Citation Codes

Equivalent Citations

citation codes

Case Number

S.J.C No. 1 of 1965

Judges

Hon'ble Mr. Justice Gati Krushna Misra
Hon'ble Mr. Justice Sachidananda Acharya

Acts

section 24(1) of the Orissa Sales Tax Act

See more information ...

Smart Summary

Structured Summary of the Opinion (Reference under section 24(1) of the Orissa Sales Tax Act)

Factual and Procedural Background

The reference to the court arose under section 24(1) of the Orissa Sales Tax Act and posed two questions about the permissibility and correctness of estimating a dealer's rate of profit. The assessment in question related to the quarter ending 31st December, 1958. The dealer was a wholesaler in grocery articles who returned a profit of 4% in his books.

The assessing officer considered that the normal profit rate for such wholesale grocery businesses in the locality was between 8% and 12% and accordingly estimated the dealer's profit at 8%, enhancing the returned figures. The first appellate authority adjusted the estimate to 6¼% while the Tribunal upheld the Assistant Commissioner's (assessing officer's) order. The Tribunal justified estimation by expressing concern that large dealers might manipulate otherwise well-kept accounts to show lower returns.

The reference order recorded that the source of the assessing officer's knowledge of the local profit rates (the "general local condition") was not disclosed to the dealer (appellant). Thus, the assessing authorities made their estimate without furnishing to the dealer the materials or information on which they relied.

Procedurally, the case came as a reference to the High Court under section 24(1), the Court reviewed the legal principles, considered precedents, and answered the two referred questions.

Legal Issues Presented

Whether the taxing officers are precluded from making a fair and reasonable guess about the rate of profit if the same is found to be low on consideration of local conditions, though the accounts as maintained are found to be correct.
Whether, in the facts and circumstances of the case, the estimation of the profit rate as made is justified or is arbitrary based on surmises and conjectures.

Arguments of the Parties

Revenue / Assessing Authority (as represented by learned standing counsel)

The assessing officer relied on information indicating that normal profit rates in the locality were significantly higher (8%–12%), and used that to estimate profits higher than those returned in the dealer's books.
It was contended by the learned standing counsel that, where third-party accounts are to be used against an assessee, supplying a copy of those third-party accounts to the assessee would be sufficient; the assessee would not necessarily be entitled to cross-examine the third party.
The Tribunal adopted a factual stance that large dealers might manipulate perfectly maintained accounts; accordingly the assessing officer's estimate based on local knowledge was treated as permissible by the Tribunal.

Dealer / Assessee

The dealer's books showed a profit of 4% and the accounts were held to be correctly maintained (as found by the Tribunal's own conclusion on maintenance of accounts).
The dealer was not supplied with the source or substance of the information on which the assessing officer relied (the local rate of profit), and therefore was denied a reasonable opportunity to rebut that information.
On this basis the dealer challenged the estimation as arbitrary and made on surmises and conjectures without affording natural justice (an opportunity to meet the material) to him.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal — A.I.R. 1955 S.C. 65	Establishes that material relied upon for assessment which is not disclosed to the assessee cannot be used as the basis of assessment; natural justice requires opportunity to rebut.	The Court invoked this Supreme Court authority to state that assessments cannot rest on undisclosed material; such material is inadmissible if the assessee has not been given an opportunity to rebut it.
Raghubar Mandal Harihar Mandal v. The State of Bihar	Affirmed the application of natural justice to assessment proceedings; approved certain earlier authorities and enunciated propositions on use/disclosure of private information in assessment.	The Court relied on Raghubar Mandal to frame the governing principles, and to support the proposition that where an assessing authority proposes to act contrary to the assessee's evidence, it should disclose the materials relied upon and give a fair chance to rebut them.
Gunda Subbayya v. Commissioner of Income-Tax, Madras — [1939] 7 I.T.R. 21	Principle that natural justice applies to assessment proceedings where particular materials are proposed to be used against the assessee; assesssing authority should draw the assessee's attention to adverse information and give opportunity to show it is wrong.	Raghubar Mandal (and this Court) approved and applied that principle to require disclosure of the substance of adverse information so the assessee may meet it.
Seth Gurmukh Singh v. Commissioner of Income-tax — [1944] 12 I.T.R. 393	Supporting authority cited in Raghubar Mandal; part of the body of law about disclosure and natural justice in assessment proceedings (referred to as the "Lahore case" in the opinion).	Was relied upon through Raghubar Mandal to extract four propositions about the duties of the assessing officer in relation to the assessee and private information.
Jayantilal Thakordas v. State of Gujarat (Bench decision)	A High Court decision taking a view more favourable to the revenue with respect to use of information in assessments.	The Court reviewed this decision and declined to accept it as laying down good law, finding it inconsistent with the Supreme Court's pronouncements in Raghubar Mandal's case.
Appukutty v. State of Kerala (Single Judge decision)	Holds that relying on third-party or "secret" account books against an assessee without affording effective opportunity to cross-examine is unjustified.	The Court regarded this decision as laying down the correct principle and quoted its reasoning approvingly to support the need for effective opportunity, including cross-examination in appropriate circumstances.
T. Devasahaya Nadar v. Commissioner of Income-Tax, Madras	Explains that income-tax (and analogous) assessment proceedings are quasi-judicial, not strictly bound by Evidence Act rules, but nevertheless governed by natural justice; the source of information need not always be divulged, but the substance of the adverse material should be disclosed so the assessee can meet it.	The Court relied on this authority to clarify that while the assessing officer is not a court and is not strictly bound by the Evidence Act, fairness requires disclosure of what is against the assessee so as to enable him to displace it; cross-examination of informants may be refused but if a witness is examined in presence of the assessee he must have a right to cross-examine.

