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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • K. Govinda Rao for Petitioners
  • Govt. Pleader
  • Andhr
Judges
  • K. Subba Rao, C.J
  • Satyanarayana Raju, J.
Acts
  • Section 6(1).7. Rule 11(3) of the same Rules
  • Rule 30 of the General Sales-Tax Rules
  • Sec. 23(4) the Income-tax Act
  • colleagues.6. Rule 8
  • sub-rule (1)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • K. Govinda Rao for Petitioners
  • Govt. Pleader
  • Andhr
Judges
  • K. Subba Rao, C.J
  • Satyanarayana Raju, J.
Acts
  • Section 6(1).7. Rule 11(3) of the same Rules
  • Rule 30 of the General Sales-Tax Rules
  • Sec. 23(4) the Income-tax Act
  • colleagues.6. Rule 8
  • sub-rule (1)
See more information ...
Smart Summary

Structured Summary of the Opinion (Satyanarayana Raju, J.)

Factual and Procedural Background

The revision arises from a challenge by the assessees (a firm of kirana dealers at Eluru) to the Sales Tax Appellate Tribunal's decision in T.A. No. 225-A of 1953. For the assessment year 1952–1953 the firm returned a total turnover of Rs. 6,35,122/-, split between a wholesale department (Rs. 1,44,442/-) and a partly wholesale/partly retail department (Rs. 4,90,680/-). A Special Assistant Commercial Tax Officer's inspection discovered sales recorded on slips of paper that were not included in accounts: three such sales for 1952–1953 and more than 70 similar entries for 1953–1954. The Deputy Commercial Tax Officer (D.C.T.O.) issued a best-of-judgment assessment under the Sales Tax Turnover and Assessment Rules, adjusting the turnover by adding an estimated value for 10 bags of sugar and adding 6.5% for alleged incorrect maintenance of accounts, producing a net turnover of Rs. 6,77,336-13-6 and tax of Rs. 10,583-6-3.

The assessees appealed. The Commercial Tax Officer (C.T.O.) partly allowed the appeal, holding that the D.C.T.O. was not justified in using material from 1953–1954 to enhance the 1952–1953 turnover, and restricted the 6.5% addition to retail turnover, fixing the addition at Rs. 31,893. The Sales Tax Appellate Tribunal, by a majority, reduced the addition to 5% (fixing an addition of Rs. 24,534-0-2 in place of Rs. 31,893); the Chairman dissented, finding no data to justify either 6.5% or 5% additions. The assessees filed this revision against the Tribunal's decision.

Legal Issues Presented

  1. Whether the assessing authority may lawfully determine turnover or estimate a rate of gross profit “to the best of his judgment” under Rule 8/Rule 11(3) of the Sales Tax Turnover and Assessment Rules on the basis of surmise or conjecture, or whether such an estimate must be supported by material obtained after making the statutory enquiry.
  2. Whether it was proper for the D.C.T.O. to utilise material from the subsequent year (1953–1954) to enhance the turnover for 1952–1953.
  3. Whether Rule 30 of the General Sales-Tax Rules prohibits disclosing the assessment basis (including assessments or profit rates of other, similarly situated trades) to the assessee such that the assessee cannot be informed of or rebut the comparative material relied upon by the assessing authority.
  4. Whether the Sales Tax Appellate Tribunal and the assessing authority acted lawfully in fixing additions to turnover (6.5% by D.C.T.O., 6.5% restricted by C.T.O., and 5% by Tribunal majority) in the absence of disclosed material or a proper enquiry.

Arguments of the Parties

Assessees / Appellants

  • The assessees challenged the enhanced assessment for 1952–1953, implicitly contending that not all sales discovered by inspection were correctly brought into account and that the use of material (including numerous slips) should not justify an arbitrary uplift without proper enquiry and opportunity to rebut. (The record shows they filed a reply to the D.C.T.O.'s notice; they also appealed the assessment.)
  • Implicit in the appeal to the C.T.O. was a contention that the D.C.T.O. was not justified in using material from 1953–1954 to enhance the assessment for 1952–1953 and that the 6.5% addition for incorrect maintenance of accounts was excessive when applied to the whole turnover.

