Rule 86A- “Reasons to be Recorded in Writing”-Inbuilt Safeguard for Protection of Principle of Natural Justice and Balancing Act between Power of the Revenue and Safeguard of Taxpayers Interest

Rule 86A- “Reasons to be Recorded in Writing”-Inbuilt Safeguard for Protection of Principle of Natural Justice and Balancing Act between Power of the Revenue and Safeguard of Taxpayers Interest

CA Arpit Haldia

Rule 86A was inserted vide Notification No. 75/2019-Central Tax Dated 26^th December 2019. Rule 86A provides that proper officer having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible, may for reasons to be recorded in writing to not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

The words “reasons to be recorded in writing” gain significant importance in the implementation of Rule 86A and would become the inbuilt safe-guard for protection of principle of natural justice since the Rule does not require issue of notices prior to blocking of Input Tax Credit. The article discusses in detail various concepts of “Reasons to be Recorded in Writing”.

a) Importance of Concept of “Reasons to be recorded in Writing”

Hon’ble Apex Court in the Matter of Ajantha Industries And Ors vs Central Board Of Direct Taxes, New … on 5 December, 1975 observed the importance and the right which the process of “recording of reasons in writing” gives to the aggrieved:

“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.”

Hon’ble Apex Court in the matter of Hukam Chand Shyam Lal vs Union Of India And Ors on 17 December, 1975 Equivalent citations: 1976 AIR 789, 1976 SCR (2)1060 held that requirement of recording such satisfaction with reasons therefor may be implicit in the Rule which will be a minimal safeguard against arbitrary exercise of this drastic power.

b) Recording of Reasons in Writing is not merely and administrative requirement and has to be such that it discloses the reasons which led to satisfaction of a particular situation

In the matter of P.K. Chowdhury and others V. Union of India and others (MP) 1976 MPLJ 690, a judgement delivered by Bench of G.P. Singh and S.M.N Raina discussed at length about the principle of “reasons to be recorded in writing. The relevant extract of the judgement is as under:

There are a number of cases in which it has been held that when a power is conferred by a Statute to take action on being satisfied of certain matters for reasons to be recorded, action cannot be taken without recording the reasons of satisfaction, even though the satisfaction required is only subjective and the nature of the power purely administrative. In such cases, mere recording of satisfaction as to the existence of the conditions is not enough but the reasons which led to the satisfaction must also be recorded. Further, the reasons recorded must be relevant and germane to the content and scope of the power conferred by the statute and must show a reasonable nexus between the facts considered and satisfaction reached : Collector of Monghyr v. Keshav Prasad : AIR 1962 SC 1694, pp. 1700, 1701, A.E. Industries Ltd. v. Its Workmen : AIR 1967 SC 284, Union of India v. M.L. Capoor : AIR 1974 SC 87, p. 88 and Ajantha Industries v. C. Board, Direct Taxes : AIR 1976 SC 437. It need hardly be emphasized that the requirement of Rule 14 (ii) and proviso (b) to Article 311(2) that reasons be recorded is not a mere formality and it must be strictly complied with. The reasons must state the facts from which the satisfaction that it is not reasonably practicable to hold an inquiry is derived by the disciplinary authority.

In the matter of Ajantha Industries And Ors vs Central Board Of Direct Taxes,New … on 5 December, 1975 Equivalent citations: 1976 AIR 437, 1976 SCR (2) 884, Hon’ble Apex Court held that

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.

c) How the reasons are to be recorded in Writing

Hon’ble Apex Court in the matter of Union Of India vs Mohan Lal Capoor & Others on 26 September, 1973 Equivalent citations: 1974 AIR 87, 1974 SCR (1) 797 held that

Reasons are the links ‘between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. -Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable.

In the matter of South Buckinghamshire District Council And Another V Porter (2004) 4 All ER 775, requirement and the process of reasoning was discussed in detail as follows:

The reasons for a decision must be intelligible and they must be adequate. They must enable the reader to understand why the matter was decided as it was and what conclusions were reached on the ‘principal important controversial issues’, disclosing how any issue of law or fact was resolved. Reasons can be briefly stated, the degree of particularity required depending entirely on the nature of the issues falling for decision. The reasoning must not give rise to a substantial doubt as to whether the decision-maker erred in law, for example by misunderstanding some relevant policy or some other important matter or by failing to reach a rational decision on relevant grounds. But such adverse inference will not readily be drawn.

d) Implications of recording irrelevant reasons or non-recording of reasons

Hon’ble Apex Court in the matter of Maneka Gandhi vs Union Of India on 25 January, 1978 Equivalent citations: 1978 AIR 597, 1978 SCR (2) 621 observed that that the necessity of giving reasons acts as a healthy check against abuse or misuse of power. If the reasons given are not relevant or are extraneous or irrelevant, the court would strike down the order. This liability to be exposed to judicial scrutiny would by itself act as a safeguard against improper or mala fide exercise of power.

e) Whether these reasons are to be communicated to the aggrieved by the concerned authority

In the matter of Ajantha Industries And Ors vs Central Board Of Direct Taxes,New … on 5 December, 1975 Equivalent citations: 1976 AIR 437, 1976 SCR (2) 884,  Question before Hon’ble Apex Court was whether communication of reasons recorded in writing are mandatory to be communicated to the assessee

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 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.

Therefore, Reasons to be recorded for the application of Rule 86A must satisfy the above conditions and non-observation of any of the above requirements might render the order void. The concept safeguards the interest of genuine taxpayer while at the same time gives sufficient tooth to the revenue to act against the errant taxpayers.  Broadly we can summarise the key safeguards Inbuilt through “Reasons to be Recorded In Writing” in Rule 86A

• Recording of satisfaction with reasons implicit in the Rule is a minimal safeguard against arbitrary exercise of this drastic power

• Mere recording of satisfaction as to the existence of the conditions is not enough but the reasons which led to the satisfaction must also be recorded.

• The reasons recorded must be relevant and germane to the content and scope of the power conferred by the statute and must show a reasonable nexus between the facts considered and satisfaction reached.

• Reasons recorded must enable the reader to understand why the matter was decided as it was and what conclusions were reached on the ‘principal important controversial issues’, disclosing how any issue of law or fact was resolved. Reasons can be briefly stated, the degree of particularity required depending entirely on the nature of the issues falling for decision.

• If the reasons given are not relevant or are extraneous or irrelevant, the court would strike down the order. This liability to be exposed to judicial scrutiny would by itself act as a safeguard against improper or mala fide exercise of power.

• Reasons are to be communicated to the Taxpayers to enable an opportunity to the assessee to approach the High Court under its writ jurisdiction under article 226 of the Constitution or Supreme 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.