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

Issues Involved:
1. Validity of the transfer order under Section 127 of the Income-tax Act, 1961.
2. Requirement of recording and communicating reasons for the transfer.
3. Applicability of principles of natural justice.

Issue-wise Detailed Analysis:

1. Validity of the Transfer Order under Section 127 of the Income-tax Act, 1961:
The appellants, a registered firm and its two partners, challenged the Central Board of Direct Taxes' order transferring their case files from Nellore to Hyderabad. The transfer was proposed "for facility of investigation," and the appellants objected. The High Court dismissed their writ petition, and their Letters Patent Appeal also failed, leading to this appeal by special leave.

The court examined Section 127 of the Income-tax Act, 1961, which replaced Section 5(7A) of the Indian Income-tax Act, 1922. The court noted that unlike Section 5(7A), Section 127(1) requires reasons to be recorded prior to the transfer order. The impugned order did not state any reasons for the transfer, which the court found problematic.

2. Requirement of Recording and Communicating Reasons for the Transfer:
The court emphasized that the requirement to record reasons under Section 127(1) is mandatory. The reasons must be communicated to the assessee to enable them to challenge the order in court. The court rejected the revenue's argument that the reasons given in the show-cause notice ("facility of investigation") could be read as part of the transfer order.

The court referred to the judgment in Pannalal Binjraj v. Union of India, which suggested that principles of natural justice should be followed, including giving notice and recording reasons, even under the old Act. The 1961 Act's Section 127 incorporated these principles by requiring reasons to be recorded.

The court also cited Shri Pragdas Umer Vaishya v. Union of India, which held that reasons must be recorded and communicated to the affected parties. The court stressed that recording and disclosure of reasons is not a mere formality.

3. Applicability of Principles of Natural Justice:
The court underscored that the principles of natural justice require reasons for a transfer order to be communicated to the assessee. This enables the assessee to challenge the order on grounds such as mala fides or arbitrariness. The court rejected the revenue's argument that merely recording reasons in the file without communicating them to the assessee meets the requirement of Section 127(1).

The court distinguished the present case from Kashiram Aggarwalla v. Union of India, where the transfer was within the same city and the proviso to Section 127(1) applied, eliminating the need to record reasons. The court also distinguished the case from S. Narayanappa v. Commissioner of Income-tax, where reasons for reopening assessments under Section 34 did not need to be communicated to the assessee.

The court concluded that non-communication of reasons in the transfer order under Section 127(1) is a serious infirmity, rendering the order invalid. The appeal was allowed, and the transfer orders were quashed.

Conclusion:
The Supreme Court held that the requirement of recording and communicating reasons under Section 127(1) of the Income-tax Act, 1961, is mandatory. Non-communication of reasons violates the principles of natural justice and invalidates the transfer order. The appeal was allowed, and the transfer orders were quashed.

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