Assessing Authority / Appellate Authorities (positions reflected in their orders)

  • D.C.T.O.: Added 6.5% to turnover on account of "incorrect maintenance of accounts" and the finding that assessees did not show reasonable profit (stating reasonable profit should be at least 12%).
  • Commercial Tax Officer: Held that it was unjust and unwarranted for the D.C.T.O. to utilise 1953–1954 material to enhance 1952–1953 turnover; restricted the 6.5% addition to retail sales and fixed the addition at Rs. 31,893.
  • Sales Tax Appellate Tribunal (majority): Reduced the addition to 5% for estimated suppression, because neither the appellant nor the State could supply a detailed analysis separating wholesale and retail turnover; concluded 5% met the ends of justice and fixed the addition accordingly. (Chairman dissented, stating no data justified either 6.5% or 5%.)

Respondent / Government Pleader

  • Argued that Rule 30 of the General Sales-Tax Rules prohibits disclosure of particulars furnished by other assessees, and relied on the Privy Council decision in Commissioner of Income-Tax v. Badridas Ramrai Shop (1937 2 M.L.J. 43) to contend that there is no duty on the assessing authority to disclose the information on which a best-of-judgment assessment is based.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner of Income-Tax, United and Central Provinces v. Badridas Ramrai Shop, Akola (1937 2 M.L.J. 43) (Privy Council) Principle that an officer making an assessment ex parte under statutory provisions must exercise honest judgment; local knowledge and previous returns may be considered; the officer need not conduct or record a local inquiry; some guess-work is inevitable but must be "honest guesswork". The Government Pleader relied on this passage to argue there is no duty to disclose the information forming the basis of an estimate. The court distinguished Badridas Ramrai on the basis that Rule 8 of the Turnover and Assessment Rules obliges the assessing authority to make an enquiry before determining turnover, so the assessing authority here could not simply rely on undisclosed material without following the enquiry procedure required by the Rules.
Dhakeswari Cotton Mills v. Commissioner of Income Tax, West Bengal (Supreme Court) Criticism of assessments and Tribunal estimates based on surmise, suspicion and conjecture; expectation that material relied upon should be shown to the assessee and the assessee given an opportunity to rebut. The court relied on this authority to support its conclusion that both the assessing authority and the Tribunal in the present case estimated gross profit rates on surmise rather than on material, and that the assessing process should have provided the assessee an opportunity to consider and rebut any comparative information relied upon.

Court's Reasoning and Analysis

The court's reasoning proceeds from the statutory framework set out in the Sales Tax Turnover and Assessment Rules (notably Rule 8 and Rule 11(3)) and the confidentiality rule in Rule 30 of the General Sales-Tax Rules. The key analytical steps in the opinion are:

  1. Interpretation of Rule 8 and Rule 11(3): The court emphasises that under Rule 8 the assessing authority "shall, after making such enquiry as he considers necessary, determine the turnover of the dealer to the best of his judgment," and under Rule 11(3) the final assessment must follow the procedures of Rules 8 and 9. The court reads these provisions to require an enquiry and material basis before the assessing authority determines turnover — the determination cannot be mere guess-work.
  2. Requirement for material basis: The court states that an estimate of gross profit or turnover must rest upon some material which furnishes a basis for the estimate. If the assessing authority proposes to estimate profit on the basis of profits earned by similar trades, it must inform the assessee that such comparative profit rates have been used and give the assessee an opportunity to contest them.
  3. Analysis of the actual assessments: The court observes that neither the D.C.T.O. nor the Tribunal explained the material on which they based their profit-rate estimates (6.5%, 6.5% limited to retail by the C.T.O., or 5% by the Tribunal majority). The court finds that the estimates appear to be based on "mere surmise and conjecture" rather than on disclosed material obtained after enquiry.
  4. Treatment of Rule 30 (confidentiality): The Government Pleader relied on Rule 30 to claim prohibition on disclosure of particulars from other assessees. The court analyses Rule 30 and concludes that it does not prohibit disclosure of the ultimate orders of assessment made on other assessees. Rule 30 protects statements, returns, documents and records produced in proceedings, but it does not bar informing an assessee that similarly situated trades have been taxed on a particular percentage of profit. Accordingly, Rule 30 does not justify withholding the basis of comparative estimates from the assessee.
  5. Distinguishing Privy Council authority: The court considers the Privy Council's observations in Badridas Ramrai (that an officer making an ex parte assessment need not conduct or record a local inquiry) but distinguishes that authority on the facts: Rule 8 here makes an enquiry obligatory before determining turnover, so the assessing authority's duty here is different from the position in Badridas Ramrai.
  6. Reliance on Supreme Court authority: The court cites Dhakeswari Cotton Mills to underline that estimates founded on surmise and conjecture (and where the assessee is not shown the comparative information) are impermissible. It adopts the view that the assessing process must provide transparent basis and opportunity to the assessee to rebut.
  7. Conclusion from analysis: On the facts of the present case the court finds that both the assessing authority and the Tribunal acted on pure surmise in estimating gross profit rates. Because the estimates lacked disclosed material and the statutory enquiry procedures were not effectively satisfied, the court concludes that the Tribunal's order cannot stand.

