Commissioner of Sales-Tax, Madhya Pradesh v. M/s. H.M. Esufali, H. M. Abdulali, Siyaganj, Indore

Judgment

The Judgment of the Court was delivered by HEGDE J. These appeals by special leave arise from the decision of the High Court of Madhya Pradesh in a consolidated Rekrence under S. 44 of the Madhya Pradesh General Sales Tax Act,· 1958 (to be hereinafter referred to as the 'State Act'). That Reference was made by the Board of Revenue, Gwalior, partly at the instance of the assessee and partly at the instance of the 6 C,S.T, v, H.M. !SUPALl (Htgde, J.) Commissioner cf Sales·tax, Madhya Pradesh. Four questions of law were referred to the High Cotirt for its decision. They are : ll . " ( 1) Whether on the facts and ciroumstances of the case the revised assessment enhancing the taxable turnover under the State law by Rs. 2,50,000/· and the taxable turnover undtr the Central law by Rs. 1,00,003/- o~ the basis. of the undisputed escape in the amount of Rs, 31,171.28 by adopting the said amount of escaped turnover as the measure for determining the quantum of enhancement tor the whole year was illegal, unjusti· fled or excessive?

(2) Whether a best .iudgmont aasesSIQent could at all be made under s. 19(1) o'l the Act or .whether revi1ion of the · aueasmont should be confined to the quantum of proved or admitted escaped turnover ? (3) If the answer tothe previous question is that the revision in assessment should be confined only to the quantum of proved or admitted escape in turnover, was the penalty of Rs. 2,009/- imposed on the footing of the revision of the assessment for the whole year legal and justified? and · ( 4) Whether on· the facts and cfrcumstances of the case the imposition Qf the penalty under section 19 ( 1) of the Madhya Pradesh General Sales Tax Act, 19S8 read with 'Section 9 ( 3 ) of the Central Sales Tax Act was pot legal?' The first three questions were referred to the High Court at the instance of the assessee and the last one was referred at the instance of the Commissioner.

The High Coutt answered the 1st and the 3rd question in favour of the assessee and the second and the fourth question in favour of the Department. It opined : " ... Our answer to the first question is that the estimate· of taxable turnover under the local Act ood the Central Act made by the assessing authority for the period from 1st November 1959 to 20th October 1960 on the basis of Rs. 31,171.28 as the escaped turnover for a period of 19 days was illegal and unjustified. The escaped turnover proved in the present case is only Rs. 31,171.28 and the assessee is liable to be assessed under both the Acts only on the taxable turnover comprised in -tb,e, escaped tUrnover of Rs. 31,171.28. Our answer to the seco'rid question is that there CBJ:l be a best·judg:rnent assessment under section 19 ( 1 ) of the local Act. lb a best·judgment assessment the quantum of escaped tumover would be that which the assessing authority thinks is proved SUPRBMB COURT REPORTS . or is established.

In other assessments the quantum of escaped turnover would be the one which the assessing authority finds proved whether on the admission of the assessee or on· the material produced at the enquiry in which the assessee has participated. The third question is answered by saying that the imposed penalty of Rs. 2,000/- is, in view of our answer to the first ·question, not legal. Our answer to the fourth question is that a penalty for escaped assessment under the Central Act can be imposed under Section 19 ( 1 ) of the local Act." Aggrieved 'by the decision of the High Court, the Commissioner has brought ·these appeals. The ass~see has not appealed against that portion of the decision which went against him. The facts of the case necessary for deciding the questions of law arising for decision in these appeals, as could be gathered trom the Statement of the case may now be set out.

The assessee was a registered deaier under the 'State Act' as well as the Central Sales Tax Act (which will hereinafter be referred to as the 'Central Act'). He was a dealer in Iron and Steel. In these appe$, we are concerned with his turnover for the period November 1, 1959 to October 20, 1960. In that year he declared a gross turnover of Rs. 3,97,356/ 18 and taxable turnover of Rs. 1,10,246/ 63P. The Sales-tax Officer determined his gross turnover at Rs. 3,97,357/- and -taxable turnover at Rs. 1,21,567/ -. Under the 'State Act" he assessed him in tke sum of Rs. 3,743.34P. on November '20, 1961. The assessee had not declared his gross or taxable turnover in respect of the year in question under the 'Central Act'. But the Sales-tax Officer determined his ·turnover under the 'Central Act' by his order dated Decembler 8, 1962 at Rs. 22,916/ - and levied on him a tax of Rs. 252.04. The assessee did not appeal against these orders.

