Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF SALES TAX, U.P.
Vs.
RESPONDENT:
M/S. BHAGWAN INDUSTRIES (P) LTD. LUCKNOW
DATE OF JUDGMENT10/10/1972
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
HEGDE, K.S.
REDDY, P. JAGANMOHAN
CITATION:
1973 AIR 370 1973 SCR (2) 625
1973 SCC (3) 265
ACT:
U.P. Sales Tax Act and Rules, s. 21--Ex-Parte
assessment--Notice for assessment of escaped turnover--When
can be issued--’Reason to believe’, scope of.
HEADNOTE:
For the assessment year 1957-58, the assessee (respondent)
was assessed to sales tax, under the U.P. Sales Tax Act and
Rules, on a turnover which included the turnover of a flour
mill of the assessee. The assessment was made ex-Parte. On
account of food shortage the Government had fixed a quota
for the flour mill in 1958 on the basis of the average
grinding done during the previous three years. In view of
the turnover according to the account books of the assessee
for the years 1955-56 and 1958-59, the sales-tax officer
thought that the turnover for the year 1957-58 was
underestimated and that ’some turnover had escaped assess-
ment. He accordingly issued a notice in September 1961 and
a memorandum on 13th March 1962 calling upon the assesses
to produce the account books but no account books were
produced. On 24th March,1962, a notice was issued under
s.21 of the Act. It was served on the assessee on 26th
March 1962. On March 19, 1963, the sales tax officer made
an assessment order under s. 21 estimating the turnover at a
higher figure. Section 21 provides that if-the assessing
authority has reason to believe that the whole or part of
the turnover of a dealer had escaped assessment, be may
reassess the dealer to tax, that such reassessment shall not
be made for any assessment year after the expiry of four
years, and that where notice under the section bad been
served within four years, the reassessment may be made
within one year of the date of service of the notice even if
the period of four years is thereby exceeded.
The High Court, on reference under s. 1 1 of the Act, held
that : (1) the first notice and memorandum were not notices
under s.21 so as to attract the period of limitation of one
year for making the reassessment, but (2) that the assessing
officer could not in the circumstances of the case, be said
to have reason to believe that some turnover of the assessee
had escaped assessment.
In appeal to this Court,
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HELD : (1) The High Court wag.-right in holding that the
first notice and memorandum were of a preliminary nature and
did not constitute notices under s.21. All that was stated-
in them was to call upon the assessee to produce account
books, and a threat, in case of non-compliance, that action
may be taken under s.21 of the Act. It was only on March
24, 1962, that notice under that section was given to the
respondent. The reassessment made on March 19, 1963, was
Within one year of the dates of service if the notice and
hence, the reassessment was not barred by limitation. [635C-
E]
626
(2) The High Court was in error in holding that the
assessing authority did not act within, the ambit of his
powers in ’initiating proceedings under s. 21. [634F]
(a) The words ’reason to believe’ convey that there must be
some reasonable grounds for the assessing authority to form
the belief that the turnover had escaped assessment.
Reasonable grounds necessarily postulate that they must be
germane to the formation of the belief regarding escaped
assessment. The belief must be held in good faith and
should pot be a pretense. At the stage of the issue of
notice the only consideration which has to weigh with the
assessing authority is whether there is some relevant
material giving rise to the prima facie inference that some
turnover has escaped assessment. If the grounds are of an
extraneous character, they would not warrant initiation of
proceedings under the section. But if they are relevant and
have a nexus with the formation of the belief regarding
escaped assessment, the assessing authority would be clothed
with jurisdiction to take action under the section. Whether
the grounds are adequate or not is not a matter which would
be gone into by the High Court or this Court, for, the
sufficiency of the grounds which induced the assessing
authority to act is not a justifiable issue. What can be
challenged is the existence of the belief, but not the
sufficiency of reasons for the belief. [632D-H]
S. Narayanappa v. Commissioner of Income Tax, [1967] 63
I.T.R. 219, applied.
