Natural justice in tax assessment: adverse findings on alleged sham transactions failed for want of proper enquiry and cross-examination.

A finding that Gwar split purchases were intra-State and sham could not stand where the Tax Board relied on limited enquiry, sample transactions, and statements not tested through cross-examination or proper verification from the registered sellers. The HC held that tax authorities must conduct a meaningful enquiry and observe natural justice before drawing adverse conclusions from incriminating material. As the assessee had produced supporting documents and was denied a real opportunity to meet the evidence, the assessment orders were set aside and the matter remitted for fresh consideration after giving a reasonable opportunity of hearing.

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Issues: Whether the Tax Board was justified in holding that the purchases of Gwar split were intra-State transactions and in restoring the assessment orders despite the assessee's challenge based on want of proper enquiry, denial of cross-examination, and absence of verification from the registered sellers.

Analysis: The assessment was founded on a limited enquiry, sample transactions, and statements of truck owners and drivers, without verification from the Gujarat dealers or inspection of their records. The materials relied upon against the assessee were not subjected to cross-examination, though they were used as incriminating evidence. In a tax adjudication, the authority must conduct a meaningful enquiry and observe the principles of natural justice before branding transactions as sham or bogus. A conclusion on the nature of the transaction cannot rest on conjectures, selective material, or an infirm procedure when the assessee has produced supporting documentary material and asserted purchase from registered dealers.

Conclusion: The finding that the transactions were intra-State could not be sustained. The question was answered in favour of the assessee and against the Revenue, and the matter required fresh assessment after giving the assessee a reasonable opportunity of being heard.

Final Conclusion: The revisions succeeded to the extent that the impugned orders were set aside and the assessment was remitted for reconsideration in accordance with law and natural justice.

Ratio Decidendi: In tax assessment proceedings, a finding that a transaction is sham or intra-State cannot be sustained unless it is reached after a proper enquiry and after affording the assessee a real opportunity to meet the material relied upon, including cross-examination where such material is used adversely.

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