Principles of Cross Examination in Context of Income Tax Proceedings

Sulekha Verma
Commissioner, Income Tax
(Departmental Representative),
Income Tax Appellate Tribunal
New Delhi
sulekha.verma@incometax.gov.in

Smt. Sulekha Verma is an Indian Revenue Service (IRS) officer of 1990 batch. She is an M.A. in Political Science and is also a law graduate. She has had a varied experience of working in the Income Tax Department, at various levels, such as assessment, ITAT, computerization, CIB, Directorate of Recovery dealing with BIFR cases and as CIT(Appeal). She has a rich experience of working for almost 8 years as a Departmental Representative before ITAT, having served as Jr. AR/Sr. DR for 4 years and as CIT (DR) for almost 4 years now. She is currently working as CIT(DR)-6 &Admn. at ITAT, Delhi. She was awarded Meritorious Service Medal 2017-18 and the Certificate of Appreciation by Pr. CCIT, Delhi in July 2018 for her outstanding work as CIT (Appeal).

Executive Summary

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. It is necessary, therefore, to understand the importance and scope of the principles of cross examination in income tax proceedings. The purpose of this article is to provide a focus on various decisions and judgments of Tribunals and Courts on the issue of cross-examination and its applicability to the provisions of Income Tax Act 1961.

(A) 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.

(B) 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–

The Supreme Court in the case of Indian & Eastern Newspaper Society v CIT 119 ITR 996 held that, ‘the proceedings for assessment before the Assessing Officer are quasi-judicial in character.’ The Delhi High Court in Addl. CIT v. Jay Engg. Works Ltd. 113 ITR 389 held that:

While the word ‘evidence’ may recall the oral and documentary evidence as may be admissible under the Indian Evidence Act, the use of the word ‘material’ shows that the ITO not being a court can rely upon material which may not be strictly evidence admissible under the Indian Evidence Act for the purpose of making an order of assessment.

The Supreme Court in S.S. Gadgil v. Lal & Co. 53 ITR 231 held that the income-tax authorities who have power to assess and recover tax are not acting as judges deciding a litigation between the citizen and the State: they are administrative authorities whose proceedings are regulated by statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate.

i. Powers of Assessing Officer under Income Tax Act and the Principle of Natural Justice –

Under the Income Tax Act, the Assessing Officer is empowered to assess the correct income of the assessee. For this purpose, the AO may make necessary enquiries and gather evidences or may rely upon the materials and evidences collected by the investigating agencies. However, natural justice demands that in such cases, AO must bring these facts to the knowledge of the assessee for rebuttal. The principles of natural justice are an inalienable part of the Income-tax law as provided under various provisions of the Act, namely, audi alteram partem, i.e., no man should be condemned unheard, decisions with adequate reasons, acting fairly i.e. without prejudice.

In the case of Dhakeswari Cotton Mills Ltd. v CIT 26 ITR 775, the Supreme Court held that: Although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment.

The Supreme Court in the case of Chuharmal v CIT [1988] 172 ITR 250 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.

ii. Whether the principles of natural justice should be followed with all the rigidity or it should be kept flexible –

Various authorities i.e. courts and tribunals have held that considering the complexity of the cases and advanced technologies, the principles of natural justice should not be followed with all the rigidity but be kept flexible.

In the case of Nokia India (P.) Ltd. v DDIT 59 taxmann.com 212, the ITAT Delhi Bench relied upon the decision of ITAT Bombay Bench in the case of GTC Industries Ltd. where in para 94 the judgment of Supreme Court in the case of R.S. Dass v. Union of India AIR 1967 SC 593 and the judgment of the Supreme Court in Chairman, Board of Mining Examination v Ramjee AIR 1977 SC 965 has been considered which says that:

‘94. The Supreme Court had an occasion to consider the applicability of the principles of natural justice in a recent case in R.S. Dass v Union of India AIR 1967 SC 593. The Supreme Court in Chairman, Board of Mining Examination v Ramjee AIR 1977 SC 965 held as follows:

