Madras High Court
Vel Metal Industries vs The State Of Tamil Nadu on 20 January, 1987
Equivalent citations: [1988]68STC55(MAD)
ORDER Swamikkannu, J.
1. This is a revision case filed by M/s. Vel Metal Industries, questioning the order of the Tamil Nadu Sales Tax Appellate Tribunal, Coimbatore Bench, dated 18th July, 1978, passed in C.T.A. No. 210 of 1978, confirming the order of the Appellate Assistant Commissioner (CT) Vellore, North Arcot District, with respect to the assessment year 1976-77.
2. The revision petitioner herein did not report any turnover for the assessment year 1976-77. Accounts were called for and checked. It was found that the revision petitioner did not maintain a production-cum-stock account in form XXX as laid down in rule 26(14). No details were available to verify the actual stock of any particular date. A low gross profit of Rs. 386.32 was mentioned. So, the accounts were rejected and the assessing officer had chosen to add 20 per cent for probable omissions and also 20 per cent for gross profit and determined a total and taxable turnover as Rs. 52,071. The revision petitioner preferred an Appeal No. 876 of 1977 before the Appellate Assistant Commissioner, Salem and it was transferred to the file of the Appellate Assistant Commissioner, Vellore and numbered as Appeal No. 959 of 1977. The Appellate Assistant Commissioner did not agree with the contentions of the revision petitioner herein and dismissed the appeal. Aggrieved by the said order, the second appeal was preferred before the Tribunal. On the point whether the order of the Appellate Assistant Commissioner is liable to be set aside, the Tribunal came to the conclusion that the officers were justified in not giving a relief to be assessed under section 7 also and also rejecting the contention raised on behalf of the revision petitioner before it that there are circumstances warranting the assessing authorities as well as the lower appellate authority to assess on the basis of the "best judgment assessment". It is seen from the order of the Tribunal under revision that the Tribunal endorsed the opinion of the assessing authorities as well as the lower appellate authority that rule 26(14) of the Tamil Nadu General Sales Tax Rules, 1959 has not been complied with by the revision petitioner inasmuch as the revision petitioner has not maintained manufacturing-cum-stock account, as required by the said rule. It was contended on behalf of the revision petitioner hereinbefore the Tribunal that the total turnover is less than Rs. 50,000 and so the revision petitioner did not choose to maintain the required accounts. It is also the contention of the revision petitioner hereinbefore the Tribunal that the accounts maintained by the revision petitioner would enable anybody to verify the entire stock as per accounts, and that could be verified and tallied by taking the actual stock of materials available in the premises. But this contention was rejected by the Tribunal in its order under revision. It is admitted that the revision petitioner produced an account book which contained various items of expenditure, the sale products are realised on different dates, etc., page 7 of the account contained only one entry mentioning the opening stock of brass and aluminium, and the details were mentioned in pencil. Apart from that, at pages 12 and 20 of the entries in the account book, entries have been made in pencil regarding the purchase value of the brass and aluminium during the year. The sale value was deducted and the closing stock is available. The Tribunal has taken into account the failure to explain the pencil entries in the account books as a ground for rejecting the ground raised on behalf of the revision petitioner herein, before it. Apart from that, the Tribunal in its order has mentioned the entry at page 20 regarding the opening stock of aluminium as 42 kgs., to which the purchase of 277.020 kgs. was added as mentioned in page 51. A reference to page 51, according to the Tribunal, showed that there were only 2 items of purchases totalling to 238.320 kgs. There is another entry in pencil for 38.700 kgs. The Tribunal could not reconcile this entry inasmuch as it had interrogated itself as to the source regarding this particular entry which resulted in its rejection of the very accounts maintained and had given rise to a circumstance enabling it to assess the revision petitioner herein on the basis of the "best judgment assessment". Aggrieved by the conclusion arrived at by the Tribunal on the basis of its inference that normally, in this line of business, the gross profit vary from 20 per cent to 25 per cent; and especially when the revision petitioner has shown only 1 per cent gross profit, the Tribunal rejected the account maintained by the revision petitioner. The Tribunal has also observed that the contention that the revision petitioner herein is new in the business and so there is no profit cannot be accepted. The Tribunal further observed that the officers below have chosen to add only 20 per cent for probable omissions, and similarly the addition of 20 per cent towards gross profit is also normal in this line of business. According to the Tribunal, since the accounts have not been properly maintained, 20 per cent addition is very nominal, and so the revision petitioner herein is not entitled to any relief. So, the Tribunal confirmed the assessment made by the assessing authorities which in turn was confirmed by the Appellate Assistant Commissioner. Before the Tribunal it is urged that the revision petitioner was not even given an opportunity for assessment under section 7; but nowhere before the officer below and even before the Tribunal, the revision petitioner herein made a specific offer to be assessed under section 7 and therefore, the Tribunal held that the officers below were justified in not giving a relief to be assessed under section 7 also, and the Tribunal dismissed the appeal preferred by the revision petitioner.
