Right of Cross Examination: Part of Natural Justice

Through a series of judgments from the Supreme Court and the High Courts it has become a settled principle of law that evidence not tested by the cross examination has no probative value and there should be opportunity provided to the opposite parties to cross examine the witnesses.² It is a settled principle of law that if the authority wants to rely upon the statement of any witness, the opportunity of cross-examination ought to have been given to enable the party to prove its case. Non-providing of the opportunity of cross examination amounts to violation of the natural justice and in absence of natural justice, such documents cannot be relied upon. The statement against the assessee cannot be used without giving them opportunity of cross-examination. Cross-examination is a valuable right of the accused/ noticee in quasi-judicial proceeding which can have adverse consequences for them.³

If any statement of a third party is to be used against the assessee, an opportunity should be given to him to cross examine the third party before any inference can be drawn from the statement. Where revenue has relied upon statement of witness while passing the order, accused is entitled to cross-examine the witness even if the material available against it in the statement of witness is too little. It is not for the authority to conclude in advance whether the cross-examination would be helpful or not or nothing fruitful would be elicited in cross-examination.⁴

Apex Court in the case of Kishanchand Chellaram v. Commissioner of Income-tax⁵ held that the department is bound to give the assessee an opportunity to controvert evidence and cross examine the evidence on which the department places its reliance. A failure in providing the same can result in the order being a nullity. The Bombay High Court in H.R. Mehta vs. Asst Commissioner of Income-tax⁶ noted that while making addition under section 68 of the income-tax Act, the A.O. had relied upon some evidence collected in that behalf including statement on oath said to have been made on behalf of persons whose identity was not disclosed. It was held that assessee was bound to be provided with the material used against him apart from permitting him to cross-examine the deponents by the department. The denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment order and renders it vulnerable. This not having been done, the addition was not sustainable.

In Andaman Timber Industries Vs. Commissioner of C.EX., Kolkata-II,⁷ the revenue found that the price at which goods were sold, ex-factory remained the same over a period of time, as far as sales from depots were concerned, the price increased from time to time. Investigation was carried out. Statements of two buyers were recorded and on that basis a show cause notice was served to state as to why the price at which the goods were sold to these customers from the depots may not be the basis for determining the value for excise duty. The taxpayer contested the show cause notice by furnishing its reply, wherein various defences/justifications were given. The taxpayer also questioned the correctness of the statement of the aforesaid two witnesses and demanded the right to cross examine them. The adjudicating authority as well as Tribunal did not grant the cross-examination. The Tribunal expressed the opinion that the grant of cross-examination would not help the taxpayer since the examination of the dealers would not bring out any material which would not be in the possession of the taxpayer themselves to explain as to why their ex-factory price remain static. The Supreme Court held that 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 that makes the order nullity in as much as it amounted to a violation of principles of natural justice because of which the assessee was adversely affected. It was not for the adjudicating authority or Tribunal to presuppose as to what could be subject matter of cross-examination and guess the outcome.

Not only should the opportunity of cross examination be made available, but it should be one of effective cross examination, so as to meet the requirement of the principles of natural justice.⁸

No Reason Need Be Stated for Requiring Cross-Examination

No reason needs to be stated by any person for requiring cross-examination. In an enquiry, a person gets two kinds of rights. The first set of right revolves around the right to peruse the documents relied upon by the department and the right to cross-examine the witnesses on whose statements, the enquiry or prosecution is based. The second set of right revolves around the right to produce the witnesses and documents in defence. If a person facing an enquiry seeks to summon some persons to be examined in his defence or seeks to summon some documents to be produced in support of his defence, it is open to the enquiry officer to ask the person to justify such a request by adducing reason. But, in so far as cross-examination is concerned, no justification need be provided in the form of reasons by the person facing enquiry or prosecution. The very fact that some statements are relied upon is good enough reason for permitting cross-examination. The very fact that the right of cross-examination is part of the most essential rights is sufficient to grant the request. The enquiry officer cannot test the request for cross-examination on the strength of the reasons.⁹

