Ajit K. Sengupta, J.:— In this reference under section 256(2) of the Income-tax Act, 19.61, the following questions of law have been referred by the Appellate Tribunal for our opinion:
“1. Whether the reduction of the gross profit rate from 30% as determined by the Assessing Officer to 7 per cent. by the Tribunal is based on any relevant material and/or otherwise perverse?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not confirming the gross profit rate of 30 per cent. as determined by the Assessing Officer?”
2. The facts as found by the Tribunal are as follows:
The assessment year involved is 1986-87. The assessee is carrying on business of oils of various descriptions and grades. On May 5, 1987, in the course of a search in the premises of the assessee certain materials were found which led the Income-tax Officer in the course of the assessment of the assessee for the assessment year 1986-87 to a conclusion that the purchases shown by the assessee in the books of account during the year of account were inflated and bogus purchases were debited to suppress profits. The assessee was called upon to prove the genuineness of the purchases. The Assessing Officer also issued notices to various parties who had purportedly sold goods to the assessee. Of them Imperial Oil Co., and Bengal Enterprises were the main parties. One Shri Ram Sevak Sukla appeared on behalf of Imperial Oil Co., as its sole proprietor and confessed in effect that the sales alleged to have been made by him to the assessee were not genuine and that the sales were bogus transactions. He was paid a sum of Rs. 15 per drum of oil for fabricating such sales. Thus, the Income-tax Officer concluded that the assessee has inflated the purchases and reduced the profit from oil business. The gross profit of Rs. 1,41,610 disclosed by the assessee in the books on a turnover of Rs. 26,78,388 was disbelieved. The Officer rejected the book results and estimated the gross profit at 30 per cent. of the turnover as against the rate of gross profit at 5.2 per cent. shown by the assessee. The difference between the book results and the estimates called for an addition of Rs. 6,61,908.
3. In the appeal by the assessee, the Commissioner of Income-tax (Appeals), however, reduced the gross profit rate from 30 per cent. to 10 per cent. The said order of the Commissioner of Income-tax (Appeals) was challenged both by the assessee and the Revenue in second appeals before the Tribunal. The Tribunal on hearing the parties came to the conclusion that the Income-tax Officer was not right in accepting the oral statement of Shri Sukla when the documents produced by the assessee in evidence of the purchases proved the genuineness of the same. The Tribunal also referred to the affidavit dated February 16, 1988, affirmed by Shri Sukla where he testified that his sales of lubricant oils to the assessee were correct and genuine and payments for such sales were received by account payee cheques. The Tribunal took the view that the Income-tax Officer erred in preferring oral evidence to documentary evidence to rely upon for the purpose of making the addition. The Tribunal further held that by reason only of the fact that one person from whom the assessee claims to have effected purchases had deposed that the transactions were not genuine, the Officer could not in fairness disbelieve all the purchases and make an arbitrary addition on estimates at a gross profit as high as 30 per cent. as against 5.2 per cent. disclosed by the assessee. The Tribunal also compared the assessment for the earlier years and the relative gross profit rates which are as under:
Assessment years
Rate of gross profit
1980-81
5.60
1981-82
1.67
1982-83
1.13
1983-84
2.21
1984-85
3.63
1985-86
6.15
4. The Tribunal also noted that the assessee was also assessed at the said gross profit rates for the past assessment years. Therefore, even if the rejection of book results was called for, the estimate is not open to be framed in an arbitrary manner. Therefore, the Tribunal further reduced the rate of gross profit from 10 per cent. as determined by the Commissioner of Income-tax (Appeals) to 7 per cent. Thus, the assessee's appeal was allowed in part while the Revenue's appeal stood dismissed. Before us, it has been contended on behalf of the Revenue that the affidavit affirmed by the witness, Shri Sukla, on February 16, 1988, is not a reliable evidence as Shri Sukla is supposed to have obliged the assessee by making the affidavit. Emphasis was laid on the deposition of Shri Sukla, proprietor of Imperial Oil Co., denying having made the sales to the assessee. He was unambiguous in the confession that he issued challans so as to make the fictitious transactions look real. As for the cheques, his statement was that he no doubt received the cheques from the assessee but these issued cheques are also a subterfuge because the proceeds of the cheques immediately on encashment by Shri Sukla went back to the assessee. For the purpose of the repatriation of the money for which the account payee cheques were issued, the assessee, according to the statement of Shri Sukla, got signed blank cheques from Shri Sukla drawn on his bank account. Thus, the amount of cheque was recouped by the assessee. According to Shri Sukla, he received as remuneration for being a party to such fabrication of transaction Rs. 15 per drum of oil. After this statement of Shri Sukla, there cannot be any doubt as to the bogus nature of the assessee's book results and it legitimately called for rejection. It is pointed out by learned counsel for the Revenue that the Commissioner of Income-tax (Appeals) also accepts this position but according to him the estimate was excessive and he reduced it to 10 per cent. It is submitted that the Commissioner of Income-tax (Appeals) gave no basis for the reduction of the estimated gross profit rate. If the Assessing Officer's estimate was faulty and non-maintainable, the reduction by the Commissioner of Income-tax (Appeals) fares no better. He has not indicated why he considered that the gross profit rate at 10 per cent. instead of 30 per cent. would be reasonable. Therefore, the proper course in this case was to set aside the assessment for further fact-finding when the Commissioner of Income-tax (Appeals) found that the estimate had no basis. Thus, the Tribunal also erred in reducing the estimate further to 7 per cent. It has been further submitted that the Tribunal has referred to the past gross profit rates but such past assessment could not be worth, reliance when it is found that the assessee is a person who indulged in cooking up accounts. The assessee's manipulation of the accounts came to light only during this instant year because of the search and seizure and the investigative assessment undertaken on the basis of materials found in the course of the search. If there were a deep scrutiny in the assessment of any of the earlier years, the same might also reveal similar circumstances calling for the rejection of the accounts. It is on this basis that the Revenue assails the order of the Tribunal reducing the estimate of gross profit to 7 per cent.
