That the AO is not obliged to disclose his sources indicates that cross examination is not mandatory in income-tax proceedings.
So long as the assessing officer acts in conformity with the specific principles of natural justice enshrined in the various provisions of the tax law, his/her action would be upheld and not be held as illegal.
For completing an assessment, an Assessing Officer has to follow the procedure laid down in the Income-Tax Act, 1961.
The assessment procedure under Section 142(3) does not allow the Assessing Officer to rely on any evidence or facts in arriving at a conclusion without first intimating the same to the assessee and giving himher a reasonable opportunity of meeting the case which is ultimately made out in the assessment order.
Some of the important decisions on the principle of natural justice relevant under the Act are:
In Hira Nath Mishra versus The Principal, Rajendra Medical College (AIR 1973 S.C. 1260), the Supreme Court held that the principles of natural justice are not inflexible and may differ with circumstances.
In this decision, strong reliance was placed on the English case, Russell v. Duke of Norfolk (1949; I ALL E.R. 109). Tucker L. J. held that the requirement of natural justice must depend on the circumstances of the case, the nature of the enquiry, the rules under which the Tribunal is acting, the subject matter that is being dealt with and so forth.
Accordingly, one essential condition is that the person concerned should have a reasonable opportunity of presenting his case.
The Apex Court also referred to Byrne v. Kinematograph Renters Society Ltd. (1958; 2 All ER 579). In this case Harman J. observed: "What, then, are the requirements of natural justice?
"First, I think that the person accused should know the nature of the accusation made; secondly that he should be given an opportunity to state his case; and thirdly, of course, that the Tribunal should act in good faith. I do not think that there is really anything more".
On the basis of the aforesaid English decisions, the Supreme Court held in Hira Nath Mishra's case as follows: "Rules of natural justice cannot remain the same applying to all conditions" (page 1264, para 11).
I-T Act provisions
Under the I-T Act, 1961, the principles have been laid down in Section 142(3). The Assessing Officer
must place before the assessee all materials gathered by him on the basis of his enquiry, which he proposes to use against the assessee;
must give the assessee an opportunity of being heard by him to deal with the material and other evidence;
must take into account the explanations given by the assessee;
cannot frame his assessment order based on guesswork; and
must not act arbitrarily or vindictively but the assessment must be framed on the basis of cogent material and facts.
The Assessing Officer is not debarred from relying for information on private sources, which he may not disclose to the assessee at all. However, in case he proposes to use the result of any private enquiry made by him against the assessee, he should communicate to the assessee the substance of such information so as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him sufficient opportunity to meet it.
This principle is established by the judgment of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. C.I.T (26 ITR 775,783) and applied by the Court in Kishinchand Chellaram v. C.I.T (125 ITR 713).
That the Assessing Officer not obliged to disclose the sources of his information indicates that the requirement of cross examination is not mandatory in income-tax proceedings because if that were so, the Assessing Officer would be duty-bound to disclose the sources of information.
After all, cross-examination can only be done if sources of information are revealed.
Substance bigger than form
The only point that has been stressed by the Supreme Court time and again is that the "substance of the information" must be conveyed to the assessee and he must "put the assessee in possession of full particulars of the case".
Thereafter, opportunity should be given to the assessee to meet the case before an assessment order is passed.
In a recent decision dealing with the Assessing Officer's power to direct a special audit to be conducted where accounts are found to be complex, the Bombay High Court held in Atlas Copco (India) Ltd. v. C.I.T (283 ITR 56) that the law-makers while enacting Section 142(2A) of the I-T Act, 1961 empowered the Assessing Officer to direct the assessee to get the accounts audited by a special auditor. To ensure that such powers are not abused the Legislature has provided safeguards.
The Bombay High Court held that the order passed under Section 142(2A) is purely administrative and not quasi-judicial.
For forming an opinion as to whether it is necessary to have the accounts of the assessee audited by a special auditor, the Assessing Officer has to consider the nature of complexity of the accounts of the assessee and the interests of the revenue.
Then he has to seek the approval of the Chief Commissioner or the Commissioner, as the case may be, before directing the assessee to have his accounts audited by a special auditor. This by itself is a vital safeguard in preventing abuse of power.
No civil consequences
In the very scheme of things, the assessee need not be heard before the directions are issued to him for audit of its accounts by his special auditor. Such an order does not entail any civil consequences. No decision is given. No liability is created against the assessee merely because the assessee is required to pay the auditor's fee.
In coming to this decision, the Court relied on the decision of the Allahabad High Court in Jhunjhunwala Vanaspati Ltd. v. C.I.T. (266 ITR 657).
In this case, the High Court held that it is not necessary for the Assessing Officer to issue a show-cause notice or give a hearing to the assessee before issuing directions under Section 142(2-A). The purpose of the direction under Section 142(2-A) is to ensure that a correct assessment order is passed so that the revenue is not deprived of its dues.
The principles of natural justice are flexible in the light of the requirements of different statutes. Under the tax law, the specific principles of natural justice have been enshrined in certain provisions. Therefore, so long as the assessing officer acts in conformity with these principles, hisher action would be upheld and cannot be held to be illegal.
H. P. Ranina (The author, a Mumbai-based advocate specialising in tax laws)