In the present case, the facts show that the assessing
authority had valid grounds for forming the belief that pan
of the turnover of the respondent had escaped assessment,
and that the belief was formed in good faith. [634C-F]
(b) There is nothing in s.21 to support the contention that
proceedings for re-assessment cannot be initiated under the
section in the case of ex-parte assessments. Such a
construction would put a premium on contumacy and afford
protection to dealers who avoid appearing before the
assessing authority. [634G-H; 635A-B]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2032 of
1969.
Appeal by special leave from the judgment and order dated
February 26, 1969 of the Allahabad High Court in Sales Tax
Reference No. 440 of 1967.
S. C. Manchanda and O. P. Rana, for the appellant.
N. D. Karkhanis. Ram Awtar Garg and Ram Lal, for the
respondent.
The Judgment of the Court was delivered by
KHANNA, J. This appeal by special leave by the Commissioner
of Sales Tax Uttar Pradesh is directed against the judgment
of Allahabd High, Court whereby it answered the following
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two questions referred to it under section 11 of U.P. Sales
Tax Act (hereinafter referred to as the Act) ’in the
negative :
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(i)- Whether the assessing officer under
these circumstances could be said to have had
an honest belief that the turnover had
partially escaped taxation so as to start
proceedings under section 21 ?
(II) Whether the aforesaid two preliminary
notices asking for the production of accounts
can be taken to be notices under Sec. 21 for
the starting of the proceedings so as to
warrant passing of the assessment within one
year of the service thereof?"
The matter relates to the assessment year 1957-58. The res-
pondent assssee, Bhagwan Industries (P) Ltd., carries on the
business of selling atta, maida and sooji. Its business
comprises various units including Venkateshwar Flour Mills,
Lucknow. It was assessed on December 26, 1958 for the
purpose of sales tax for the year 1957-5 8 under rule 41 (5)
of the U.P. Sales Tax Rules. The estimated turnover was
determined to be Rs. 46,00,000, out of which the net
turnover of Venkateshwar Flour Mills for atta, maida and
sooji was estimated at Rs. 43,00,000. The assessment was
ex-parte and the respondent did not produce the account
books.
On account of food shortage the Government banned the pur-
chase of wheat by rolling flour mills from the open market
in August 1958. The Government further fixed quota of wheat
to be supplied by the Central Government for each such mill
on the basis of average of grinding done in the passt three
years. The quota of Venkateshwar Flour Mills was fixed at
1,192 tons, i.e. 32,000 maunds per month. With that quota
the respondent in the assessment year 1958-59 disclosed a
turnover of Rs. 75,70,840. On September 13, 1961 the Sales
Tax Officer issued the following notice to the respondent
"Certain items of sales and purchases made by
you during the year 57-58 & 58-59 have come to
my notice which need verification. You are
required to appear before me on 27-9-61 with
all your account books of the year 57-58 and
58-59 for the above mentioned verification.
2. Please note that in case you fail to
appear it will be presumed that the Sales and
Purchases under reference are not entered in
your books and action under section 21 of the
U.P. Sales Tax Act may be taken against you."
The above notice was served upon the
respondent on September 19, 1961. Appearance
was put in on behalf of the respondent in
pursuance of the notice, but the account books
were not produced.
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On March 13, 1962 the Sales Tax Officer sent
the following memorandum to the respondent :
"M/s Bhagwan Industries Private Ltd., Aishbagh
Lucknow deal in atta, maida and sooji which
are manufactured by them in their rolling
flour millss Shree Venkateshwar Flour Mills.
They have been finally assessed for the years
1956-57 and 1957-58 on estimated turnover of
Rs. 42,75,000/- (tax assessed Rs. 98
,046-94)
and Rs. 45,00,000 (tax assessed Rs. 72,875.00)
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respectively. Both these assessment orders
were passed exparte. The case of the year
1956-57 was reopened under section 21 on the
basis of certain information and an escaped
turnover of Rs. 35,532/- was again assessed
under section 21 of the U.P. Sales Tax Act.
