[2023] 147 taxmann.

com 458 (Article)

[2023] 147 taxmann.com 458 (Article)

Date of Publishing: February 22, 2023

Right of the Assessee to Cross Examination in Income Tax Proceeding

SOMBIR SINGH
Chartered Accountant

1. Introduction

Currently, thousands of cases are pending for the reassessment proceeding under the Income Tax Act on the
basis of the third party information/statements and the assessing officer want to make addition on the basis of
these information/statements. In this scenario opportunity of cross examination become a powerful tool in the
hands of the assessee. But unfortunately, it is seen that the assessee or their authorised representatives are very
reluctant in requesting the income tax authorities for cross examination of the witness. Further, it is also
observed that income tax authorities typically do not allow for cross examination with knowing the fact that no
adverse inference can be drawn against a assessee unless the assessee is put on notice of the case made out
against him. The income tax authority is duty bound to supply the contents of all such evidences, both oral and
documentary, so that the assessee can prepare the case against him. Therefore, it is necessary to understand the
importance and scope of the principles of cross examination in income tax proceedings so that the assessee
should cross examine the witness on whose statement the assessing officer relies to make addition against him.
The purpose of this article is to provide a focus on relevant provision of the Indian Evidence Act relating to
cross examination along with 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.

2. Principle of Natural Justice and Cross Examination : -

Principles of natural justice are those rules which have been laid down by the Courts as being the minimum
protection of the rights of the person against the arbitrary procedure that may be adopted by a judicial, quasi-
judicial and administrative authority while making an order affecting those rights. These rules are intended to
prevent such authority from doing injustice. Cross examination of witness is one of the important aspect of
principles of natural justice or in other words right to cross-examine also flows from the principles of natural
justice that evidence may not be read against a party until the same has not been subjected to cross-
examination or at least an opportunity has not been given for cross examination.

3. Cross Examination in the Income Tax Proceeding : -

To uphold the principle of natural justice, the assessee should be given the right of cross-examination in income
tax proceedings. The authority to cross-examine witnesses is delegated from the Assessing Officer to the
Principal Commissioner of Income Tax. Further, The CBDT has advised CIT(A) to allow cross-examination of
witnesses in cases where the assessee requests it at the appellate stage. The Board has instructed in Instruction
F. No. DGIT(Vig.)/HQ/SI/Appeals/2017-18/9959, dated March 8, 2018, that-
 "……In some other cases, the additions were deleted in a summary manner solely on the ground that
opportunity of cross-examination was not given to the assessee. The CIT (Appeals) could have given the
opportunity of cross- examination to the assessee rather than summarily deleting the additions in such
cases since it has been held by Hon'ble Apex Court in a number of cases that the scope of power of CIT
(Appeals) is coterminous with that of the Assessing Officer…."
However, it is always advisable for the assessee to file a claim for cross-examination of witnesses before the
Assessing Officer rather than the appellate authorities. The Calcutta High Court ruled in Hindusthan Tabacco
Co. v. CIT [2012] 27 taxmann.com 155/211 Taxman 111/[2014] 366 ITR 282 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.

4. Relevant provision under Indian Evidence Act regarding cross examination for the purpose
of Income Tax Act.

Evidence of a witness through examination or cross-examination is covered under sections 137 to 154 of the
Indian Evidence Act though not explicitly under the Income-tax Act, 1961. For the purposes of application
under Income-tax Act, the relevant provisions are sections 137 to 139 of the Indian Evidence Act. These
sections are reproduced herein under-

i. Section 137. Examination-in-chief. —The examination of a witness by the party who calls him shall be
called his examination-in-chief. Cross-examination. —The examination of a witness by the adverse
party shall be called his cross-examination. Re-examination. —The examination of a witness,
subsequent to the cross-examination by the party who called him, shall be called his re-examination.
ii. Section 138. Order of examinations. —Witnesses shall be first examined-in-chief, then (if the adverse
party so desires) cross-examined, then (if the party calling him so desires) re-examined. The
examination and cross-examination must relate to relevant facts, but the cross-examination need not
be confined to the facts to which the witness testified on his examination-in-chief. Direction of re-
examination. —The re-examination shall be directed to the explanation of matters referred to in
cross-examination; and, if new matter is, by permission of the Court, introduced in re-examination,
the adverse party may further cross-examine upon that matter
iii. Section 139. Cross-examination of person called to produce a document. —A person summoned to
produce a document does not become a witness by the mere fact that he produces it and cannot be
cross-examined unless and until he is called for as a witness.
In brief, 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 authoritiesare 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 and the proceedings under the Income-tax Act
are not judicial proceedings in the sense in which the phrase "judicial proceedings" is ordinarily used.
Therefore, Assessing Officer is entitled to act on material which may or may not be accepted as evidence in a
court of law for the purposes of making addition to the total 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. This
principle is established by many judgement of the courts, namely: -

i. The Supreme Court held in the case of Dhakeswari Cotton Mills Ltd. v CIT [1954] 26 ITR 775, 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.
ii. The Supreme Court in the case of Chuharmal v. CIT [1988] 38 Taxman 190/172 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.
5. Consequence of not affording of cross-examination

