Synopsis
A question on sellers’ genuineness, leading to nonallowance of Input Tax Credit (ITC) to the buyers, has been frequently faced by sales tax payers. No opportunity for cross examination is afforded to the buyer to test or rebut the evidences used against him for such disallowance. Author throws light on the recent decision of Madras High court on this issue wherein it has been held that right of cross examination is the most essential right and the same cannot be denied to the buyer.
Introduction
There are a number of situations where the Revenue Departments rely upon material collected from opposite/third parties. For example, at present under Maharashtra Value Added Tax Act, 2002, the sales tax department is disallowing Input Tax Credit (ITC) to the buyers on the ground that the seller is non genuine dealer. The department for this purpose relies upon statement of the vendor, as well as his affidavit etc.
It is a common experience that no opportunity for cross examination of the adverse material used, is given to the concerned buying dealer. Further, no opportunity for personal cross examination of the vendor is given.
The issue which arises is whether such procedure is acceptable in the eyes of law?
Recent Madras High Court judgment in case of Thilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295) E.L.T. 195 (Mad.)
The issue as to whether granting of opportunity for cross examination is necessary or not had arisen in above case.
The facts were that the petitioners in writ petitions challenged orders passed by the Enquiry Officer, rejecting their request for cross-examination of certain officers and persons in an enquiry, in pursuance of the show cause notices, issued u/s. 11A of the Central Excise Act, 1944. In the annexure to the show cause notices, the authorities relied upon the reports of the Energy Auditor as well as the statements of some officers and witnesses. The petitioner made a request for the cross-examination of those officers and witnesses.
Before the High Court, the Excise Authority took objection to the request of the petitioners for cross-examination on following grounds:
(i) that the petitioners prolonged the issue even without submitting an explanation to the show cause notices for more than one and half years;
(ii) that the petitioners have not adduced any reasons for cross-examination of those persons; and
(iii) that none of the witnesses have retracted from their original statements.
Based on above facts, the Hon. High Court held that even if the petitioners had never submitted any explanation to the show cause notices, the conduct of an enquiry becomes necessary and the cross-examination of the officers, who are authors of the statements, crystallises into a right for the petitioners. Thus, the first objection to the request for cross-examination was rejected.
About second objection to the request for crossexamination that the petitioners had not stated any reason for cross-examination of those persons, the Hon. High Court held that no reason need be stated by any person for requiring crossexamination. 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 crossexamine 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 delinquent to justify such a request by adducing reason. But, insofar as cross-examination is concerned, no justification need be provided in the form of reasons by a delinquent. The very fact that some statements of some officers 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. But, the enquiry officer cannot test the request for cross-examination on the strength of the reasons. Therefore, the second ground on which the request of the petitioners is rejected, also cannot be sustained, held the Hon. High Court.
In respect of the third ground on which the request of the petitioners was rejected was that none of the witnesses had retracted from their original statements. Retraction from an early statement would normally occur only during the course of the enquiry. In the course of the enquiry, witnesses had not been examined. In other words, the respondents have presumed that the right to cross-examine would arise only in cases, where witnesses retract from their early statements. That is a wrong presumption or understanding of the law. The purpose of cross-examination is only to disprove the statements given by the witnesses. If the witnesses had already retracted from their original statements, the petitioners would have been well advised not to ask for cross-examination at all. This aspect has not been appreciated by the respondents, held the Hon. High Court. Therefore, it was held that the third objection also was not sustainable.
Conclusion
The law on the issue of right of cross examination is thus clear. The above principle duly applies to sales tax department. Assuming that the sales tax department may be correct in its investigation, still the department is 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.
There are two aspects about ITC. If transaction is non-genuine, ITC cannot be allowed even though seller might have paid tax. However, this fact requires to be established by following the above principle of law.
The truth whether transaction was genuine or not, can get established only upon providing an opportunity of cross examination.
The other aspect is that the transaction is genuine but tax is not paid by concerned vendor. In such case disallowing ITC to buyer will be incorrect. The concerned vendor should be first assessed as he is first in sequence. The recovery should be made from him. Without assessing him, jumping upon next buyer will be inappropriate and cannot withstand the legal position.
Hence ascertainment of correct position of transaction is very much necessary and for that purpose cross examination opportunity is mandatory.
Therefore, the one way process adopted today by the sales tax authorities can not be said to be correct as per law. The buyers can expect justice in due course of appeal at higher forum.