At the time of this assessment also the
account books were not produced.
2. The above mentioned firm is on record
for the last many years. The sale of atta,
maida and sooji was exempt under section 4 of
the U.P. Sales Tax Act upto 31-3-56 but was
declared taxable with effect from 1-4-56.
According to the assessment order of the year
1955-56 their sales of atta, maida and sooji
had amounted to Rs. 58,18,425-15-6. The
assessment case of the firm for the year 1958-
59 has also been completed and during that
year according to the account books the
turnover of atta, maida and sooji had amounted
to Rs. 75,70,840/Keeping in view the turnover
according to the account books during the year
1955-56 and 1958-59 it appeared that the
turnover determined in the exparte orders of
the year 1956-57 and 1957-58 was estimated at
a lesser amount and thus some turnover escaped
assessment during each of these two years. It
was, therefore, considered necessary that the
actual position be ascertained from the
assessee. Some information received from
other Sales Tax Officers regarding the sales
made by this firm during the year 1957-58 also
needed verification as was done in the year
1956-57 resulting in the assessment of the
firm under section 21 during that year.
3. A notice was, therefore, issued to the
firm on 13-9-61 for the production of the
account books of the year 1957-58 but the firm
failed to produce the account books. Again
summons were issued under rule 78 of the U.P.
Sales Tax Rules to Shri Keshoe Pd. Vaid,
Managing Director of the firm requiring him to
appear in person and to produce the account
books of the
629
firm for the year 1956-57 and 1957-58 but
again neither the account books were produced
nor Shri Vaid appeared in person. One
application dated 27-12-1961 was, however,
received from one of the directors of the firm
informing that Shri Kesheo Pd. Vaid was out
of station and requesting that the summons be
issued in the name of the concern M/s.
Bhagwan Industries Private Ltd. rather than in
the name of any individual. This application
has been kept on record.
4. The hesitation on the part of the firm
to produce the account books and even to
disclose their actual turnover during the
years 1956-57 and 1957-58 as per their account
books confirms the presumption that they have
been under-assessed for these two years. They
are, however, given an opportunity to produce
their account books of these years on 19-3-62
and disclose their sales of the above
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mentioned two years as per their account books
failing which their case of the year 1957-58
will be reopened under section 21 of the U.P.
Sales Tax Act and penalty or prosecution
proceedings as permissible under the U.P.
Sales Tax Act shall be started for the year
1956-57 the assessment of which has already
become time barred.
5. A copy of this order shall be kept in
the file of the dealer pertaining to the years
1956-57 and another shall be kept in the file
pertaining to the year 1957-58."
The memorandum was received by the respondent on March 16,
1962, but the account books were not produced by the respon-
dent. On March 24, 1962 the following notice was issued
under section 21 of the Act to the respondent and the same
was served on March 26, 1962 :
"As I have come to know that a part of your
sale proceeds relating to the assessment year
1957-58, has been left over from being taxed.
Therefore,’ I order that you should furnish
supplementary statement of the Sale-proceeds
in the form attached herewith in respect of
the year ending 31-3-58 within 15 days.
2. You are further informed that you should
be present at the Sales Tax Office, Golaganj
on 27-4-62 at 10.30 O’clock, along with all
the account books and your other business
papers in respect of the year the
630
sale proceeds whereof are mentioned by you in
the above mentioned statement. If you fail to
turn up on the fixed date tax shall be levied
on you ex-parte."
On October 5, 1962 the accountant of the respondent made a
statement before the Sales Tax Officer that the account
books for the years 1956-57 and 1957-58 had ’been displaced
in the head office at Bombay and no books, registers or
vouchers regarding the business of the years 1956-57 and
1957-58 were available. On March 19, 1963 the Sales Tax
Officer made an assessment order under section 21 of the Act
for the assessment year 1957-58 estimating the total net
turnover for that year at Rs. 84,50,000. The amount of
escaped turnover was estimated to be Rs. 38,50,000.
