Principles of cross examination in income tax proceedings

The issue of cross examination of witnesses in Income Tax proceedings has seen substantial litigation before various appellate fora. Many a time, income tax assessments, otherwise sound on facts and merits, suffer adverse consequences due to opportunity of cross examination not being provided to the assessees.

What is Cross-Examination?

In law, cross-examination is the interrogation of a witness called by one’s opponent. Section 138 of the Indian Evidence Act 1872 provides that a witness will be first examined in chief, and then if the adverse party deems fit, cross-examined and if the party calling him so desires, be re-examined.

Rules of evidence do not govern the income-tax proceedings strictly, as the proceedings under the Income Tax Act are not judicial proceedings in the sense in which the phrase “judicial proceedings” is ordinarily used. The Assessing Officer is not fettered or bound by technical rules of evidence contained in the Indian Evidence Act, and he is entitled to act on material which may or may not be accepted as evidence in a court of law. However, the principles of natural justice need to be applied by the income-tax authorities during assessment and appellate proceedings. Wherever Revenue collects evidences against the assessee and does not confront the same to the assessee, before using it against the assessee, the addition cannot be sustained.

Requests for cross-examination may be denied under the following situations.

(i)        Warranting cross examination of the source(informer):

(ii)      When there are enough and more documentary evidences, the copies of all of which furnished;

(iii)    When the witnesses to be made available for cross examination are in foreign countries and the expenditure involved will not be commensurate with the seizure, revenue involved etc. and

(iv)    Enough care to be taken in allowing cross examination of experts by another expert which should not unnecessarily protract or prolong the proceedings. The reasons for denial should be clearly detailed in the order passed.

Section 3 of India Evidence Act, 1872

“Evidence" means and includes —

(1)  all statements which the Court permits or requires to be made before it by witnesses, in relation to matters of fact under inquiry; such statements are called oral evidence;

(2)  all documents including electronic records produced for the inspection of the Court; such documents are called documentary evidence.

Types of Evidence

(i)              Oral - statement of witness

(ii)            Documentary including electronic records

(iii)          Courts presumptions - conclusive and rebuttable.

(iv)          Surrounding circumstances

(v)            Information available in public domain.

(vi)          An admission of fact - where contents are proved.

(vii)        Expert opinion- valuation or technical report

Rules of Evidence –Cross Examination

In State of Kerala v. K.T. Shaduli Grocery Dealer etc. it was held that:  

“The question is what is the content of this provision which imposes an obligation on the Sales Tax Officer to give and confers a corresponding right on the assessee to be afforded, a reasonable opportunity “to prove the correctness or completeness of such return”. Now, obviously “to prove” means to establish the correctness or completeness of the return by any mode permissible under law. The usual mode recognized by law for proving a fact is by production of evidence and evidence includes oral evidence of witnesses. The opportunity to prove the correctness or completeness of the return would, therefore, necessarily carry with it the right to examine witnesses and that would include equally the right to cross-examine witnesses examined by the Sales Tax Officer.” – [State of Kerala v. K.T. Shaduli Grocery Dealer Etc: (1977) 2 SCC 777]

Technical Rules of Evidence do not Apply to Income Tax Proceedings

Though the word ‘evidence’ is not defined under the Income-Tax Act, the concept of ‘Evidence’ is statutorily and judicially recognised in the Income Tax proceeding. However, the strict provisions of the Evidence Act do not apply to income-tax proceedings and Income Tax authorities are not bound by the technical rules of evidence. Rules of Evidence and Indian Evidence Act are applicable to proceedings in the courts before the judges and the magistrates. They apply to judicial proceedings. Further, the proceedings for assessment are not proceedings relating to a civil right. The liability to income-tax is not a civil right enforceable as such in courts of law. Such proceedings are of the nature of revenue proceedings. This principle is established by many judgments of courts, namely–

It was held that on consequential impact of lack of cross examination and violation of principle of natural

 justice, I have no hesitation to accept the plea of Ld. AR that lack of cross examination and violation of 

principle of natural justice results is total nullity of the entire addition, hence, the additions in dispute is 

hereby deleted." (Related Assessment Year : 2010-11) 

– [P Mittal Manufacturing (P) Ltd. v. ITO – Date of Judgement : 23.07.2019. (ITAT Delhi)]

