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K. Mohan And Co. (Exports) v. M.H Vatnani, Assistant Commissioner Of Sales Tax And Others

Bombay High Court

Jan 9, 2002

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

The petition challenges a notice dated August 4, 1987 issued under section 35 of the Bombay Sales Tax Act, 1959 (the "BST Act") purporting to reopen the assessment for the period 1 September 1978 to 31 August 1979. Petitioner No. 1 is a registered partnership firm engaged in manufacture, sale and export of garments and resale of dyes and chemicals. Returns under both the BST Act and the Central Sales Tax Act, 1956 (the "CST Act") were filed for the relevant period and assessments under both Acts were passed on 29 March 1982.

In the CST assessment (exhibit B), high seas sales (sales by transfer of documents before goods crossed customs frontier) were allowed at Rs. 62,35,943 under section 5(2) of the CST Act. In the BST assessment (exhibit A), sales exempt under section 75 were determined at Rs. 5,99,92,392 and also included the Rs. 62,35,943 allowed under section 5(2) CST.

The respondents issued a reassessment notice in Form No. 28 under section 35 of the BST Act read with rule 34 of the BST Rules, 1959, on the ground that the deduction of high seas sales of Rs. 62,35,943 had been wrongly allowed under section 5(2) CST. The petitioners objected by letters dated 7 September 1987 and 26 October 1987, raising jurisdictional and limitation objections and other infirmities; no substantive reply was received and this petition followed.

Legal Issues Presented

Whether the reassessment notice issued under section 35 of the BST Act after almost eight years from the end of the assessment year is valid in the absence of material satisfying section 35(1)(b) (i.e., reason to believe of concealment of sales or knowingly furnished inaccurate returns).
Whether the reopening of assessment under the BST Act is maintainable when the parallel CST Act assessment (which allowed the same deduction) had not been reopened and had become final.
Whether a change of opinion based on scrutiny of documents already on file (i.e., doubt or suspicion arising from existing records) can amount to the "reason to believe" necessary to invoke the extended 8-year jurisdiction under section 35(1)(b) of the BST Act.
Procedural/ancillary issue raised by the petitioners: whether the notice is barred by limitation and whether allowing reassessment would prejudice the petitioners because they had not preserved all books beyond five years as required under section 54 of the BST Act.

Arguments of the Parties

Petitioners' Arguments

The notice dated 4 August 1987 was without jurisdiction and barred by limitation.
No reasons were given that justified reopening the assessment under section 35; there was no material to show concealment or knowingly furnishing inaccurate returns as required for invoking the extended 8-year period under section 35(1)(b).
In the absence of withdrawal or reassessment of the deductions granted under the CST Act, it was impermissible to reopen the BST assessment on the basis of an alleged wrong deduction under the CST Act.
Under section 54 of the BST Act, books of accounts and registers had to be preserved for five years; because the notice was issued beyond five years and the petitioners had not preserved all books (only ledger and cash book remained), proceeding with reassessment would seriously prejudice them.

Respondents' Arguments / Case as Stated in Affidavits

In an affidavit-in-reply (filed 21 November 1987) M.H. Vatnani (Assistant Commissioner of Sales Tax) stated the assessing officer had reason to believe the assessee knowingly furnished incorrect returns because, during a raid in February 1983, the petitioner allegedly admitted dealings with bogus parties and admitted part liability for dealings in the assessment year 1978–79. The affidavit also stated audit objections to the deductions under section 5(2) CST because proof of transfer of documents before the goods crossed customs frontiers was not produced.
The petitioners denied the alleged admissions in an affidavit-in-rejoinder (12 January 1988).
After being ordered to disclose actual reasons, Shri P.N. Khopade (Sales Tax Officer) filed a further affidavit (10 December 2001) stating there was doubt whether the sales occurred before goods crossed customs frontiers; a letter dated 6 June 1984 asked the petitioner why those sales should not be treated as local sales; the petitioner’s reply was not satisfactory; and the reason recorded for reopening was that deduction under section 5(2) CST was wrongly allowed to the extent of Rs. 62,35,943.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Crompton Greaves Ltd. v. State of Gujarat, [2000] 120 STC 510 (Gujarat High Court)	That where conditions precedent for invoking jurisdiction after 5 years are not fulfilled, reassessment is invalid; the statutory language requires a "reason to believe" (not merely "reason to suspect"). Reopening based on doubt, conjecture or surmise is not covered by the extended jurisdiction provision.	The court referred to and relied on the principle that doubt or suspicion based on existing records is insufficient to invoke section 35(1)(b) and used this reasoning to support the conclusion that the notice, founded on such doubt from records, could not validly reopen the assessment.