Appeal filed by the respondent against the above order was
dismissed.
The respondent then went up in revision and contended that
there was no material on which the Sales Tax Officer could
have reason to believe that turnover had escaped assessment.
The proceedings initiated under section 21 of the Act were
said to be without jurisdiction. It was also urged on
behalf of the respondent that notice issued on September 13,
1961 as also the memorandum dated March 13, 1962 constituted
valid notices under section 21 of the Act and as the
assessment had not been completed within one year of the
service of those notices, the assessments were barred by
limitations The Judge (Revisions) rejected these
contentions. He was, however, of the opinion that the
quantum of turnover needed redetermination. At the instance
of the respondent, the Judge (Revisions) referred the
questions reproduced at the commencement of this judgment to
the High Court.
The High Court while answering the first question in the
negative, referred to the words "reason to believe" in
section 21 of the Act and observed that the reason must be
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that of an honest and reasonable person based upon
reasonable grounds and that it was not sufficient that the
Sales Tax Officer should have reason to suspect that the,
turnover had been under-assessed. In the opinion of the
High Court, it could not be said that the Sales Tax Officer
had reason to believe that the turnover had been under
assessed. As regards the second question, the High Court
held that notice dated September 13, 1961 and the memorandum
dated March 13, 1962 were of a preliminary nature and could
not be considered to be notices under section 21 of the Act.
In appeal before us Mr. Manchanda on behalf of the appellant
has assailed the correctness of the answer given by the High
631
Court to the first question. It is submitted that there was
rational basis for the Sales Tax Officer to believe that the
turnover of the respondent had been under-assessed and that
the finding of the High Court that the Sales Tax Officer
could not be said to have reason to believe that the
turnover had been- under-assessed was incorrect. As against
that Mr. Karkhanis on behalf of the respondent has canvassed
for the correctness of the view of the High Court in answer
to question No. (1). There is, in our opinion, considerable
force in the submission of Mr. Manchanda. Section 21 of the
Act deals with assessment of tax on assets and levy of
licence fees incorrectly assessed, and reads as under :
"(1) If the assessing authority has reason to
believe that the whole or any part of the
turnover of a dealer has, for any reason,
escaped assessment to tax for any year, the
assessing authority may, after issuing notice
to the dealer, and making such enquiry as may
be necessary, assess or re-assess him to tax
Provided that the tax shall be charged at the
rate at which it would have been charged had
the turnover not escaped assessment, or full
assessment, as the case may be.
Explanation.-Nothing in this subsection shall
be deemed to prevent the assessing authority
from making an assessment to the best of its
judgment.
(2) No order of assessment under sub-section
(1) or under any other provision of this Act
shall be made for any assessment year after
the expiry of four years from the end of such
year :
Provided that where the notice under sub-
section (1) has been served within such four
years the assessment or re-assessment to be
made in pursuance of such notice may be made
within one year of the date of the service of
the notice even if the period of four years is
thereby exceeded
Provided further that nothing contained in
this section limiting the time within which
any assessment or re-assessment may be made
shall apply to an assessment or re-assessment
made in consequence of, or to give effect to,
any finding or direction contained in an order
under section 9, 10 or 11.
Explanation.-Where the assessment proceedings
relating to any dealer remained stayed under
the orders
632
of any Civil or other competent Court, the
period during which the proceedings remained
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so stayed shall be excluded in computing the
period of limitation for assessment provided
under this sub-section."
Perusal of sub-section (1) of the section reproduced above
shows that the assessing authority can assess or re-assess a
dealer to tax if such authority has reason to believe that
the whole or any part of the turnover of a dealer has, for
any reason, escaped assessment to tax for any year. In such
an event, the assessing authority before making the
assessment or re-assessment must issue notice to the dealer.
The said authority may also make such enquiry as may be
necessary in the circumstances of the case.
