IN THE HIGH COURT OF KERALA AT ERNAKULAM
TRC No. 4 of 2003()
1. M/S. NATIONAL STORES, PERINTHALMANNA.
... Petitioner
Vs
1. STATE OF KERALA, REPRESENTED BY
... Respondent
For Petitioner :SRI.E.P.GOVINDAN
For Respondent :GOVERNMENT PLEADER
The Hon'ble the Chief Justice MR.H.L.DATTU
The Hon'ble MR. Justice K.T.SANKARAN
Dated :22/10/2007
O R D E R
H.L. DATTU, C.J. & K.T. SANKARAN, J.
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TAX REVISION CASE. No. 4 OF 2003
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Dated this the 22nd October, 2007
O R D E R
H.L. Dattu, C.J.:
The assessee has framed the following questions of law for our
consideration and decision:
(i) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is justified in law in confirming the
rejection of books of accounts of the petitioner.
ii) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is justified in holding that stock
inventories produced subsequent to the inspection was not the
genuine one. Has not the Tribunal committed an error in not
appreciating the facts properly.
iii) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is justified in holding that the stock
differences detected on the basis of the subsequently produced
stock inventories cannot be treated as the actual variations
available at the time of inspection.
iv) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is justified in holding that there was
misclassification of taxable items at a large extent. Has not the
Tribunal committed an error in not verifying the duly audited
report?
v) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is justified in holding that the
revision petitioner have made an unaccounted purchase for
Rs.2,970/-
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vi) Whether on the facts and in the circumstances of the
case, the Appellate Tribunal is justified in sustaining the addition
made by the lower authorities. Is not the addition
disproportionate and excessive?”
2. The factual matrix are: The assessee is a dealer registered under
the provisions of the Kerala General Sales Tax Act. The assessee is a
partnership firm, running a hardware shop at Perinthalmanna in Malappuram
district. The assessment year in question is 1997-98.
3. The business premises of the assessee had been inspected by the
Intelligence Squad of Sales Tax Department . After such inspection, they have
prepared a shop inspection report. In that report, there is a categorical
finding that the assessee had not maintained either the stock register or stock
inventory at the time of inspection.
4. The assessee in the annual return filed before the assessing
authority had conceded the total turnover of Rs.52,48,298.95/- and the
taxable turnover of Rs.15,01,213.30/-. Before completion of assessment
proceedings, the assessing authority had received the shop inspection report
of the Inspection Squad of the Department. After rejecting the returns so filed
by the assessee , the assessing authority had issued a pre-assessment notice.
In the said notice, the assessing authority had pointed out the irregularities
pointed by the inspection squad of the Department. The irregularities pointed
out by the assessing authority, as found in the assessment order, is extracted
below:
“The books of accounts cannot be accepted as correct and
complete for the following reasons:
TAX REVISION CASE. No. 4 OF 2003
3
1. The following purchase is not seen supported by bill.
Madhu Industries 09.06.1997 Rs. 2970.00
2. You have not kept and produced either stock register or
stock inventory.
3. Your business place was inspected by the Intelligence
Officer, Malappuram on 13/11/1997 and prepared SIR No.
294933. Subsequently, the books of accounts were verified by
that office. On verification certain irregularities and stock
differences were noticed. The discrepancies were admitted by
you and as per your request the offence was compounded on
payment of Rs. 350/- vide order No.TRL.3/97-98 dtd.
03/12/1997. The non-accounting of purchases and stock
difference are startling example for sales and purchases.
4. You have mis-classified the taxable items at a large extent.
The following details submitted by yourself would clear the point
purchase list given by you in the Head of 8% taxable goods
contain- cement products, brushes, paints, varnishes, powder ,
locks of all varieties, rubber products, plastics items. These
items come under 10% and 12.5% respectively. Hence, the
sales turnover furnished under 8% would attract 10% and
12.5% according to the volume of purchases and sales
involved. Besides that you have reported a taxable 6% in your
statement. These items would attract 8% tax instead of 6%.
I have verified the SIR with reference to the above and
available records. At the time of the inspection there was no
stock register or stock inventory. In the absence of stock
register or stock inventory, I was really surprised how the
verification was fruitfully completed. So the exercise done by
the Intelligence Officer is not sufficient. Hence an addition on
turnover is required.
The sales turnover of taxable goods seen incredibly low,
considering the opening stock, purchase and closing stock.