Court's Reasoning and Analysis

The court proceeded by reference to the statutory framework and the facts disclosed by the papers and affidavits:

Statutory threshold: Section 35(1) of the BST Act permits reopening within 5 years; section 35(1)(b) extends the period to 8 years but only if the officer has "reason to believe" that the dealer has concealed sales or knowingly furnished inaccurate returns. Because the notice was issued almost eight years after the end of the assessment year, the respondents bore the burden of showing facts satisfying section 35(1)(b).
Nature of the impugned ground: The reopening notice stated it was issued because deduction of high seas sales of Rs. 62,35,943 was wrongly allowed under section 5(2) of the CST Act.
Finality of CST assessment: The assessment under the CST Act (which allowed the high seas sales deduction) had not been reopened and had become final. The court noted that the same authority who issued the BST reopening notice could have reopened the CST assessment if it considered the deduction wrongly allowed; no such CST reopening was issued.
Examination of the respondents' affidavits: The first affidavit asserted alleged admissions in a 1983 raid and audit objections; the petitioners denied those allegations. Because the affidavit did not adequately set out the actual reasons for reopening and factual statements were disputed, the court ordered a further affidavit specifying the actual reasons.
Further affidavit and the true basis for reopening: The subsequent affidavit stated the real basis was doubt as to whether sales occurred before goods crossed customs frontiers; there had been a letter of 6 June 1984 requesting explanation, and the petitioner’s reply was deemed unsatisfactory. The reason recorded in file (dated 4 August 1987) stated the deduction under section 5(2) CST was wrongly allowed.
Legal assessment of those reasons: The court found that the recorded reasons were based on scrutiny of records and documents already on file (i.e., material that existed at the time of assessment). The court reasoned that if the "reason to believe" springs only from material already on the file and not from newly discovered material or material showing concealment or knowing inaccuracy, there cannot be concealment nor knowingly furnished inaccurate returns.
Change of opinion is insufficient: The court emphasized that a mere change of opinion by the assessing officer, grounded in reconsideration of documents already available when the assessment was originally passed, does not constitute the requisite reason to believe under section 35(1)(b). Reopening on the basis of doubt, conjecture or surmise — as distinguished from a bona fide belief founded on fresh material indicating concealment or falsity — is not sanctioned by the provision.
Reliance on precedent: The court referred to the Gujarat High Court decision in Crompton Greaves Ltd. v. State of Gujarat to underscore that suspicion or doubt is not enough and that the statutory phrase is "reason to believe" not "reason to suspect".
Conclusion from analysis: Because the conditions precedent in section 35(1)(b) were not satisfied, the impugned notice for reopening could not be held valid.

Holding and Implications

Holding: The petition is allowed; the impugned notice dated 4 August 1987 under section 35 of the BST Act is quashed and set aside. The court made the rule absolute in terms of the petitioner's primary prayer (paragraph 14) and entered costs in favour of the petitioners (paragraph 14–15).

Implications:

The direct effect is that the reassessment proceedings under the BST Act initiated by the impugned notice are invalid and cannot be proceeded with against the petitioners on that basis.
The court expressly confined its decision to the limited ground that the conditions of section 35(1)(b) were not fulfilled; it did not adjudicate on other contentions or precedents advanced by the petitioners. Consequently, the judgment is grounded on the statutory interpretation that doubt or a mere change of opinion based on records already in file cannot sustain reopening under the extended period; the court did not lay down a broader new principle beyond this application of the statute and the cited authority.

Outcome in the opinion: Petition allowed; notice dated 4 August 1987 quashed and set aside.

Show all summary ...

J.P Devadhar, J.:— In this petition, the petitioners challenge notice dated August 4, 1987 issued under section 35 of the Bombay Sales Tax Act, 1959 (hereinafter referred to as “the BST Act”, for short), wherein the respondents have purported to reopen the assessment in respect of the turnover for the period from September 1, 1978 to August 31, 1979.