Holding and Implications

Holding: Revision allowed; the order of the Sales Tax Appellate Tribunal is set aside and the case is remanded to the Tribunal for fresh consideration in accordance with the directions given by this court.

Implications and immediate consequences:

  • The Tribunal is directed to arrive at any estimate of gross profit only after giving the assessee full opportunity to place relevant material on the point. The assessing authority (D.C.T.O.) is permitted to produce evidence or material supporting the previous estimates, but such material must be placed before the assessee so that the assessee can rebut it.
  • The Tribunal may, if it thinks fit, remit the matter to the D.C.T.O. for a fresh assessment after taking further evidence from the assessee or the Department.
  • The costs of the revision are to abide the result of the appeal before the Tribunal; advocate's fee fixed at Rs. 100/-.
  • The court did not purport to lay down a new general precedent beyond applying the existing principles that an assessing authority must base an estimate on material obtained after an enquiry and that estimates based on mere conjecture are impermissible; the decision's practical effect is to require proper enquiry, disclosure of comparative bases relied upon, and opportunity to the assessee to rebut.

Note: This summary is limited to the information contained in the provided opinion and does not add or infer facts beyond that text.

Show full summary ...

    Madupalli Anjaneyulu & Co. Eluru v. State Of Andhra

    Satyanarayana Raju, J.:— This is a revision filed by the assessees against the decision of the Sales Tax Appellate Tribunal in T.A No. 225-A of 1953.

    2. The petitioners are a firm of dealers in kirana articles at Eluru. They have two departments of trade, one wholesale and the other partly wholesale and partly retail. For the year of assessment 1952-1953, they submitted a total turnover of Rs. 6,35,122/-, made up of Rs. 1,44,442/- from the wholesale department and Rs. 4,90,680/- from the partly wholesale and partly retail department. The petitioners' shop was inspected by the Special Assistant Commercial Tax Officer and he found that all the sales were not brought into account. He discovered three sales written on slips of paper in the year 1952-1953, which did not find a place in the accounts. For the year 1953-1954, he found that such sales written on slips of paper, but which were not brought into account, were more than 70 in number. A notice was issued that the net turnover would be determined to the best of judgment. The petitioners sent their reply to the notice. After the reply was received, it was considered and the D.C.T.O, in his order of assessment, determined the net turnover finally for 1952-1953 as follows:—

    Rs. A. P. 1. Gross turnover as per the accounts 9,30,559 13 6 2. Deduct the sales of taxed tobacco and return goods. 2,95,438 0 0 3. Balance. 6,35,121 13 6 4. Add the estimated value of 10 bags of sugar which were sold and which were not shown as sold at Rs. 87-8-0 a bag… … 875 0 0 5. Total. 6,35,996 13 6 6. Add 6.5% for incorrect maintenance of the accounts on account of the reasons stated above…… 41,340 0 0 7. Net turnover. … … 6,77,336 13 6

    3. The petitioners were finally assessed on this turnover to a sales tax of Rs. 10,583-6-3.

    4. The assessees preferred an appeal to the Commercial Tax Officer. The Commercial Tax Officer held that the D.C.T.O, was not justified in utilising the material relating to 1953-1954 for enhancing the turnover of 1952-1953. He characterised this as both unjust and unwarranted and allowed the appeal in part. While the D.C.T.O, estimated the margin of profit for the business of the petitioners at 12 per cent the Commercial Tax Officer added the difference of 6.5 per cent (the difference between the actual profit shown as per the accounts and the estimated profit of 12 per cent). The Commercial Tax Officer restricted the addition of 6.5 per cent to the turnover of retail sales and fixed the addition of Rs. 31,893 as against Rs. 41,340 adopted by the Deputy Commercial Tax Officer.

