Fair hearing in tax assessments bars reliance on undisclosed adverse material to deny a statutory deduction.

A statutory deduction for sales to a registered dealer under the Punjab General Sales Tax Act and Rules depended on production of the prescribed declaration form, and the assessee had produced it. The assessment was nevertheless based substantially on private enquiries and material not disclosed to the assessee. The governing principle is that adverse material used in tax proceedings must be disclosed in substance and the assessee must be given a fair opportunity to rebut it, including cross-examination where the material is testimonial. A finding founded on undisclosed, irrelevant, or inadmissible material is vitiated in law and cannot support denial of the deduction.

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Issues: Whether the disallowance of deduction claimed on sales to a registered dealer was legally sustainable when the assessing authority relied on material collected behind the assessee's back and denied effective opportunity to meet it.

Analysis: The deduction claimed under section 5(2)(a)(ii) of the Punjab General Sales Tax Act and rule 26 of the Punjab General Sales Tax Rules, 1949 depended on compliance with the prescribed declaration form. The assessee had produced the required form, and there was no finding of non-compliance with the statutory procedure. The assessment, however, rested substantially on private enquiries and material not disclosed to the assessee. The governing principle in tax proceedings is that while technical rules of evidence do not strictly apply, any material proposed to be used against the assessee must be disclosed in substance and the assessee must be given a fair opportunity to rebut it, including cross-examination where the material is testimonial in character. A finding based partly on undisclosed, irrelevant, or inadmissible material is legally vitiated and cannot stand as a valid finding of fact.

Conclusion: The disallowance was not legally sustainable and the answer to the reference was in favour of the assessee.

Ratio Decidendi: In tax assessment proceedings, adverse material collected behind the assessee's back cannot be used to deny a statutory deduction unless the assessee is afforded a fair opportunity to meet it; a finding resting on undisclosed or irrelevant material is vitiated in law.

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