3. Mrs. Chitra, Venkataraman, learned counsel for the revision petitioner herein, inter alia, contended that the Tribunal is not correct in confirming the orders of the assessing authority and the Appellate Assistant Commissioner. According to the learned counsel, the Tribunal failed to see that on its own comparison of entries found at pages 42 and 51 of the account books relating to purchase of 277.020 kgs. of aluminium, the purchases are correctly recorded and entered in the books. According to the learned counsel for the revision petitioner, the Tribunal erred in relying on pencil entries, which were made when ink was exhausted in the pen, as one of the grounds for rejecting the accounts, and that they are trivial and they do not warrant rejection of accounts. The learned counsel for the revision petitioner further contended that the Tribunal having practically found that the particulars of purchases, sales, opening and closing stock are substantial contents of the form of book prescribed under rule 26(14), ought to have held that the only alleged defect of low gross profit would not be the sole basis warranting rejection of accounts. The learned counsel for the revision petitioner further contended that the Tribunal's finding that the very fact that only a gross profit of 1 per cent shown is sufficient to prove that the accounts maintained are not acceptable, is unfounded on facts and cannot warrant rejection of accounts as held by this Court in Perianna Pillai & Co. v. Commissioner of Income-tax [1961] 42 ITR 370 and Ratna Cafe's case reported in [1974] 33 STC 39. It is also the contention raised on behalf of the revision petitioner that the Tribunal failed to consider the legal position that law does not oblige a trader to make a maximum profit out of his trading transactions as per the law laid down by the Supreme Court in Raman & Co.'s case, reported in [1968] 67 ITR 11. It is very much stressed on behalf of the revision petitioner that the revision petitioner is new to the business. It is also stressed on behalf of the revision petitioner that the Tribunal erred in misdirecting itself in law in rejecting the accounts on the sole ground of low gross profit position, when there was no positive purchase or sale suppression and when there was no stock discrepancy or any other similar irregularity was found at any time during any of the surprise inspections made in the business premises during the year under dispute. It is finally contended on behalf of the revision petitioner that the Tribunal erred in holding that the petitioner did not offer for compounding tax under section 7 at least before the Tribunal, and in this, the Tribunal has ignored the grounds of appeal raised before it. In other words, it is contended that the Tribunal erroneously decided the question of law as to taxation under section 7 in the instant case, and it failed to see that the revision petitioner could not have opted so before the assessing officer within the time prescribed.
4. In support of the contention raised on behalf of the revision petitioner, Mrs. Chitra Venkataraman, the learned counsel for the revision petitioner, refers to the decisions in R. M. P. Perianna Pillai & Co. v. Commissioner of Income-tax [1961] 42 ITR 370 (Mad.), Veeriah Reddiar v. Commissioner of Income-tax [1960] 38 ITR 152 (Ker) and State of Tamil Nadu v. Arulmurugan and co. [1982] 51 STC 381 (Mad.) [FB] at page 388.
