A Dalek lie detector was a device used to extract the truth from a subject. The subject was hooked up to a machine, facing away from a large, typically circular, screen. They were then interrogated, with their truthfulness assessed on the screen behind them. If they told a lie, a truthful image would replace the lie they had originally been trying to tell. Thus the device not only determined falsehoods, it extracted and revealed the truth that the subject was seeing in their own mind.
Both Jeff Stone and Romana II experienced the device on Skaro, though at different times. Romana was actually hooked up to one (TV: Destiny of the Daleks), while Stone observed a Dalek being interrogated with one. That Dalek had spotted Stone creeping around the Dalek city, and his fellow Daleks were incredulous that such a thing might be possible. The fact that the Daleks hooked one of their own up to the device implied that Daleks were quite capable of lying. When his colleagues determined that he was telling the truth, they sounded an intruder alarm, forcing Stone to hurriedly leave the planet. (COMIC: City of the Daleks)