2017 (5) TMI 1524 - HC - Income Tax

Relied upon documents furnished to the petitioner - need for issuing Show cause Notice - Held that - 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. As regards the contention that a SCN is not required to be issued, it is obvious that the Department itself recognises the importance of complying with the rules of natural justice and has therefore rightly issued the SCN 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 SCN 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. Thus directed that not later than 1st June, 2017, the Respondents will provide to each of the Petitioners copies of the documents referred to and relied upon in the SCN issued to the Petitioners, including the statements made by the Petitioners, copies of the statements of bank accounts and any other documents relied upon and referred to in the SCN.

Summary

Issues:
1. Furnishing of copies of documents relied upon in Show Cause Notice (SCN) to petitioners.
2. Compliance with rules of natural justice in issuing SCN and providing necessary documents to petitioners.
3. Interpretation of Article 26(2) of the OECD Model Tax Convention on Income and on Capital in the context of sharing information with persons being prosecuted.

Issue 1: Furnishing of copies of documents relied upon in Show Cause Notice (SCN) to petitioners
The petitioners sought copies of documents and their statements referred to in the SCN to enable them to file a reply. The search conducted at their residences resulted in the seizure of documents and recording of statements. Despite representations and denials of allegations, the petitioners were not provided with the requested documents. The Assistant Director of Income Tax (ADIT) cited restrictions under the OECD Model Tax Convention on sharing information obtained from foreign countries, including bank account statements, as a reason for not furnishing the documents.

Issue 2: Compliance with rules of natural justice in issuing SCN and providing necessary documents to petitioners
The court emphasized the importance of natural justice, stating that the person being prosecuted must be furnished with copies of material relied upon by the prosecuting authority. While acknowledging the need for maintaining confidentiality in certain cases, the court held that denying the person copies of documents being relied upon is against natural justice principles. The court rejected the argument that merely showing the documents to the petitioners without providing copies would suffice. The court directed the respondents to provide copies of all relevant documents to the petitioners by a specified date to ensure a fair opportunity for the petitioners to respond effectively to the SCNs.

Issue 3: Interpretation of Article 26(2) of the OECD Model Tax Convention on Income and on Capital
The court analyzed Article 26(2) of the OECD Model Convention, which deals with the disclosure of information received by a contracting state. The court highlighted that the exception allowing disclosure to persons or authorities involved in assessment or prosecution includes both individuals and entities. The court concluded that the prosecution or proceedings against a person cannot proceed without providing that person with copies of the material being relied upon. The court rejected the contention that issuing an SCN was unnecessary, emphasizing the importance of complying with natural justice principles even if not explicitly mandated by the governing statute.

In conclusion, the judgment emphasized the fundamental principles of natural justice, directing the respondents to provide the petitioners with copies of all relevant documents referred to in the SCNs. The court's interpretation of Article 26(2) of the OECD Model Convention highlighted the necessity of ensuring fairness and transparency in legal proceedings, particularly in matters of prosecution and assessment.