“Natural justice is no unruly horse, no lurking land mine, nor a judicial cure all. If fairness is shown by the decision maker to the man proceeded against, the form, features and the fundamentals of such essential processual propriety being conditional by the facts and circumstances of such situation, no breach of natural justice can be complained of. Unnatural expansion of natural justice, without reference to the administrative realities and other factors of a given case, can be exasperating. We can neither be finical nor financial but should be flexible yet firm in this jurisdiction”

CIT v East Coast Commercial Co. Ltd. 63 ITR 449: The income-tax authorities are not strictly bound by the rules of evidence, and the mere fact that certain provisions of the Taxation of Income (Investigation Commission) Act relating to the inquiries to be held were declared to be ultra vires by this court did not render the Commission an unlawful body; and in any event the admissions which are recorded by the Commission, as having been made before them, cannot be ignored. The report had evidentiary value and could be taken into account. Undoubtedly, the Report had to be brought to the notice of the company, and the company had to be given an opportunity to make its representation against the report and to tender evidence against the truth of the recitals contained therein.

In the case of Hersh Win Chadha v DCIT 135 TTJ 513 ITAT Delhi has analysed the nature of income-tax proceedings and powers of Assessing Officer and held that the dispute concerned the determination of the income-tax liability of the assessee rather than fixing any criminal liability or accountability of the assessee for any other law or obligation. The admissibility of documents, evidence or material differs greatly in income-tax proceedings and criminal proceedings respectively. In criminal proceedings, the charge is to be proved by the State against the accused, establishing it beyond doubt, whereas as per the settled proposition of law, the income-tax liability is ascertained on the basis of the material available on record, the surrounding circumstances, human conduct and preponderance of probabilities.

If the Assessing Officer, during the course of proceedings comes across some material indicating any accrual or receipt of income in the hands of the assessee, he is empowered to investigate the matter and ask relevant questions. The Assessing Officer’s burden is initial in nature, the assessee, thereafter, has to give a proper explanation, which means, it must be true and disclosing proper facts, more particularly when they are in the exclusive knowledge of the assessee. The assessee has no option to remain selective, elusive, evasive or  restrained in disclosure. After such explanation, statement or other disclosure of the assessee, the Assessing Officer will ascertain the correctness of the assessee’s submissions on the basis of material available on record, the surrounding circumstances, the conduct of the assessee, the preponderance of probabilities and the nature of incriminating information/evidence available with him.

We are conscious of the fact that the I.T. Department was carrying out investigations in difficult circumstances ascribable to the sensitive nature of enquiries, their ramification on national politics and public perception. It was very difficult to get information and documents and to examine concerned links due to the premeditated surreptitious cover up of transactions and smokescreen corporate jugglery. There is no presumption in law that the Assessing Officer is supposed to discharge an impossible burden to assess the tax liability by direct evidence only and to establish the evasion beyond doubt as in criminal proceedings. This is why Hon’ble courts by way of a catena of binding judicial pronouncements, have held that tax liabilities can be assessed by Revenue Authorities on consideration of material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/evidence available on record.

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

In the case of CIT v Metal Products of India 150 ITR 714 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.

In the case of Nokia India (P.) Ltd. v DDIT 59 taxmann.com 212 ITAT Delhi Bench has 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 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.

In the case of CIT v Kuwer Fibers (P.) Ltd. 77 taxmann.com 345, the High Court of Delhi has 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 instead of seeking rejection of the documents.

In the case of GTC Industries Ltd. v ACIT 65 ITD 380, 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, of law that the revenue could not rely on any evidence which had not been subjected to cross-examination. 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.”

