2021 (12) TMI 524 - HC - VAT and Sales Tax

Right to cross-examine - whether the imposition of penalty subsequent to and by referring to the statement/material/Books recovered on 13.09.2010 from the house of K. Ravindran and in the circumstances of these cases, whether the right of the dealer to cross-examine K.Ravindran is tenable or not? - HELD THAT - The Revenue has categorized the recoveries of books under the 3 categories 1) from Mrs.Rekha Pharmaceuticals, Palakkad, 2) from the residence of the proprietrix of the registered dealer, 3) from Mr.K.Ravindran from Palakkad, an employee of the dealer. The analysis in the show-cause notice refers to the books of account recovered from the house of Ravindran. Variation between the figures shown in the returns filed by the dealer and the details noticed from the books of accounts recovered from the house of Ravindran constituted the basis for penalty proceedings. The reply of the dealer is excerpted above and on material facts and accusations made against the dealer, the dealer has not only denied the veracity of the statement and books of account relied on by the Revenue but requested an opportunity of cross-examination if the Revenue desires to proceed on the statement of Ravindran or the books of account recovered from the house of Ravindran. The order dated 10.03.2014 in Annexure-D imposes a penalty by completely accepting details noted from the books of account recovered from the house of Ravindran. The broad test in matters of present nature is the nature of the interest affected by the decision, and whether the decision relates to the imposition of a detriment on an individual e.g. penalty, sanction or cancellation, then the requirement to follow minimum procedure while making such decision is required. The paradigm situation in which the duty to act fairly will apply, is where a decision-maker is taking a decision that will or may have an adverse impact on the dealer. Ultimately the right is dependant on nature of the proceeding, or of the function exercised; the conduct of the party and the circumstances of the case. So now we have to examine whether the circumstances of the case are persuasive enough to consider whether the denial of right to cross examine Ravindran has resulted in prejudice to the Dealer. The crucial aspect of the matter at this stage is, these books have been recovered behind the back of the dealer. On this either aspect, the argument of Mr. Anil D Nair is contextual to be noted to wit that there is no prohibition for the Revenue to collect or gather information against the dealer, but any material relied on by the Department must be put to the dealer and if the material is contested, the semblance of fair play and procedure are followed before accepting material gathered behind the back of the dealer as constituting the basis for imposition of penalty. The test here is not only the procedural impropriety but the real prejudice in accepting extraneous and other relevant material constituting the basis for imposing penalty. We are not convinced with the reasoning recorded by the Tribunal. We appreciate the objection raised by Mr. Muhammed Raffiq that the Appellate Authority, if had a reason to hold in the case on hand that the denial of the right of cross-examination resulted in prejudice to the dealer, the Appellate Authority ought to have remitted the matter to the Intelligence Officer for disposal afresh. Therefore, allowing the appeal in its entirety on merits, in our view by the Appellate Authority is equally unsustainable and illegal. The matter remitted to the Intelligence Officer for consideration and disposal afresh in accordance with law - Appeal disposed off.

Summary

Issues Involved:
1. Legality of penalty proceedings initiated based on materials seized from an employee's residence.
2. Right to cross-examine witnesses in penalty proceedings.
3. Procedural fairness in the imposition of penalties.

Detailed Analysis:

1. Legality of Penalty Proceedings Initiated Based on Materials Seized from an Employee's Residence:

The dealer, a proprietary concern engaged in manufacturing and trading Ayurvedic medicines, was subjected to an inspection by the Revenue on 13.09.2010. The Revenue claimed to have seized accounts and ledgers from the residence of an employee, Mr. K. Ravindran, which were alleged to be parallel accounts maintained by the dealer. The Intelligence Officer initiated penalty proceedings under Section 45A(1) of the KGST Act, 1963, based on these seized documents, asserting that they revealed substantial tax evasion.

The dealer contested the penalty proceedings, denying any connection with the seized books and asserting that they were not related to their business. The dealer argued that the penalty proceedings were based on fabricated evidence and demanded the right to cross-examine the individuals who provided statements against them.

2. Right to Cross-Examine Witnesses in Penalty Proceedings:

The dealer's primary contention was the denial of the right to cross-examine Mr. K. Ravindran and others who provided statements used against them. The Intelligence Officer refused this request, stating that the testimony of Ravindran was not used directly against the dealer and that cross-examination was not a matter of right in quasi-judicial proceedings.

The dealer relied on the judgment in Edakalathur Traders Vs. State of Kerala, which emphasized the necessity of providing a fair hearing, including the right to cross-examine witnesses when their statements form the basis of penalty proceedings. The dealer argued that the denial of cross-examination resulted in procedural unfairness and prejudice.

3. Procedural Fairness in the Imposition of Penalties:

The court examined whether the imposition of penalties based on materials seized from Ravindran's residence, without allowing cross-examination, constituted procedural unfairness. The court noted that the materials were seized behind the dealer's back and were contested by the dealer. The court emphasized that any material relied upon by the Revenue must be put to the dealer, and if contested, fair procedures, including the opportunity for cross-examination, must be followed.

The court referred to the Full Bench decision in M.K. Thomas v. State of Kerala, which held that the right to cross-examination depends on the nature of the proceeding, the function exercised, the conduct of the party, and the circumstances of the case. The court concluded that in this case, the denial of cross-examination resulted in prejudice to the dealer, as the penalty was imposed based on contested materials without following fair procedures.

Conclusion:

The court set aside the orders of the Intelligence Officer, Deputy Commissioner, and the Kerala Agricultural Income Tax and Sales Tax Appellate Tribunal. The matter was remitted to the Intelligence Officer for reconsideration and disposal afresh in accordance with the law. The Revenue was given liberty to serve additional reassessment notices if necessary, and the dealer was given the opportunity to file an additional reply and cross-examine witnesses or rebut additional materials introduced by the Revenue.

Separate Judgments:
No separate judgments were delivered by the judges; the decision was a common judgment.