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PETITIONER: AJANTHA INDUSTRIES AND ORS.

       Vs.

RESPONDENT: CENTRAL BOARD OF DIRECT TAXES,NEW DELHI & OTHERS

DATE OF JUDGMENT05/12/1975

BENCH: GOSWAMI, P.K. BENCH: GOSWAMI, P.K. MATHEW, KUTTYIL KURIEN UNTWALIA, N.L.

CITATION:  1976 AIR  437            1976 SCR  (2) 884  1976 SCC  (1)1001

ACT:      Income  Tax   Act,  1961-Section   127(1)-Recording  of reasons  and   communication     thereof  is  mandatory-Non- communication to the assessee is violative of the principles of natural justice-Purport of recording of reasons.

HEADNOTE:      The appellants  were assessees under the Income Tax Act under the  jurisdiction of  the Income  Tax officer, Nellore since a  number of  years on 23-1-1973, the Central Board of Direct Taxes sent a notice to the appellants under s. 127(1) of the Income Tax Act proposing to transfer their case files for facility  of investigations" from the respective Income. Tax Officer  Nellore to  the Income  Tax Officer  ’B’  Ward, Special Circle.  II, Hyderabad and called for objections, if any, to  the proposed  transfer within  fifteen days  of the receipt  of   the  notice.   Despite  their  representations objecting to  the transfer,  the Central  Board ordered  the transfer  on  26-7-1973.  The  validity  of  the  order  was questioned before  the  Andhra  Pradesh  High  Court  by  an application under  Article 226  of the  Constitution on  the ground  of   violation  of  principles  of  natural  justice inasmuch as neither the reasons were given. nor communicated in the said order.      The writ  petition was  dismissed  by  a  single  Judge holding that  mere failure  to communicate the reasons which were found by him to have been recorded in the files, to the appellants was  not fatal.  The Letters Patent Appeal before the Division  Bench failed.  Allowing the  appeal by special leave and rejecting the contentions of the Revenue. namely.      (a) that  the reasons  given in  the  notice  under  s. 127(1)  calling   for  objections,   namely,  "facility  for investigations can be read a part of the impugn ed order.      (b) that recording of the reasons in the file, although not  communicated   to  the   assessee,  fully   meets   the requirements of s. 127(1) and      (c) that  the orders  under s.  127 (1)  being  "purely administrative in  nature, it  was not necessary to give the assessee,  an   opportunity  to   be  heard  and  there  was consequently no need to record reasons for the transfer, the Court

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^      HELD:(1) Unlike  s. 5(7A) of the 1922 Act, s. 127(1) of the Income  Tax Act,  1961, requires  reasons to be recorded prior to  the passing of an order of transfer. Once an order is passed  transferring the  case file  of  an  assessee  to another  area,   the   order   has   to   be   communicated. Communication  of  the  order  is  an  absolutely  essential requirement since  the assessee  is  then  immediately  made aware of the reasons which impelled the, authorities to pass the order  of transfer.  The  Legislature  has  imposed  the requirements of  show-cause notice  and  also  recording  of reasons to  avoid a  great deal  of  inconvenience  and  the monetary loss  if a  case file is transferred from the usual place of  residence or  office where  originally assessments are made to a distant place. [888A, 889A-B]      (2) The  reason for  recording of  reasons in the order and making  these reasons  known 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 the Supreme  Court under  Article 136 of the Constitution in an appropriate  case for  challenging the order, inter alia, either on the ground it is mala fide or arbitrary or that it is  based   on  irrelevant  and  extraneous  considerations, irrespective of  the result  of such a writ or special leave application. [889C-D] 885      (3) Recording  of reasons and disclosure thereof is not a mere formality. The requirement of recording reasons under s. 127  (1) of  the Income  Tax Act is a mandatory direction under the  law and non-communication thereof is not saved by showing that  the reasons  exist in  the files  although not communicated to the assessee. [889-E]      Pannalal Binjraj  and Another v. The Union of India and Others, [1957] 31 I.T.R. 565, applied.      Sunanda Rani  Jain v. Union of India and Others, [1975] 99 I.T.R. 391, overruled.      Shri Pragdas Umar Vaishya v. Union of India and others, [1967] 12 Madhya Pradesh Journal 868, discussed.      (4) When  law requires  reasons to  be  recorded  in  a particular order affecting prejudicially the interest of any person, who  can challenges 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. [890-C]      Kashiram Aggarwalla  v.  Union  of  India  and  others, [1965] 56 I.T.R. 14, not applicable.      S. Narayanappa  and others  v. Commissioner  of Income- tax, Bangalore, [1967] 63 I.T.R. 219, distinguished.      (5)  In  the  insant  case,  non-communication  of  the reasons in  the order  passed under  s. 127(1) of the Income Tax Act,  1961 is a serious infirmity in the order and it is invalid. [890-G]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No. 724 of 1975.      (Appeal by  Special Leave  from the  judgment and order dated the  12th September,  1974 of  the Andhra Pradesh High Court at Hyderabad in Writ Appeal No. 626. of 1974)      A. Subba Rao for the appellant.      G. C. Sharma and S.P. Nayar for the respondents.      The Judgment of the Court was delivered by      GOSWAMI, J.  The appellant  No. 1  is a registered firm