Allahabad High Court in the case of Motilal Padampat Udyog Ltd. v CIT 293 ITR 565 after considering the judgment of Supreme Court in the case of Krishna Chand Chela Ram v CIT has held that right of cross examination from whom the AO 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.

iv. Opportunity to cross-examine when the witness is the unconnected third party

On the basis of the principle of natural justice, if the I.-T authorities are relying on the testimony of a witness, the assessee must be supplied with the contents of all such evidences and he should get an opportunity to cross-examine the witness who are not connected and are hostile to him. Courts and tribunals have held that cross-examination is must where AO relies upon only on the statement of the unconnected Third Party.

In the case of Krishna Chand Chela Ram v CIT 125 ITR 713 Supreme Court has held that cross-examination is must where AO relies upon only on the statement of the Third Party unconnected with the appellant. Hon’ble Supreme Court has held that the letters, dated 14-2-1955 and 9-3-1959, did not constitute any material evidence which the Tribunal could legitimately take 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.

The Supreme Court in the case of Andaman Timber Industries v Commissioner of Central Excise, Civil Appeal No. 4228 of 2006 order dated 02.09.2015 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 cross-examination 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.

v. Whether the judgment of Supreme Court in the case of Andaman Timber Industries (Supra) should be followed mechanically in Income Tax proceedings and also when the witness is a related party and not an unconnected third party.

Recently, a number of assessment orders have been annulled and decided against the Revenue by the Tribunals by placing reliance on the judgement of the Supreme Court in the case of Andaman Timber Industries (supra) without appreciating the facts and circumstances of the case. At the outset, this case is not applicable in the matter of Income Tax 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/ judgement 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. 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. As mentioned above, the appellant had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross-examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No. 2216 of 2000, order dated 17.03.2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions. 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.”

vi. Retraction of Confessional Statements and Cross-Examination by the Assessing Officer-

Confessional statements play a very important role in the income-tax proceedings, as they generally bind the maker and such statements, admissions and confessions are binding and cannot be retracted, unless and until it is proved that such admission, confession or oath statement was involuntary or was tendered under coercion or duress as held by the Supreme Court in the case of Surjeet Singh Chhabra v Union of India 1 SCC 508. The statements which are recorded by administering oath are presumed to be true in the light of the provisions of section 181 and section 193 of the Indian Penal Code which provide for imprisonment if a false statement is given. Generally, the first statement is presumed to be more reliable as this was recorded on the spot and possibility of an afterthought and to fabricate the evidence is minimal. A retraction to have any evidentiary value must preferably be in a statement not only denying the earlier stated facts but explaining the reasons for making a statement earlier and giving substituted facts in support of retraction. The AO must cross-examine the party to compare both the statement and reveal the truth. Regarding the retraction made by way of an affidavit, the Assessing Officer is entitled to cross examine the deponent and the assessee can be required to produce the deponent in person for cross examination. If the assessee fails to comply, affidavit can be ignored. Hence, it is desirable that the AO must ask the assessee to produce the deponent for cross examination in case of retraction of the statement or called upon to produce documentary evidence in support of the affidavit sworn by him.

Denial of Cross-examination where Cross examination is not possible/ irrelevant–The right to cross-examine a witness may be dispensed with if the exercise of such a right is not feasible or it is impracticable. However, the AO, in such situations must obtain other evidences in support of his findings.

In the case of Manidhari Stainless Wire (P) Ltd. v. Union of India 88 taxmann.com 10, 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.

In the case of Smt. Kusum Lata Thakral v CIT 150 ITR 714 Punjab & Haryana High Court has held that:

It was clear from the findings recorded by the Tribunal that there was no relationship between the donors and the assessee and there was no natural love and affection. The Tribunal had followed the judgment of the jurisdictional High Court in Shri Tirath Ram Gupta v CIT [2008] 304 ITR 145/[2009] 177 Taxman 294 (Punj. & Har.), laying down that in the absence of natural love and affection, the gift could not be accepted as genuine. The question whether denial of opportunity of cross-examination results in violation of natural justice depends upon facts of each case. The object of cross-examination is to test the veracity of the version given in examination in chief. In the instant case, even if cross-examination was allowed and the donors who had disowned the making of gifts, were confronted and shown to be factually wrong, the same would have made no difference, as there was no natural love and affection and in its absence, the gifts were not genuine.