5. The decision in Ramayana Printing Works v. State of Tamil Nadu [1985] 58 STC 133 (Mad.) is also referred to by the learned counsel for the revision petitioner for the proposition that section 7 of the Tamil Nadu General Sales Tax Act, 1959, by itself does not impose any time-limit for exercising the option to claim the benefit of assessment at compounded rate. Therefore the assessee can exercise the option within the reasonable time, and even after the deletion of sub-rule (4-B) of rule 15 of the Tamil Nadu General Sales Tax Rules, 1959, on 27th September, 1971 the assessee is entitled to exercise the option at any time before the final assessment.
6. Mr. K. S. Bakthavatsalam, learned Additional Government Pleader for the Revenue, has contended that in the instant case the facts clearly show that the "best judgment assessment" can be made. According to the learned Additional Government Pleader, inasmuch as no proper accounts have been maintained as per the compliance of rule 26(14), the "best judgment assessment" is warranted in the instant case, and the failure to maintain proper accounts together with 1 per cent profit shown in the accounts, are adequate reasons for rejecting the accounts and assessing the revision petitioner herein on the basis of the "best judgment assessment". According to the learned Additional Government Pleader, even with respect to a registered non-assessee, the accounts maintained by him should conform to the rules prescribed under the enactment. In this regard he has also taken through the contents of the letter written by the revision petitioner to the department.
7. The learned Additional Government Pleader has also relied on the decision in Commissioner of Sales Tax v. H. M. Esufali H. M. Abdulali , in support of his case that the assessment in the instant case cannot be said against law. In fairness the learned Additional Government Pleader brought to our notice the decision in Ravi v. State of Tamil Nadu [1981] 48 STC 274 (Mad.).
8. We have carefully gone through the facts in this case as well as the various points raised by the learned counsel for the revision petitioner as well as the contentions raised on behalf of the Revenue by the learned Additional Government Pleader.
9. The point that arises for consideration in this revision is whether the facts and circumstances in the case warrant a "best judgment assessment".
10. Rule 26(14) of the Tamil Nadu General Sales Tax Rules, 1959 reads as follows :
"26. (14) Every producer or manufacturer (other than a manufacturer of jewellery) shall maintain, in addition to the other accounts maintained in the usual course of his business and in accordance with the other sub-rules, an account in form XXX showing the production-cum-stock particulars of the raw materials used and the finished products manufactured by him :
Provided that a producer or manufacturer may maintain a production-cum-stock account in any other form so long as it contains all the substantial information that is required in form XXX prescribed in this sub-rule."
Proviso of rule 26(14) was added by S.R.O. No. A-270 of 1977 dated 2nd September, 1977, and the assessment in the instant case before us is 1976-77, and as such the said proviso is not applicable to the facts of the instant case before us.
11. In R. M. P. Perianna Pillai & Co. v. Commissioner of Income-tax [1961] 42 ITR 370 (Mad.) it was held that the system of accounting adopted by an assessee cannot be rejected under the proviso to section 13 of the Income-tax Act on the only ground that the gross profits disclosed by his books were low and compared unfavourably with those of others in the same line of business.