Court's Reasoning and Analysis

The Court began by stating the applicable legal principles: rules of evidence under the Indian Evidence Act are not strictly applicable to assessment proceedings under sales tax or income tax statutes; the assessing officer functions as a quasi-judicial authority. Nevertheless, natural justice obligations apply. In particular, if the assessing authorities propose to rely on extraneous material or information as the basis for rejecting, varying or estimating figures returned by the assessee, the assessee must be given a reasonable opportunity to rebut that material. Material which is not disclosed and therefore not capable of being rebutted is inadmissible for assessment purposes.

The Court emphasized that an assessment cannot be made purely on guesswork that the assessee is not permitted to meet. It reasoned that when an assessing officer proposes to disregard the assessee's accounts and form an independent estimate on the basis of private information (for example, the accounts of a third party or confidential enquiries), fairness requires disclosure to the assessee of the substance of that information so the assessee may answer it.

The Court examined the scope of the right to test adverse material. It accepted that the assessing officer need not always divulge his sources of information or produce informants for cross-examination; however, where the facts and circumstances justify it (for example, where third-party secret accounts are to be used against the assessee), the assessee may be entitled to more than mere inspection — potentially a right to cross-examine the third party to test the veracity or motive behind entries relied upon. The Court found the learned standing counsel's contention that supplying a copy of third-party accounts would always be sufficient to be unacceptable, because without the means to test the third-party evidence (including by cross-examination where justified) the assessee could be unfairly prejudiced.

The Court considered earlier authorities: it rejected the Gujarat Bench decision (Jayantilal Thakordas) which favoured the revenue, and preferred the Kerala Single Judge decision (Appukutty) and the Madras Bench opinion (T. Devasahaya Nadar) as correctly stating the law. Drawing on Dhakeswari and Raghubar Mandal, the Court distilled the guiding propositions and applied them to the facts of the present case.

Applying those principles, the Court held that the assessing officer's estimate rested materially on undisclosed information about local profit rates. Because that source/substance of information was not supplied to the dealer for rebuttal, it was inadmissible; excluding that material left no proper basis to reject or replace the dealer's books. Accordingly, the estimation was arbitrary and founded on surmise.

Holding and Implications

REFERENCE ACCEPTED

Holding (core rulings):

The taxing officers are not precluded from making a fair and reasonable estimate (guess) about the rate of profit when returned profits appear low, provided that (a) the information on which such an estimate is founded is supplied to the dealer, and (b) a reasonable opportunity is given to the dealer to rebut that information.
In the present case, the estimation of the profit rate was not justified: it was arbitrary and based on surmises and conjectures because the dealer was not given a reasonable opportunity to know and rebut the information relied upon by the assessing authorities.

Implications and direct consequences:

On the facts of this case, the assessment based on the undisclosed information is invalid. The reference is therefore accepted.
The Court ordered no costs in the circumstances of the case, but the petitioner is entitled to the refund of the reference fee.
More generally, the decision confirms and restates established principles: assessing authorities may act on private sources or form estimates, but where such materials are to be used against an assessee the substance must be disclosed and the assessee given a reasonable opportunity to meet it; in appropriate circumstances the opportunity may include the right to test the material (including cross-examination) where facts and circumstances so require.

Disposition recorded in the opinion: Acharya, J. agreed; the reference was answered accordingly.

Show full summary ...

