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Principles of Cross Examination: Tool to be used during income tax proceeding
“Not allowing Assessee to cross-examine witnesses by Adjudicating Authority though statements of those witnesses were made as basis of impugned order, amounted in serious flaw which make impugned order nullity as it amounted to violation of principles of natural justice.”
– Supreme court in the case of Andaman Timber Industries vs. CICE, [281 CTR 0241(SC)] dated 02.09.2015
The principles of natural justice are an inalienable part of the Income-tax law. The principle of cross examination emanates from the principle of natural justice. There need not be any specific provision in any law for the invocation of the rules of cross examination.
It is a well settled principle of assessment that 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. It may be noted that the Rules of evidence do not strictly govern the income-tax proceedings as the proceedings under the Income Tax Act are not judicial proceedings in the sense in which the phrase “judicial proceedings” is ordinarily used. Though the Assessing Officer is not fettered or bound by technical rules of evidence contained in the Indian Evidence Act & 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.
There are various instances where income tax assessments which may be sound on facts, figures and merits suffer adverse consequences due to opportunity of cross examination not being provided to the assessees. The issue of cross examination of witnesses in Income Tax proceedings has seen substantial litigation before various appellate forums as well.
It may be recalled that there are numerous cases where the Courts have nullified the assessment orders on the ground that opportunity to cross-examine was not given to the assessee. More particularly, such decisions are widely given now 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.
It may be noted that there are various judgment by the Supreme Court, High court & the tribunal wherein it is 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 short, the assessment may not be quashed in all the cases but may be remanded back for giving the opportunity of cross examination. In ITO v. M. Pirai Choodi 334 ITR 262, 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,
In short, the court may get the assessee back to square one for cross examination and so it is necessary that the cross examination may be insisted at the time of assessment proceeding itself.
It is necessary, therefore, to understand the importance and scope of the principles of cross examination in income tax proceedings. The Supreme Court in the case of Chuharmal v CIT  172 ITR 250 has observed as under:
“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.”.
Let us know more about the rights of the cross examination and the principle laid down by the judiciary with plethora of its judgement for the purpose of the Income Tax Proceeding:
In the case of Krishna Chand Chela Ram v CIT 125 ITR 713 Supreme Court has held that cross-examination opportunity is a must where AO relies upon only on the statement of the Third Party unconnected with the appellant.
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.
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’ in the Income Tax Act 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. [Delhi High Court in Addl. CIT v. Jay Engg. Works Ltd. 113 ITR 389]
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.
In the case of Dhakeswari Cotton Mills Ltd. v CIT 26 ITR 775, the Supreme Court held that although the 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 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. The proceedings for assessment before the Assessing Officer are quasi-judicial in character.’
In CIT v East Coast Commercial Co. Ltd. 63 ITR 449, it has been held that 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.
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.
The saying remains – audi alteram partem which means that no man should be condemned unheard, decisions with adequate reasons, acting fairly i.e. without prejudice.
In Hersh Win Chadha v DCIT 135 TTJ 513, ITAT Delhi has held that 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.
It may be noted that the opportunity of the cross examination should be availed at the right stage. In Hindusthan Tabacco Company v CIT 27taxmann.com 155, Calcutta High Court observed as under:
“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”.
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.
In GTC Industries Ltd. v ACIT 65 ITD 380, ITAT Bombay Bench relying on the judgment of Calcutta High Court in the case of Kisanlal Agarwalla v. Collector of Land Customs AIR 1967 & Cal. 80 quoted this judgment at para 90 on the right of cross examination as under:
“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.”
“Though the AO has placed reliance upon the statements of Shri Manoj Vadodaria and Shri G.C. Patel for the purpose of taxing the amount in the hands of the assessee, despite specific request being made by the assessee for cross-examining both the said persons, the AO has not permitted the assessee to cross-examine them. In the circumstances, no reliance could be placed upon the statements of the said persons as the respondent assessee had no opportunity to cross-examine them. The statements made by the aforesaid persons would have no evidentiary value and as such, would not be admissible in evidence” – DCIT vs. Mahendra Ambalal Patel [462 of 1999 /40 DTR 243 ] dated 13.04.2010. 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
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.