12. In Veeriah Reddiar v. Commissioner of Income-tax [1960] 38 ITR 152 (ker), the following observation at page 168 is relied on by the learned counsel for the revision petitioner in support of her contention :
"In Pandit Bros. v. Commissioner of Income-tax [1954] 26 ITR 159, the Punjab High Court has said :
'The wording of this proviso makes it quite clear that before the Income-tax Officer can reject the final statement of profit and loss given by the assessee he must either hold that there is no method of accounting or that the method employed is such that it does not disclose the true profits and losses of the firm ....... in this case there is no definite finding by the Income-tax Officer that the case falls within the proviso to section 13, for he does not say that the method of accounting employed by the assessee was such that in his opinion "the income, profits and gains could not properly be deduced therefrom". In the second place, even if such a finding were to be implied from his order it cannot be said that there was material before him which would enable him to come to this finding. The fact that the profits appeared to him to be insufficient and the fact that there was no stock register maintained by the assessee are not in my view materials upon which such a finding can be given, but these are circumstances which may provoke an enquiry. The Income-tax Officer must discover evidence or material aliunde before he can give such a finding.' If the assessee has regularly employed a method of accounting even if the profit as entered in his accounts is not the true profit, the Income-tax Officer will not, in the opinion of the Privy Council, be justified in rejecting his method of accounting. Their Lordships say in Commissioner of Income-tax v. Sarangpur Cotton Manufacturing Company Ltd. [1938] 6 ITR 36, 40 :
'............. the section relates to a method of accounting regularly employed by the assessee for his own purposes - in this case for the purposes of the company's business and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purposes the true figure can be accurately deduced therefrom. The simplest case would be where it appears on the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which, nevertheless, it is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Income-tax Officer as discretionary power.'"
13. With respect to the contention raised by the learned counsel for the revision petitioner regarding the jurisdiction of the appellate authority, she has relied on the decision in State of Tamil Nadu v. Arulmurugan and Co. [1982] 51 STC 381 (Mad.) [FB] at pages 388 and 389, which runs as follows :
"..... The jurisdiction of an appellate authority under the Tamil Nadu General Sales Tax Act, 1959, includes the power to confirm, reduce, enhance, or annul, the assessment. It also includes the power to set aside the assessment with a direction to the assessing authority to make a fresh assessment, and also to pass any other order which the appellate authority may think fit. These powers, which are of the widest amplitude, are expressly conferred both on the Appellate Assistant Commissioner and on the Appellate Tribunal, vide sections 31 and 36 of the Tamil Nadu General Sales Tax Act, 1959. The provisions show clearly that the power of the appellate authority concerning an assessment under appeal is no different, and not less wide, than the power of the assessing authority to make the assessment in the first instance. Besides, such power as the appellate authority is empowered to exercise in relation to an assessment under appeal, has got to be exercised only in the same manner and subject to the same conditions, if any, which govern the exercise of the power of assessment by the assessing authority in the first instance. It follows, therefore, that whatever discretion is conferred on the assessing authority for purposes of assessment must so be regarded, as a matter of statutory construction, to have been conferred on the appellate authority even without the concerned statutory provision expressly naming the appellate authority in that behalf. It goes without saying that an appellate authority, engaged as it is in precisely the same task under the fiscal statute as that of the assessing authority must also be possessed of like powers as those of the assessing authority. It is implicit in the very nature of the appellate jurisdiction, as well as the purposes for which that jurisdiction is created by the statute, that the appellate authority will have to function, in the very image of the assessing authority. Appellate proceedings are often truly described as an extension of the assessment proceedings, or as a continuation of the assessment proceedings. In this context, therefore, it does not matter that a power is conferred, by any provision in the taxing statute or in the statutory rules, eo nomine on the assessing authority, and is silent about the appellate authority or any other authority under the Act. Since the enabling section, or the rule, as the case may be, expressly refers to the assessing authority, as the repository of the power, it is elementary construction to hold that such power can be, and is intended to be, exercised by the assessing authority named in the particular provision concerned. But, it does not mean that the appellate authority and any other fiscal authority who are in seisin of the assessment, either in appeal, or in revision or in any other proceeding, cannot exercise a like power. The fact that the appellate authority is not expressly mentioned in the provision conferring the enabling power, does not mean that the legislature intended to exclude that authority from the purview of the provision."