Muralimohan Prabhudayal v. State Of Orissa

Misra, C.J:— The two questions referred to this court for answer under section 24(1) of the Orissa Sales Tax Act are as follows:

“(1) Whether the taxing officers are precluded from making a fair and reasonable guess about the rate of profit if the same is found to be low on a consideration of the local conditions though the accounts as maintained are found to be correct.

(2) Whether in the facts and circumstances of the case the estimation of profit rate as made is justified or is arbitrary based on surmises and conjectures.”

2. The facts leading to this reference are clearly stated in the reference order. The quarter in respect of which the assessment has been made relates to the quarter ending with 31st December, 1958. The dealer is a wholesaler in grocery articles. He returned a profit at a rate of 4 per cent. in his account books. The assessing officer is of opinion that the normal profit in the locality in such business would be between 8 per cent. to 12 per cent. He accordingly estimated the rate of profit at 8 per cent. and enhanced the returned figures. The first appellate authority estimated the rate of profit at 6 ¼ per cent. The Tribunal upheld the order of the Assistant Commissioner. The Tribunal held that big dealers could usually maintain their accounts perfectly and yet manipulate the same showing lesser returns which could be done by showing a low rate of profit. He was of opinion that an estimation can be made by the taxing officer of the reasonable rate of profit taking into consideration the local condition of the wholesale dealers in grocery articles. It was accepted in the reference order that the source of knowledge of the general local condition of the business of the wholesale grocery dealers was not made known to the appellant. Thus the estimate was made without furnishing the materials on the basis of which the taxing authorities differed from the rate furnished in the returns of the dealer.

3. From various cases dealt with by us it seems clear that the Tribunal has no clear conception of law even though high authorities were cited before him. The law on the point is no longer in doubt and may be stated in clear terms. Rules of evidence are not strictly applicable to assessment proceedings under the Sales Tax and the Income-tax Acts. Evidence which is not admissible under the Evidence Act may be entertained in respect of assessment proceedings. But if such evidence purported to constitute the basis of assessment, then the assessee or the dealer must be given a reasonable opportunity to rebut such evidence. Without reasonable opportunity being given to the assessee to rebut the materials intended to be used against the assessee, those materials cannot be used. They would be inadmissible. There cannot be an assessment purely on guess which is not subjected to explanation given by the assessee. The principle was vary clearly laid down in Dhakeswari. Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal A.I.R 1955 S.C 65, in an income-tax case and the identical principles were followed in a sales tax case in Raghubar Mandal Harihar Mandal v. The State of Bihar. As a necessary corollary of the aforesaid principle the assessing authority cannot declare the account books to have not been properly maintained on the basis of information not supplied to the assessee. In this case the Tribunal came to the conclusion that account books were correctly maintained. He, however, did not act upon the account books on the basis of an information obtained by the taxing officer that the rate of profit prevalent in the locality pertaining to such type of business was much higher. As this information was not supplied to the assessee for rebuttal, it was inadmissible in evidence. If this evidence is excluded, then there is no other material. On the basis of which the account books could have been rejected. If from extraneous evidence allowed to be rebutted by the assessee it could be established by the assessing authorities that the account books were wrong, then the account books could be rejected even though arithmetically they were accurately maintained.

4. As has been discussed already, the dealer is to be given ample opportunity to rebut the materials found against him. A question has been raised as to the ambit and amplitude of this opportunity. In Raghubar Mandal's case the Supreme Court approved Gunda Subbayya v. Commissioner Of Income-Tax, Madras [1939] 7 I.T.R 21., and Seth Gurmukh Singh v. Commissioner of Income-tax [1944] 12 I.T.R 393.. In the Madras case, their Lordships of the Full Bench enunciated that the principle of natural justice had application to an assessment proceeding under a taxing statute where particular materials were proposed to be used against the assessee. In the language of their Lordships, the assessing authority should draw the assessee's attention and give him an opportunity to show that the officer's information is wrong. In the Lahore case, four propositions were laid down. They are:

(i) The taxing officer is not bound to rely on evidence produced by the assessee which he considers to be false.

(ii) If he proposes to make an estimate in disregard of the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the materials on which he is going to found that estimate.

(iii) He is not, however, debarred from relying on private sources of information, which sources he may not disclose to the assessee at all.

(iv) In case he proposes to use against the assessee the result of any private enquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it if possible.