TAX REVISION CASE. No. 4 OF 2003
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From the above, it was clear that you have failed to
maintain the books of accounts correctly and completely. It was
therefore proposed to reject the books of accounts and to
complete the final assessment to the best of judgment as
follows:”
5. After rejecting the books of accounts, the assessing authority has
added 10% to the total turnover declared by the assessee and thereafter has
quantified the tax liability. Aggrieved by the said order, the assessee had
unsuccessfully filed first appeal before the 1st appellate authority and second
appeal before the Kerala Agricultural Income Tax and Sales Tax Appellate
Tribunal. The Tribunal has not interfered with the orders passed by either the
first appellate authority or the assessing authority. That is how, the assessee
is before us in this Tax Revision Case.
6. The learned counsel appearing for the assessee would submit that
the best judgment assessment order passed by the assessing authority is
without any basis whatsoever. According to the learned counsel, the
inspecting squad of the Department had compounded the offence
departmentally by accepting a sum of Rs. 350/- for the irregularities which
are said to have been detected at the time of inspection by the inspection
squad of the Department. Therefore, it is submitted that the assessing
authority should have added only the actual suppression that was detected by
the inspecting squad of the Department.
7. Shri Muhammed Rafiq, learned Senior Government Pleader
appearing for the respondent, justifies the orders passed by the assessing
authority. The first principles, for the purpose of best judgment assessment
TAX REVISION CASE. No. 4 OF 2003
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order, is enunciated by the Apex Court in the case of Commissioner of
Sales Tax vs. H.M. Esufali H.M. Abdulali ( [1973] 32 STC 77 ). In the
said decision, the Court has observed as under:
“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.”
8. In the returns filed by the assessee for the assessment year 1997-
98, the assessee had conceded the total turnover of Rs. 52,48,298.95 /- and
the taxable turnover for a sum of Rs.15,01,213.30/- . The assessing authority
has rejected the returns so filed by the assessee . It has been pointed out by
the assessing authority that the assessee has not maintained either the stock
register or the stock inventory . He has further stated that the assessee in the
returns filed had mis-classified the goods and therefore, the return so filed by
the assessee cannot be accepted. Accordingly, he had made just an addition
of 10% of the total turnover conceded by the assessee. That comes to Rs.
5,24,829.89/- In a case of this nature, in our opinion, the assessing authority
has shown a lenient attitude towards the assessee , when the stock books
were not available and when the assessee had not even maintained stock
inventories and had misclassified the goods. The assessing authority should
TAX REVISION CASE. No. 4 OF 2003
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have made some more addition to the total turnover declared by the
assessee. But the assessing authority, as we have already stated, taking a
very lenient view in the matter, has just made an addition of a sum of Rs.
5,24,829.89/- to the total turnover declared by the assessee and thereafter
has proceeded to quantify the tax liability of the assessee.
9. The assessment order made by the assessee is best judgment
assessment . Since it is a best judgment, the assessing authority was
expected to give proper reasons to reject the books of accounts and then to
proceed to pass the best judgment assessment. Time and again , it is settled
that the assessing authority while rejecting the returns, is not expected to
complete the said assessment on surmises, presumptions or whims and
fancies. In the instant case, the assessing authority before rejecting the
returns filed by the assessee, has given out detailed reasons for rejecting the
returns filed by the assessee and those reasons can neither be construed as
either presumptions or assumptions . The said rejection order was passed
purely based on the report of the intelligence wing of the Department. If the
assessing authority has relied on that information and has proceeded to
complete the best judgment assessment , in our opinion, in a Revision, we are
not expected to interfere with the said best judgment assessment. In that
view of the matter, the Revision case filed by the assessee requires to be
rejected and the questions of law framed by the assessee require to be
answered against the assessee and in favour of the Revenue. Accordingly,
we pass the following:
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O R D E R
i) Tax Revision Case is rejected.
ii) The questions of law framed by the assessee is answered
against the assessee and in favour of the Revenue.
iii) Pending Civil Miscellaneous Petitions are also disposed of.
Ordered accordingly.
H.L. DATTU,
CHIEF JUSTICE.
K.T. SANKARAN,
JUDGE.
lk
TAX REVISION CASE. No. 4 OF 2003
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H.L. DATTU, C.J.&
K.T. SANKARAN, J.
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T.R.C. No. 4 OF 2003
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Dated this the 22nd October, 2007
O R D E R