretary

Justice not only should be done, it should appear to have been done is an old adage. The concept of natural justice that one must be heard before he is condemned has its root in ancient law. Though it is difficult to precisely define what is meant by natural justice, the contents of principles of natural justice are quite easy to enumerate. As it stands today, the basic principles of Natural justice are:

1)           that the parties should be heard before deciding an issue;
2)           the hearing must be before an impartial Judge, as no man can be judge of his own cause. Therefore, the hearing must be before an unbiased Judge;
3)           the Judge should decide in good faith. He should have no bias, personal or pecuniary; and
4)           the decision given must be reasoned one and therefore, the decision must be evidenced by a speaking order which enumerates the reasons for coming to a particular conclusion.

The American Due Process of Law postulates: (a) notice (b) opportunity to be heard (c) an impartial tribunal and (d) an orderly course of procedure. The concept of speaking order as a part of principles of natural justice is a significant and important contribution by Indian jurisprudence. While the English Jurists and Judges have hesitated in adopting speaking order as a part of the principles of natural justice, the Indian courts, particularly the Hon’ble Supreme Court has unequivocally accepted that speaking order is the third important basic principle of natural justice. Therefore, as it stands as far as the Indian law is concerned, the three basic accepted principles of natural justice are

1)     that the dispute should be decided by an impartial judge without any bias or interest against the parties and in the subject-matter of dispute;
2)     ‘Audi alteram partem’ which means, no man should be condemned unheard. Both parties must be heard before passing any order;
3)     that the decisions must be reasoned one and the orders containing the decision must be speaking orders.

Therefore, the third principle of natural justice is that a party ought to know the result of the inquiry and the reasons for the decision.

A ‘speaking order’ means an order speaking for itself by giving reasons. Speaking orders are necessary if the judicial review is to be effective. The party affected must know why and on what grounds an order has been passed against him. This is a new principle of natural justice which has been recognised in India and USA, but, however, yet to be recognised under English Law. There is no general rule of English law, that reasons must be given for administrative or even judicial decisions. In India also till very recently, it was not accepted that the requirement of passing speaking orders is one of the principles of natural justice. However, now it is well established principle of natural justice. The Courts have specifically held that passing of a speaking order is a part and parcel of natural justice. As the Hon’ble Supreme Court observed in M.P. Industries vs. Union of India[1], “So it is essential that some restrictions shall be imposed on Tribunals in the matter of passing orders affecting the rights of parties and the least they should do is to give reasons for their orders.”

The courts have justified the requirement for a speaking order on three grounds:

1)     the party aggrieved has the opportunity to demonstrate before the appellate or revisional court that the reasons which persuaded the authority to reject his case were erroneous;

2)     the obligation to record reasons operates as a deterrent against possible arbitrary action by executive authority invested with judicial power; and

3)     it gives satisfaction to the party against whom the order is made. The power to refuse to disclose reasons in support of the order is of an exceptional nature and it ought to be exercised fairly, sparingly and only when fully justified by the exigencies of an uncommon situation.

The Supreme Court observed in Siemens Engg. vs. Union of India[2], “The rule requiring reasons to be given in support of an order is like the principle of ‘audi alteram partem’, a basis principle of natural justice, which must inform every quasi-judicial process and this rule must be observed in its proper spirit and mere pretence of compliance with it would not satisfy the requirement of law.”

In respect of the speaking order, the law may be summarised as under:

1)           Where a statute requires recording of reasons in support of the order, it imposes an obligation on the adjudicating authority and the reasons must be recorded by the authority.

2)           Even when the statute does not lay down expressly the requirement of recording reasons, the same can be inferred from the facts and circumstances of the case.

3)           Mere fact that the proceedings were treated as confidential, does not dispense with the requirement of recording reasons.

4)           If the order is subject to appeal or revision, the necessity of recording reasons is greater as without reasons the appellate or revisional authority cannot exercise its power effectively inasmuch as it has no material on which it may determine whether the facts were correctly ascertained, law was properly applied and the decision was just and based on legal, relevant and existent grounds. Failure to disclose reason amounts to depriving the party of the right of appeal or revision.

5)           There is no prescribed form and the reasons recorded by the adjudicating authority need not be detailed or elaborate and the requirements of recording reasons will be satisfied if only relevant reasons are recorded.

6)           If the reasons recorded are totally irrelevant, the exercise of power would be bad and the order is liable to be set aside.

7)           It is not necessary to record reasons by the appellate authority when it affirms the order passed by the lower authority. (This proposition of law requires reconsideration).

8)           Where the lower authority does not record reasons for making an order and the appellate authority merely affirms the order without recording reasons, the order passed by the appellate authority is bad.

9)           Where the appellate authority reverses the order passed by the lower authority reasons must be recorded, as there is a vital difference between an order of reversal and an order of affirmation.

10)      The validity of the order passed by the statutory authority must be judged by the reasons recorded therein and cannot be construed in the light of subsequent explanation given by the authority concerned or filing affidavit. Orders are not like old wine becoming better as they grow older.

11)      If the reasons are not recorded in the order, it does not always vitiate the action.

12)      The duty to record reasons is a responsibility and cannot be discharged by the use of vague general words.

13)      The reasons recorded by the statutory authority are always subject to judicial scrutiny.

In taxation matters

Taxation laws are no exception to application of principles of natural justice. As the courts have held; the principles of natural justice are applicable in tax matters, particularly in the case of assessment proceedings. Coming to the tax field in CIT vs. Walchand, Justice Shah observed. “The practice of recording a decision without reasons in support cannot, but be deprecated.”