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and appellants  2 and  3 are  the only  two partners of that firm. They  are assessees  under the  Income-tax Act.  Their assessments have  been made for a number of years in Nellare District in  the usual  course. On  January  23,  1973,  the Central Board) sent a notice to the appellants under section 127 of  the Income-tax  Act, 1961 brietly the Act) proposing to transfer their case files "for facility of investigation" from the  respective Income-tax  Officer at  Nellore to  the Income-tax Officer, B Ward Special Circle Ii, Hyaderabad, By this notice  they were  also asked  to submit  in writing if they had  any objection  to the  proposed transfer within 15 days of  receipt of  the notice.  The appellants  made their representation objecting  to the  transfer and  on July  26, 1973,  the   Central  Board   passed  the   impugned   order transferring the cases from Nellore to Hyderabad.      There is  no provison  of appeal  or revision under the Act  against   such  orders  of  transfer.  The  appellants, therefore, preferred an application under article 226 of the Constitution before the High Court of 886 Andhra Pradesh questioning the validity of the order chiefly on the  ground of  violation of  the principles  of  natural justice inasmuch  as no  reasons were given nor communicated in the  said order.  The learned  single Judge  after having called for the relevant file found that certain reasons were recorded by  the Central  Board prior  to the passing of the impugned order and held that mere failure to communicate the reasons to  the appellants  was not  fatal to the order. The writ petition was, therefore, dismissed.      The  appellants’   Letters  Patent  Appeal  before  the Division Bench  of the  High Court  also met  with the  same fate. Hence this appeal by special leave.      The short  question that  arises for  consideration  is whether failure to record the reasons in the order which was communicated  to   the  appellants   is  violative   of  the principles of  natural justice for which the order should be held to be invalid.      Section 5(7A)  was the  corresponding  section  in  the Income-tax Act,  1922 (briefly the old Act). The section may be set out:      "The Commissioner  of Income-tax  may transfer any case      from one  Income-tax  Officer  subordinate  to  him  to      another, and  the Central Board of Revenue may transfer      any case  from any  one Income-tax  Officer to another.      Such  transfer   may  be  made  at  any  stage  of  the      proceedings, and  shall not  render necessary  the  re-      issue of  any notice  already issued  by the Income-tax      Officer from whom the case is transferred". The successor  section under  the Income-tax  Act,  1961  is section 127 and the same may be set out:      "Transfer of  cases  from  one  Income-tax  Officer  to another:-           (1)  The  Commissioner   may,  after   giving  the                assessee a  reasonable opportunity  of  being                heard in  the matter, wherever it is possible                to do so, and after recording his reasons for                doing so, transfer any case from one In come-                tax Officer  subordinate to  him  to  another                also subordinate  to him,  and the  Board may                similarly transfer  any case from one Income-                tax Officer to another.           Provided that nothing in this sub-section shall be                deemed to  require any such opportunity to be                given where  the transfer is from one Income-                tax Officer  to  another  whose  offices  are

