Adverse Civil Consequences Violate Natural Justice if Order is Passed Without Notice and Opportunity of Hearing

The Petitioner, a company with an approved in-house Research & Development (R&D) facility, filed returns for A.Y. 2016-17 to 2018-19, claiming expenditure for scientific research under Section 35(2AB) of the Income Tax Act, 1961.

The Petitioner submitted details in Form 3CLA to the Department of Scientific and Industrial Research (DSIR) (Respondent No. 1).

Respondent No. 1 subsequently issued Form 3CL, which significantly reduced the approved expenditure without providing reasons or a prior hearing.

Despite RTI applications and grievances filed on the CPGRAM portal, the Petitioner received no effective response.

1. Whether the Respondent No. 1 was required to provide reasons and an opportunity of being heard before disallowing R&D expenditures in Form 3CL.

2. Whether the lack of a show-cause notice prior to an order entailing adverse civil consequences vitiates the administrative action.

Principles of Natural Justice (Audi Alteram Partem) and Article 226 of the Constitution of India.

Even if a statute is silent regarding notice and hearing, such requirements must be read into provisions where an order entails adverse civil consequences or is prejudicial to a person (Excise Commissioner, Karnataka v. Mysore Sales International Ltd. [2024] 300 Taxman 115 (SC)).

The Court examined the Petitioner’s contention that the disallowance of expenses under Section 35(2AB) of the Act occurred without a Show Cause Notice or a reasoned order.

While Respondent No. 1 argued that only ineligible expenditures as per DSIR guidelines were disallowed and that reasons were communicated via email, the Court focused on the procedural lapse.

Since the quantification in Form 3CL directly affects the tax liability and results in "adverse civil consequences," the assessing/approving authority is duty-bound to provide an adequate and reasonable opportunity of hearing, including a personal hearing, regardless of whether Section 35(2AB) expressly mandates it.

The Court allowed the petition in part, setting aside the arbitrary disallowance of expenditures and remanding the matter to Respondent No. 1 with directions to reconsider Form 3CL for A.Y. 2016-17 to 2018-19 afresh, after affording the Petitioner a proper and reasonable opportunity of hearing within four months.