In Surajmal’s case, the Hon’ble Supreme Court observed: “The assessment has to be made on relevant materials as evidenced and the assessee ordinarily has the fullest rights to inspect all records and materials that are to be used against him. Under the provisions of section 37 of the Indian Income-tax Act, 1922, the proceedings before the Income Tax Officer are judicial proceedings and all the incidence of such judicial proceedings are to be observed before the result is arrived at. In other words, the assessee would have a right to inspect the records and all relevant documents before he is called upon to lead evidence in rebuttal. The broad principles emerged in view of application of principles of natural justice are the assessing officers exercising quasi-judicial function would be governed in procedure by judicial consideration and must conform to the rules of natural justice. That is to say, he must proceed without bias and give sufficient opportunity to the assessee to place his case before the Department. He must conduct himself in accordance with the principles of justice, equity and good conscious. The assessing officer cannot rely on any evidence or any fact in arriving in his conclusion without first pointing out the same to the assessee and giving him a reasonable opportunity of meeting the case which is ultimately made out in the assessment order.

In the case of Dhakeswari Cotton Mills, where the principle of natural justice were violated, the Supreme Court set aside the assessment.”

Useful reference may be made to the following cases, wherein the issue of operation of Principles of Natural Justice was considered.

The Supreme Court in CIT vs. Electro House[3]  set aside the order of the Commissioner u/s. 263 as the Commissioner has not given a reasonable opportunity of being heard to the assessee. However, the Hon’ble Supreme Court held that the violation of Rule affected only the order and not the jurisdiction of the Commissioner and as such, it held that, the Commissioner could pass a fresh order after hearing the assessee.

Similarly, the Hon’ble Andhra Pradesh High Court in Moh. Begum vs. CIT[4]  held that the order passed in violation of principles of natural justice, does not make the whole proceedings invalid ab initio, but it only affects the order passed in violation of these principles.

In Raja vs. CIT[5], the Hon’ble Madras High Court held that any order passed in violation of principles of natural justice is null and void. However, as long as the order so passed is not set aside by the competent Court or Authority, it will continue to operate.

The Hon’ble Supreme Court again in Supt. Excise vs. Pratap Rai[6]  and CIT vs. National Taj Theatres[7]  held that the order passed in violation of natural justice, though void, it does not affect the jurisdiction otherwise vested in such authority and in exercise of such authority, it can pass fresh orders. The Hon’ble Court also held that the limitation to pass the order within two years under section 263 would be applicable only for passing the original order and not for passing a fresh order in pursuance of the Appellate or other order setting aside the original order.

The Courts have held that the Assessing Officer need not hear the assessee before recording the reasons for re-opening the completed assessment and before initiating reassessment proceedings. Similarly, it has been held that the Wealth Tax Officer need not hear the assessee before referring the matter for valuation to the Valuation officer u/s.16A of the Wealth-tax Act, 1957. However, the Courts have held that the Valuation Officer must hear the assessee before he makes his valuation report.

In Kapurchand vs. CIT[8]  the facts were that the Commissioner had passed an order in violation of principles of natural justice. In such cases, the Hon’ble Supreme Court held that the Tribunal, while cancelling the order ought to have directed the Commissioner to pass a fresh order.

In Ajanta Industries vs. CBDT[9], The Hon’ble Supreme Court set aside an order u/s.127 of the Income-tax Act, 1961 for transferring the case of the assessee, because the reasons recorded for his satisfaction were not conveyed to the assessee, and as such, such order was passed in violation of the principles of natural justice.

In Briharilal vs. CIT[10], the Hon’ble Supreme Court held that a garnishee order passed without hearing the person against whom it is passed in the course of recovery proceedings, is void because the same had violated principles of natural justice.

The rules of natural justice were fully applied in case of exercise of jurisdiction of the Commissioner u/s. 273A for waiver or reduction of penalty, interest etc. The Commissioner must pass a speaking order while exercising his jurisdiction u/s. 273A, giving reasons for his answer and non speaking order is liable to be set aside. Similarly, while passing the order, he should take into account all material facts and should not take into account facts which are not material.

In case of the authorities exercising jurisdiction to grant approval or exemption and the tax-payer has a right to claim it on fulfillment of the statutory condition, the tax-payer should be given a reasonable opportunity of being heard, and the authority is bound to pass a speaking order and give reasons in support of his finding that the tax-payer is not entitled to the approval or exemption (Bharat Nidhi vs. Union of India[11]). Similarly, the assessing, appellate and revisional authorities must pass speaking orders.

[Published in Corporate Secretary of ICSI, November, 2010]

[1] M.P. Industries vs. Union of India; AIR 1966 SC 671
[2] Siemens Engg. vs. Union of India; AIR 1976 SC 1785
[3] CIT vs. Electro House; (1971) (82 ITR 284)
[4] Moh. Begum vs. CIT; (1986) (158 ITR 662)
[5] Raja vs. CIT; (1984) (147 ITR 212 (Mad))
[6] Supt. Excise vs. Pratap Rai; (1978) (114 ITR 231)
[7] CIT vs. National Taj Theatres; (1980) (121 ITR 535)
[8] Kapurchand vs. CIT; (1981) (131 ITR 451) (SC)
[9] Ajanta Industries vs. CBDT; (1976) (102 ITR 281)
[10] Briharilal vs. CIT; (1981) (131 ITR 129)
[11] Bharat Nidhi vs. Union of India; (1973) 92 ITR 1)

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