2024 (11) TMI 647 - HC - Income Tax

Undisclosed income u/s 68 - addition on basis of statements obtained from employees/ 3rd parties - denial of natural justice - Denial of a specific request having been made by the petitioner to furnish the complete sworn statement purported to have been recorded u/s 132 (4) and also an opportunity to cross-examine the persons whose statements were sought to be relied upon HELD THAT - It is by now well-settled that taxing authorities entrusted with the powers to make assessment for taxes discharge quasi-judicial functions and they are bound to observe the principles of natural justice in reaching their conclusions. It is true that the assessing authority is not fettered by technical rules of evidence and pleadings and is entitled to act on material which may not be accepted as evidence in a court of law but that does not absolve it from the obligation to comply with the principles of natural justice. It is normally necessary that a copy of the incriminating statement of the witness must be given to the assessee in order to enable him to have an effective and useful cross-examination (State of Punjab vs. Bhagat Ram 1974 (10) TMI 105 - SUPREME COURT It is also trite law where the assessee has clearly stated in his objections that he wanted an opportunity to cross-examine the witnesses who provided information to the Department, denying such opportunity to the assessee results in violation of the principles of natural justice (L.Abdulla Kunhi vs. State of Kerala 2000 (10) TMI 927 - KERALA HIGH COURT Taking into account the above legal position, this Court is of the considered view that the impugned order suffers from the vice of violation of principles of natural justice. In view thereof, the impugned order is set aside and the Respondent is directed to furnish the sworn statements of the parties which were relied upon and also consider the request for an opportunity to cross-examine and pass orders in accordance with law after affording a reasonable opportunity of hearing to the petitioner.

Summary

Issues:
Challenge to impugned order treating loan transactions as undisclosed income under Section 68 of the Income Tax Act, 1961 based on statements from employees/3rd parties. Violation of principles of natural justice in not providing complete sworn statements and opportunity for cross-examination.

Analysis:

Issue 1: Challenge to Impugned Order
The petitioner challenged the order dated 30.03.2022 where the claim of loan transactions was rejected and treated as undisclosed income under Section 68 of the Income Tax Act, 1961. The petitioner requested the complete sworn statement recorded under Section 132(4) and an opportunity to cross-examine the persons whose statements were relied upon. The impugned order was based on material evidence found during a search and sworn statements recorded, leading to a show-cause notice to the assessee. The petitioner contended that denial of access to complete sworn statements and cross-examination violated principles of natural justice.

Issue 2: Violation of Principles of Natural Justice
The learned Senior Advocate argued that the impugned order suffered from a violation of principles of natural justice due to the failure to provide complete sworn statements and an opportunity for cross-examination. The Court acknowledged that taxing authorities must adhere to natural justice principles in quasi-judicial functions. The Court cited precedents emphasizing the importance of cross-examination and providing incriminating statements to the assessee for effective defense. Denying the opportunity to cross-examine witnesses or access incriminating statements constitutes a violation of natural justice. The Court held that the impugned order was set aside due to this violation and directed the Respondent to furnish sworn statements and consider the request for cross-examination.

Conclusion:
The Court, after considering both sides and perusing the record, found that the impugned order suffered from a violation of natural justice principles. Despite the availability of statutory remedies, the Court exercised its discretion under Article 226 of the Constitution of India due to the exceptional circumstances of the case. The judgment emphasized the importance of natural justice in tax assessments and directed the Respondent to comply with the principles by providing necessary documents and opportunities for cross-examination. The writ petition was disposed of with directions to lift the bank attachment and no costs were awarded.