DENIAL OF CROSS-EXAMINATION OF WITNESS ‘H’ VIOLATES NATURAL JUSTICE; 153C ASSESSMENT SET ASIDE
ISSUE
Whether the denial of the assessee’s request to cross-examine a third party (‘H’), whose statement (recorded under Section 132(4)) and seized material were used as the basis for assessments under Section 153C read with Section 153A, amounts to a violation of the principles of natural justice, warranting the quashing of the Tribunal’s order which had upheld the assessment on the ground that the documentary evidence was “self-explanatory.”
FACTS
Search & Seizure: A search was conducted on a third person, ‘H’. During the search, certain materials were seized, and a statement was recorded from ‘H’ under Section 132(4) which implicated the appellants (assessees).
Assessment: Based on these seized materials and the statement, proceedings under Section 153C read with Section 153A were initiated against the assessees. The assessments were completed under Section 143(3) making additions based on ‘H’s testimony and documents.
Request for Cross-Examination: During the assessment proceedings, the assessees specifically requested an opportunity to cross-examine ‘H’ to verify the veracity of the statement and the nature of the seized documents relied upon by the Revenue.
Denial: The Assessing Officer (AO) denied this request.
Tribunal’s View: On appeal, the Tribunal dismissed the assessee’s grievance regarding the denial of cross-examination. The Tribunal reasoned that the documentary evidence was clear and self-explanatory, and thus, cross-examination was unnecessary.
Appeal: The assessees approached the High Court challenging the Tribunal’s order as a violation of natural justice.
DECISION
Natural Justice Violated: The High Court held that the right to cross-examine a witness whose statement is being used against the assessee is a fundamental principle of natural justice. The Revenue cannot rely on third-party statements to implicate an assessee without affording them an opportunity to test that evidence through cross-examination.
Tribunal’s Error: The Court found that the Tribunal erred in holding that cross-examination was unnecessary merely because it viewed the documents as “self-explanatory.” A document’s interpretation can be contested, and the context provided by the witness (H) is crucial, which can only be tested via cross-examination.
Outcome: The impugned order of the Tribunal was quashed and set aside.
Remand: The matters were remanded back to the Assessing Officer with a specific direction to decide the issues afresh, but only after granting the assessees a due opportunity to cross-examine witness ‘H’.
Verdict: [In Favour of Assessee / Matter Remanded]
KEY TAKEAWAYS
Andaman Timber Principle: This judgment reinforces the Supreme Court’s ruling in Andaman Timber Industries, which established that not allowing the cross-examination of witnesses whose statements are the basis of the demand is a serious fatal flaw in the proceedings.
Documents are Not Enough: Even if seized documents appear “clear,” if the Revenue relies on a person’s statement to link those documents to the assessee or to explain their content, that person must be offered for cross-examination.
Demand Cross-Examination: In Section 153C cases (where material comes from a third party), always formally request cross-examination of the searched person. If denied, it becomes a strong ground for appellate relief.
HIGH COURT OF GUJARAT
Ador Ceramic (P.) Ltd. Yogeshkumar M Adroja
v.
Deputy/Assistant Commissioner of Income-tax
A.S. Supehia and Pranav Trivedi, JJ.
R/TAX APPEAL NO. 157, 183 and 184 of 2025 and Ors.
NOVEMBER 21, 2025
Darshan R Patel and RK Patel, Sr. Advs. for the Appellant. Varun K.Patel, Adv. for the Respondent.
JUDGMENT
A.S. Supehia, J. – ADMIT. Learned senior standing counsel Mr.Varun Patel waives service of notice of admission for respondent.
2. Since the common substantial questions of law are involved in the present appeals, the same are decided by this common judgment and order. The Tax Appeal No.157 of 2025 is taken up as a lead matter.
3. The appellants have prepared the following substantial questions of law as contemplated under Section 260A of the Income Tax Act, 1961 :
“(1) Whether the ITAT has substantially erred in rendering a vitiated finding on facts and law by confirming the additions based on non-granting of an opportunity of crossexamination to the Appellant which results the assessment itself into nullity?
(2) Whether on facts the Tribunal has substantially erred in law in confirming the additions at 13% on estimate basis on account of unaccounted sales in absence of any transactions with Hiren K Kalariya?
(3) Whether on facts the ITAT has committed a serious error of law in confirming the partial additions on estimate basis on rejection of books of accounts based on statement of Shri Hiren Kalariya without the Appellant’s name being reflected in the seized material?
(4) Whether the ITAT has substantially erred in facts and law in granting jurisdiction u/s 153C when there is an inordinate delay and pre conditions of the statutory provisions in issuing a notice under Section 153C are not satisfied?”
4. We have substantially heard the learned advocates appearing for the respective parties so far as the preliminary and core substantial question of law as mentioned in paragraph No.1, which pertains to non-granting of an opportunity of cross-examination to the appellant.
5. In the present appeal, the appellants have questioned the judgment and order passed by the Income Tax Appellate Tribunal, Rajkot, which has decided 46 appeals on different dates.
6. All the appeals before the Tribunal emanate from the separate orders passed by the Commissioner of Income Tax (Appeals) arising out of separate assessment orders passed by the Assessing Officers under Section 153C/143(3) and 153(A) of the Income Tax Act, 1961.
7. There were various grounds raised by the assessee in the appeals. One of the grounds which was raised by the assessee pertains to the failure to give the opportunity of cross-examination of one Shri Hiren Kalariya. We may, at this stage, mention about the role attributed to Shri Hiren Kalariya from whom certain incriminating documents/assets were found and seized during the search and post-search inquiries. Thus, all the orders passed by the Commissioner of Income Tax (Appeals) and the Assessing Officers emanate from the search conducted at the premises of Shri Hiren Kalariya, where certain incriminating documents were found and seized. The search was conducted along with the group cases of Coral Group of Morbi, which commenced from 3.1.2019 and was finally concluded on 2.3.2019, in all the group cases. During the course of search at the residential premises of Shri Hiren Kalariya, various diaries and loose paper sheets containing details of various cash transactions pertaining to group companies and with other entities, were found and seized. It is pertinent to note that his statement was recorded under Section 132(4) of the Income Tax Act, 1961 and he had explained the detailed modus operandi adopted by him to assist the group companies and other persons in collection of proceeds of unaccounted sales. The entire modus operandi involving the present appellant-assesses was disclosed by Shri Hiren Kalariya.
8. Thus, it is not in dispute that all the present appellants are roped in, in view of the statements and the documents seized from Shri Hiren Kalariya during the search undertaken by the respondent authorities.
9. It is also not in dispute that the statements recorded by the respondent Officers and the Assessing Officers i.e. examination-in-chief, were used against the present appellants. A categorical request was made by the appellants before the Assessing Officers to grant an opportunity to cross-examine Shri Hiren Kalariya on the statements as well as the material recorded, during the search. However, the Assessing Officer did not provide any opportunity of cross-examination. The Assessing Officer rejected the assessee’s prayer for cross-examination and it was contended that such an action of denial of crossexamination would be against the principles of natural justice.
10. The same request was made before the Commissioner. However, no opportunity to cross-examination was granted to the appellants for cross-examining Shri Hiren Kalariya. Before the Tribunal, various judgments were cited by learned counsels appearing for the petitioners pointing out the effect of rejecting the request of cross-examination of a witness on whose statement the reliance has been placed by the respondent department. We may, at this stage, refer to the issue raised by the present appellants before the Tribunal denying the cross-examination of Shri Hiren Kalariya. The relevant paragraphs are as under:
“37. We find that during the course of assessment proceeding, assessee has requested the Assessing Officer, to provide an opportunity of cross-examination of Shri Hiren Kalariya, however, the Assessing Officer did not provide the same. In this context, the ld Counsel relied on various case laws and argued that principle of natural justice has not been followed. The ld Counsel also contented that the presumption u/s 132(4A) and 292C of the Act, applies only to a person from whose possession the material was seized and not to a third party. We note that it is an undisputed that Shri Hiren Kalariya was a commission agent and he was acting as a mediator for the collection of sale proceeds of unaccounted sales in lieu of commission. During the course of search and in post-search investigation, Shri Hiren Kalariya has admitted that modus operandi of his business activities, which also found recorded in various diaries and loose papers seized from his premises. The Assessing Officer has also noted in the assessment order that some of the beneficiaries whose names are mentioned in the seized diaries admitted that they had received cash Shri Hiren Kalariya. Thus, where the addition is made by the Assessing Officer, based on the documentary evidences, and these documentary evidences, speak clearly, then there is no need to provide opportunity for cross-examination. It is pertinent to note that Shri Hiren Kalariya recorded the names of the parties in his diaries as he knew the beneficiaries. Even in respect of representatives coming to collect cash on behalf of beneficiaries, Shri Hiren Kalariya clearly linked the names of such representatives with the respective beneficiaries in his statements recorded. Thus, Shri Hiren Kalariya had full knowledge of the persons with whom he was dealing as a commission agent and whose representatives’ names are mentioned in the seized diaries. Further, in respect of such transactions of undisclosed sales and receipts thereof, all the links in the chain remain well connected and therefore, the remittance of cash always reaches the intended recipients and not to anyone else. Therefore, mere denial on the part of the assessee stating that they have not carried out any transactions with Shri Hiren Kalariya is not sufficient in any manner. Since the seized material is clear in its contents and the assessee is not able to rebut such content by any contradicting evidence, the legal arguments of the assessee fail and they cannot be accepted de hors of the undeniable picture emerging from the seized material the sanctity of which is already established. Seized material (The diaries) was systematically maintained by Shri Hiren Kalariya and it is not just loose papers or dumb documents which is not capable of any meaning. Therefore, where the seized material contains the name of any beneficiary or the name of any representative of such beneficiary and such representative and the beneficiary are subsequently linked by Shri Hiren Kalariya, the beneficiary cannot escape consequential tax liability. The assessee has not produced any confirmation of Shri Hiren Khimjibhai Kalariya stating that notings in such seized material does not pertain to the assessee.
38. We find that about issue of cross examination, 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, 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 evidences, statement or record on which the charge is being made against him the demands and therefore the test of natural justice are satisfied. 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. As, in the assessee’s case, under consideration, the assessee had proper opportunity to controvert the material gathered by the search team and Assessing authority and used against it, then there had been compliance of the principle of natural justice. Having gone through the above findings of the ld. CIT(A), we observed that there was no need to provide opportunity of crossexamination, as the addition was made by the Assessing Officer, based on the documents and evidences seized during the search. Considering the above factual position, we reject the plea raised by the ld. Counsel for the assessee, in respect of cross-examination. Hence, grounds raised by the assessees, relating to cross examination, are dismissed.”
11. A bare perusal of the aforesaid observations of the Tribunal will expose that, though the Tribunal was aware about the importance of cross-examination of the witness, very curiously, the Tribunal dealt with the issue of non-cross-examining of Shri Hiren Kalariya by recording that since the Assessing Officer has based his findings on documentary evidence and since the documentary evidence speaks clearly, there is no need to provide the opportunity for such crossexamination. Simultaneously, it is also observed by the Tribunal that Shri Hiren Kalariya recorded the names of the parties as he knew the beneficiaries and his representatives used to collect cash on behalf of the beneficiaries. It is also recorded by the Tribunal that the diaries were systematically maintained by Shri Hiren Kalariya and it is not just loose papers or dumb documents which are not capable of any meaning and when the seized material contains the name of any beneficiary or the name of any representative of such beneficiary and are linked with Shri Hiren Kalariya, the beneficiary cannot escape consequential tax liability. Strangely, after recording the role of Shri Hiren Kalariya in the entire episode involving the present appellants, it is recorded that “we find that about the issue of cross-examination, 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 part of natural justice but of legal and statutory justice.”
12. We fail to understand the analogy adopted by the Tribunal on the vital aspect of cross-examination of a witness whose statement and material has been used against the assessees and assessees have been denied the opportunity of cross-examination to question such material which has been recovered from Shri Hiren Kalariya. It appears that the Tribunal does not have the basic understanding of the importance of cross-examination of a witness whose material as well as statement has been used against the assessees by the department in arriving at a finding recorded against them. The Tribunal appears to have been ignorant of the settled legal precedent that the denial of cross-examination of a witness would be against the fair play and equity as well as it would amount to violation of principles of natural justice, more particularly, when the statements of such witnesses as well as the material produced by him has been used against a person and to his detriment. Thus, on this sole issue, the present appeals are required to be allowed and the impugned judgment and order passed by the Tribunal in respective appeals are required to be quashed and set aside. The matters are required to be remanded to the Tribunal for fresh consideration. Accordingly, the substantial question of law at paragraph No.1 is answered in favour of the appellants – assessees.
13. Hence, in view of the peculiar facts of the case and in light of the lacuna on the part of the Assessing Officer in denying the opportunity of cross-examination of a very vital person from whom the entire assessment has emerged, we set aside the impugned orders of the Tribunal only on this ground and remand the matters to the Assessing Officer to decide them afresh, after the appellants are granted the opportunity of cross-examination of the witness Shri Hiren Kalariya. We further clarify that all the other questions of law as framed hereinabove are left open. We further clarify that we have not expressed any opinion on merits. All the contentions of the respective parties are left open and the same shall be dealt with in accordance with law.
The appeals are allowed to the aforesaid extent.