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              situated in the same city, locality or place.           (2)  The transfer  of a case under sub-section (1)                may be  made at any stage of the proceedings,                and shall  not render  necessary the re-issue                of any notice already issue by the Income-tax                Officer from whom the case is transferred. 887      Explanation:-In this  section and  in sections  121 and 125, the word ’case’ in relation to any person whose name is specified in any order or direction issued thereunder, means all proceedings  under this Act in respect of any year which may be  pending on  the date  of such  order or direction or which may  have been  completed on  or before such date, and includes also  all proceedings  under this  Act which may be commenced after  the date  of such  order  or  direction  in respect of any year". The section  was amended  by section  27 of  Finance (No. 2) Act, 1967, and section 127 since then stands as under:      (1) "The  Commissioner may, after giving the assessee a      reasonable opportunity  of being  heard in  the matter,      where ever it is possible to do so, and after recording      his reasons  for doing  so, transfer  any case from any      Income-tax Officer  or officers also subordinate to him      and the  Board may similarly transfer any case from any      Income-tax Officer  or Income-tax Officers to any other      Income-tax Officer or Income-tax Officers.           Provided that  nothing in this subsection shall be      deemed to  require any  such opportunity  to  be  given      where the  transfer is  from any Income-tax  Officer or      Income-tax Officers  to any other Income-tax Officer or      Income-tax Officers and the offices of all such Income-      tax Officers are situated in the same city, locality or      place:           Provided further  that where  any  case  has  been      transferred from  any Income-tax  officer or Income-tax      Officers  to  two  or  more  Income-tax  Officers,  the      Income-taxers to  whom the case is so transferred shall      have concurrent  jurisdiction over  the case  and shall      perform such  functions in relation to the said case as      the Board  or the  Com- missioner  (or  any  Inspecting      Assistant Commissioner  authorised by  the Commissioner      in this  behalf) may,  by general  or special  order in      writing, specify for the distribution and allocation of      the work to be performed".           (2)  The transfer  of a  case under subsection (1)                may be  made at any stage of the proceedings,                and shall not render necessary the reissue of                any notice  already issued  by the Income-tax                Officer or  Income-tax Officers from whom the                case is transferred.      Explanation:-In this  section and in sections 121, 123, 124 and 125, the word ’case’ in relation to any person whose name  is   specified  in   any  order  or  direction  issued thereunder means  all proceedings  under this Act in respect of any  year which  may be pending on the date of such order or direction  or which  may have been completed on or before such date, and includes also all proceedings under this 888 Act which  may be commenced, after the date of such order or direction in respect of any year."      Unlike-section 5(7A) section 127(1) requires reasons to be recorded  prior to  the passing  of an order of transfer. The impugned order does not state any reasons whatsoever for making the order of transfer.      It is  submitted on behalf of the Revenue by Mr. Sharma

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that reasons  were communicated  to  the  assessees  in  the notice calling  for objection against the proposed transfer. It is,  therefore, manifest  that the  reasons given in that show cause  notice, namely,  "facility of investigation" can be read as a part of the impugned order although there is no mention of any reasons therein as such.      We are  unable to accede to this submission. It appears section 5(7A)  of the  old Act  came  for  consideration  in Pannalal Binjraj  and Another  vs. The  Union of  India  and others and this Court observed at page 589 as follows:-           "......it would  be prudent  if the  principles of      natural  justice   are  followed,  where  circumstances      permit, before  any order  of  transfer  under  section      5(7A) of the Act is made by the Commissioner of Income-      tax or  the Central   Board of Revenue, as the case may      be, and notice is given to the party affected and he is      afforded a  reasonable opportunity  of representing his      views on  the question and the reasons of the order are      reduced however  briefly  to  writing...  There  is  no      presumption against  the bona fide or the honesty of an      assessee and  normally the Income-tax authorities would      not  be   justified  in   refusing  to  an  assessee  a      reasonable opportunity  of representing  his views when      any order to the prejudice of the normal procedure laid      down in  Section 64(1) and (2) of the  Act is sought-to      be made  against him, be it a transfer from one Income-      tax Officer  to another  within their  State or from an      Income-tax officer  with in  the State to an Income-tax      Officer without  it, except  of course  where the  very      object of  the transfer  would be  frustrated if notice      was given  to the  party affected.  If the  reasons for      making the  order reduced however briefly to writing it      will  also   help  the  assessee  in  appreciating  the      circumstances which  make it necessary or desirable for      the Commissioner  of Income-tax or the Central Board of      Revenue, as the case may be, to transfer his case under      section 5(7A)  of the  Act and  it will  also help  the      Court in  deter mining  the bona  fides of the order as      passed if  and when  the same is challenged in Court as      mala fide or discriminatory. It is to be hoped that the      Income-tax authorities will observe the above procedure      wherever feasible".      This judgment  was rendered  by this  Court on December 21, 1956,  and we  find that  in the  1961 Act  section  127 replaced section 5(7A) 889 where  the  legislature  has  introduced,  inter  alia,  the requirement of  recording reasons  in making  the  order  of transfer. It  is manifest  that  once  an  order  is  passed transferring the  case file  of an  assessee to another area the order has to be communicated. Communication of the order is an absolutely essential requirement since the assessee is then immediately  made are of the reasons which impelled the authorities to  pass the order transfer. It is apparent that if a  case file  is transferred  from  the  usual  place  of residence or office where ordinarily assessments are made to a distant  area, a  great deal  of  inconvenience  and  even monetary loss  is involved,  That is  the reason  why before making an  order of  transfer the legislature has ordinarily imposed the  requirement of  a show-cause  notice  and  also recording of  reasons. The  question then arises whether the reasons are  at all  required  to  be  communicated  to  the assessee. It  is submitted,  on behalf  of the Revenue, that the very  fact  that  reasons  are  recorded  in  the  file, although these  are not  communicated to the assessee, fully