    5. By a majority judgment, the Sales Tax Appellate Tribunal held that the addition of 5 per cent profit would meet the ends of justice and accordingly fixed an addition of Rs. 24,534-0-2 in the place of Rs. 31,893/- estimated by the Commercial Tax Officer. The Chairman of the Sales Tax Appellate Tribunal, in a dissenting judgment, held that there was no data made available justifying the addition of either 6.5 per cent by the Commercial Tax Officer or the addition of 5 per cent instead by his colleagues.

    6. Rule 8 of the Sales Tax Turnover and Assessment Rules reads as follows;

    “If no return is submitted by the dealer as required by Rule 6 or if the return submitted by him appears to the assessing authority to be incorrect or incomplete, the assessing authority shall, after making such enquiry as he considers necessary, determine the turnover of the dealer to the best of his judgment, and fix provisionally the annual tax or taxes payable at the rate or rates specified in Section 3 or 5 or notified under Section 6(1).”

    7. Rule 11(3) of the same Rules provides as follows:

    “If no return is submitted or if the return submitted appears to the assessing authority to be incorrect or incomplete, the assessing authority may, after following the procedure prescribed in Rules 8 and 9, finally assess the tax according to the best of his judgment.”

    8. In fixing the amount of Rs. 41,340/- by the addition of 6.5 per cent the D.C.T.O, gave the reason for the addition as “incorrect maintenance of accounts on account of the reasons stated above,” the reasons given above being that the assessees did not show reasonable profit which should be 12 per cent at least. In appeal, the C.T.O, disposed of the matter in these words:

    “In addition the rate of profit in retail kirana business will be 12% and the addition in that respect is not excessive. But the D.C.T.O estimated the profit for the entire turnover. I am restricting it to the retail business only. The turnover is refixed as below:

    “3. Add. 6.5% of item 2 for the irregularities etc. … Rs. 31,893-0-0”

    9. The material portion of the judgment of the majority of the Sales Tax Appellate Tribunal fixing 5 per cent may be stated here.

    “If the turnover of Rs. 4,90,680-3-3 according to the Commercial Tax Officer is partly wholesale and partly retail, it is difficult to support the addition of 6.5%, for an estimated suppression of the turnover. The appellant has not been in a position to give a detailed analysis of the two types of turnover ‘wholesale’ and ‘retail’ involved in this figure of Rs. 4,90,680-3-3. The State Representative also is unable to help us in this analysis. We have therefore no alternative but to fix up a reasonable percentage, for an estimated addition. Taking all the facts into consideration, we are of opinion that the addition of 5% meets the ends of justice. We accordingly fix an addition of Rs. 84,534-0-2 in place of Rs. 31,893/- estimated by the Commercial Tax Officer.”

    10. It is not clear from any of these orders on what material the estimate of profit is based. Rule 8 of the Turnover and Assessment Rules, above set out, provides that “the assessing authority shall, after making such enquiry as he considers necessary, determine the turnover of the dealer to the best of his judgment.” Rule 9 provides that before taking action under Rule 8, the assessing authority shall issue a notice to the dealer calling upon him to produce his accounts and prove the correctness and completeness of his return. It is true that such a notice has been given in this case. Rule 11(3) provides that after following the procedure prescribed in Rules 8 and 9, the assessing authority may finally assess the tax according to the best of his judgment, under Rule 8, there must be an enquiry and on such enquiry the authority must determine the turnover of the dealer to the best of his judgment. What does the word ‘determine’ there mean? The determination provided under Rule 8 cannot be mere guess-work. There must be some material before the assessing authority which must furnish the basis for the estimate of the profit. The estimate of the gross profit on sales both by the D.C.T.O and the Appellate Tribunal is based on mere surmise and conjecture. If the estimate of the profit is made on the basis of the profit earned by similar trades, similarly situated and circumstanced, then it is the duty of the assessing authority to intimate the assessee that the profit earned in trades similarly situated and circumstanced is so much and give notice to the assessee why his profit should not similarly be estimated.

    11. The learned Government Pleader cited before us Rule 30 of the General Sales-Tax Rules as containing a prohibition on the assessing authority from disclosing the particulars furnished by other assessees. Rule 30 provides as follows:

    “30(1) All particulars contained in any statement made, return furnished or accounts or documents produced under the provisions of the Act or of the rules made thereunder, or in any evidence given or affidavit or deposition made in the course of any proceeding under the Act or the rules made thereunder or in any record of any proceeding relating to the recovery of a demand, prepared for the purpose of the Act or the rules made thereunder, shall be treated as confidential and shall not be disclosed.”