Belated claim of Cross Examination - Accommodation entries - Addition under section 68 was confirmed as cash credits - Opportunity of cross examination - Rejection of rectification was held to be justified

In the case of R. L. Traders v. ITO, the Supreme Court dismissed the SLP filed by the assessee where the High Court upheld Tribunal’s order rejecting assessee’s application for rectification of order under section 254(2) on the ground that while making addition under section 68, assessee was not given an opportunity to cross examine the person who allegedly gave accommodation entries. Dismissing the petition the Court held that; considering the overall circumstances of the case, the Tribunal has dismissed the rectification  appreciating the facts. Accordingly the order of Tribunal is up held. - [R. L. Traders v. ITO (2018) 100 Taxmann.com 331 (Del)]

KEY NOTE

SLP of assessee is dismissed; R.L. Traders v. ITO (2019) 260 Taxman 109 (SC)

Addition under Section 69C Bogus purchases - No opportunity provided to assessee to cross-examine the witness

Where assessment order was passed by Assessing Officer, without granting an opportunity to assessee to cross-examine the witness matter was restored to the file of Assessing Officer to make a fresh assessment after giving opportunity of being heard to assessee. During search and seizure operation conducted on group, engaged in providing accommodation entries, notice under section 133(6) was issued to the concerned party for verifying the genuineness of the purchases made by the assessee. On the basis of such statement, assessee was called upon to furnish the witness, and in absence of any reply, Assessing Officer made addition alleging bogus purchase to the income of the assessee. CIT(A) restricted the addition to 7.86%, by considering only the profit element in the transaction. Assessing Officer contended that as the onus cast upon assessee was not discharged, addition made by him should be confirmed.Held: It was the duty of Assessing Officer to enforce attendance of a witness, if his evidence was material. At the same time, the assessee must furnish the complete address of such person. Since order of assessment was passed without granting an opportunity to assessee to cross-examine the witness, matter was restored to the file of Assessing Officer, to make a fresh assessment after giving opportunity of being heard to assessee. Income Tax Act, 1961. – [ITO v. Ashok V. Viradia (2017) TaxPub(DT) 4928 (ITAT Mumbai)]

In the case of Dr. Gauri Shankar Prasad v. ITO, the Hon'ble High Court of Patna has held that the assessee had been given sufficient opportunity in the matter and at no point of time did he raise the plea that copies of the statements of persons relied upon or such evidence ought to be supplied to him or that he intended to cross-examine them. Therefore, it was not open to him to turn around and claim that he had been denied the opportunity of cross- examination and the statements in question could not be used against him. Considering the entirety of the evidence and materials which had come up against the assessee, including the huge amount of assets both movable and immovable, investments made by the assessee, it could not be said that the said statements, which had been concurrently accepted as relevant or corroborative evidence or material used for the purpose of addition, could not have been taken into consideration. – [Dr. Gauri Shankar Prasad v. ITO (2017) 393 ITR 635 (Pat)]

It was held that: As far as the question relating to cross examination is concerned, the court notices that though the documents were furnished to the assessee, it had not sought opportunity of cross examination; this was made at the fag end, in March, 1997. This court finds no justification to reject the statements, which merely explain the documents seized; the assessee could well have given a full explanation instead of seeking rejection of the documents. – [CIT v Kuwer Fibers (P) Ltd. (2017) 77 taxmann.com 345 (Del)]

Demand could not be set aside solely on ground of denying permission to cross-examine witness

In the case of Manidhari Stainless Wire (P) Ltd. v. Union of India, the High Court of Andhra Pradesh while dealing with the case of Central Goods and Services Tax Act 2017 has held that: The right to cross examine is not absolute at least insofar as the cases of this nature are concerned. If there are factual grounds to show that the denial of cross-examination was based upon the sound logic, then the order of adjudication cannot be interfered with. - [Manidhari Stainless Wire (P) Ltd. v. Union of India (2018) 360 ELT 255 : 65 GST 6 : (2017) 88 taxmann.com 10 (AP)]