Where the assessing officer want to refer or relies upon material gather back of the assessee or the statement of
witness with intent to make addition against the assessee then he is duty bound to confront these material or
statement with the assessee. When the material/statements does not confront with the assessee then it is
violation of the principle of natural justice and entire addition solely based on such statement is likely to be
deleted. Where the AO provides the copy of the statements to the assessee then two situations will emerge.

i. Where assessee demands the cross-examination: - Where the assessee demand the cross examination
and such cross-examination is not provided then addition so made would fall in the domain of
illegality and addition so made is likely to be deleted.
ii. Where assessee is not demand the cross-examination: - If cross- examination is not demanded by the
assessee after receiving the copy of the statement, then no illegality leading to quashing of
assessment/deletion of addition is visualized by the appellate authorities and if cross-examination is
demanded at the appellate stage, then it is seen as irregularity and matter is restored to the AO for
providing opportunity of cross-examination.
To understand the consequences of not allowing cross-examination, we divide judicial
pronouncements into the following two categories.

a. Cases where not affording of cross examination is held as illegality.

b. Cases where not affording of cross examination is held as
irregularity.
a. Cases where not affording of cross examination is held as illegality.
Not allowing the opportunity of cross examine or denial of such cross examination to the
assessee, there are several case law where addition made by the AO on the basis of
uncomforted material or statements were quashed.
i. The Supreme Court in C.Vasantlal & Co. v. CIT [1962] 45 ITR 206 observed as
under:
"The Income-tax Officer is not bound by any technical rules of the law of evidence. It
is open to him to collect materials to facilitate assessment even by private enquiry.
But if he desires to use the material so collected, the assessee must be informed of
the material and must be given an adequate opportunity of explaining it'.
Accordingly, denial of opportunity to cross-examine has been held to be clearly
illegal and unsustainable apart from being violative of natural justice."
ii. The Allahabad High Court in the case of Gargi Din Jwala Prasad v. CIT [1974]
96 ITR 97 had held that the principles of natural justice are applicable to
assessment proceedings. The elementary principle of natural justice is that the
assessee should have knowledge of the material that is going to be used against him
so that he may be able to meet it. The Income-tax Officer (ITO) in that case was
placing reliance on the statements of certain witnesses. He had permitted the
assessee to cross-examine the witnesses but he did not supply copies of the
statements of those witnesses although the assessee had requested for it. He did not
even supply the substance of the contents of the statements as recorded. The court
was also apprised of the correspondence between the ITO and the assessee but in
none of the letters of the ITO there was any indication as to what was the name of
the witnesses, much less any semblance of indication as to what he had stated.
Under these circumstances the mere grant of the permission to cross-examine those
witnesses, held was an eye-wash. The assessee could not have effectively cross-
examined any particular person. The assessee was not told the names of witnesses or
apprised of the contents of their statements. It was therefore clear that an adequate
opportunity to cross-examine was denied. The ITO had refused to give copies of the
statements of the witnesses on the view that they formed part of the record. Even so,
he refused permission to the assessee to inspect the record. It is evident that the
proceedings were vitiated by violation of the principles of natural justice.

iii. The High Court of Delhi in the case of CIT v. Ashwani Gupta [2010] 191
Taxman 51/322 ITR 396 held that once there is a violation of the principles of
natural justice in as much as seized material is not provided to an assessee nor is
cross-examination of the person on whose statement the Assessing Officer relies
upon, granted, then, such deficiencies would amount to a denial of opportunity and,
consequently, would be fatal to the assessment proceedings. Based on the above
finding, the Hon'ble Court upheld the order of the tribunal wherein the tribunal
confirmed the order passed by the Commissioner of Income-tax (Appeals) which
held the entire addition made by the Assessing Officer to be invalid and had deleted
the same.