2. Petitioner No. 1 is a partnership firm duly registered under the Partnership Act, 1932 and, inter alia, carries on the business of manufacture, sale and export of garments and is a reseller of dyes and chemicals.

3. For the abovesaid period from September 1, 1978 to August 31, 1979, the petitioners had filed their returns under the provisions of the BST Act and also under the Central Sales Tax Act, 1956 (hereafter referred to as “the CST Act”, for short) and the assessment under both the Acts were passed on March 29, 1982. In the assessment order under the CST Act (exhibit “B” to the petition) sales by transfer of documents before the goods crossed customs frontiers were allowed at Rs. 62,35,943 under section 5 of the cst act. In the assessment order under the BST Act (exhibit A to the petition) sales under section 75 of the bst act which are exempt from sales tax were determined at Rs. 5,99,92,392. The said document included sales claimed and allowed amounting to Rs. 62,35,943 under section 5(2) of the CST Act.

4. By the impugned notice dated August 4, 1987 addressed to M/s. K. Mohan & Co., the respondent No. 1 purported to make reassessment in Form No. 28 under section 35 of the BST Act read with rule 34 of the BST Rules, 1959, for the period from September 1, 1978 to August 31, 1979 on the ground deductions of high seas sales amounting to Rs. 62,35,943 had been wrongly allowed under section 5(2) of the CST Act, 1956. By a letter dated September 7, 1987 and October 26, 1987, the petitioners pointed various infirmities in it and contended that, the said notice was without jurisdiction and barred by limitation. Since no reply was received, the above petition has been filed.

5. Mr. Jetly, the learned counsel appearing on behalf of the petitioners, raised several contentions, inter alia, on the ground that there were no reasons for reopening the assessment and that the same was barred by limitation. It was also submitted that in the absence of withdrawal/reassessment of the deductions granted under the CST Act, it was not open to the respondents to reopen the assessment under the BST Act. It was submitted that under section 54 of the bst act, the petitioners were required to preserve the books of accounts and registers for 5 years. Since the notice is issued beyond the period of 5 years and the petitioners have not preserved the books, except ledger and cash book, it was submitted that the petitioners will be seriously prejudiced if the impugned notice is allowed to be proceeded with.

6. Under section 35(1) of the BST Act, an assessment can be reopened, if the assessing officer has reason to believe that any turnover of sales or turnover of purchases has escaped the assessment or has been under-assessed within a period of 5 years from the end of that the assessment year. Section 35(1)(b) provides that the assessment can be reopened within the extended period of 8 years if the assessing officer has reason to believe that the dealer has concealed such sales or purchases or has knowingly furnished inaccurate returns.

7. In the instant case, the notice under section 35 of the bst act has been issued almost after eight years from the end of the assessment year and, therefore, under Section 35(1)(b) of the BST Act, 1959, the burden was upon the respondents to establish that there was concealment of sales or purchases on the part of the assessee or that the assessee has knowingly furnished incorrect returns. In the impugned notice dated August 4, 1987 it is stated that the reopening of the assessment is on account of the deduction of high sea sales amounting to Rs. 62,35,943 being wrongly allowed under section 5(2) of the CST Act, 1956.

8. It is not in disputed that the assessment for the period September 1, 1978 to August 31, 1979 passed on March 29, 1982 allowing deduction of high sea sales amounting to Rs. 62,35,943 has not been reopened at all under the CST Act, 1956 and as such the said assessment has become final. Under the circumstances, reopening of the assessment under the BST Act on account of the alleged wrong deduction under the CST Act cannot be sustained. It is pertinent to note that the assessment under the CST Act and the BST Act is done by the same authority and the authority or the officer who has issued the impugned notice under the BST Act could very well have issued notice for reopening of the assessment under the CST Act, if wrong deduction was given under that Act. However, no such notice has been issued and the said assessment under CST Act has become final.

9. In the affidavit-in-reply filed by M.H Vatnani, the Assistant Commissioner of Sales Tax (Assessment) on November 21, 1987 it was stated in para 3 that the assessing officer had reason to believe that the assessee has knowingly furnished incorrect returns because during the course of raid in February, 1983 the petitioner had admitted to have dealing with bogus parties and had admitted their liability in respect of a part of their dealings for the assessment year 1978-79. It was also stated in the affidavit-in-reply that the audit party had raised serious objections to the deductions given under section 5(2) of the CST Act, 1956 as the petitioners had not produced proof of transfer of documents before the imported goods crossed customs frontiers of India. The petitioners in their affidavit-in-rejoinder dated January 12, 1988, emphatically denied that during the course of raid they had admitted to have dealing with bogus parties. They also denied to have admitted their liability in respect of their dealings for the assessment year 1978-79.