14. In the instant case before us, we find that the gross profit is only Rs. 386.32 for the whole year, as seen from the order of the assessing authority, for a net purchase value of Rs. 36,160.26. A careful reading of the above decisions together with the decisions referred to by the learned Additional Government Pleader, we are inclined to hold that the percentage of profit, namely, 1 per cent in the instant case before us, though may be "trifling" for the assessing officer, cannot afford as a ground for coming to an irresistible conclusion that there has been sales suppression on the part of the revision petitioner. For the proposal on the part of the assessing officer to reject the accounts maintained by the revision petitioner herein, we find that no adequate reasons had been given by the assessing authorities as well as by the lower appellate authority as well as by the Tribunal which is the final fact finding authority. It is also relevant to note that there is no finding that the purchases in the transactions were inflated or the sales were suppressed.
15. In Commissioner of Sales Tax v. H. M. Esufali H. M. Abdulali , it was held that in estimating any escaped turnover, it is inevitable that there is some guess-work. The assessing authority while making the best judgment assessment, no doubt, should arrive at his conclusion without any bias and on a rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima, facie, the assessing authority is the best judge of the situation. It is his best judgment and not anyone else's. The High Court cannot substitute its best judgment for that of the assessing authority. The Supreme Court also held that penalty of Rs. 2,000 imposed on the footing of the revision of of the amount of turnover for the whole year was justified.
16. We have also seen the reply given by the revision petitioner for the pre-assessment notice that was given to her in this regard.
17. In the instant case before us, it is relevant to note that there had been no adequate ground for rejecting the accounts and as such there is no justifiable reason for resorting to best judgment assessment in the instant case before us.
18. In Ravi v. State of Tamil Nadu [1981] 48 STC 274 at page 276, it was observed by this Court as follows :
"...... A look at the trading account leaves us an impression that the assessing officer seems to have an unreasonable suspicion and there was no real basis for rejection of the return submitted by the assessee. It may also be pointed out that neither the assessing officer nor the appellate authorities have found any particular sale or purchase omission. It is only on the general impression that 20 per cent profit should have been derived by the assessee that the account books were rejected and the taxable turnover was determined at best of judgment basis. Even for adopting 20 per cent as the normal gross profit for such transaction, we do not have any evidence or comparable date with reference to the business of other dealers in this line. This Court has been repeatedly pointing out that even a best judgment assessment cannot be a wild guess but a reasonable and justifiable guess based on some material at least. As we have pointed out earlier, in this case there was absolutely no material by which one can justifiably say an addition of 20 per cent to the purchase turnover was reasonable. Further, in the Full Bench judgment in Kathiresan Yarn Stores v. State of Tamil Nadu [1978] 42 STC 121 this Court had held that the mere fact that there is a best judgment assessment, particularly when the assessment is based on the inference flowing from the inability of the assessee to establish the case pleaded by him, will not be sufficient for the purpose of imposition of penalty, for the degree of proof required for the imposition of penalty is quite different from and is of a much higher order than that required for the purpose of making a best judgment assessment. The Full Bench further observed that though an estimate made on best judgment basis may be legal, for the purpose of imposing penalty something more concrete is required which would enable the judicial mind to reach the conclusion that the dealer actually had the turnover which was fixed by best judgment. As we have already pointed out, no such material is available for us to conclude that there was any wilful suppression of the taxable turnover warranting a penalty under section 12(3). Therefore, the order of the Tribunal imposing penalty is not sustainable and accordingly we set aside the penalty and allow the tax revision case."
19. On a careful and anxious scrutiny of the entire facts in the instant case before us, we do find that there is absolutely no real basis for rejection of the accounts maintained by the revision petitioner herein, and there is also no ground warranting for a "best judgment assessment". In view of the decision arrived at by us with regard to this aspect, we do not find any necessity to discuss the second point raised on behalf of the revision petitioner.
20. In the result, we allow the tax revision case and set aside the order of the assessing officer as confirmed by the Appellate Assistant Commissioner and the Tribunal. Under the circumstances, there is no costs.
21. Petition allowed.