Assessment – Disallowance/addition on the basis of statement of third party – Reliance on statements of third party without giving the assessee the right of cross-examination results in breach of principles of natural justice

The
assessee was engaged in the business of advertisement, market research
and business promotions for its clients. In the A. Y. 2007-08, the
assessee had engaged services of M/s. Inorbit Advertising and Marketing
Services P. Ltd. (Inorbit) and M/s. Nupur Management Consultancy P. Ltd.
(Nupur) to enable them to carry out promotional and advertisement
activities. The amount of Rs. 1.15 crore paid to them was claimed as
expenditure. The Assessing Officer reopened the assessment to disallow
the claim on the basis of the statements of representatives of Inorbit
and Nupur. The assessee requested for the copies of the statements and
also requested for an opportunity of cross examining the deponents. The
Assessing Officer completed the assessment disallowing the expenditure
of Rs. 1.15 crore without giving the opportunity to cross examine the
deponents.

The Tribunal upheld the disallowance. The Tribunal
held that it is a final fact finding authority and it could direct cross
examination in case it felt that material relied upon by the Assessing
Officer to disallow expenses was required to be subject to the cross
examination. It held that denial of cross examination of the
representatives of Inorbit and Nupur had not led to breach of the
principle of natural justice.

On appeal by the assessee, the Bombay High Court held as under:
“i)
We find that there has been breach of principle of natural justice in
as much as the Assessing Officer has in his order placed reliance upon
the statements of representatives of Inorbit and Nupur to come to the
conclusion that the claim for expenditure made by the appallent is not
genuine. Thus, the appellant was entitled to cross examine them before
any reliance could be placed upon them to the extent it is adverse to
the appellant. This right to cross examine is a part of “audi altrem
partem” principle and the same can be denied only on strong reason to be
recorded and communicated.

ii) The impugned order holding that
it would have directed cross examination if it felt it was necessary, is
hardly a reason in support of coming to the conclusion that no cross
examination was called for in the present facts. This reason itself
makes the impugned order vulnerable.

iii) Moreover, in the
present facts, the appellant had also filed affidavits of the
representatives of Inorbit and Nupur which indicates that they had
received payments from the appellant for rendering services to the
appellant. These affidavits also have not been taken into account by any
authority including the Tribunal while upholding the disallowance of
the expenditure.

iv) Thus, the appellant was not given an
opportunity to cross examine the witnesses whose statement is relied
upon by the revenue and the evidence led by the appellant has not been
considered. Therefore, clearly a breach of principle of natural justice.
In view of the above, we set aside the order of the Tribunal and
restore the issue to the Assessing Officer for fresh disposal after
following the principles of natural justice and in accordance with law.”