India: Importance Of Service Of Documents Referred In The Show Cause Notice Issued Under (Indian) Income Tax Act, 1961 And (Indian) Black Money (Undisclosed Foreign Income And Assets) And Imposition Of Tax Act, 2015

Last Updated: 20 May 2017
Article by Vijay Pal Dalmia, Partner and Rajat Jain

*Vijay Pal Dalmia, Advocate & Partner Vaish Associates

Email: vpdalmia@vaishlaw.com   Mobile: +91 9810081079

Rajat Jain, Advocate

Email: rajatjain@vaishlaw.comMobile: +91 9953887311

The Division Bench of Delhi High Court while deciding the writ petition nos. W.P.(C) 3732/2017 and W.P.(C) 3749/2017 ( http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=90237&yr=2017), has signified the importance of the principle of natural justice in the Indian legal framework. The short point involved in these writ petitions was that neither of the Petitioners were furnished with the copies of the documents relied upon in the Show Cause Notice ("Notice") issued to them by the Income Tax Department ("Department"). Both the petitioners sought copies of the documents and their statements referred to in the respective Notices to enable them to file appropriate response.

Prior to the issuance of Notices, searches were conducted at the respective residences of the Petitioners and during the search, several documents were seized and statements were recorded of the Petitioners. Pursuant to the searches, two separate Notices were issued to each of the Petitioners, proposing their prosecution under Section 276 C (1) and Section 277 of the Income Tax Act, 1961 ("IT Act‟) as well as under Section 181 of the Indian Penal Code, 1860 ("IPC‟) and Sections 50 and 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ("Black Money Act‟).

After the issuance of Notices, Petitioners made representations before the Department for seeking copies of the documents and their statements referred to in the Notices. In response to the Notices, Petitioners sent a response wherein all the allegation levelled in the Notices were denied and also stated therein that without being furnished all the documents referred in the Notices they would not be able to give appropriate reply.

Thereafter, the Assistant Director of the Income Tax (ADIT) sent a reply to each of the Petitioners stating that the said documents have been confronted to the Petitioners during the course of search and further opportunities had already been granted earlier by the summons issued to them under Section 131 (1A) of the IT Act. Aggrieved by the act of the Department of not providing such documents, writ petitions were filed.

During the course of hearing, it was contented by the Respondents that under Article 26(2) of the OECD Model Tax Convention on Income and on Capital ('OECD Model Convention'), there is a restriction on the authorities in India sharing information that may have been obtained from foreign countries and such prohibition comes in the way of the Respondents furnishing copies of the said documents to the Petitioners as the documents relied upon in the Show Cause Notices include statement of bank accounts maintained with foreign banks, It was further contented that there is no requirement for issuing show cause notice to the Petitioners in terms of Section 279 of the IT Act.

Article 26(2) of the OECD Model Convention states as under:

"Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use."

The Hon'ble Court after perusing the aforesaid Article observed that the exception includes both the "persons and authorities‟ and stated as under:

"It is inconceivable that the person against whom the prosecution or the proceedings is proposed can be denied the material relied upon to prosecute such person. The basic principle of natural justice requires that the person being proceeded against has to be furnished with copies of the material (whether in the form of documents or statements) gathered against such person and which is being relied upon by the authority which is prosecuting such person. This may, in a given case, and if the prosecution or agency makes out a case in that behalf, be subject to safeguards requiring the person to maintain the confidentiality of such document depending on their nature and contents. But to say that the person being prosecuted or proceeded against can only be 'shown' such documents, but not provided copies thereof is untenable even on a plain reading of Article 26 (2) of the OECD Model Convention."

With dissenting with the contention of the Respondents that a show cause notice is not required to be issued, the Hon'ble Court observed as under:

Department itself recognises the importance of complying with the rules of natural justice and has therefore rightly issued the Show Cause Notice to the Petitioners, which has to be responded to by them. Indeed, for an effective response, the Petitioners would be required not merely to be 'shown' the material relied upon in the Show Cause Notice but with copies thereof. This would include their own statements, documents seized during the search and documents gathered from other sources including statements of bank accounts, relied upon against them to be provided copies thereof. Such a requirement inheres in the principles of natural justice and would be applicable even if the statute governing the proceedings does not specifically mandate it.

While disposing the writ petitions, the Hon'ble Court directed the Respondents to provide to each of the Petitioners copies of the documents referred to and relied upon in the Notices issued to the Petitioners.

Comments:

The decision of the Hon'ble Court reiterates and reaffirms the well-established principle of law propounded by the Supreme Court of India and various High Courts.  It has been observed by the authors during the course of their practise of trial of criminal cases that Income Tax Department has repeatedly initiated criminal complaints without paying any heed to the requests made by the parties for supplying the documents relied upon in the show cause notices by the Department issued  under Section 276 C (1) and Section 277 of the Income Tax Act, 1961, Section 181 of the Indian Penal Code, 1860 and Sections 50 and 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. This way of Income Tax Department can even fall into the category of Contempt of Court, as there is no dearth of judgments holding the proposition affirmed by the Hon'ble High Court.

The present decision clearly signifies the necessity of compliance of the principle of natural justice by the Income Tax Department. The show cause notices are issued by the Income Tax Department for giving opportunity to the defaulter/ receiver to put his case before them to enable them to take a decision whether any further action is required to be taken or not. The primary purpose of the show cause notice is to give a fair opportunity to the defaulter/ receiver to defend himself and if, certain documents which are relied by the Department for issuing show cause notice are not provided to the person, the whole intend of issuing such notices would get defeated as a fair opportunity of contesting the matter in its spirit will be taken away and it will be a mere formality.

Authors

*Vijay Pal Dalmia (Partner Vaish Associates Advocates) And Rajat Jain, Advocate

Phone: +91 11 42492532 (Direct) Mobile: +91 9810081079

Email:  vpdalmia@vaishlaw.com & Email:  vpdalmia@vaishlaw.com & rajatjain@vaishlaw.com

www.vaishlaw.com

* Vijay Pal Dalmia is a senior litigator with 30 years of experience in court trials and deals with cases relating to prosecution under the Income Tax Act, 1961, The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Money Laundering Act, economic offences and white collar crimes.

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