Burden was on assessee

It was held that: Where Income-Tax Department had busted racket of bogus accommodation entries and name of assessee was discovered as one of beneficiaries of alleged racket and further amounts were actually found in books of assessee to be credited in name of alleged entry operators, burden was on assessee to prove that it was not a beneficiary of racket and did not allow the ground of appeal of the assessee that the Assessing Officer had erred in not making available the said entry operators for his cross examination. – [M/s. Meghna Towers (P) Ltd (2017) 87 taxmann.com 329 (ITAT Delhi)]

Assessee is bound to be provided with the material used against him apart from being permitted to cross examine the deponents - Violation of principles of natural justice –Statement relied without giving an opportunity of cross examination – Reassessment was held to be not valid -  Denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment order and renders it vulnerable

Allowing the petition the Court held that the Revenue was not justified in making addition at the time of reassessment without having first given the assessee an opportunity to cross-examine the deponent on the statements relied upon by the Assistant Commissioner. Quite apart from denial of an opportunity of cross examination, the Revenue did not even provide the material on the basis of which the Department sought to conclude that the loan was a bogus transaction. In the light of the fact that the monies were advanced apparently by account payee cheque and were repaid by account payee cheque the least that the Revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against the assessee before passing the order of reassessment. This not having been done, the denial of such opportunity went to the root of the matter. The order of reassessment was not valid. Followed Andaman Timber Industries v. CCE (2015) 281 CTR 241 : 127 DTR 241 : 62 taxmann.com 3 (2016) 38 GSTR 117 (SC). (Related Assessment year : 1983-84) – [H. R. Mehta v. ACIT (2016) 387 ITR 561 : 138 DTR 217 : 72 taxmann.com 110 (Bom)]

Principles of natural justice and cross-examination

It is well settled that while acting in their quasi-judicial capacity the income tax authorities have to adhere to the principles of natural justice.

In the case of Andaman Timber Industries v. CCE (2015) 62 taxmann.com 3 : 52 GST 355 (SC), the Apex Court observed that not allowing the assessee to cross-examine the witness whose statement has been relied upon to frame the order is a serious flaw. This makes the order a nullity

It was held that Whether cross-examination is to be provided or not depends upon the facts of each case and there is no thumb rule or straight tight jacket formula for arriving at this conclusion. It all depends on facts of each case whether principles of natural justice have been complied with or not. If decision making authority has provided due opportunity to the person complaining of non-observance of principles of natural justice then it is for the person so complaining to demonstrate the same and show the prejudice caused to him. Mere bald assertion of non-observance of the principles of natural justice is of no consequence. – [Nokia India (P) Ltd. v DDIT (2015) 59 taxmann.com 212 (ITAT Delhi)]

Failure to give the assessee the right to cross-examine witnesses whose statements are relied up results in breach of principles of natural justice. It is a serious flaw which renders the order a nullity

The assessee raised a plea that it was not allowed to cross-examine the dealers whose statements were relied upon by the Adjudicating Authority in passing the order. However, the Tribunal rejected the plea on the basis that “The plea of no cross examination granted to the various dealers would not help the appellant case since the examination of the dealers would not bring out any material which would not be in the possession of the appellant themselves to explain as to why their ex factory prices remain static”. On appeal by the assessee to the Supreme Court HELD allowing the appeal:

Not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession of the appellant themselves to explain as to why their ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.

The Supreme Court has considered that if there was no material with the Department on the basis of which it could justify its action, and if the statement of the two witnesses who were unknown to the appellant was the only basis of issuing the Show Cause Notice, right to crossexamination has to be given and held that we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show Cause Notice. – [Andaman Timber Industries v. Commissioner of Central Excise – Date of Judgement :  02.09.2015 (SC)]

KEY NOTE

At the outset, it appears that the judgement of the Supreme Court in the case of Andaman Timber Industries (supra) case is not applicable in the matter of IncomeTax proceedings since in the Adjudicating Manual of Customs and Central Excise there is a specific provision of cross-examination to be given by the Central Excise authorities, whereas there is no such parallel provision under the Income-Tax Act for giving the opportunity of cross-examination while giving the opportunity of hearing by the Assessing Officer. This is a thumb rule that decision/ judgment of any court is given in the light of the Rules/Acts/ Manuals which are legislated with respect to the specific authorities and cannot be imported to any authority who are not covered under that legislation.