The controversy between the parties has centered on the
point as to whether the assessing authority in the present
case had reason to believe that any part of the turnover of
the respondent had escaped assessment to tax for the
assessment year 1957-58. Question in the circumstances
arises as to what is, the import of the words "reason to
believe", as used in the section. In our opinion, these
words convey that there, must be some rational basis for the
assessing authority to form the belief that the whole or any
part of the turnover of a dealer has, for any reason,
escaped assessment to tax for some year. If such a basis
exists, the assessing authority can proceed in the manner
laid down in the section. To put it differently, if there
are, in fact, some reasonable grounds for the assessing
authority to believe that the whole or any part of the
turnover of a dealer has escaped assessment, it can take
action under the section. Reasonable grounds necessarily
postulate that they must be germane to the formation of the
belief regarding escaped assessment. If the grounds are of
an extraneous character, the same would not warrant
initiation of proceedings under the above section. If,
however, the grounds are relevant and have a nexus with the
formation of belief regarding escaped assessment, the
assessing authority would be clothed with jurisdiction to
take action under the section. Whether the grounds are
adequate or not is not a matter which would be gone into by
the High Court or this Court, for the sufficiency of the
grounds which induced the assessing authority to act is not
a justiciable issue. What can be challenged is the
existence of the belief but not the sufficiency of reasons
for the belief. At the same time, it is necessary to
observe that the belief must be held in good faith and
should not be a mere pretence.
It may also be mentioned that at the stage of the issue of
notice the consideration which has to weigh is whether there
is some relevant material giving rise to prima facie
inference that some turnover has escaped assessment. The
question as to
633
whether that material is sufficient for making assessment or
re-assessment under section 21 of the Act would be gone into
after notice is issued to the dealer and he has been heard
in the matter or given an opportunity for that purpose. The
assessing authority would then decide the matter in the
light of material already in its possession as well as fresh
material procured as a result of the enquiry which may be
considered necessary.
The import of the words "reason to believe" has been
examined by this Court in cases arising out of proceedings
under section 34 of the Indian Income Tax Act, 1922 wherein
also these words were used. The aforesaid section dealt
with income escaping assessment and conferred jurisdiction
on the Income Tax Officer to make assessment or re-
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assessment if he had reason to believe. that income, profits
or gains chargeable to income tax had been under-assessed
and that such under-assessment had occurred by reason of
either omission or failure on the part of the assessee to
make a return of his income or to disclose fully and truly
all material facts necessary for his assessment. Certain
other conditions were also necessary, but we are not
concerned with them.. Dealing with that section in the case
of S. Narayanappa v. Commissioner of Income Tax(1) this
Court observed :
" But the legal position is that if there, are
in fact some reasonable grounds for th
e Income-
tax officer to believe that there had been any
non-discosure as regards any fact, which could
have a material bearing on the question of
under-assessment, that would be sufficient to
give jurisdiction to the Income-tax Officer to
issue the notice under section 34. Whether
these grounds are adequate or not is not a
matter for the court to investigate. In other
words, the sufficiency of the grounds which
induced the Income-tax Officer to act is not a
justiciable issue. It is of course open for
the assessee to contend that the Income-tax
Officer did not hold the belief that there had
been such nondisclosure. In other words, the
existence of the belief can be challenged by
the assessee but not the sufficiency of the
reasons for the belief. Again the expression
"reason to believe" in section 34 of the
Income-tax Act does not mean a purely
subjective satisfaction on the part of the
Income-tax Officer. To put it differently, it
is open to the court to examine the question
whether the reasons, for the belief have a
rational connection or a relevant bearing to
the formation of the belief and are not
extraneous or irrelevant to the purpose of the
section. To this limited extent,
(1) (1967) 63 I. T. R. 219.
634
the action of the Income-tax Officer in
starting proceedings under section 34 of the
Act is open to challenge in a court of law."
Reliance was placed in the above context upon an earlier
decision of this Court in the case of Calcutta Discount Co.