5. It is the amplitude and ambit of this fourth proposition which needs examination. There cannot be any controversy that tie assessee can adduce independent evidence of his own to disprove the particulars proposed to be used against him. The question is: whether he can have the right of cross-examination in certain circumstances. Take an illustration. A third party's accounts are proposed to be used against the assessee and if such accounts are relied on, the assessee's accounts are to be discarded. It is contended by the learned standing counsel that supply of a copy of the accounts of the third party would be sufficient material particulars and the assessee cannot be permitted to test the correctness of those accounts by cross-examination, if necessary. We are unable to accept this contention which is abhorrent to the elementary concept of natural justice that no material should be accepted without heing tested. If the assessee gets an opportunity by cross-examination, he can establish that the accounts of the third party are wrong and manipulated to suit the interest of the third party, or that they were intended to be adversely used against the assessee with whom the third party had inimical relationship. It is difficult to accept the contention in such a case, that the ample and reasonable opportunity to be given to the assessee would not include within its sweep the right of cross-examination.

6. A number of decisions have been cited before us. It is unnecessary to examine all of them. Jayantilal Thakordas v. State of Gujarat is a Bench decision of the Gujarat High Court which takes a view in support of the revenue. For reasons discussed we are unable to accept this decision as laying down good law. If critically examined, it runs counter to the pronouncement of the Supreme Court in Raghubar Mandal's case, though it has been referred to in that decision. It differed from Appukutty v. State of Kerala, a Single Judge decision of the Kerala High Court, which according to us lays down the correct principle. In paragraph 8, his Lordship observed:

“In the first place, the assessing authority in my view had absolutely no justification for relying upon the books of account of a third party, much less the secret account books, as against persons like the petitioner, without affording an effective opportunity to cross-examine those persons who are supposed to have maintained the secret accounts and from whom they have been discovered. The fact that some third party maintaining, even according to the department, some secret accounts has made certain entries in his accounts which may connect a person like the petitioner, by itself will not give jurisdiction to the assessing authority to utilize that information, unless that person has been given ample opportunity, in the presence of the person who has kept the secret accounts to effectively cross-examine him and elicit the necessary facts as to how exactly the relevant entries came to be made connecting the petitioner with such books of account.”

7. The Gujarat decision wrongly assumed that the aforesaid Kerala decision was oblivious of the legal position that the Evidence Act had no application to assessment proceedings. The legal position has been clearly explained in T. Devasahaya Nadar v. Commissioner Of Income-Tax, Madras., Madras. A Bench of the Madras High Court observed thus:

“We are of opinion that it cannot be said as a general proposition of law that any evidence upon which the department might rely should have been subjected to cross-examination. The procedure for assessment is indicated in section 23(3) of the Act. The Income-tax Officer is not a court. Having regard to the nature of the proceedings, he occupies the position of a quasi-judicial tribunal. He is not bound by the rules of evidence in the Indian Evidence Act. The limit of the enquiry and the kind of materials or evidence which he can act upon cannot be specified and the statute has not attempted it. Wide though his powers be, he must act in consonance with rules of natural justice. One such rule is that he shall not use any material against the assessee without giving him an opportunity to meet it. The source of information for the material against the assessee need not be divulged. In fairness to the assessee he should be told what is against him, so that he may, if he can, displace it. It is no denial of natural justice if the Income-tax Officer refuses to produce an informant for being cross-examined by the assessee. If any witness is examined in the presence of the assessee, he must of course have a right of cross-examination………The range of natural justice is wide and whether or not there has been violation of natural justice would depend on the facts and circumstances of the case.”

8. Thus, the position can be summed up by saying that, as a general rule, it cannot be said that in no circumstances a dealer or assessee has a right of cross-examination. He would have such a right of cross-examination if the facts and circumstances so justify. On the aforesaid analysis, we would answer the questions referred thus:—

(i) The taxing officers are not precluded from making a fair and reasonable guess about the rate of profit if the same is found to be low, on a consideration of the local conditions, though the accounts are found to be correct, provided that the further condition that the information on the basis of which a fair and reasonable guess is made is supplied to the dealer and a reasonable opportunity is given to him to rebut the same, is fulfilled.

(ii) In the facts and circumstances of this case, the estimation of profit rate as made was not justified and is arbitrary as it was based on surmises and conjectures, and as no reasonable opportunity was given to the dealer to know and to rebut the same.

9. In the result, the reference is accepted; but in the circumstances there will be no order as to costs. The petitioner is, however, entitled to the refund of the reference fee.

Acharya, J.:— I agree.

10. Reference answered accordingly.

Muralimohan Prabhudayal v. State Of Orissa

Structured Summary of the Opinion (Reference under section 24(1) of the Orissa Sales Tax Act)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue / Assessing Authority (as represented by learned standing counsel)

Dealer / Assessee

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Muralimohan Prabhudayal v. State Of Orissa

Comments