Further, the facts in the case of Andaman Timber are entirely different where the Supreme Court has considered that there was no material with the Central Excise Department on the basis of which it could justify its action, as the statement of the two witnesses who were unknown to the appellant was the only basis for issuing the Show Cause Notice. Hence, this judgment will not apply where there is sufficient material on record of the Revenue against the assessee after detailed investigation, apart from the statement of the witnesses e.g. the cases of ‘Penny Stock’, ‘Accommodation Entries’ and similar other cases.

This case will also not apply where the assessees seek to cross examine their own witnesses who are known and connected to them and not regarded as third party, since under the rule of evidence the right to cross examine is given for the witness of the opposite party. For example, if the assessee makes a claim of purchase/investment/transaction in the Return of income and files the necessary details of the parties in support of the claim as witness and if the Revenue has collected material to rebut such claim which may be in the form of the statement recorded, the assessee has to discharge the onus cast upon him and in such condition he cannot take the plea of cross examination of his own witnesses unless he claims in the proceedings that the witnesses on which he relied upon turned hostile.

Further, the case of Andaman Timber was earlier set aside to the Tribunal by the Supreme Court with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions of the appellant and to give the opportunity of cross-examination. However, in the second round also, the Tribunal observed that cross-examination of the said dealers could not have brought out any material. This stand of the Tribunal was found fault with by Supreme Court, and it is in this light that the Supreme Court observed that, “According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity in as much as it amounted to violation of principles of natural justice because of which the assessee was adversely affected.

The Hon‟ble Supreme Court of India in New India Assurance Company Ltd. v. Nusli Neville Wadia & Anr., AIR 2008 SC 876, while considering a case under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971, held that though the statute may not provide for cross- examination, the same being a part of Principles of Natural Justice should be held to be an indefeasible right. It was held as follows:-

“If some facts are to be proved by the landlord, indisputably the occupant should get an opportunity to cross-examine. The witness who intends to prove the said fact has the right to cross-examine the witness. This may not be provided by under the statute, but it being a part of the principle of natural justice should be held to be indefeasible right"

Effective cross-examination could have been done as regards the correctness or otherwise of the report, if the contents of them were proved. The principles analogous to the provisions of the Indian Evidence Act as also the principles of natural justice demand that the maker of the report should be examined, save and except in cases where the facts are admitted or the witnesses are not available for cross-examination or similar situation. The High Court in its impugned judgment proceeded to consider the issue on a technical plea, namely, no prejudice has been caused to the Appellant by such non-examination. If the basic principles of law have not been complied with or there has been a gross violation of the principles of natural justice, the High Court should have exercised its jurisdiction of judicial review. – [Rajiv Arora v. Union of India and Ors. AIR 2009 SC 1100]

The aforesaid decision makes it evident that, not only should the opportunity of cross-examination be made available, but it should be one of effective cross examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross-examination is an integral part and parcel of the principles of natural justice.

Right of cross examination from whom the Assessing Officer has collected the evidence is not required under the income tax law and such assessment was valid under the Act

In the case of Motilal Padampat Udyog Ltd. v. CIT, the Allahabad High Court after considering the judgment of Supreme Court in the case of Krishna Chand Chela Ram v.  CIT (1980) 125 ITR 713 (SC), has held that right of cross examination from whom the Assessing Officer has collected the evidence is not required under the income tax law and such assessment was valid under the Act. In the instant case, the copies of the rough cash books and the statements of the partners of ‘V’ which were recorded, had been provided to the assessee and, in fact, the assessee had also submitted its reply. In the letter an opportunity to cross-examine was asked for only in case the statements had not been recorded. As, in the instant case, the assessee had proper opportunity to controvert the material gathered by the assessing authority and used against it, there had been compliance of the principle of natural justice. – [Motilal Padampat Udyog Ltd. v. CIT (2007) 293 ITR 565 (All)]

In the case of GTC Industries Ltd. v. ACIT, ITAT Bombay Bench has relied upon the judgment of Calcutta High Court in the case of Kisanlal Agarwalla v. Collector of Land Customs AIR 1967 & Cal. 80 and quoted this judgment in para 90 which throws light on the right of cross-examination–.

