2013 (5) TMI 153 - HC - Income Tax

Transfer of a case - Section 127(1) of the Income Tax Act - reasons for transferring the case - Held that - What the Apex Court has observed in Ajantha Industries 1975 (12) TMI 1 - SUPREME COURT is that while transferring the case on the ground of co-ordinated investigation some reason has to be given by the commissioner which reveals why it is necessary to transfer the case for the purpose of co-ordinated investigation. In our view unfortunately Commissioner of Income Tax apart from stating that case has been transferred for co-ordinating investigation has not given any other reason - Impugned order is therefore quashed and set aside - Matter is however remanded back to the Commissioner of Income Tax who shall pass fresh order U/s 127(1) of the Income Tax Act after giving an opportunity to the petitioner and pass an order in accordance with law after recording his reasons - Petition is accordingly partly allowed and disposed of - Contentions of both the parties are kept open.

Summary

The core legal questions considered in this judgment revolve around the validity and procedural propriety of an order passed under Section 127(1) of the Income Tax Act, specifically concerning the transfer of an income tax investigation case from one jurisdiction (Goa) to another (Delhi) without recording detailed reasons. The principal issues include:

• Whether the order transferring the case under Section 127(1) without recording and communicating reasons to the assessee violates principles of natural justice.
• The scope and mandatory nature of the requirement to record reasons in such transfer orders under the Income Tax Act.
• The permissibility of transferring cases for the purpose of coordinated investigation and the extent of judicial scrutiny over such transfers.
• The applicability and precedential value of the Supreme Court's ruling in Ajantha Industries v. CBDT and other High Court decisions concerning the recording of reasons and natural justice in transfer orders under Section 127.

Issue-wise detailed analysis:

1. Requirement to Record Reasons under Section 127(1) and Principles of Natural Justice

The legal framework centers on Section 127(1) of the Income Tax Act, which empowers the Commissioner of Income Tax to transfer cases for investigation. The Supreme Court's ruling in Ajantha Industries v. CBDT is pivotal, establishing that recording reasons in the order and communicating them to the assessee is a mandatory requirement. The rationale is to enable the assessee to challenge the order on grounds such as mala fides, arbitrariness, or extraneous considerations through writ jurisdiction under Article 226 or special leave petitions under Article 136 of the Constitution.

The Court interpreted this requirement as a fundamental aspect of natural justice, emphasizing that mere existence of reasons in the file, without communication to the assessee, does not suffice. The Apex Court explicitly overruled prior decisions that allowed non-communication or non-recording of reasons.

In the present case, the impugned order stated only that the transfer was necessary for coordinated investigation but failed to elaborate why such coordination necessitated transfer. The Court held this to be insufficient under the binding precedent of Ajantha Industries, requiring at least brief but clear reasons to be recorded and communicated.

The petitioner's argument that failure to record reasons invalidates the order was upheld, with the Court concluding that the impugned order violated principles of natural justice.

2. Permissibility of Transfer for Coordinated Investigation

While the Court accepted that transferring cases for coordinated investigation is permissible under the Act and recognized by various High Court decisions, it stressed that such transfers must comply with procedural safeguards, including the recording of reasons. The Court noted that coordination as a ground is valid but must be substantiated by reasons explaining the necessity of transfer.

Judgments relied upon by the revenue, including those from the Bombay, Allahabad, and Jharkhand High Courts, were examined. These decisions generally upheld transfers for coordination but did not address the specific issue of recording reasons in the order as mandated by the Supreme Court.

The Court distinguished the present case from the Bombay High Court's decision in One-up Shares and Stock Brokers, noting that the issue of recording reasons was not considered therein. Similarly, the Allahabad High Court's judgment in Trimurti Fragrances was found not to have been apprised of the Ajantha Industries ruling and thus was not binding on the present facts.

The Jharkhand High Court's recognition of coordinated investigation as a valid ground was acknowledged but again subject to the requirement of reasoned orders.

3. Application of Law to Facts and Treatment of Competing Arguments

The Court applied the binding precedent of the Supreme Court to the facts, finding the impugned order deficient for failing to record adequate reasons. The revenue's reliance on other High Court decisions was rejected insofar as they conflicted with the Apex Court's clear mandate.

The Court also noted that the Commissioner's order was a mere recital of the need for coordinated investigation without explaining the factual or administrative basis for this necessity. This lack of reasoning deprived the petitioner of a meaningful opportunity to challenge the transfer and was therefore contrary to the principles of natural justice.

The Court remanded the matter, directing the Commissioner to pass a fresh order under Section 127(1) after giving the petitioner an opportunity to be heard and after recording reasons that explain the necessity of transfer for coordinated investigation.

4. Presumption of Good Faith and Discretionary Power

In reviewing the Allahabad High Court's observations, the Court acknowledged the presumption that high-ranking officials act honestly and that the discretionary power vested in Commissioners is not easily assumed to be abused. However, this presumption does not obviate the statutory requirement to record and communicate reasons. The discretionary power must be exercised within the bounds of law and natural justice.

Significant holdings:

The Court reiterated the principle from Ajantha Industries that "the requirement of recording reasons under Section 127(1) is a mandatory direction under the law and non communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee."

It was held that "merely mentioning this reason that it is necessary to transfer it for co-ordinated investigation is not sufficient... the commissioner ought to have given reasons why co-ordination investigation is necessary."

The Court emphasized that "co-ordinating investigation can always be a good ground for transfer from one place to another," but "some reason has to be given by the commissioner which reveals why it is necessary to transfer the case for the purpose of co-ordinated investigation."

Consequently, the impugned order was quashed and set aside, and the matter remanded for fresh consideration in accordance with law, ensuring compliance with principles of natural justice.