It appears that on September 19, 1963 the Flying Squad inspected the business premises of the assessee and found a Bill book for the period September 1, 1960 to Se~tember 19, 1960. The Bill book showed that the assessee had effected sales of iron and steel during that period of the value of Rs. 31,171.28P. Those sales had not been entered in the books of account maintained by the assessee. On the basis of the information provided by the bill book seized, the Sales-tax Officer initiated proceedings under s. 19(1) of the 'State Act' on January 15, 1964 by issuing the prescribed notices to the assessee. He also initiated proceedings under that section under the 'Central Act' on March 15; 1964. The notices in question were served on the assessee on April 17, 1964 and March 19, 1964 respectively. In response to these notices; the assessee submitted an explanation denying that the bill book in question pertained to his dealings.

Further, he also disputed the correctness of the estimates made by the Sales-tax Officer of C.S.T. V, H.M. ESUFALI (Hegde, J.) his turnovers in the notices issued to him. After hearing the assessee, the Sales-tax Offi~er reassessed the assessee under the 'State Act' on April20, 1964 and under the 'Central Act' on April 30, 1964. The reassessments were made on the basis of 'bestjudgment'. Ia:t estimating the assessee's turnover, the Sales-tax Officer took into considration the fact that the assessee had dealings outside his accounts of the value of Rs. 31,171.28 during a period of 19 days. On the basis afforded by the facts discovered, the Sales-tax Officer estimated the assessee's turnover under the 'State Act' for the assessment period in question at Rs.6,47,357 /- (3,97,357, + 2,50,000). Similarly he reopened the assessee's assessment under the 'Central Act, and estimated the turnover of the assessee under that Act at Rs. 1,22,916/- (22,916+1,00,000).

He also imposed on the assessee a penalty of Rs. 2,000/- under the 'State Act' and a penalty of Rs. 1,500/- under the 'Central Act' The assessee appealed against the reassessments made on him as well as against the penalties imposed on him. Those appeals were dismissed by the, Appellate authority. The asseSsee took up the matter in second appeal to the Board of Revenue, Madhya Pradesh, Gwalior. The Board of Revenue set aside the penalty Otf Rs. 1500/-imposed under the 'Central Act, but in other respects. it rejected the appeal of the assessee. Thereafter the Board, partly at the instance of the assessee and partly at the instance of the Commissioner,· submitted the four questions set out earlier to the High Court. Before proceeding to examine the contentions advanced on behalf of the parties, it is necessary to clearify certain aspects.

It may be noted that the first assessments were made by the Sales.tax Officer primarily on the basis of the returns submitted by the assessee. , In the proceedings relating to those assessments, the Sales-tax Officer relied on the books of account of the assessee. While making reassessments on the basis of the information gatherred from the bill book seized, the Sales-tax Officer rejected the accounts maintained by the assessee as unreliable and assessed the assessee on the basis of his 'best judgment'. The distinction between a 'best judgment' assessment and assessment based on the accounts submitted by an assessee must be borne in mind. Sometime there may be in<Docent or trivial mistakes in the accounts maintained by the assessee. There may be even certain unintended or unimportant omissions in those accounts; but yet the accounts may be accepted as genuine and substantially correct.

In such cases, the assessments are made on the basis of the accounts maintained even though the assessing officer may add back to the accounts price of items that might have been omitted to be included in the accounts. In such a case, the assessment made is not a · 'best-judgment' assessment. It is primarily made on the basis of the accounts maintained by the assessee. But when the assessing SUPREME· COURT REPORTS [1973] 3 S,C.R. officer comes to the conclusion that no reliance can be placed on thC' accounts maintained biY the assessee, he proceeds to assess the 18801see on the basis of his 'best-judgment', In doing so. he may take such assistance as the assessee's accounts may afford, he may also. rely on other infonnation gathered by him as well as an the surrounding circumstances of the case. The assessments made on the basis of assessee's accounts and those made on 'best-judgment basis are totally different types of assessments.