“90. There is a good deal of misconception on this question of the right of cross-examination as part of natural justice. Natural justice is fast becoming the most unnatural and artificial justice and for that confusion the Courts are no less responsible than the litigants. Ordinarily the principle of natural justice is that no man shall be a judge in his own cause and that no man should be condemned unheard. This latter doctrine is known as audi alteram partem. It is on this principle that natural justice ensures that both sides should be heard fairly and reasonably. A part of this principle is that if any reliance is plated on evidence or record against a person then that evidence or record must be placed before him for his information, comment and criticism. That is all that is meant by the doctrine of audi alteram partem, that no party should be condemned unheard. No natural justice requires that there should be a kind of a formal cross-examination. Formal cross-examination is procedural justice. It is governed by rules of evidence. It is the creation of Courts and not a part of natural justice but of legal and statutory justice. Natural justice certainly includes that any statement of a person before it is accepted against somebody else, that somebody else should have an opportunity of meeting it whether it (sic), by way of interrogation or by way of comment does not matter. So long as the party charged has a fair and reasonable opportunity to see, comment and criticise the evidence, statement or record on which the charge is being made against him the demands and the test of natural justice are satisfied. Cross-examination in that sense is not the technical cross-examination in a Court of law in the witness-box.”

ITAT has further held that, “As regards the dictum ‘audi alteram partem’ the assessee’s basic contention was that the statements of witnesses and materials which were relied upon by the Assessing Officer in the assessment order to reach the conclusions and findings which were adverse to the assessee should have been disclosed to the assessee and the witnesses should have been offered for cross-examination. The right to cross examine the witness who made adverse report is not an invariable attribute of the requirement of the said dictum. The principles of natural justice do not require formal cross- examination. Formal cross-examination is a part of procedural justice. It is governed by the rules of evidence, and is the creation of Court. It is part of legal and statutory justice, and not a part of natural justice, therefore, it cannot be laid down as a general proposition of law that the revenue could not rely on any evidence which had not been subjected to crossexamination. However, if a witness has given directly incriminating statement and the addition in the assessment is based solely or mainly on such statement, in that eventuality it is incumbent on the Assessing Officer to allow cross- examination. Adverse evidence and material, relied upon in the order, to reach the finality, should be disclosed to the assessee. But this rule is not applicable where the material or evidence used is of collateral nature.” - – [GTC Industries Ltd. v. ACIT (1998) 65 ITD 380 (ITAT Bombay)]

Order passed without granting opportunity to cross-examine - High Court - Writ petition -High Court ought not to set aside entire assessment order--Ought only to direct Assessing Officer to grant opportunity to cross-examine

The Assessee had not availed the statutory remedy of filing an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] against the order of the Assessing Officer but had approached the High Court directly by way of a writ petition. In those circumstances, the Supreme Court held that the High Court ought to have required the Assessee to avail the remedy of a statutory appeal instead of quashing the assessment proceedings on the ground of violation of natural justice. In this case the Court had disapproved the approach of the concerned High Court which set-aside an order of reassessment on the ground of the assessee not having been given opportunity to cross-examine the concerned witness. The relevant observations of the Supreme Court in this regard are as follows: -

“.......We are of the view that the High Court should not have set aside the entire assessment order. At the highest, the High Court should have directed the Assessing Officer to grant an opportunity to the assessee to cross-examine the concerned witness. Be that as it may, we are of the view that, even on this particular aspect, the assessee could have gone in appeal to the Commissioner of Income-tax (Appeals). The assessee has failed to avail of the statutory remedy. In the circumstances, the Supreme Court of India has held that we are of the view that the High Court should not have set aside the entire assessment order. At the highest, the High Court should have directed the Assessing Officer to grant an opportunity to the assessee to cross-examine the concerned witness.” – [ITO v. Pirai Choodi (2011) 334 ITR 262(SC)]

Opportunity for cross examination - Entire order cannot be set aside

Where an order had been passed by the Assessing officer without granting the assessee an opportunity to cross examine and the assessee preferred a writ petition. The Hon'ble Supreme Court in case of M. Pirai Choodi v. ITO, wherein the Hon'ble Supreme Court while considering the decision of the Hon'ble MP High Court in 302 ITR 40 has held that not granting an opportunity of cross examination to the assessee is merely an regularity and therefore the High Court was not correct in cancelling the order of the adjudicating authority. Therefore, Hon'ble Supreme Court thought it fit to set aside the matter to the adjudicating authority with a direction to grant opportunity of cross examination to the assessee. (Related Assessment year : 2004-05). – [ITO v M. Pirai Choodi ( 2011) 334 ITR 262 ( SC)]

