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The right of cross-examination
June, 30th 2007
All the evidence collected by the Assessing Officer which is to be used against the assessee must be placed before the latter who must also be given an opportunity to rebut.

An interesting question arises where an Assessing Officer proposes to make an assessment by adding income not disclosed by the assessee, based on evidence he has gathered from third parties. Can the assessee insist on cross-examining these parties? If the right of cross-examination is not granted, would the assessment be invalid in law?

The important point to be borne in mind is that the Assessing Officer is not debarred from relying on private sources of information, which he may not disclose to the assessee at all. But in case he proposes to use against the assessee the result of any private inquiry, he should communicate to the assessee the substance of such information so as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him sufficient opportunity to meet it.

Apex Court Ruling

This principle is established by the judgment of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. C.I.T. (26 I.T.R. 775, 783), and applied by that court in Kishinchand Chellaram v. C.I.T. (125 I.T.R. 713), where an assessment based on the result of private inquiries conducted behind the back of the assessee was set aside because the evidence so gathered was not placed before the assessee. In Gunda Subbayya v. C.I.T. (7 I.T.R. 21, 28), Leach CJ said: Information which the Income-Tax Officer has received may not always be accurate and it is only fair when he proposes to act on material which he has obtained from an outside source that he should give the assessee an opportunity of showing, if he can, that the Income-Tax Officer has been misinformed; but the Income-Tax Officer is obviously not bound to disclose the source of his information.

This Income-Tax Act makes an express statutory provision empowering the Assessing Officer to make the necessary inquiry Section 142(2) and directing him to give the assessee an opportunity of being heard in respect of any material proposed to be usedfor the purpose of assessment under this Section 142(3). Further, the Assessing Officer should satisfy himself about the correctness of the information which he has received before acting upon it.

The Assessing Officer must not act arbitrarily but must obtain materials and base his decision on them. Though the Assessing Officer has wide powers and is not fettered by technical rules of evidence and pleadings, there is one overriding restriction on his judgment and that is he must act honestly on the material, however inadequate, before him, and not vindictively, capriciously or arbitrarily.

Confidentiality Clause

Therefore, there is no doubt that the Assessing Officer must place before the assessee all evidence gathered from private sources but he is not required by law to give to the assessee the right to cross-examine the parties from whom the evidence was gathered. In fact, he need not even disclose the names of the parties because in that event confidentiality of the names of the parties would not be maintained.

If the parties who have given evidence are to be assured confidentiality, the question of cross-examination would not arise. Such an assessment would be valid in law, so long as the assessee has been confronted with evidence gathered by the Assessing Officer from private and confidential sources and the assessee is given the opportunity of meeting the case made out in the assessment order.

This point was considered by the Allahabad High Court in Moti Lal Padampat Udyog Ltd. v. C.I.T. (160 Taxman 233). The facts in this case were that the assessee-company was engaged in the business of manufacturing vanaspati oil. A search was conducted at the premises of the firm V, to which the assessee used to supply oil. During the search, a rough cash book was found which revealed that certain payments had been made by the firm V to the assessee as on money in addition to the purchase price.

The statements of the partners and cash book were served on the assessee on its request. The assessee, however, prayed that the statements of the partners and employees of firm V and of any other person as recorded by the department should be furnished to the assessee and if no such statement had been recorded, then the persons should be summoned and their statement be recorded on oath and due opportunity should also be provided to the assessee to cross-examine each of them.

The Assessing Officer rejected the explanation of the assessee and made addition of amount received as on money. The assessees case was that as no such opportunity to cross-examine the partners of the firm had been provided to the assessee, the rough cash book and the statement of the said persons could not be used against it. On appeal, the Commissioner (Appeals) set aside the order of the Assessing Officer. On further appeal, the Tribunal restored the order of the Assessing Officer holding that as the statement had been recorded during the assessment proceedings and the copies of such statements had been provided to the assessee, no question arose for summoning the said persons for providing the assessee an opportunity to cross-examine them.

Valid Assessment

On reference, the Allahabad High Court held that it was not in dispute that the adverse material which was found by the income-tax authorities during the course of search in the business premises of V had been placed before the assessee. The entries recorded in the rough cash book seized during the search operation tallied with the entries recorded in the regular books of account of the assessee as also that of V. The assessee was issued the copy of the rough cash book as also the statements of partners of V. After considering the reply the assessment order was passed. Hence, the assessment was validly made though the assessee was not given the right of cross-examination the partners and employees of V.

This decision lays down the correct principle of law. Right of cross-examination of persons from whom the Assessing Officer has collected the evidence is not required by law. The requirement of the statute for a valid assessment would be met if all the evidence collected which is to be used against the assessee while framing the assessment order is placed before the assessee and he is given opportunity to rebut the evidence.

H. P. Ranina
(The author is a Mumbai-based advocate specialising in tax laws)
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