Guidance to AO-18
Examination of Witnesses
1. Identifying Relevant Witnesses Linked to Trading Transactions: Begin by identifying individuals directly or indirectly associated with the trading activities—such as suppliers, purchasers, transporters, brokers, employees, and accountants. These persons can provide vital insights into whether the transactions are genuine or merely book entries. Focus on persons whose names appear in purchase/sale invoices, ledger entries, or shipping documents. Their testimony often helps verify physical movement of goods and delivery/payment arrangements.
2. Summoning Key Parties under Section 131: Utilize Section 131 of the Income-tax Act to summon suppliers, customers, or intermediaries to verify the genuineness of large or suspicious trading entries. A witness can be compelled to appear and provide oral or written evidence, including books and documents. If a party does not respond or denies the transaction, this raises suspicion about the transaction's authenticity. Such denial can form the basis of additions under Section 68, 69, or 69C.
3. Verifying On-Record Suppliers and Customers: Cross-examine persons whose names appear in the books of the assessee as trade creditors, debtors, or major vendors. Their statements must be compared with the assessee’s trading account records for quantity, rate, and delivery timelines. If a supposed supplier denies making any sale or lacks the infrastructure to supply the goods, it points toward accommodation entries. Such testimony helps pierce the veil of benami or bogus transactions.
4. Examining Internal Employees and Accountants: Internal staff such as storekeepers, cashiers, Tally operators, and dispatch clerks are key witnesses in reconstructing the genuineness of trading activities. Their familiarity with billing practices, stock handling, and customer orders helps corroborate or contradict the book entries. If staff claim ignorance of any sale/purchase or deny awareness of physical stock movement, it casts doubt on the entries. Their examination can also uncover cases where books were manipulated post-facto.
5. Recording the Statements during Survey or Search: During survey (u/s 133A) or search operations (u/s 132), statements from relevant employees, owners, and related parties must be recorded. Ensure that the questions cover trading practices, billing mechanisms, physical stock, and identification of vendors/customers. Statements recorded contemporaneously during operations carry strong evidentiary value. Discrepancies between the witness statements and trading account entries often form the foundation of reassessment or addition.
6. Cross-Questioning Witnesses for Inconsistencies: Use targeted and comparative questions to test the consistency and depth of the witness’s knowledge. Ask about exact dates of transactions, mode of transport, delivery personnel, payment terms, or invoice numbers. Witnesses who have no knowledge of basic trade details may not be the real parties, or may be benamidars. Establishing that a person has lent their name but has no business control strengthens the case of fictitious trading.
7. Obtaining Signed Statements with Identity Proofs: When a witness accepts or denies a transaction, ensure that their statement is taken in writing, signed, and supported with proof of identity such as Aadhaar, PAN, or voter ID. This gives legal authenticity and helps defend the assessment in appeal or litigation. Such documentation reduces the chances of later retraction or claim of impersonation. It also helps connect the witness with the ledger entries if needed.
8. Using Witness Statements to Disprove Book Entries: Where a supplier or creditor denies knowledge of transactions shown in the trading account, or is untraceable, the AO can treat the entry as non-genuine under Section 68 or 69C. The burden of proof then shifts to the assessee to explain the nature and source. Witness statements carry probative value and may rebut documentary evidence created to mask the real nature of the trade. The AO should summarize such contradictions in the assessment order.
9. Handling Hostile or Non-Cooperative Witnesses: In many cases, summoned witnesses either turn hostile or deny involvement under pressure or fear. The AO must document their demeanor and refusal to cooperate, as this conduct itself may raise red flags about the genuineness of transactions. Cross-verification of their earlier statements (e.g., during survey) or material seized during search can be used to impeach their denial. The AO can also refer such conduct to the Initiating Officer under the Benami Act if proxy control is suspected.
10. Recording Retraction and Assessing its Credibility: Sometimes, witnesses retract earlier statements alleging coercion or misunderstanding. In such cases, the AO must evaluate:
Timing of retraction (was it immediate or after much delay?)
Presence of independent witnesses during initial recording
Documentary corroboration with initial statement
Courts have held that a bald retraction without supporting proof does not invalidate the earlier statement (e.g., Kishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293 (P&H)
11. Corroborating Statements with Documentary Evidence: Witness statements must be backed by secondary or circumstantial evidence such as:
Delivery challans
Transport receipts
Ledger extracts
Mobile call records
Bank payment trail
The strength of a witness's testimony increases when supported by such documents. If a supplier confirms that they never issued any invoice, and there is no GST return or delivery log, it undermines the assessee's trade claim.