In case of CIT v. Ashwani Gupta, the Delhi High Court while dealing with the issue of not providing the opportunity to cross examine the witnesses has held in para 5 to 7 as under :- Thus the Hon'ble High Court has held that once there is a violation of principles of natural justice inasmuch as seized material is not provided to the assessee nor is cross examination of the person on whose statement the AO relied upon, granted, then, such deficiencies would amount to denial of opportunity and consequently would be fatal to the proceedings. – [CIT v. Ashwani Gupta (2010) 322 ITR 396 (Del)]

In Rajiv Arora v. Union of India & Ors., the Apex Court held that Effective cross-examination could have been done as regards the correctness or otherwise of the report, if the contents of them were proved. The principles analogous to the provisions of the Indian Evidence Act as also the principles of natural justice demand that the maker of the report should be examined, save and except in cases where the facts are admitted or the witnesses are not available for cross-examination or similar situation. The High Court in its impugned judgment proceeded to consider the issue on a technical plea, namely, no prejudice has been caused to the appellant by such non-examination. If the basic principles of law have not been complied with or there has been a gross violation of the principles of natural justice, the High Court should have exercised its jurisdiction of judicial review. – [Rajiv Arora v. Union of India & Ors. AIR 2009 SC 1100 (SC)]

Denial of the right to cross-examine, would amount to a denial of the right to be heard i.e. audi alteram partem

In Lakshman Exports Ltd. v. Collector of Central Excise, the Supeme Court Court, while dealing with a case under the Central Excise Act, 1944, considered a similar issue i.e. permission with respect to the cross-examination of a witness. In the said case, the Assessee had specifically asked to be allowed to cross-examine the representatives of the firms concern, to establish that the goods in question had been accounted for in their books of accounts, and that excise duty had been paid. The Court held that such a request could not be turned down, as the denial of the right to cross-examine, would amount to a denial of the right to be heard i.e. audi alteram partem. – [Lakshman Exports Ltd. v. Collector of Central Excise (2005) 10 SCC 634 (SC)]

The Hon’ble Supreme Court in the case of Chuharmal v. CIT, held that - What is meant by saying that the Evidence Act does not apply to proceedings under the Income-tax Act is that the rigor of the rules of evidence contained in the Evidence Act are not applicable, but that does not mean that when the taxing authorities are desirous of invoking the principles of the Act in proceedings before them, they are prevented from doing so. All that is required is that if they want to use any material collected by them which is adverse to the assessee, then the assessee must be given a chance to make his submissions thereon. The principles of natural justice are violated if an adverse order is made on an assessee on the basis of the material not brought to his notice. - [Chuharmal v. CIT (1988) 172 ITR 250 (SC)]

Belated claim of assessee at appellate stage that it is denied the opportunity of cross-examining witnesses in assessment proceeding is wholly untenable in law

In the case of Hindusthan Tabacco Company v. CIT, the Calcutta High Court has held that: If the assessee feels that cross-examining of any person is necessary for establishing its case it is incumbent upon assessee to make such prayer before Assessing officer during the assessment proceeding and if a party fails to avail of opportunity to cross-examine a person at appropriate stage in proceeding, the said party would be precluded from raising such issue at a later stage of proceeding. Therefore, the belated claim of assessee at appellate stage that it is denied the opportunity of cross-examining witnesses in assessment proceeding is wholly untenable in law. Plea of violation of natural justice taken at the appellate stage appears to be belated and clearly an afterthought. It appears that no prejudice had been suffered by the appellant assessee in the manner the proceeding was conducted by the Assessing Officer and the assessee was not aggrieved at that stage. Only when the assessment order went against it, the assessee conveniently raised such belated plea of denial of opportunity of fair hearing and breach of principles of natural justice. – [Hindusthan Tabacco Company v. CIT (1986) 27 taxmann.com 155 (Cal)]