iv. The High Court of Delhi in the case of CIT v. Pradeep Kumar Gupta [2008]
303 ITR 95 held that the reassessment based on deposition of third party without
allowing opportunity to assessee to cross examine third party is not valid
v. Other cases where addition, solely made on the basis of statement of other party
without affording opportunity of cross examination to the assessee, was deleted are
–
CIT v. A.L. Lalpuria Construction (P.) Ltd. [2013] 32 taxmann.com 384/215
Taxman 12 (Raj.) (Mag.)].
Mohanlal R. Daga v. ITO [2005] 147 Taxman 28 (Mum.)(Mag.);
Prakash Chand Nahta v. CIT [2008] 170 Taxman 520/301 ITR 134 (MP);
CIT v. Independent Media (P.) Ltd. [2012] 25 taxmann.com 276/210 Taxman 14
(Delhi) (Mag.);
Heirs & LR of Late Laxmanbhai S. Patel v. CIT [2008] 174 Taxman 206/[2010] 327
ITR 290 (Guj.);
CIT v. Gani Silk Palace [1988] 37 Taxman 295/171 ITR 373 (Mad.);
CIT v. Supertech Diamond Tools (P.) Ltd. [2014] 44 taxmann.com 460/[2015] 229
Taxman 62 (Raj.).
CIT v. Dharam Pal Prem Chand Ltd. [2007] 295 ITR 105 /[2008] 167 Taxman 168
(Delhi);
CCE v. Gujarat Cypromet Ltd. [2013] 34 taxmann.com 249/40 STT 210 (Guj.);
 CTO v. Haryana Dal Mill [1993] 90 STC 519 (Raj.);
CIT v. Indrajit Singh Suri [2013] 33 taxmann.com 281/215 Taxman 581 (Guj.);
CIT v. SMC Share Brokers Ltd. [2007] 159 Taxman 306 (Delhi);
CIT v. Geetanjali Education Society [2008] 174 Taxman 440 (Raj.);
Sri Krishna Educational & Social Trust v. ITO [2013] 40 taxmann.com 7/[2014]
220 Taxman 16 (Mag.)/[2013] 351 ITR 178 (Mad.).
b. Cases where not affording of cross examination is held as irregularity.
Certain court has also held that failure to allow cross examination is an irregularity which
will not vitiate the assessment itself as void. In such cases, the assessment can be set aside for
curing the irregularity rather than to declared assessment void.
i. In the case of ITO v. M. Pirai Choodi [2012] 20 taxmann.com 733/[2011]
334 ITR 262 (SC) 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.
ii. In the case of Ashok Lalwani v. ITO [2011] 196 Taxman 82 (Mag.)/[2010] 328 ITR
272 (Delhi) the High Court after going through the record held that statement of 'P'
was recorded behind back of assessee. Despite specific request made by assessee, no
opportunity was provided to him to cross-examine 'P', impugned addition made by
authorities below was to be set aside and, matter was to be remanded back to
Assessing Officer for disposal afresh.

iii. Similar view also taken in CIT v. Eastern Commercial Enterprises [1994] 210 ITR
103 (Cal.); Rameshwar Lal Mali v. CIT [2003] 132 Taxman 629/[2002] 256 ITR
536 (Raj.); C I T v . Land Development Corpn. [2009] 316 ITR 328 (Kar.); R.W.
Promotions (P.) Ltd. v. Asstt. CIT [2015] 61 taxmann.com 54/376 ITR 342 (Bom.)
It is worth noting that the aforementioned cases are prior to the landmark judgment
delivered by the Hon'ble Supreme Court in the case of Andaman Timber Industries
v . CCE [2015] 62 taxmann.com 3/2016 (38) GSTR 117/[2015] 52 GST 355/2015
(314) E.L.T. 641), where the controversy on the issue of not affording opportunity to
cross-examine a witness whose statement AO sought to rely for making addition is
settled by observing as under:
 "6. 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
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 was not even dealt with by the Adjudicating Authority. As far as the
Tribunal was concerned, rejection of this plea was totally untenable. The Tribunal
had simply stated that cross-examination of the said dealers could not have brought
out any material which would not be in possession of the appellants themselves to
explain as to why their ex-factory prices remained static. It was not for the Tribunal
to have guesswork for what purposes the appellant wanted to cross-examine those
dealers and what extraction the appellant wanted from them.
7. 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 pre-suppose 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.
8. In view the above, 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."
Through this landmark judgment, the Hon'ble Supreme Court affirmed the legal position that when statements
of witnesses are used as the basis of addition, not allowing assessee to cross-examine witnesses is a serious flaw
that renders the order null and void, as it violates natural justice principles.

6. Conclusion

After going through the aforementioned judgements including the judgement of the apex court in case of
Andaman Timber Industries (supra) the judicial position that emerge is that wherever the AO want to
rely/refer the statement of third parties for drawing adverse inference against the assessee. He must be
supplied the contents of all such evidence, both oral and documentary to the assessee, so that he can prepare to
meet the case against him. Further, the assessee has to demand cross-examination of such parties. On failure to
provide cross-examination the assessment proceedings are vitiated, and the relevant addition is likely to be
deleted. It is also advisable for the assessee to file a claim for cross-examination of witnesses before the
Assessing Officer rather than the appellate authorities because he is unlikely to get a relief, unless appellate
authorities accept an explanation of the assessee regarding his failure to demand such cross-examination
holding it as irregularity.