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meets the  requirement section  127(1). We   are  unable  to accept this submission.      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 based  on irrelevant  and extraneous condonations Whether such a writ or special leave application ultimately  fails is not relevant for a decision of the question      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.      Mr. Sharma  drew our  attention to  a decision  of  the Delhi High  Court in Sunanda Rani Jain vs Union of India and others, where  the learned single Judge has taken a contrary view. For the reasons, which we have given above, we have to hold that the said decision is not correct.      The appellant  drew our attention to a decision of this Court in  Shri Pragdas  Umar Vaishya  vs.Union of  India and Other where  rule 55  of the Mineral Concession Rules, 1960, providing for  exercise of reversional power by the  Central Government was  noticed. It  was held that under rule 55 the Central Government  in disposing of the revision application must record its reasons and communicate these reasons to the parties affected  thereby. It  was  further  held  that  the reasons could not be gathered from the nothings in the files of  the   Central  Government.   Recording  of  reasons  and disclosure thereof is not a mere formality. 890      Mr. Sharma  drew our  attention to  a decision  of this Court in Kashiran Aggarwalalla vs. Union of India and other. It is  submitted that  this Court  took the view that orders under section  127(1) are held in that decision to be purely administrative  in   nature"  passed  for  consideration  of convenience and  no possible  prejudice could be involved in the transfer.  It was  also  held  therein  that  under  the proviso to  section 127(1)  it was not necessary to give the appellant  an   opportunity  to   be  heard  and  there  was consequently no  need to  record reasons  for the  transfer. This decision is not of any assistance to the Revenue in the present case  since that  was a transfer from one Income-tax Officer to  another Income-tax Officer in the same city, or, as stated  in the judgment itself, in the same locality" and the proviso to section 127(1), therefore, applied.      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      Mr. Sharma  also drew  our attention  to a  decision of this Court  in S  Narayanappa and Others vs. Commissioner of Income-tax, Bangalore  where this  Court  was  dealing  with section 34  of the  old Act.  It is  clear that  there is no requirement in  any of  the provisions  of the  Act  or  any section laying down as a condition for the initiation of the proceedings that  the reasons which induced the Commissioner to accord  sanction to proceed under section 34 must also be communicated to  the assessee.  The Income-tax  Officer need not communicate to the assessee the reasons which led him to

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initiate the   proceedings  under section 34. The case under section  34  is  clearly  distinguishable  from  that  of  a transfer order  under section  127(1) of  the Act.  When  an order under  section 34  is made  the aggrieved assessee can agitate the  matter in  appeal against the assessment order, but an  assessee against  whom an  order of transfer is made has no  such remedy  under the  Act to question the order of transfer. Besides,  the aggrieved assessee on receipt of the notice under  section 34  may even  satisfy  the  Income-tax Officer  that  there  were  no  reasons  for  reopening  the assessment. Such  an opportunity  is  not  available  to  an assesse under  section 127(1) of the Act. The above decision is, therefore, clearly distinguishable.      We  are,   therefore,  clearly  of  opinion  that  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. No costs. S.R.                                         Appeal allowed. 891