In the case of Mehar Singh v.  The Appellate Board Foreign Exchange, 1986 (10) DRJ 19, the Hon‟ble High Court while dealing with a case under the Foreign Exchange Regulation Act, 1973, decided the appeal in favour of the Appellants on the short ground that the applications made to the Director of Enforcement and before the Appellate Board during the pendency of the appeal to summon four witnesses for cross- examination, were not dealt with by the authorities below. It was held that non-summoning of the said witnesses for purposes of cross-examination has resulted in miscarriage of justice. – [Mehar Singh v.  The Appellate Board Foreign Exchange 1986 (1) Crimes 561, 1986 (10) DRJ 19 (Del)]

Principles of Natural justice and Cross Examination in the Income Tax Proceedings

In the case of CIT v. Metal Products of India, the Punjab & Haryana High Court has held that: In the context of the Indian Evidence Act, ‘evidence’ means and includes all statements made before the Court which are called ‘oral evidence’ and all documents produced before it for inspection which are called ‘documentary evidence’’. That is a controlled meaning of the word for that Act. Yet, in certain circumstances, evidence in the form of affidavits, declarations and other means of the same kind are allowed to be adduced. But all such exercise is made before a Court or a quasi-judicial Tribunal to make things obvious or manifest. In other words, the effort is to make things plainly visible or conspicuous. The object can also be achieved by a positive suggestion indicating an inference which adds to the plain visibility or manifestation. The Court or the Tribunal must have before it, in all events, the correct perspective of things and what is helpful or valuable in that direction is ‘evidence’ in the larger context or in the generic sense. As is well known, strict rules of evidence, as are known to the Indian Evidence Act, are not applicable to income-tax proceedings and thus the word ‘evidence’ in the income-tax proceedings has to be understood in the generic sense. – [CIT v. Metal Products of India (1984) 150 ITR 714 (P&H)]

In K. L. Tripathi v. State Bank of India & Ors., the Hon’ble Supreme Court has held that in order to sustain a complaint of violation of the Principles of Natural Justice on the ground of denial of opportunity to cross examine, it must be established that some prejudice has been caused to the party by the procedure followed. A party which does not want to controvert the veracity of the evidence on record or does not want to controvert the testimony gathered behind its back cannot expect to succeed in any subsequent grievance raised by him on the ground that no opportunity of cross-examination was provided to him especially when the same was not requested and especially when there was no dispute regarding the veracity of the statement. – [K. L. Tripathi v. State Bank of India & Ors., AIR 1984 SC 273 : (1984) SCR (1) 184 (SC)]

The Hon‟ble Supreme Court in Needle Industries (India) Ltd. & Ors. v. N.I.N.I.H. Ltd. & Ors., AIR 1981 SC 1298, considered a case under the Indian Companies Act, and observed that it is generally unsatisfactory to record a finding involving grave consequences with respect to a person, on the basis of affidavits and documents alone, without asking that person to submit to cross- examination. – [Needle Industries (India) Ltd. & Ors. v. N.I.N.I.H. Ltd. & Ors., AIR 1981 SC 1298]

Cross-examination is must where Assessing Officer relies upon only on the statement of the Third Party unconnected with the appellant

In the case of Krishna Chand Chela Ram v. CIT, the Supreme Court has held that cross-examination is must where Assessing Officer relies upon only on the statement of the Third Party unconnected with the appellant. Hon’ble Supreme Court has held that the letters, dated 14.02.1955 and 09.03.1959, did not constitute any material evidence which the Tribunal could legitimately taken into account for the purpose of arriving at the finding that the amount of Rs. 1,07,350 was remitted by the assessee from its Madras Office, and if these two letters were eliminated from consideration, there was no material evidence at all before the Tribunal which could support its finding. What the manager of the bank wrote in his letters could not possibly be based on his personal knowledge but was based on here say. The revenue authorities ought to have called upon the manager to produce the documents and papers on the basis of which he made the statement and confronted the assessee with those documents and papers. – [Krishna Chand Chela Ram v. CIT (1980) 125 ITR 713 (SC)]

In the case of Kanugo & Co. v. Collector of Customs, the Supreme Court held categorically that the principles of natural justice do not require that in matters of this nature, persons who gave information should be allowed to be cross-examined. In Kanugo & Co., what was in challenge was an order of confiscation of goods under Section 167(8) of the Sea Customs Act, 1878 read with Section 3(2) of the Imports and Exports (Control) Act, 1947. In paragraph-12 of its judgment, the Supreme Court held in Kanugo & Co. as follows:

