STATE OF KERALA V. C. VELUKUTTY (1966) LX ITR 239 (SC)

STATE OF KERALA V. C. VELUKUTTY (1966) LX ITR 239 (SC)

FACTS

• The case involves two appeals against the High Court of Kerala's order on Tax Revision Cases relating to sales tax assessments for the years 1955-56 and 1956-57.
• The respondent operated two offices in Kozhikode- a head office at Court Road and a branch office at Big Bazar.
• The branch office engaged in wholesale business, while the head office handled retail business. They maintained separate accounts.
• Goods transferred from the branch office to the head office were recorded as transfers in the accounts.
• A surprise inspection of the head office revealed some secret books and records.
• Based on the discovered secret books, the Sales Tax Officer issued notices proposing best judgment assessments.
• The respondent agreed to the reassessment of the head office and objected to a reassessment of the branch office turnover.
• The Sales Tax Officer applied a percentage increase from discovered turnover to both offices.
• The respondent's appeals to the Appellate Assistant Commissioner and Sales Tax Appellate Tribunal were unsuccessful.
• The High Court set aside the Sales Tax Tribunal's orders for both assessment years, citing errors of law and conjecture.
• The State appealed against the High Court's decision in Supreme Court.

STATE'S ARGUMENT (MR. GOVINDA MENON)

• Contended that the branch office likely maintained secret accounts like the head office, suggesting suppression of accounts by the respondent.
• Asserted that the Sales Tax Officer acted reasonably in assessing escaped turnover based on the percentage of turnover found in the head office's secret accounts.
• Argued that the High Court exceeded its jurisdiction by interfering with the Tribunal's findings of fact.

RESPONDENT'S ARGUMENT (MR. SREEDHARAN NAMBIAR)

• Argued that there was no basis for the Sales Tax Officer's assumption of separate accounts for the branch office.
• Contended that there was insufficient material to support the best judgment assessment.
• Asserted that the assessment was capricious and arbitrary, leading to its rightful dismissal by the High Court.

ISSUE

• Whether the Sales Tax Officer's best judgment assessment was justified under section 12(2)(b) of the Travancore-Cochi General Sales Tax Act. [Correspondence to sec 144 of ACT,1961]

RULE

• Section 12 of Travancore-Cochi General Sales Tax Act – (1) Every dealer whose turnover is ten thousand Indian rupees or more in a year shall submit such return or returns relating to his turnover, in such manner and within such periods as may be prescribed. 

2(b) If no return is submitted by the dealer under sub-section 1) before the date prescribed or specified in that behalf or if the return submitted by him appears to the assessing authority to be incorrect or incomplete, the assessing authority shall assess the dealer to the best of his judgment.

• Best judgment assessment must be based on relevant material and exercise of sound judgment. It may involve some guesswork but must not be capricious or arbitrary.
• Assessment should have a reasonable nexus to available material and circumstances.

HELD

• In Commissioner of Income Tax v. Laxminarayan Badridas (1937) 5 I.T.R. 170 (PC), The Privy Council observed that the assessing authority must not act dishonestly, vindictively, or capriciously. The assessment must be based on an honest estimate of the proper figure of assessment, taking into consideration relevant material.
• Doma Sahu Kishun Lal Sao v. State of Bihar (1951) 2 S.T.C. 37 (Patna HC): The court refused to interfere with a best judgment assessment as the assessing authority took into consideration relevant material such as shop situation, customer rush, and stock.
• The mere existence of secret accounts in the branch office did not establish that all transactions were accounted for.
• Other potential sources of information, such as records of dealings with other customers, could have been used for assessment purposes.
• Lack of relevant material before the assessing authority to support the impugned assessments.
• The application of a ratio between disclosed and concealed turnover from one shop to another was deemed arbitrary and unsupported by sufficient evidence.
• The High Court's decision to set aside the orders of the Tribunal was upheld by the Supreme Court.

COMMENTARIES RATIO/NOTE

• Best judgment estimates. —In taxation laws of this country, assessment by best judgment as a distinct category of power has come into practice and wherever the Legislature thought fit, it expressly conferred that power upon the assessing authority [ S. Subramaniam Chettiar v. Jt. CTO, (1966) 18 STC 357 [LNIND 1966 MAD 92] (Mad—FB) ]. Where the best judgment assessment power has been conferred, the limits of the power are implicit in the expression "best of his judgment". 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. 
• Similarly, an estimate cannot be based on entries found in the records of third party until and unless the assessee is given an opportunity of cross-examining the third party [CST v. Jain Shudh Vanaspati Ltd.,(1989) 72 STC 62 [LNIND 1988 ALL 144], 66 (All) ]. However, where the assessee does not choose to avail such opportunity to cross-examine the third party, he cannot complain of violation of principles of natural justice [ Pappanna & Bros. v. CCT, (1990) 79 STC 177, 183 (Karn) ].
• A tax officer, who makes a best judgment assessment, should make an intelligent well-grounded estimate rather than launch upon pure surmises [M. Hasan v. New Gramophone House,AIR 1977 SC 1788 = (1977) Tax LR 2224 (SC) ].
• The estimates, even in a best judgment assessment, must be based on legal and not on mere hearsay evidence [Baijnath v. CIT,AIR 1926 Lah 233 = 2 ITC 176 ] and not purely on the Officer’s private opinion to the exclusion of the material before him [Muhammad Hayat v. CIT, AIR 1931 Lah 87 = 5 ITC 159 ]. Such an assessment cannot be based on mere conjecture or suspicion [Chouthmal Agarwalla v. CIT, (1962) 46 ITR 262 (Assam) ; Kodidasu Appalaswamy v. CIT, (1962) 46 ITR 735 (AP) ].