GST Demand Must Rest on Tested Evidence and Year-Wise Adjudication

The Dispute Was About the Legality of the Route to Demand

A tax demand is not sustained merely because the Department believes the facts are serious or the amount involved is substantial. The demand must follow a lawful route. In tax adjudication, the route is as important as the destination. If statements are relied upon, they must be capable of being tested. If documents are relied upon, they must be properly proved. If multiple tax years are involved, the proceedings must respect the statutory structure of separate tax periods. The Kerala High Court judgment in EMAS Gold And Diamonds LLP, Shri. Basheer K.P., Shri. Anwar P.V. Versus The Joint Commissioner Office Of The Joint Commissioner, Central GST And Central Excise, Kozhikode, Joint Director, Directorate General of GST Intelligence Kochi. - 2026 (7) TMI 1599 - KERALA HIGH COURT, is important because it brings these principles together.

The case arose from proceedings under Sections 67, 74 and 130 of the CGST Act, 2017. The petitioner firm was engaged in the wholesale jewellery business. A search was conducted on 11.12.2019, during which gold ornaments, gold pieces, books, documents, computer systems and other materials were seized. The Chairman's statement was recorded, and he was arrested on 16.12.2019. According to the petitioners, employees' statements were recorded while the Chairman was under detention. These statements were relied upon in the show cause notice and later in the adjudication order.

The adjudicating authority confirmed liability under Section 74 and ordered confiscation under Section 130. The petitioners challenged the order mainly on two grounds. First, they contended that cross-examination of persons whose statements were relied upon had been wrongly denied. Secondly, they argued that proceedings under Section 74 had been conducted as a block assessment for multiple years, whereas GST law contemplates adjudication with reference to separate tax periods. Both objections went to the foundation of the adjudication process.

Search Power May Collect Evidence, But Adjudication Must Test It

Section 67 of the CGST Act empowers inspection, search and seizure in specified circumstances. It is an investigative provision. It enables the proper officer to enter premises, inspect records, seize goods, documents or other things, and gather material where there is reason to believe that tax has been evaded or that goods or documents are liable to seizure. However, material collected during a search does not automatically constitute final proof of liability. Investigation gathers evidence. Adjudication tests it.

This distinction is central to the judgment. During a search and investigation, statements may be recorded, and documents may be seized. But when the Department uses those statements and documents to frame a demand under Section 74, the taxpayer must be given a fair opportunity to respond. The adjudicating authority cannot treat investigation material as unquestionable truth merely because it was collected by officers. The material must still be subjected to the discipline of adjudication.

Section 74 is far more serious than an ordinary demand provision. It applies where tax has not been paid or has been short paid, or input tax credit has been wrongly availed or utilised, by reason of fraud, wilful misstatement or suppression of facts with intent to evade tax. These are serious allegations. They can lead not only to tax and interest but also to substantial penalty. Therefore, where Section 74 is invoked, the factual foundation must be clear, the evidence must be reliable, and the taxpayer must be given a meaningful chance to contest the allegations.

Cross-Examination Cannot Be Buried in the Final Order

The petitioners had sought cross-examination in their replies to the show cause notice, and such request ought to have been considered before final adjudication. By rejecting it only in the final order, the Department deprived the taxpayer of an effective opportunity to challenge that rejection before confirmation of demand.

Cross-examination is not a mere procedural formality. It enables the taxpayer to test the truthfulness, voluntariness, reliability and context of statements relied upon by the Department. Where the demand is founded, even partly, on such statements, denial of cross-examination affects the fairness of adjudication unless supported by legally sound reasons.

Non-Retraction Does Not Make a Statement Untouchable

One reason given for denying cross-examination was that the persons concerned had not retracted their statements. The High Court found this reasoning unsustainable. A statement does not become conclusive merely because it has not been retracted. Non-retraction may be relevant when appreciating evidence, but it cannot take away the taxpayer's right to test a statement relied upon against him.

Cross-examination is not confined to retracted statements. It helps examine whether the witness had personal knowledge, whether the statement was accurately recorded, whether answers were based on assumption, and whether important explanations were omitted. This assumes greater importance in investigation-driven GST cases, where statements of employees, accountants or operational staff may later be used to allege suppression or evasion under Section 74. Denying cross-examination merely on the ground of non-retraction would make adjudication unfairly one-sided.