    “(2) Nothing in sub-rule (1) shall apply to the disclosure—

    “(i) of any such particulars for the purpose of a prosecution under the Indian Penal Code in respect of any such statement, return, account, documents evidence, affidavit, or deposition or for the purpose of a prosecution, under the Act or the rules made thereunder…”

    12. Nowhere in Rule 30 is there any prohibition against the disclosure of the ultimate order of assessment made on other assessees. What all is prohibited under Rule 30 is the disclosure contained in a statement in the course of any proceeding or any record of any proceeding relating to the recovery of a demand, prepared for the purpose of the Act or the rules made thereunder. The assessment order is not the record of the assessee. We are not convinced that there is any prohibition in Rule 30 from giving intimation to the assessee that trades similarly situated and circumstanced have been taxed on the basis of a particular percentage of profit.

    13. The learned Government Pleader relied upon the following passage from the judgment of the Privy Council in Commissioner of Income-Tax, United and Central Provinces v. Badridas Ramrai Shop, Akola 1937 2 M.L.J 43..

    “The officer is to make an assessment to the best of his judgment against a person who is in default with regard to supplying information. He must not act dishonestly, 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 assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and although there must necessarily be guess-work in the matter it must be honest guesswork. In that sense, too, the assessment must be to some extent arbitrary. Their Lordships think that the section places the officer in the position of a person whose decision as to amount is final and subject to no appeal; but whose decision, if it can be shown to have been arrived at without an honest exercise of judgment, may be revised or reviewed by the Commissioner under the powers conferred upon that official by Sec. 33.

    “Their Lordships can find no justification in the language of the Act for holding that an assessment made by an officer under Sec. 23(4) without conducting a local inquiry and without recording the details and results of that inquiry cannot have been made to the best of his judgment within the meaning of the section. Nor can they find any such justification in the authorities upon which the Judicial Commissioners appear to have relied.”

    14. Relying upon these observations of Lord Russell of Killowen, the learned Government Pleader contends that there is no duty cast upon the assessing authority to disclose the information which formed the basis of the estimate of profits made by the assessee. Their Lordships of the Privy Council pointed out that in making an assessment ex parte under Sec. 23(4) the Income-tax Act imposed no obligation on the Income-tax Officer either to conduct any kind of local enquiry or to record a note of the details and results of that enquiry. But Rule 8 of the Turnover and Assessment Rules makes it obligatory on the assessing authority to make an enquiry before he determines the turnover of the dealer to the best of his judgment. Rule 11(3) also casts a duty on the assessing authority to follow the procedure prescribed in Rules 8 and 9 before making a final assessment. Their Lordships of the Privy Council pointed out that although there must necessarily be guess-work in the matter, in must be honest guess-work. Honest guess-work does not mean that the assessing authority can make a dogmatic assertion that there must have been a profit of 12 per cent.

    15. It has been pointed out by the Supreme Court in Dhakeswari Cotton Mills v. Commissioner of Income Tax, West Bengal as follows:—

    “The estimate of the gross rate of profit on sales, both by the Income-tax Officer and the Tribunal seems to be based on surmises, suspicions and conjectures. It is somewhat surprising that the Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills without showing that statement to the assessee and without giving him an opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It is not known whether the mills which had disclosed these rates were situate in Bengal or elsewhere, and whether those Mills were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the appellant, but it refused even to look at the trunk load of books and papers which Mr. Banerjee produced before the Accountant-Member in his chamber……………We think that both the Income-tax Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion.”

    16. We hold that in the instant case, both the assessing authority and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure surmise.

    17. In the result, we allow this revision, set aside the order of the Tribunal and remand the case to it with a direction that in arriving at its estimate of gross profit it should give full opportunity to the assessee to place any relevant material on the point. It will be open to the assessing authority to place any evidence or material to support the estimate made by the D.C.T.O or by the Tribunal in its judgment. The Tribunal may, if it thinks fit, remit the case to the D.C.T.O for making a fresh assessment after taking such further evidence as is furnished by the assessee or the Department. The costs of the revision will abide the result of the appeal before the Tribunal. Advocate's fee fixed at Rs. 100/-.

    T.A.B

    18. Revision allowed.

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    Comments

    Madupalli Anjaneyulu & Co. Eluru v. State Of Andhra
    (Sep 8, 1955)