12. The complaint of the appellant now is that all the persons from whom enquiries were alleged to have been made by the authorities should have been produced to enable it to cross-examine them. In our opinion, the principles of natural justice do not require that in matters like this the persons who have given information should be examined in the presence of the appellant or should be allowed to be cross-examined by them on the statements made before the Customs Authorities. Accordingly we hold that there is no force in the third contention of the appellant. – [Kanungo & Co. v. Collector of Customs, (1973) 2 SCC 438 (SC)]

The Assessing Officer cannot gather material or evidence at the back of the assessee and use it unilaterally. Evidence has to be tested on cross examination. Failure to afford opportunity to the assessee to cross-examine a third party whose evidence is sought to be utilised would make the assessment void as held in the cases of Kishinchand Chellaram v. CIT (1980) 4 Taxman 29 (SC), Sona Electric Co. v. CIT (1984) 19 Taxman 160 (Delhi), Nathu Ram Prem Chand v. CIT (1963) 49 ITR 561 (All).

The Hon'ble Supreme Court in case of C. Vasantlal & Co. v. CIT has held that the ITO is not bound by any technical rules of the law of evidence. It is open to him to collect material to facilitate assessment even by private enquiry. But, if he desires to use the material so collected, the assessee must be informed about the material and given adequate opportunity to explain it. The statements made by Praveen Jain and group were material on which the Income Tax authorities could act provided the material was disclosed and the assessee had an opportunity to render their explanation in that regard. – [C. Vasantlal & Co. v. CIT (1962) 45 ITR 206 (SC)]

Cross-examination is one part of the principles of natural justice

A Constitution Bench of the Supreme Court in State of M.P. v. Chintaman Sadashiva Vaishampayan AIR 1961 SC 1623, held that the rules of natural justice, require that a party must be given the opportunity to adduce all relevant evidence upon which he relies, and further that, the evidence of the opposite party should be taken in his presence, and that he should be given the opportunity of cross-examining the witnesses examined by that party. Not providing the said opportunity to cross-examine witnesses, would violate the principles of natural justice. – [State of M.P. v. Chintaman Sadashiva Vaishampayan AIR 1961 SC 1623]

The Tribunal was not entitled to reject the Affidavit filed by the assessee on the mere ground that he had produced no documentary evidence; if it was not accepted as sufficient proof, the assessee should have been called upon to produce documentary evidence or he should have been cross examined to find out how far his assertions in the affidavit were correct. – [L. Sohanlal Gupta v. CIT (1958) 33 ITR 786 (All)] 

It was held that it will not be open to the revenue to challenge the statements made by the deponent in their affidavits later on, if no cross examination with reference to the statements made in the affidavits is done.- [Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC)]

Principles of natural justice are applicable to the proceedings under the Income-tax Act

In the case of Dhakeswari Cotton Mills Ltd. v. CIT, the Hon'ble Supreme Court has held that the rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh where it was stated that while proceeding under sub-section (3) of section 23, the Income-tax Officer, though not bound to rely on evidence produced by the assessee as he considers to be false, yet if he proposes to make an estimate in disregard of that evidence, he should in fairness disclose to the assessee the material on which he is going to find that estimate; and that in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilized to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and that he should further give him ample opportunity to meet it." It was held in that case that "In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. – [Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC)]

In Suraj Mall Mohta and Co. v. A. V. Visvanatha Sastri, the Supreme Court has held that the assessment proceedings before the Income-tax Officer are judicial proceedings and all the incidents of such judicial proceedings have to be observed before any conclusion is arrived at. The assessee has a right to inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal. This right has not been taken away by any express provision of the Income Tax Act. - [Suraj Mall Mohta and Co. v. A. V. Visvanatha Sastri (1954) 26 ITR 1 (SC)]

Subsequent explanations cannot sustain a decision

The Supreme Court in Commissioner of Police v. Gordhandas Bhanji 1952 AIR SC 16 held as under:

“We are clear that public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanation subsequently given by the Officer making the order of what he meant, or of what was in his mind or what he intended to do.”