Documents Cannot Always Cure Untested Statements

The Department argued that the statements were supported by documents and that the demand was not based solely on oral evidence. The High Court, however, observed that the documents were used as corroborative material for the statements, not as independent evidence standing on their own. This distinction is important in GST adjudication.

Some documents, such as returns, invoices, ledgers, e-way bills, stock records or bank statements, may independently establish facts. However, loose sheets, pocket diaries, handwritten notes, computer extracts or internal records often require explanation from the person who prepared or maintained them. If such documents derive meaning from statements, the taxpayer must be allowed to test those statements through cross-examination.

The Court also noted the petitioners' objection regarding pocket diaries allegedly maintained by goldsmiths, whose statements had not been recorded. It accepted the practical point that a document must be properly produced or proved by its author or custodian before being treated as reliable evidence. This is significant because seized papers frequently form the basis of large tax demands, but their authorship, context and meaning cannot be presumed where they are disputed.

Bias Cannot Be Presumed Before Cross-Examination Begins

Another reason given for denying cross-examination was that the witnesses were employees or persons connected with the petitioner and might have been influenced over time. The High Court rejected this reasoning. Bias cannot be presumed merely because a witness is connected with the taxpayer, since tax cases often involve employees, accountants, managers, suppliers, brokers or business associates.

The proper course is to allow cross-examination and then assess the witness's answers. If the witness changes his stand, gives evasive replies or appears influenced, the adjudicating authority may record appropriate findings while appreciating the evidence. However, cross-examination cannot be denied on the assumption that the witness may support the taxpayer. Evidence must first be tested before it is judged.

The Supreme Court's Warning in Andaman Timber Still Controls the Field

The petitioners relied on Andaman Timber Industries Versus Commissioner of Central Excise, Kolkata-II - 2015 (10) TMI 442 - Supreme Court, where the Supreme Court held that denial of cross-examination of witnesses whose statements formed the basis of the order amounts to a serious violation of natural justice. The Supreme Court also clarified that the adjudicating authority or Tribunal cannot presume what the assessee may or may not establish through cross-examination.

The Kerala High Court applied this principle and held that where statements are relied upon in the show cause notice and influence the final conclusion, cross-examination should normally be granted when specifically requested. Such a request need not be accepted mechanically in every case, but refusal must rest on sound, relevant and legally sustainable reasons.

Reliance was also placed on Commissioner of Central Excise, Ahmedabad - II Versus Gujarat Cypromet Ltd. - 2013 (7) TMI 245 - GUJARAT HIGH COURT; SAMPAD NARAYAN MUKHERJEE Versus UNION OF INDIA - 2019 (6) TMI 977 - CALCUTTA HIGH COURT ; and Shree Parvati Metals, Through Surendra Chauhan Proprietor Versus Union of India Through Commissioner of Central Excise, NCRB, Customs, Central Excise and Service Tax Appellate Tribunal - 2018 (1) TMI 208 - RAJASTHAN HIGH COURT. These decisions reinforce the settled principle that when statements are used against a taxpayer, cross-examination cannot be denied casually.

The Right to Cross-Examine Is Real, But Not Unlimited

The High Court also made an important distinction. A taxpayer may seek cross-examination of ordinary witnesses whose statements are used against him. However, he cannot insist on cross-examining co-noticees who are themselves facing penalty in the same proceedings, because such persons may be forced to answer questions that could harm their own defence. For example, if the Department relies on the statement of an employee who is only a witness, the taxpayer may ask to cross-examine that employee. But if the Department has also issued notice to another person alleging that he helped in the evasion and has proposed a penalty against him, that person is a co-noticee. The taxpayer cannot claim an automatic right to cross-examine such co-noticee, because he is also defending himself in the same case.

This clarification prevents the judgment from being read as granting an unrestricted right to cross-examine every person named in the record. An ordinary witness and a co-noticee stand on different footings. The entitlement depends on the nature of the statement, the person's role, the reliance placed by the Department, and the fairness required in the facts.