Ltd. v. Incometax Officer, Companies District I,
Calcutta.(1) The above observations regarding the import of
the words "reason to believe" though made in the, context of
section 34 of the Indian Income Tax Act, 1922 have, in our
opinion, equal bearing on the construction of those words in
section 21 of the U.P. Sales Tax Act.
In the light of the view we have taken of the import of the
words "reason to believe", we have no doubt that the
assessing authority in the present case had valid grounds
for initiating proceedings under section 21 of the Act
against the respondent. It would appear from the memorandum
dated March 13, 1962 sent by the assessing authority that
for the assessment year 1955-56 the sales of atta, maida and
sooji of the respondent amounted to over rupees fifty eight
lakhs. Account books of the respondent also showed that
during the year 1958-59 the turn-over of the respondent for
sale of atta, maida and sooji amounted to over rupees
seventy five lakhs. The assessing authority had also
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material with it to show that the quota of wheat for the
respondent had been fixed in August 1958 on the basis of the
average of grinding done in the past three years. There was
also the additional. fact that the respondent had in spite
of repeated notices not produced its account books for the
assessment year 1957-58. These facts, in our opinion, were
germane to the formation of the belief of the assessing
authority that part of the turnover of the respondent had
escaped assessment to tax. It cannot be said that the above
belief was not formed in good faith or was mere pretence for
initiating action under section 21 of the Act. The
assessing authority in the circumstances, in our opinion,
acted within the ambit of its powers in initiating
proceedings under section 21 of the Act.
We are unable to accede to the contention of Mr. Karkhanis
that as the assessment sought to be reopened was ex-parte
assessment under rule 41(5) of the Uttar Pradesh Sales Tax
Rules, no proceedings in respect of that assessment can be
initiated under section 21 of the Act. There is nothing in
that section to restrict its operation to assessments other
than those which have ’been made ex-parte under rule 41(5).
The language of the section makes it plain that the
assessing authority can take action if such authority has
reason to believe that the whole or part of the turnover of
a dealer has, for any reason, escaped assessment
(1) (1961) 41 I. T. R. 191.
635
to tax for any year. To accede to the contention of Mr.
Karkhanis would be tantamount to affording protection, so
far as the operation of section 21 is concerned, to dealers
who avoid to put in appearance and produce their account
books before the assessing authority. Such a construction
is not only not warranted by the language of the section, it
is manifestly unreasonable inasmuch as it puts a premium on
contumacy.
Mr. Karkhanis has also assailed the answer of the High Court
to question No. (11) and has contended that the notice dated
September 13, 1961 and the memorandum dated March 13, 1962
should be construed as notices under section 21 of the, Act.
As the re-assessment was not completed within one year of
the service of these notices, the re-assessment, according
to the learned counsel, should be held to be barred by
limitation. There is, in our opinion, no force in this
contention, we agree with the High Court that the above
notice and the memorandum were of a preliminary nature and
did not constitute notices under section 21 of the Act. All
that was stated in the said notice and The memorandum was to
call upon the respondent to produce account books. Threat
was also held out that in case of noncompliance by the
respondent, proceedings would be taken under section 21 of
the Act. The above notice and the memorandum could not
consequently be construed as notices under section 21 of the
Act. It was only on March 24, 1962 that notice under
section 21 of the Act was given to the respondent and the
same was served on March 26, 1962. The assessment under
section 21 was made on March 19, 1963 which was admittedly
within one year of the date of the, service of the notice
under section 21 of the Act.
We accordingly accept the appeal and discharge the answer
given by the High Court to question No. (1). In our
opinion, the assessing authority had an honest belief that
the turnover of the respondent had partially escaped
taxation so as to justify initiation of proceedings under
section 21 of the Act. We accordingly answer the said
question in the affirmative and in favour of the department.
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The appellant shall be entitled to the costs of this Court
as well as in the High Court.
V.P.S. Appeal allowed.
636