IN THE HIGH COURT OF KERALA AT ERNAKULAM
ST.Rev..No. 158 of 2008()
1. STATE OF KERALA, REP. BY JOINT
... Petitioner
Vs
1. MOLLY BABY PROPRIETRESS,
... Respondent
For Petitioner :GOVERNMENT PLEADER
For Respondent :SRI.ARIKKAT VIJAYAN MENON
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice K.SURENDRA MOHAN
Dated :02/03/2009
O R D E R
C.N.RAMACHANDRAN NAIR & K.SURENDRA MOHAN, JJ.
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S.T.Rev. Nos: 158, 165 & 179 OF 2008
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Dated this the 2nd March, 2009.
JUDGMENT
RAMACHANDRAN NAIR, J.
The tax revision cases are filed by the revenue challenging the
orders of the Tribunal whereby the Tribunal has directed
acceptance of books of accounts for sales tax assessments of the
respondent assessee for the assessment years 2002-03, 2003-04
and 2004-05.
2. We have heard Special Govt. Pleader appearing for the
State and Shri. Harisanker V.Menon for the respondent.
3. The respondent commenced business in gold jewellery and
in precious stones and diamonds in the year 2001 and continued
the same without taking registration or making payment of sales
tax. The clandestine business transactions carried on in the
residential premises and in two business places were detected on
search conducted by the inspection team. In the course of search,
the search team examined the business slips, stock statements,
note books, scribbling pads etc maintained by the assessee and
estimated the purchase and sales during all the four years. It was
S.T.Rev.Nos: 158,165 & 179/2008 2
noticed that the business transaction of the respondent in the
individual capacity in 2001-02 was not of the magnitude that
attract sales tax liability. However on evaluation of the seized
records for the remaining three years, the department found that
the respondent while carrying on business in the name of the
partnership firm by name Ross ‘N’ Glow evaded estimated sales tax
of Rs.1,01,200/- for 2003-04 and Rs.2,98,763/- for 2004-05. The
respondent assessee however made application under Section 47
and offered to compound the offence for non-maintenance of books
of accounts and for non-payment of tax dues and the request for
compounding was accepted by the department. The respondent
accordingly remitted Rs.1,02,200 for 2002-03 and Rs.2 lakhs each
for the assessment years 2003-04 and 2004-05. The respondent
thereby avoided prosecution and penalty.
4. The proceedings of compounding under Section 47 by the
Intelligence Officer produced in this Court is dated 31.1.2005. The
respondent assessee however applied for registration under the
KGST Act only on 14.8.2006. Even though it is stated that the
assessee has discontinued the business there is nothing on record
to show that the assessee had in fact taken registration or carried
on business. When assessments were taken up for all the above
three years the assessee returned the turnover estimated by the
Inelligence Officer in the proceedings for compounding issued on
S.T.Rev.Nos: 158,165 & 179/2008 3
31.1.2005. However, from the assessment orders it is clear that
tax is not paid. The Assessing Officer however estimated the
assessee’s turn over based on the seized records and in addition to
the actual suppression estimated by the Intelligence Officer, the
assessing officer made addition of two times. The assessments
were contested in appeal before the first appellate authority who
held that since the entire records are recovered there is no scope
for further addition. However still he sustained the addition of one
time to the suppression noticed on inspection. When this was
challenged by the assessee before the Tribunal in second appeal
the Tribunal allowed the appeals holding that assessment should be
made based on the suppression noticed by the intelligence officer
in the compounding proceedings issued by him. It is against these
orders the Revenue has filed these revisions before this Court. The
issue raised is whether the estimates made by the Intelligence
Officer in the course of permitting compounding binds the
assessing officer or whether he is entitled to reappraise the seized
records, verify the books of accounts produced by the assessee and
make his own estimate for finding whether the turnover disclosed
by the assessee is acceptable. The contention raised is that,
compounding under Section 47 is different from the assessment
process and findings in compounding proceedings as such will not
bind the assessing officer. However the contention of the counsel
S.T.Rev.Nos: 158,165 & 179/2008 4
for the assessee is that entire records were seized from the
respondent’s residence and two business premises of the assessee
and based on the seized records the Intelligence Officer has arrived
at certain conclusions and since seized records are the only
materials based on which the assessment is made, the assessing
officer is bound to follow the findings of the Intelligence Officer.
The further contention raised by the counsel for the assessee is
that the first appellate authority had in fact held that no addition is
justified over and above the suppression noticed by the Intelligence
Officer and this was not challenged by the department in the
second appeal and so much so, the department cannot raise this
issue before this Court. In answer to this the special Govt. Pleader
submitted that each and every finding of the first appellate
authority need not be challenged by the department if the
conclusions are accepted by the department. According to him in
spite of the findings and observations in favour of the assessee the
first appellate authority sustained an addition of one time, in
addition to the turnover declared by the assessee which was
acceptable to the department. We are unable to accept the
technical objection raised by the assessee that in the absence of a
second appeal by the department, the department was precluded
from challenging the orders of the Tribunal in this Court by which
the Tribunal directed acceptance of the turnover returned by the
S.T.Rev.Nos: 158,165 & 179/2008 5
assessee who has not taken registration or filed any monthly
returns or maintained regular books of accounts. We are however
in agreement with the proposition put forward by the counsel for
the assessee that if the entire records of clandestine business are
seized the assessment should not lead to any addition to the
turnover, over and above what is disclosed in the records. However,
the question to be considered in this case is whether seized books
of accounts relate to the entire transactions. The argument raised
can be accepted only if it is established that the seized records
cover the entire transactions of assessee and if it does not disclose
full business transactions then the turnover has to be estimated
based on available materials. On going through the proceedings of
the intelligence officer dated 31.1.2005 we find that the following
are the items seized from the residence:-
1. Business slips 234 sheets
2. Business slips 505 sheets
3. Stock statements 222 sheets
4. Business slips 29 Nos.
5. Financial position statement
etc for the year 2000-01,
01-02, 02-03,03-04 80 Nos.