5. Mr. Poddar, learned counsel for the assessee, at the outset, pointed out that Shri Sukla was examined and his statement obtained by the Assessing Officer behind the back of the assessee, Since Shri Sukla is the witness of the Department, it is not permissible to admit the oral evidence of Shri Sukla unless an opportunity of cross-examination was granted to the assessee-firm. He next drew our attention to the fact that in the assessment proceedings the assessee relied on a comparable case, viz., of Reliance Oil Mills, which concern dealing; in lubricating oils in the same manner as the assessee, earned gross profit at a rate which favourably compared with the gross profit rates shown by the assessee-firm. The said concern, Reliance Oil Co. Ltd., had declared a gross profit of Rs. 5,04,941 on a turnover of Rs. 78,57,758 for the previous year being the financial year ending March 31, 1987, relevant to the assessment year 1987-88, resulting in a gross profit rate of 6.42 per cent. It is, thus, urged that the comparative instance clearly rules out the scope for rejection of the book results of the assessee and even if the book results are rejected, the gross profit rate could not call for any interference. Shir Poddar further stressed the fact that the purchases by the assessee were fully vouched for and were genuine. As a matter of fact, the books of account lying seized in the course of search corroborate the book results. The seized documents clearly showed that the assessee firm did purchase from various parties, including Imperial Oil Co. He also mentioned that the income-tax authorities, in fact, failed to discover any incriminating documents falsifying the assessee's accounts and that is the reason why the assessee's suppliers were called upon to testify before him but the said supplier, Shri R.S Sukla, was examined behind the back of the assessee and the assessee was not given an opportunity of cross-examining him. Even a copy of the statement was not supplied to the assessee. Thus, the assessee was not put on notice of the case against the assessee so as to rebut the allegations raised against him. It is further mentioned that Shri Sukla was examined by the tax authorities earlier on several occasions and had also given affidavit to the tax authorities confirming, inter alia, that he did make genuine supplies of lubricating oils to various persons including the assessee.
6. Shri Poddar highlights one more inconsistency in the manner in which the evidence of Shri Sukla has been used by the Assessing Officer against the assessee. In that connection, he refers to the fact that the other trader in lubricating oil as already mentioned, viz., Reliance Oil Co. Pvt. Ltd., was also facing investigation with regard to the allegations of fictitious purchases from the self-same person, Shri Sukla, and manipulation of accounts to suppress profits. In that case also, Shri Sukla was examined by the Assessing Officer of Reliance Oil Co. Pvt. Ltd. Shri Sukla in his statement before that other officer assessing Reliance Oil Co. Pvt. Ltd., affirmed that his proprietary concern, Imperial Oil Co., had sold oil to Reliance Oil Co. Pvt. Ltd. as well as to the assessee-firm. Shri Sukla also filed an affidavit to the same effect. In the case of the Reliance Oil Co. Pvt. Ltd., the statement made by Shri Sukla and the affidavit filed by him were accepted as true and no interference was made in the book results of the Reliance Oil Co. Pvt. Ltd. When that earlier statement of Shri Sukla in connection with Reliance Oil Co. was treated as truthful, there is no reason why the same statement should not have evidentiary value and why the purported deposition of Shri Sukla subsequently obtained by the Officer assessing the assessee-firm should be taken as evidence falsifying the assessee's purchases. This contradiction vitiates the entire assessment and in all manner the assessment made is arbitrary and the estimate made by the rule of thumb is absolutely infirm. The next point submitted is that the purchases made by the assessee-firm were fully corroborated by various documents, vouchers, etc., which are lying with the Department in the course of seizure before the commencement of the assessment proceedings. Therefore, contemporaneity of such evidence cannot be thrown aside simply by reason of the purported oral evidence of Shri Sukla against the assessee. More so when Shri Sukla in his earlier statements had described his sales as genuine and again the same was also corroborated by an affidavit affirmed by him.
7. We have considered the contesting contentions of the parties. It is true that Shri Sukla has proved to be a shifty person as a witness. At the earlier stages, he claimed all his sales to be genuine but before the Assessing Officer in the case of the assessee, he disowned the sales specifically made to the assessee. This statement can at the worst show that Shri Sukla is not a trustworthy witness and little value can be attached to what he stated either in his affidavits or in his examination by the Assessing Officer. His conduct neutralises his value as a witness. A man indulging in double-speaking cannot be said by any means a truthful man at any stage and no court can decide on which occasion he was truthful. If Shri Sukla is neutralised as a witness what remains is the accounts, vouchers, challans, bank accounts, etc. But, we would observe here that which way lies the truth in Shri Sukla's depositions, could have been revealed only if he was subjected to a cross-examination by the assessee. As a matter of fact, the right to cross-examine a witness adverse to the assessee is an indispensable right and the opportunity of such cross-examination is one of the corner-stones of natural justice. Here Shri Sukla is the witness of the Department. Therefore, the Department cannot cut short the process of taking oral evidence by merely having the examination-in-chief. It is the necessary requirement of the process of taking evidence that the examination-in-chief is followed by cross-examination and re-examination, if necessary.
8. It is not just a question of form or a question of giving an adverse party its privilege but a necessity of the process of testing the truth of oral evidence of a witness. Without the truth being tested no oral evidence can be admissible evidence and could not form the basis of any inference against the adverse parties. We have also examined the records and we find that this Shri Sukla was examined by a number of officers. The Assistant Director of Investigation examined him on August 4, 1987, and in reply to question No. 2 in that deposition he confirmed that he was a dealer in lubricating oil since 1977. In reply to question No. 3, he confirmed having been assessed to income-tax. Again, in reply to question No. 4, he explained that he used to purchase lubricating oil from different garages as well as through various brokers. Such lubricating oil was processed by him in his factory for sale. All payments were received by him through account payee cheques. In reply to question No. 5, he stated that he had seven full-time employees whose names are mentioned by him. He also claimed to have maintained books of account like sales books, purchase books, cash books and sale bills. In reply to question No. 18, he, on his own, stated that his big customers were the Reliance Oil Mills and Eastern Commercial Enterprises, the assessee, in the present reference. As for his cash withdrawals, he explained that his business required ready cash for purchase of raw materials which explained his large drawings of cash from the bank. Learned counsel then cited a host of decisions to bring home the point that no evidence or document can be relied upon unless it is shown to the assessee. Kishanchand Chellaram v. CIT, [1980] 125 ITR 713 (SC). Similarly, the requirement of cross-examination as the requirement of the rules of natural justice has been underlined by the Bombay High Court in Vasanji Ghela and Co. v. CST, [1977] 40 STC 544. It is trite law that cross-examination is the sine qua non of due process of taking evidence and no adverse inference can be drawn against a party unless the party is put on notice of the case made out against him. He must be supplied the contents of all such evidence, both oral and documentary, so that he can prepare to meet the case against him. This necessarily also postulates that he should cross-examine the witness hostile to him.
9. In any case, we have nothing to rely upon to come to a decision this way or the other. The first thing is that which of the statements of Shri Sukla is correct, is anybody's guess. Therefore, it is necessary to delve out the truth from him and for that matter a cross-examination is necessary. Secondly, if the statement of Shri Sukla as a witness against the adverse party, the assessee, is relied upon as truthful, still remains the question of estimation of the profit. The assessee no doubt has given a comparative instance of gross profit rate but it is also necessary for the Department to come to a finding as to the norm of the gross profit on the basis of comparative cases. Therefore, it is the duty of the Assessing Officer to counter the comparative statement cited by the assessee before he can have the option to estimate the gross profit. Again, it is the comparative instance that alone can be the foundation of such estimate in case the accounts are really found to be unreliable and requiring to be rejected. Therefore, in the interest of justice for both the parties, the assessee and the Revenue, it is necessary for us to direct the Tribunal to remand the case to the Assessing Officer for reconsidering the whole matter in the light of the observations made by us in the foregoing and redo the assessment accordingly. All opportunities should be given to the assessee in order to lead any evidence that the assessee may feel necessary to rebut the case against him. As a result we decline to answer the question. There will be no order as to costs.
Nure Alam Chowdhury, J.:— I agree.