Block Assessment Cannot Override Tax-Period Discipline

The second major issue concerns the structure of the assessment itself. The petitioners argued that proceedings under Section 74 were initiated as a block assessment for multiple assessment years. According to them, GST law does not permit such a broad composite assessment in which separate tax periods are merged. The argument was based on the statutory scheme of GST, where returns, tax liability, input tax credit, limitation and compliance are structured period-wise.

The High Court accepted this contention by relying on its earlier decisions in Joint Commissioner (Intelligence & Enforcement) Thiruvananthapuram, Joint Commissioner Taxpayer Services, Kottayam, Versus M/s. Lakshmi Mobile Accessories. - 2025 (2) TMI 666 - KERALA HIGH COURT, and M/s. Tharayil Medicals Versus The Deputy Commissioner Audit Division-IV, Thrissur. - 2025 (4) TMI 1152 - KERALA HIGH COURT. In those cases, it was observed that a composite notice for multiple assessment years while completing assessment under Section 74 is not legally sustainable.

This is a highly practical principle. Section 2(106) defines 'tax period' to mean the period for which the return is required to be furnished. GST compliance is built around tax periods. Outward supplies are reported periodically. Input tax credit is availed and utilised periodically. Interest may arise with reference to period-wise delay. Limitation may also have to be tested with reference to the relevant financial year or period. Therefore, an adjudication order must give the taxpayer a clear period-wise case to answer.

Year-Wise Clarity Protects the Department as Much as the Taxpayer

A block assessment may look administratively convenient when an investigation covers several years, but convenience cannot override statutory discipline. If years are clubbed together, the taxpayer may not know which transaction, document or allegation relates to which period, or how tax, interest and penalty have been computed year-wise. A finding of suppression for one year may also not automatically apply to another.

Year-wise clarity protects both sides. It gives the taxpayer a fair opportunity to respond and makes the Department's demand more defensible. The Department may certainly investigate a pattern across several years, but once the matter reaches adjudication, the material must be converted into legally sustainable, tax-period-wise proceedings

Confiscation Also Requires a Sound Procedural Foundation

The adjudication order also directed confiscation under Section 130, which is a serious consequence affecting property and carrying penal implications. When confiscation is proposed along with a demand under Section 74, the evidentiary and procedural foundation must be especially strong. The taxpayer must clearly know why confiscation is proposed and must receive a fair opportunity to meet that case.

The Court did not decide the merits of confiscation. However, once the adjudication order was found procedurally defective due to denial of proper cross-examination and block assessment, the confiscation order also could not stand. The lesson is clear: where tax, penalty and confiscation are proposed together, statements must be tested where necessary, documents must be properly proved, findings must be period-wise, and the reasoning must be clear.

Writ Jurisdiction Was Justified Because the Process Itself Was in Question

The Department argued that the petitioners should have used the statutory appeal. Ordinarily, High Courts do not interfere when an effective appellate remedy is available. However, this rule is not absolute. Writ jurisdiction may still be invoked where there is violation of natural justice, lack of jurisdiction, or a fundamental procedural defect.

Here, the challenge was not merely to the tax amount or appreciation of evidence. The petitioners complained of denial of cross-examination of relied-upon witnesses and also challenged the block assessment structure. These objections went to the fairness and legality of the process itself. The High Court therefore examined the matter under Article 226, without deciding the tax liability on merits, and remanded it for fresh lawful adjudication

Fresh Proceedings Must Follow the Correct Route

The High Court quashed the impugned adjudication order and permitted the Department to initiate fresh proceedings. However, the fresh proceedings must be started by issuing separate notices for each assessment year. The petitioners must also be given a proper opportunity of hearing. Their request for examination or cross-examination of witnesses must be reconsidered afresh, and the earlier unsustainable reasons for rejecting that request cannot be repeated.

The Court did not decide the tax demand on the merits. All factual and legal issues were left open for fresh adjudication. Since the writ petition had remained pending from 2021, the Court directed that this period should be excluded while computing the time limit for completing the fresh proceedings. Thus, the Department may still pursue the demand, but it must do so through a year-wise, evidence-based and procedurally fair process.

A Large Demand Cannot Justify a Weak Process

Emas Gold and Diamonds LLP leaves a clear message. GST adjudication may be evidence-heavy, but evidence must still be tested through a lawful process. Statements must be fairly examined, documents must be properly proved, and multi-year demands must be structured year-wise. A large demand cannot justify an unfair route.

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