Now coming to the facts of this case, it is nece.ssal'y to remember that at the initial stage, the assessee denied that the bill book seized w'as his bHI book and the entries thel·ein related to his dealings. He asserted that he had nothing to do with the bill book in question and the entries therein do not relate to his dealings. But at a later stage, he conceded that that 'bill book was his and 1the entries 1heretn related to his dealings. It is now proved as well as admitted that his dealings outstde his accounts during a period of 19 days were of the value of Rs. 31,171.28. From this circumstance, it was open to the Sales-tax Officer to infer tb,at the assessee had large scale deaHngs oumde his accounts. The assessee has neither pleaded nor established only jus~ifiable reason for not entering in his accounts the dealings noted in the bill book seized.

It is obvious that he was maintaining false accounts to evade payment of sales-tax. :&1 such a situation it was not possible for the Sales-tax Officer to find out precisely· the turnover suppressed. He could only make an estimate of the suppressed tum.over on the basis of the material . before him. So long as the estimate made by him is not arbitrary and has nexus with facts discovered, the name cannot be questioned. In the very nature of things the estimate made may be an over-estimate or an under-estimate. But that is no ground for interfering with his 'be~t judgment'. It is true that the basis adopted by the officer should be relevant to the estimate made. The High Court was wrong in assuming that the assessing authority must have material before it to prove the exact turnover suppressed. If that is true there is no question of best-judgment. The assessee cannot be pennitted to take advantage of his own illegal acts.

It was his duty to place all facts truthfully before the assessing authority. If he fails to do his duty, he cannot be allowed to call upon the assessing authority to prove conclusively what turnover, he had suppressed. That fact must be within his personal knowledge. Hence the burden of proving that fact is on him. No circumstance has been placed before the assessing a~thority to show that the as- &essee's deelings during 1-9-1960 to 19-9-1960 outside his accoul!ts were due to some exceptional circumstance or that they were proportionately more than his dealings outside his accm,mts, during the remaining periods. The assessing authority c;:ould not have been in possession of any correct measure to find out the escaped II C.S.T. V, H.M. ESUPALI (Hegfk, J.) 10 II turnover during the periods 1-11~1959 to 31-8-1960 and 20..9-1960 to 20-1 0-1960.· The task of the a$sessing authority ~finding out the escaped turnover was by no means.easy.

In estimating any escaped turnover it is inevitable that there is some guess. work. The assessing authority while making the 'best-judgment' as8essment: no doubt should arrive at its conclusion without any bias and on rational blasis. That authority should not be vindictive or capricious. If the . estimate made b~ the assessing authority is a bona fidt estimate and is based on a rational basis, 'the fact the.t there is no good proof m support of that estimate is immaterial. Prima 'facll, the IIIMI· mg authority is the best judge of tho situation. It is his •best-j\ldgment' and not of any-on~ else's. The High Court could· not substitute its 'best-judgment' for that of the assessing authority. In the· case of 'best-judgment' assessments, the courts will have to first see whether the accounts maintained by the assessee were rightly rejected as unreliable.

If they come to the conclusioo Chat they were rightly rejected, the next question that arises for consideration is whether the basis adop~ed in -estimating the turnover has a reasonable nexus with the estimate made. If thebasis adopted is held to be a relevant basis even though the courts may think that it is not the most appropriate basis, the estimate made by the assessing authority can.not be disturbed. In the present case, there is no dispute that the assessee's accounts were rightly discarded. We do not agree wi'th the High Court that it is the duty of the assessing authority to adduce proof in support of' its estimate. The b~is adoptOO by the Sales-tax Officer was a relevant one whether it was the most appropriate or not. Hence· the High Court was not justified in interfering with the same. The Jaw relating to 'best-judgment' assessment is the same both in the case of income-tax assessment as well as in the case of sales-tax assessment.