Right of Cross Examination Is Not an Unfettered Right

Right of cross examination is not an unfettered right which can be asserted irrespective of the facts and circumstances and in all inquiries. Even if there is denial of the request to cross examine the witnesses in an inquiry, without anything more, by such denial alone, it will not be enough to conclude that principles of natural justice have been violated.¹⁰

Formal cross-examination is procedural justice. It is governed by rules of evidence. It is the creation of Courts and may be said not to be part of natural justice but of legal and statutory justice. The right to cross-examination is not necessarily a part of reasonable opportunity. In a particular case, whether a particular party should have the right to cross-examine or not depends upon the facts and circumstances of the case. The law does not state that the right of cross-examination of witnesses is an inalienable right, and any denial of the same would vitiate the order passed in adjudication for the proceedings before the departmental authorities.¹¹

No rights can be exercised, in a fair and just way, as per procedure and substance, to cross-examine the witnesses with recorded statements before the reply to the show cause notice gets filed and before adjudication commences. The exercise of cross-examination commences only after the proceedings for adjudication have commenced. If the Revenue chooses not to examine any witnesses in adjudication, their statements cannot be considered as evidence. However, if the Revenue chooses to rely on the statements, then in that event, the persons whose statements are relied upon have to be made available for cross examination for the evidence or statement to be considered.¹²

It is only those persons whose statements are taken on record in the enquiry and relied upon by the department, who can be summoned for cross examination. There is no necessity to cross-examine persons who recorded such statements. Persons who gave statements and who are witnesses, alone are liable to be cross-examined by the accused.¹³

If the sworn statements are not going to be used against the aggrieved person, it cannot be gainsaid that the persons who made the sworn statements have to be cross-examined.¹⁴ The assessing authority cannot rely on the statement of those witnesses, who have not been subjected to cross-examination, for any purpose. Even if it is used to corroborate the material collected during the course of search and seizure, it cannot be without an opportunity of cross-examination. Using the statements of those witnesses who were not made available for cross-examination by the assessee would not qualify to be evidence in the eye of law. Use of the statement even for corroboration cannot be without an opportunity of cross-examination, otherwise it cannot be termed to be admissible evidence.¹⁵

Rejection of Request for Cross Examination by a Separate and Speaking Order Only

Taxpayer has a right to be told whether his request for cross examination is being granted or refused before final order is passed. When the taxpayer prayed for cross-examination and reasonably expected that the same would be granted, they cannot be expected to participate in the adjudicating proceedings up to the final stage. In other words, without dealing with and disposing of the application for cross-examination, the adjudicating authority cannot finally adjudicate the issues. If the authority is of the opinion that the request for cross-examination is not tenable, he can reject it by giving reasons. Merely because Commissioner was of the opinion that the petitioners had made such a request somewhat belatedly, would not permit him to deal with such an application only in the final order itself.¹⁶

Consequences, If Right Is Not Asserted

The laws assist those who are vigilant and not those who sleep over their rights. This principle is embodied in the well-known dictum “VIGILANTIBUS NON DORMIENTIBUS, JURA SUBVENIUNT”.¹⁷ If the taxpayer does not avail the opportunity of cross-examination, it must follow that he believed that the testimony given could not be disputed. In a matter before the ITAT, Delhi,¹⁸ the Tribunal observed that when an adverse view is to be drawn on the basis of statement of a third party, the person affected should be afforded an opportunity to rebut such statement and cross examination if asked for. Thus, if the taxpayer does not assert its right of cross-examination, revenue will proceed for assessment/adjudication assuming the material gathered to be true and trustworthy.

Role of Cross Examination in Input Tax Credit Disputes

Section 16(2)(c) of the CGST Act, 2017 mandates payment of tax by the supplier to the Government as pre-condition to avail input tax credit by the recipient. A registered person becomes entitled to credit of input tax on any supply of goods or services, only when he is able to demonstrate that the tax in respect of such supply has been paid to the Government either in cash or through utilization of input tax credit admissible in respect of the said supply, as per scheme of the rules.

Vide Section 109 of the Finance Act, 2021, an additional condition in the form of section 16(2)(aa)¹⁹ has been inserted in the CGST Act providing that Input Tax Credit (“ITC”) based on invoice or debit note can be availed only when details of such invoice/debit note have been furnished by the supplier in his outward supplies return (GSTR-1) and such details have been communicated to the recipient of such invoice or debit note. Rule 36(4) has also been amended²⁰ providing that no input tax credit shall be availed unless the details of such invoices or debit notes have been communicated to the registered person in Form GSTR-2B. Thus, so far as the condition of payment of tax by the supplier is concerned, the procedure is fairly formalised by virtue of reporting of relevant document in Form GSTR-2B, the recipient is reasonably assured that the tax has been/will be paid by the recipient.

Other condition in the form of Section 16(2)(b) mandates receipt of goods or services by the recipient. A question of supplier’s genuineness, leading to disallowance of ITC to the recipients has been frequently faced by taxpayers. There are a number of situations where the revenue relies upon intelligence gathered from different sources, including statements of various parties in the supply chain doubting the genuineness of the flow of underlying supply of the goods or services from supplier to recipient. If the transaction is not genuine, i.e., there is no flow of goods/services from supplier to recipient, ITC cannot be allowed even though supplier might have paid tax. However, this fact requires to be established by following the established principle of law. The truth, whether transaction was genuine or not, can get established only upon providing an opportunity of cross examination.

There have been instances where revenue has detained/confiscated goods in transit claiming that documentation is not genuine in as much as only invoices are being generated down the supply chain. The goods are being procured from suppliers without raising an invoice and then these are covered by fraudulent invoices generated by the non-existent firms to claim inadmissible ITC. In Shiv Enterprises v. State of Punjab and others,²¹ the High Court, while holding the proceedings of confiscation of goods or conveyance and levy of penalty cannot be initiated against the recipient alleging wrongful availing of Input tax credit by the supplier(s) in supply chain noted that even if a recipient wants to be prudent, there is no system in place from where he can check whether his predecessors in supply chain have paid tax or not and it is for this reason also that the claim to input tax credit has been made subject to scrutiny and assessment.

The law on the issue of the right of cross-examination is clear. Even if the revenue has creditable evidence for disallowance of input tax credit, it is still under obligation to grant opportunity of cross-examination as per the law laid down above, as well as to comply with the principles of natural justice. It thus transpires that disallowing ITC without above opportunity is bad in law.

The Madras High Court in case of DY Beathel Enterprises v. Sales Tax Officer²² observed that when the revenue claims that there was no movement of goods, which fact is denied by the recipient, and the recipient insists for examination of supplier, such examination is “necessary and important”. The High Court directed for the examination of supplier “as witnesses”.

Presumption of Culpable Mental State

Section 132 of the CGST Act provides for “punishment for certain offences”. Clause (a) of sub section 1 deals with supply without issue of invoice “with the intention to evade tax”. Clause (b) deals with the issue of invoice or bill without underlying supply “leading to wrongful availing or utilisation of input tax credit or refund of tax”. Clause (c) talks about offence by the taxpayer who “avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill”. Phrase “with the intention to evade tax” is not there in clause (c). While first part of clause (c) talks about ITC availed based on invoice or bill issued under clause (b), second part is about fraudulent availing of ITC without invoice or bill.

A “fraud” is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage.²³ In the case of fraud, the person making the suggestion does not believe it to be true. Dissection of clause (c) reveals that availing of ITC using the invoice or bill without supply of goods or service may not be a fraud or wilful attempt to evade payment of tax, whereas availing of ITC without having invoice or bill is fraud. Presumption of culpable mental state cannot be invoked in case of availing of ITC without supply of goods or service.

