1975 (12) TMI 1 - SC - Income Tax

Whether the assessee should be informed of the reasons for transfer of a file and whether the reasons are to be recorded in the order for transfer - non-communication of the reasons in the order passed under section 127(1) is a serious infirmity in the order for which the same is invalid. The judgment of the High Court is set aside. The appeal is allowed and the orders of transfer are quashed

Summary

The core legal question considered by the Court was whether the failure to record and communicate reasons in an order transferring income-tax assessment cases under section 127(1) of the Income-tax Act, 1961, violates the principles of natural justice and renders the order invalid.

Section 127(1) of the Income-tax Act, 1961, empowers the Commissioner or the Central Board of Direct Taxes to transfer any case from one Income-tax Officer to another, provided that the assessee is given a reasonable opportunity of being heard wherever possible and that reasons for the transfer are recorded. The proviso exempts transfers between officers situated in the same city or locality from the requirement of hearing. The section also mandates that the transfer shall not necessitate the re-issue of any notice already issued.

The appellants challenged the transfer order on the ground that no reasons were stated in the order itself, nor communicated to them, despite the statutory requirement to record reasons. The Court had to determine whether the existence of reasons in the file, but not communicated to the assessee, satisfied the statutory and natural justice requirements.

In analyzing the issue, the Court examined the relevant statutory provisions and prior judicial pronouncements. It contrasted the earlier section 5(7A) of the Indian Income-tax Act, 1922, with the current section 127(1), noting that the latter expressly requires recording of reasons. The Court relied on a precedent where it was held that the principles of natural justice require that the party affected by a transfer order be given notice and a reasonable opportunity to represent their views, and that reasons for the order be recorded in writing. This procedural safeguard serves to ensure transparency, fairness, and enables judicial scrutiny of the bona fides of the order.

The Court rejected the revenue's argument that reasons given in the preliminary notice proposing the transfer could be read as part of the final order, even though the order itself was silent on reasons. It held that the statutory mandate requires reasons to be recorded in the order and communicated to the assessee, not merely noted in the file or in a separate notice. The communication of reasons is essential to inform the assessee of the grounds of transfer and to enable effective judicial review under articles 226 and 136 of the Constitution.

The Court distinguished this case from others where the proviso to section 127(1) applies, exempting transfers within the same locality from the hearing and reason-recording requirements. It also differentiated the present case from proceedings under section 34 of the old Act, where no such communication of reasons was mandated, and the assessee had alternative remedies.

In addressing competing authorities, the Court declined to follow a contrary decision by the Delhi High Court, which held that non-communication of reasons was not fatal. It also held that a prior decision characterizing transfers under section 127(1) as purely administrative and not requiring reasons or hearing was limited to transfers within the same locality and thus not applicable.

The Court emphasized that when the law requires reasons to be recorded for an order that prejudicially affects a person's interests and is subject to judicial challenge, the failure to communicate those reasons constitutes a violation of natural justice and invalidates the order. Recording reasons is not a mere formality but a substantive requirement to ensure fairness and transparency.

Consequently, the Court set aside the High Court's dismissal of the writ petition and quashed the transfer order, holding that non-communication of reasons under section 127(1) is a serious infirmity that renders the order invalid.

Significant holdings include the following verbatim legal reasoning:

"We are clearly of opinion 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."

"When law requires reasons to be recorded in a particular order affecting prejudicially the interests of any person, who can challenge the order in court, it ceases to be a mere administrative order and the vice of violation of the principles of natural justice on account of omission to communicate the reasons is not expiated."

"The reason for recording of reasons in the order and making these reasons known to the assessee is to enable an opportunity to the assessee to approach the High Court under its writ jurisdiction under article 226 of the Constitution or even this court under article 136 of the Constitution in an appropriate case for challenging the order, inter alia, either on the ground that it is mala fide or arbitrary or that it is based on irrelevant and extraneous considerations."

Core principles established are that under section 127(1) of the Income-tax Act, 1961: (i) reasons for transfer must be recorded in the order; (ii) those reasons must be communicated to the assessee; (iii) failure to communicate reasons violates natural justice; and (iv) such failure invalidates the transfer order. The proviso exempts intra-locality transfers from these requirements.

Final determinations were that the impugned transfer order was invalid due to non-communication of reasons, the High Court's dismissal of the writ petition was set aside, and the transfer order was quashed with no order as to costs.