The scope of 'best-judgment' assessment under the Income-tax law came up for consideration before the Judicial Committee as early as 1937 in Commissioner of Incometax, Central and U.P. v. Laxminarain Badridas.(l). Therein Lord Russel of Killowen speaking for the Judicial Committee observed (at P- 180): 'The Officer is to make an assessment to the best of his judgment against a perSon who is in default as regardS supplying information. He must not act dishoAestly, or vindictively or capriciously because he must exercise judgment in 'the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessm~nt, and for this purpose he must; their Lordship think, be able to take into consideration local knowledge and repute in regard to the assessee's circum- 0) 5.1.1 .R.l70. SUPREME. COURT kEPORTS (i973)

3 S.C.R. stances and his ·own. knowledge of 'previous returns . by and ~essments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate, and though . 'there must nec~s~ily be guess--work ill the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary.'' In Raghubar Mandai Harihar Manda! v. The State of Bihar(1) a case arising under the Bihar Sales Tax Act, 1944, the law relating to 'best-judgment' assessment was examined at length by this Court. Therein S. K. Das J. speaking for the Court observed ·(atp.778): "No doubt it is true that when the r~turns and the books· of account are rejected, the assessing officer must make an estimate, and to that extent he must make a · guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion.

To use the words of Lord Ruessel of Killowen again, "he must make what he honestly believes to be a fair estimate of the proper figure of assessment'' and for this purpose he must take into consideration such materials as the assessingofficer has before him. including the assessee's circumstances knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and ·proper estimate:· (emphasis supplil!d) Proceeding further the learned judge quoted with approval the observations of Din Mohamad J. in Ganga Ram Balmokand v. Commissioner of Income-tax, Punjab (2) : ••rt cannot be denied that there must be some material before the Income-tax Officer on which to base his estimate, but no hard and fast rule can be laid down by the Court to define what sort of material is 'required on which his estimate cnn be founded." ~ftcr quoting those ob~ervations, the learned judge proceeded to oh.<;erve: .

"With that obc;crvation we generally agree. If. in th1q case, the Sale'! Tax Authorities had based their c<.rimate on some material ~fore them, no objection could have been taken." Armhin~~ the nJie laid down in Raelwbar Manclal f[arihar .'U,mdal'.f Cu'.4'! ( ~upra). to the f:.tcts of the present case it, i'l seen (I'}~'> T C -7111 f:!l S I. T.R. 46-l. ll Jl <;;.S.T. V, H.M. ESUFALI (f!egde,· J.) that the. Sales~ tax Otfi.ce,r had material bef~re him t~ find out, how much turnover had escaped assessment dunng a penod of 19 days. On the baSis. of that material he estimated 'the escaped turnover for the entire year. Hence it cannot be said that there was no basis for the estimate made by the Sales-tax Officer. ~t may be · that ·his estimate was an over-estimate or an under-estJm~te but it" cannot be said that 'the estimate was without any basis. .In making that estimate, there was an element of guess-work winch was inevitable in the circumstances of the case.

If the Sales-tax Officer was compelled. to adopt a: rule of thumb which in a sense is an arbitrary rule, assessee was entirely responsible for that situation. In State of Kerala v. C. Velukutty,(L) this Court speaking through Subba Rao J. (as he then was) observed (at p. 244 of the Report) : "The limits of the power are implicit in tl1e expression "best of his iudgment". Judgment is a faculty to decide matters· with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice. Though there is an clement of gues.;-work in a "best judgment assessment". It shall not be a wild one, but shall have a reasonable nexus to the available muterial and the circumstances of each case." The question before us is whether there is a r.::as0nable nexus betwee-n the basis adopted by the assessing authority and the estimate of escupcd turnover mude. We have no doubt that there is such a nexus.

On behalf of the assessee, reliance was placed on the decision . of this Court in Commissioner of Income-tax, JV est ·Bengal v. Pctdamclrand Ramgopal( 1). Therein, while investigating ·into the case of l11c assessee, the Income-tax Ollicer found two insignificant 1rustakcs in the asscssees accounts relating to the assessment year 1953-54. No mistakes were fOlmd in the accounts rel.atincr to the assessment years 1954-55 to 1957-58. Merely because"' therl! were some insignificant mistakes in theaccoums maintained by the as~ssce for the assessment year 1953-54, the Income-tax Otncer reJected the acc{)unts of the assessee for all the cotic.:m..:d assessment year> and added to the income returned half the amount of gro~s receipts shown by the assessee under the head "interest'' for eac~ _of the years ~s escaped lr1comc. The Tribunal upheld the _u~dtttOn but the H1p.h Court came to the conclusion that the add1hons made by the Income-tax Officer were quite arbitrary.