12. Examining Transporters and Warehouse Staff: To test the movement of goods reflected in the trading account, transport operators (truck owners, drivers, logistics agents) and warehouse caretakers should be examined. If they deny having moved or stored the goods on the dates mentioned in invoices, it casts serious doubt. Their statements help determine whether the trading was real or merely book-based. Statements must cover goods description, quantity, loading points, delivery times, and consignees.
13. Using Statement of Brokers or Commission Agents: In many trading businesses, brokers or agents mediate sales/purchases. Their examination provides clarity on pricing, terms of delivery, and whether a transaction was genuinely executed. If brokers deny involvement or claim that the transaction was merely a paper entry to help inflate turnover, such admissions can invalidate the trading entry. Their commission records may also reveal the volume of actual business.
14. Preparing Structured Questionnaire for Witnesses: Effective examination begins with well-drafted, specific, and sequential questions tailored to the witness's role. For example:
“Who placed the order and when?”
“What quantity was delivered?”
“How was payment made and by whom?”
Avoid open-ended or leading questions. Tailor the questionnaire to cross-reference figures from the trading account to the witness’s conduct.
15. Safeguarding Against Witness Coaching: There is always a risk that key witnesses may be coached or threatened by the assessee. To mitigate this:
Call witnesses at short notice
Record statements in presence of independent departmental officers
Ask unexpected, case-specific questions
Review CCTV footage or mobile location data when relevant
Such measures reduce the chance of fabricated testimonies.
16. Evaluating Witness Credibility: The AO must assess the overall credibility of each witness by considering:
Their proximity to the transaction
Consistency in statement
Availability of documentation
Conduct before and during examination
A credible witness who gives a clear, consistent narrative discrediting the trading entries can outweigh even book evidence fabricated by the assessee.
17. Using Witness Contradictions to Justify Additions: When witness statements directly contradict the assessee’s trading entries—such as denial of sale, non-delivery of goods, or non-receipt of payment—these discrepancies can be the foundation for additions under Sections 68 (unexplained credits), 69 (unexplained investments), or 69C (unexplained expenditure). The AO must clearly outline:
What the books show
What the witness stated
Why the explanation is not acceptable
This method satisfies both the “reason to believe” standard for reopening and the “preponderance of probabilities” standard for additions.
18. Sample Format for Recording Witness Statements: To ensure legal validity, witness statements should follow a uniform structure:
Full name, address, identification details (PAN/Aadhaar)
Relationship with assessee, if any
Question-answer format (each question clearly numbered)
Signature of witness, officer, and independent witness (if present)
Date, time, and place of recording
Statements should be recorded in the language understood by the witness, and a translated copy (if required) should be annexed.
19. Legal Value of Oral Evidence vs Documentary Proof: While documentary evidence often has higher probative value, oral testimony can override book entries if it proves that transactions were fictitious. Courts have consistently held that statements of witnesses under Section 131 or 132(4), supported by surrounding facts, can be relied upon even if the assessee holds invoices or bank entries. Oral evidence is especially potent in identifying benami deals, fake suppliers, or non-existent customers.
20. Drafting Assessment Orders Using Witness Evidence: When framing an assessment involving witness statements:
Quote relevant portions of the testimony verbatim
Highlight contradictions with trading records
Explain efforts made to cross-verify facts
Provide reasoning why the witness is reliable (or not)
Discuss corroborative evidence such as transport documents, ledger inconsistencies, and survey findings
This improves sustainability of additions at appellate levels.
21. Special Considerations for Rebuttal by Assessee: If the assessee tries to rebut witness statements, the AO must:
Ask for evidence of actual transaction (e.g., proof of delivery, confirmation by bank)
Examine motive of retraction (coercion, collusion, delay)
Evaluate alternative evidence offered (GST returns, e-way bills, confirmations)
The AO can insist on cross-examining the witness only if the assessee provides prima facie proof to discredit them. Otherwise, denial of cross-examination is not fatal (Andaman Timber Industries v. CCE, SC).
22. Practical Tips for Witness-Based Investigation of Trading Accounts
Prioritize examination of parties involved in high-value or frequent transactions.
Use survey powers to gather spontaneous statements before coaching.
Preserve digital evidence (emails, WhatsApp messages, Tally backups) to support oral claims.
Avoid reliance on a single witness; seek corroboration.
Summarize findings in a tabular format showing each trading entry, associated witness, and inference drawn.