Where there are sufficient materials before the Assessing Officer/Appellate Authorities the opportunity of cross-examination may not be given being irrelevant. Similarly, when it is not feasible to give the opportunity of cross examination due to lapse of time or a large number of beneficiaries being part of a racket, their claim for cross-examination of a witness, may be denied by the Assessing Officer.

vii. Belated claim of Cross Examination– Whether acceptable?

In the case of R.L. Traders v ITO 100 taxmann.com 332 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 u/s 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.

In the case of Hindusthan Tabacco Company v CIT 27 taxmann.com 155 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.

In the case of T. Deasahaya Nadar v CIT 51 ITR 20, Madras High Court has held that:

It cannot be said as a general proposition of law that any evidence upon which the department might rely should have been subjected to cross-examination. The procedure for assessment is indicated in section 23(3) of the Act. The ITO is not a Court. Having regard to the nature of the proceedings, he occupies the position of a quasi-judicial Tribunal. He is not bound by the rules of evidence in the Indian Evidence Act. The limit of the enquiry and the kind of materials or evidence which he can act upon cannot be specified and the statute has not attempted it. Wide though his powers be, he must act in consonance with rules of natural justice. One such rule is that he shall not use any material against the assessee without giving him an opportunity to meet it.

In the case of M/s. Meghna Towers Pvt. Ltd 87 taxmann.com 329 ITAT Delhi Bench has 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.

In the case of Nokia India (P.) Ltd. v DDIT 59 taxmann.com 212 ITAT Delhi Bench has held that:

On going through the proceedings from inception it was found that authorities below have acted justly to assessee by providing statements of all employees, ex-employees, CFL reports etc. Having regard to the nature of dispute, it is opined that principles of natural justice have been complied with by affording fair hearing to assessee. The assessee has been imparted substantial justice on this count. In course of hearing assessee fairly accepted that the witnesses were not hostile. This was so because they were the assessee’s employees and were occupying the senior most position in the operation. Considering all these aspects, there is considerable force in the contention of the revenue that timing of raising this plea at such a later stage of proceedings is not justified. If the assessee was very serious about this plea then it should have been taken on the very first date of hearing and not when revenue was replying to the detailed submissions advanced by assessee on merits.

In the case of Dr. Gauri Shankar Prasad v ITO 393 ITR 635, 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.

viii. Can assessment order be annulled if the opportunity to cross examine the witness is not given?

Recently in a number of cases, Tribunals have annulled the assessment orders on the ground that opportunity to cross-examine was not given to the assessee. Such decisions are widely given in the cases of penny stock and accommodation entry where after a detailed investigation, racket was busted and sufficient materials were collected by Revenue identifying the modus operandi to bring black money through such transactions in the books/accounts of the assessee without paying due taxes. Supreme Court has observed that the court/tribunal has the power to direct the authority to pass fresh order after complying with the law or the principles of natural justice and is not required merely to quash the order.

In the case of ITO v. M. Pirai Choodi 334 ITR 262 where the High Court has set aside the order of assessment on the ground that no opportunity to cross-examine was granted, as sought by the assessee, 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.

Further, the CIT(Appeals) who have co-terminous powers with the Assessing Officers cannot delete the addition on the ground that opportunity of cross-examination was not given to the assessee, rather they should give this opportunity to the assessee even at appellate stage if it is crucial to decide the appeal and there is no other material evidence with the Assessing Officer other than the statement of the witnesses.

(C) Conclusion

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. Similarly, the AO and Appellate Authorities should take the precaution to give the opportunity to cross-examine the witness if the witness is a totally unconnected party.

Source- Taxaloguue – Volume 1- Issue 2- OCT-Dec 2019 Issued by Directorate of Legal & Research -Central Board of Direct Taxes