Thi~ Court agreed with that view. We do not think that the said decision lends any support to the assessee's contention. (I) 60 I,T.R.23<1 fl) 76 I.T.R.7I9. 1 014 For the reasons mentioned ab~ve, we are unable to agree with · Jhe High Court that the Saks-tax Officer had arbitrarily assessed 1J1e assessee. . lt was next contended that in a re-assessment under s. 19 ( l J .of ·the Act, Sale-tax Officer was not competent to make 'bestjudgment assessment' as no such power was conferred on him under the said section. This contention had been rejected by the High Coi.Jrt and 'the assessee had not appealed against that part of the judgment. Be that as it may, even though s. 19 does not in specific terms confer on the assessing. authority power to make 'best-judgment assessment' that section specifically says that th~ assessment made under that section is a re-assessment. Section 18 deals with assessment of tax. Section 18 ( 4) says : "lf a registered dealer- (a) X X X X (b) X X X X (C)

X X X X (d) has not maintained any account or has not regularly employed any method of acQounting, or if the method employed is such that in the opinion of the Commis!iioncr assessment cannot properly be made on the b<tsis thereof; the Commissioner shall in the prescribed manner assess the dealer to the best of his judgment.'' What is true of the ao;sessment must also be true of rc<.hscssment because reasessment is nothing but a fresh assessment. When reassessment is made under s. 19, the former assessment i-i completely reopened and jn its place fresh assessment is madl!. While rcasscs!>ing a dealer, the ~-;sessing authority does not merely a~sess him on the escaped turnover c!ut it assesses him on his total estimated turnover. While making reassessment under s. 19, it the asses~ing authority has no power to make best judgment assessment, all that the assessee need do to escape reassessment i~ to refuse to file a return or refuse to produce his account-books.

If the contention taken on khalt of the ussesscc is correct, the assessee can escape hie; liability to be rco:~sscssed bv adoptin" an ob~lructive attitude. lt is difficult to conceive that such could be the position in bw. Before maling rea~scs!>mcnt, the assessing authority hJs H•. undtr rule 33(1) framed under the Act, Ctlll upon the uo;c;css.:~ to priJJuce his books of ;~ccount and other documl!nts \\hi("h th~ " ~'c,~ing ~uthority may r~uire and any evidcm:o: '' hich the JeJkr may .,.. !"~ to produce in ~upp:)ft of his objection. When ~uch a nviH.:c ·'" ~>~ ucJ to the dealer, he may appear before the assessing :JLHlHJrtly Pn the date fixell in the notice and prefer his objections II I 015 C.S.T. V, H.M. ESUF".L! (H egde, J.) and p~oduce such evid~:1cc as he m (2) of rule 33 provides that if the a ay thrnk necessary. Sub-rule rhe notice under s.

33 (I ) the asse~s~~'See appears in response to assessment, if necessary o~ly after c~~m% a~thority may make ret<i by the dealer and ~fter examinin~ 51 er~ng t.he objections rais- . produced by him. Jt is important to~ ~uc e~rdence a~ may be ll the assessing authority is required to is~u~dhat Hl the notr7e which 1 6, the ex~ent of the escaped turnover as ~? t~e ~caler In form ing authonty has to be specified The es rmdate bY: the assess- 33 ld proce ure lard down in rue cou no ave een a mere empty f r assessee's contention is right in order t oesca ~rma lty. If the d d -: ' . p-. reassessment all that t e assessee nee o 1s to rgn_ore the notice issued under rule 33 ( 1) and refuse to ~o-operate wrth the assessing authority in the rca~sessment. proc_eedmgs. We are unable to accept that tha ·s the true posrtron rn law. t r. In our opinion the decision of th~ Andra Pradesh High Court 10 State of A ndhra Pradesh v. Bavun V. Narasimhan,(') relied on by the assessee was not correctly decided.

For the reasons mentioned above, we altow the;c appeals, vacate the answers given by the High Court to Que:;tions Nos. I and 3 and answer those questions in favour of the Department i.e, that the estimate of taxable turnover under the 'State Act and the 'Central Act' m:tde by the assessing authority for the . period from November l, 1959 to October 20, 1960 on the basis E of Rs. 31,171.28 as tlie escaped turnover for a period of 19 days was legal and justified and consequently the penalty of Rs. 2,000/- imposed on the assessee was in accordance with law. The asscss:e ~ shall pay the costs of the Department both in this Court and m the High Court. G.C. Appeals allowed. .16 S.T.C.5