Section 135 of the CGST Act presupposes “existence of” culpable mental state “in any prosecution for an offence……..which requires a culpable mental state on the part of the accused”. First part of clause (c) of section 132(1) is not an offence which requires a culpable mental state on the part of the accused. Section 135 of the Act is really a rule of Evidence regarding existence of mens rea by drawing a presumption though rebuttable. A ‘culpable mental state’ which can be presumed under section 135 of the CGST Act would come into play only in a prosecution for any offence under the Act, when the said offence requires a ‘culpable mental state’ on the part of the accused.²⁴

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Footnotes & Judicial References

1. See Black’s Law Dictionary (Tenth Edition) page 458
2. Vijay S Poojary v Commissioner of Customs (Export) 2022-TIOL-965-CESTAT-Mum Single member Bench judgment dated 28.07.2022
3. Commissioner of Central Excise v Kurele Pan Products Private Limited [2014] 307 ELT 42 (Allahabad)
4. Sameer Shah v UOI 2022-TIOL-854-HC-MUM-CUS judgment dated 09.06.2022
5. [1980] 125 ITR 713 (SC); [1981] 1 SCC 720 judgment dated September 16, 1980
6. [2016] 387 ITR 561 (Bom.) (HC)
7. 2015 [324] ELT 641 (SC); 2015-TIOL-255-SC-CX - Quoted in The Commissioner of Central Excise v Kamal Singhania – 2021-TIOL-1899-HC-Mum-CX
8. AIR 2013 SC 58
9. Thilagarathinam Match Works v Commissioner of Central Excise, Tirunelveli [2013] 295 ELT 195 (Madras) judgment dated 29.01.2013
10. Patel Engineering Limited v Union of India [2014] 307 ELT 862 (Bombay) judgment dated 30.06.2014
11. See G.Sridhar and others v Collector of customs [1992] 43 ECR 95 (Tri.-Chennai) judgment dated March 07, 1992
12. Sultan Tanneries and Leather Products v Union of India 2022-TIOL-487-HC-ALL-Cus Judgment dated April 07, 2022
13. Thilagarathinam Match Works v Commissioner of Central Excise, Tirunelveli [2013] 295 ELT 195 (Madras) judgment dated 29.01.2013
14. SRS Mining v The Dy Commissioner of Income-tax 2021-TIOL-2020-HC-MAD-IT judgment dated 28.09.2021
15. 2022-TIOL-1112-HC-MAD-IT judgment dated 10.08.2022
16. Mahek Glazes Private Limited v Union of India [2014] 300 ELT 25 (Gujarat) judgment dated 10.04.2013
17. A Selection of Legal Maxims, Classified and Illustrated, by Herbert Broom, LLD, 7th American, from the 5th London Edition, T & J.W. Johnson and Co, 1874.
18. Dy Commissioner of Income-tax v Vatika Limited 2023-TIOL-322-ITAT-Del judgment dated February 07, 2023
19. Notified vide Notification No. 39/2021–Central Tax dated December 21, 2021, w.e.f. January 01, 2022
20. Vide Notification No. 40/2021 – Central Tax dated December 29, 2021
21. [2022] 135 taxmann.com 123 (Punjab and Haryana); 2022-TIOL-169-HC-P&H-GST Judgment dated 04.02.2022
22. [2021] 127 taxmann.com 80 (Madras); 2021-TIOL-890-HC-MAD-GST judgment dated 24.02.2021
23. S.P. Changalvaraya Naidu v. Jagannath (1994 (1) SCC 1) as quoted in Commnr. of Customs (Preventive) v Aafloat Textiles (I) Pvt.Ltd. and Ors. [2010] 1 GSTR 453 (SC); 2009 (235) ELT 587 (S.C.)
24. See Mrs Noorjahan v The Dy Commissioner of Income-tax [2022] 445 ITR 17 (Madras); 2022-TIOL-707-HC-MAD-IT judgment dated 26.04.2022 – This judgment is in respect of section 278E of the Income-tax Act. Section 135 of the CGST Act is Pari Materia to provision under the Income-tax Act. Principle of Pari Materia, means same matter or subject. Accordingly, similar language in statutes with common purpose is to be interpreted in the same way.

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Author may be reached at: eboard@icai.in