10. Since the actual reasons for reopening of the assessment were not set out in the affidavit-in-reply and the factual statements made in the affidavit-in-reply were seriously disputed by the petitioners, with a view to give fair opportunity to the respondents, this Court permitted the respondents to file a fresh affidavit, directing them to disclose the actual reasons for reopening the assessment and not the reasons that the deponent may think reasonable at the time of the filing of the affidavit.

11. Accordingly, Shri. P.N Khopade, Sales Tax Officer, filed a further affidavit, dated December 10, 2001 stating therein that there was doubt as to whether the sales took place before the goods crossed the customs frontiers of India and, therefore, by a letter dated June 6, 1984 the petitioner was requested to state as to why the said sales should not be treated as local sales. and tax should be levied. It was stated that the petitioner's reply contained in their letter was not satisfactory and not accepted. It was further stated that the reasons recorded in the file regarding reopening of the assessment are as follows:

“August 4, 1987: On scrutiny of the case records and documents of high seas sales available it is seen that deduction of high seas sales under section 5(2) of the Central Sales Act, 1956 was wrongly allowed to the extent of Rs. 62,35,943. Hence notice in F-28 issued calling the dealer on August 24, 1987.”

Sd/- (A.C)

12. From the aforesaid facts, it is abundantly clear that the assessment order passed on March 29, 1982 for the period September 1, 1978 to August 31, 1979, was reopened in 1987 because on scrutiny of the case records and. documents, the assessing officer was of the opinion that the deduction of high seas sales given under section 5(2) of the CST Act, 1956 was wrongly allowed. Under section 35 of the bst act, an assessment could be reopened only if the assessing officer has reason to believe that the assessee has concealed sales or has knowingly furnished incorrect returns. From the reasons recorded, it is evident that neither of the conditions set out in Section 35(1)(b) of the BST Act, 1959 are satisfied because admittedly the opinion formed by the officer is based on the scrutiny of the case records and documents which were already there on file. If the “reason to believe” is based on the material already on record and not based on any other material gathered, then there can neither be concealment nor it can be said that the assessee has furnished inaccurate particulars. As stated hereinabove, the assessment with deduction under section 5(2) of the CST Act, 1956 has become final and mere change of opinion cannot constitute reasons for reopening of the assessment under the BST Act, especially when the assessing officer has consciously chosen not to reopen the assessment under the CST Act. Since the conditions precedent set out in Section 35(1)(b) of the BST Act, 1959 are not satisfied, we are of the opinion that the notice for the reopening of the assessment cannot be held to be valid. Accordingly, the petition succeeds and the impugned notice dated August 4, 1987 is quashed and set aside.

13. Since the petition is allowed on the limited ground of not fulfilling the conditions set out in Section 35(1)(b) of the BST Act, we are not dealing with the various arguments advanced and various decisions cited by Mr. Jetly, the learned counsel for the petitioners. However, in view of the contentions raised by the respondents in their affidavit to the effect that on account of the doubts about the allowability of the deduction under section 5(2) of the CST Act, 1956, the assessment is being reopened we may refer to the decision of the Gujarat High Court, which has been relied upon by Mr. Jetly reported in [2000] 120 STC 510 (Crompton Greaves Ltd. v. State of Gujarat). In that case, while dealing with Gujarat Sales Tax Act, 1969, wherein the provisions are similar to the BST Act, 1959 it was held that if the conditions precedent for invoking the jurisdiction after 5 years are not fulfilled, then the reassessment would be invalid. It was further noted in the said judgment that the words used in the section are “reason to believe” and not “reason to suspect”. In the present case admittedly, the reasons for reopening was the doubt or suspicion gathered in 1987 by the officer on perusal of the records on the basis of which assessment order was passed in 1982. Such a case where the reopening is based on doubt or conjecture or surmises, is not covered under Section 35(1)(b) of the BST Act, 1959.

14. In the premises aforesaid, rule is made absolute in terms of prayer clause (a) of the petition with costs.

15. Petition allowed.