6. Bill book of Ross 'N'Glow
Chalakudy 16 Nos.
7. Note books, pocket book
Diary A/c books etc. 22 Nos.
8. Copy of bills of Beaut
Diamonds, Ross 'N' Glow etc 407 Nos.
9. Income Tax Files 2 Nos.
10. Stock Statement as on
22.12.2004 30 Nos.
S.T.Rev.Nos: 158,165 & 179/2008 6
In addition to the recoveries of the above items from the residence
of the assessee the department has traced the following records
from the business premises IX/457:-
1. Account Books 9 Nos.
2. Note book 1 No.
3. Pocket Books 5 Nos.
4. Order Form/Prod. Order
Forms 65 Nos.
5. Account Slip etc. 14 Nos.
It is seen that he has made his own estimates of purchase and sales
and estimated the tax evaded for the purpose of compounding.
However, on going through the assessment notice we find that the
respondent had filed returns and produced records in support
thereof. The assessing officer on verifying the returns filed and the
records produced and those available with the department he did
not accept the records as full and complete and therefore, rejected
the returns filed and the books of accounts produced and made
estimation by adding two times the turnover returned by the
assessee which was reduced by the first appellate authority to equal
addition. The Tribunal however directed acceptance of books of
accounts and ordered assessment based on the returns by the
assessee.
5. We are unable to accept contention of the assessee that
the turnover returned by the assessee which is exactly the same
turnover estimated by the intelligence officer should be accepted
S.T.Rev.Nos: 158,165 & 179/2008 7
and the assessing officer has no justification to make any
estimation or addition to the turnover. In the first place as already
held by us proceedings for compounding is a proceeding different
from regular assessment. As per the scheme of compounding, the
assessee who has been detected of an offence has to pay
compounding fee which during the relevant years was double the
amount of tax or Rs.2 lakhs whichever is higher. In fact for the year
2003-04 the tax sought to be evaded by the assessee has been
estimated by the Intelligence Officer at Rs.2,15,443/-. Similarly for
the year 2004-05 tax sought to be evaded is Rs.2,98,763/-. For
both these years the assessee was permitted to compound the
offence and to avoid the prosecution and penalty on payment of
Rs.2 lakhs each. The estimation of tax evasion by the Intelligence
Officer in the compounding application is not for the purpose of
assessment but for the purpose of collecting, compounding fee.
When the tax sought be evaded is found to be more than the
compounding fee, then there is no necessity for the Intelligence
Officer to exactly estimate the actual amount of tax that was
evaded by the dealer. In fact it is for the assessing officer to assess
the exact tax that is payable by the dealer. Therefore we are of the
view that proceedings in the course of compounding will not bind
the assessing officer for the purpose of assessment. The assessing
officer is the authority who has the exclusive duty to make
S.T.Rev.Nos: 158,165 & 179/2008 8
assessment pertaining to the tax liability of the dealer. The
Tribunal in our view was not justified in directing acceptance of
books of account which are admittedly not maintained by the
assessee in accordance with the rules. However, we agree with the
contention of the assessee that if the transactions can be co-related
from the seized records and if it is proved that entire business
carried on in the clandestine manner are covered by entries in the
seized records, then there is no scope for further addition.
However, it is for the assessee to establish and co-relate entries in
the business slips, bill books, note books, purchase bills, sales bills
etc and in the absence of any co-relation it is for the officer to
reject books of accounts as incomplete and estimate turnover
based on relevant materials.
6. We therefore set aside the orders of the Tribunal and that
of the first appellate authority and remand the matter back to the
assessing officer for giving opportunity to produce the books
including the seized records if released to the assessee and to
make fresh assessment based on the above observations. However,
since the assessee has closed the business and since the
department has not filed second appeal against the orders of the
first appellate authority we give an option to the assessee to accept
the first appellate authority’s order and on the assessee’s
acceptance the assessing officer shall complete the assessment by
S.T.Rev.Nos: 158,165 & 179/2008 9
making an addition equal to the turnover in terms of the first
appellate authority’s order.
7. Yet another issue raised in addition to the estimation of
turnover is assessee’s liability for purchase tax under Section 5A on
the value of the diamonds and other precious stones sold in
studded ornaments. Diamonds and precious stones are high value
items which are separately billed when studded jewellery is sold. If
assessee has done this, there is no scope for levy of tax under
Section 5A on the stones and diamonds purchased because the
commodity suffers tax at sale point under Section 5(1). This is a
matter for verification by the assessing authority in the course of
re-assessment.
C.N. RAMACHANDRAN NAIR
Judge
K. SURENDRA MOHAN
Judge
jj
K.K.DENESAN & V. RAMKUMAR, JJ.
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M.F.A.NO:
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JUDGMENT
Dated: