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PETITIONER: RAGHUBAR MANDAL HARIHAR MANDAL

       Vs.

RESPONDENT: THE STATE OF BIHAR

DATE OF JUDGMENT: 22/05/1957

BENCH: DAS, S.K. BENCH: DAS, S.K. BHAGWATI, NATWARLAL H. KAPUR, J.L.

CITATION:  1957 AIR  810            1958 SCR   37

ACT: Sales Tax-Assessee’s accounts rejected as unreliable-Assess- ment  made  on  guess  without  reference  to  evidence   or materialValidity-Bihar Sales Tax Act, 1944 (Bihar Act VI  of 1944),S.I0(2)(b)-Indian  Income-tax Act, 1922 (XI Of  1922), S. 23(3).

HEADNOTE: The  appellant filed the necessary returns, as  required  by the  provisions  of  the  Bihar Sales  Tax  Act,  1944,  and produced   the  account  books.   The  Sales   Tax   Officer considered  that the account books were not dependable  and, after  rejecting them as well as the returns,  proceeded  to estimate  the  gross turnover by adopting a figure  by  pure guess,  without reference to any evidence or  material,  and made the assessment under s. 10 (2) (b) of the Act. Held,  that under S. 1O (2) (b) of the Bihar Sales Tax  Act, 1944,  a duty is imposed on the assessing authority to  make the  assessment after hearing such evidence as the  assessee may  produce  and  such  other  evidence  as  the  assessing authority may require on specified points, and, in case  the returns  of  the  assessee  and his  books  of  account  are rejected, the assessing authority must make an estimate, but this  must  be  based on such evidence or  material  as  the assessing authority has before him, including the assessee’s circumstances,  knowledge of previous returns and all  other matters which the assessing authority thinks will assist him in arriving at a fair and proper estimate. Dhakeswari Cotton Mills Ltd. v. Commissioner of Income  Tax, West Bengal, (1955) 1 S.C.R. 941 and Income-tax Commissioner v.  Badridas  Ramrai Shop, Akola, (1937) L.R. 64  I.A.  102, relied on.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 249 of 1954. Appeal  by special leave from the judgment and  order  dated January 8, 1952, of the Patna High Court in Misc.   Judicial Cases Nos. 13, 14, 15, 16, 17, 18 and 19 -of 1949.

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38 Bhawani Lal and K. L. Mehta, for the appellants. L.K.  Jha,  B.  K.  P.  Sinha and  R.  C.  Prasad,  for  the respondent. 1957.  May 22.  The Judgment of the Court was delivered by S.K.  DAS J.-The appellant Messrs.  Raghubar Mandal  Harihar Mandal,  hereinafter referred to as the assessee, is a  firm of bullion dealers carrying on its business at  Laheriasarai in  the  district of Darbhanga in the State of  Bihar.   The assessee was assessed to sales tax for seven quarters ending December 31, 1945, March, 31, 1946, June 30, 1946, September 30,  1946,  December 31, 1946, March 31, 1947 and  June  30, 1947,  respectively.  For three of the  aforesaid  quarters, namely those ending on December 31, 1945, March 31, 1947 and June  30,  1947, the assessee failed to file  the  necessary returns as required by the provisions of the Bihar Sales Tax Act,  1944 (hereinafter referred to as the Act),  which  was the Act in force during the material period; therefore,  the assessee was assessed for those three quarters under  sub-s. (4)  of s. 10 of the Act.  For the remaining four  quarters, the  assessee  did  file returns.   The  Sales  Tax  Officer rejected those returns as also the books of account filed by the  assessee  for all the seven quarters and  assessed  the assessee  under el. (b) of sub-s. (2) of s. 10 of  the  Act. The  Sales Tax Officer passed separate orders assessing  the tax for all the seven quarters simultaneously on October  9, 1947.   He  assessed the tax on a taxable  turnover  of  Rs. 2,94,000  for each of the five quarters ending December  31, 1945, March 31, 1946, September 30, 1946, December 31,  1946 and  March  31, 1947; for the other two quarters  ending  on June  30, 1946, and June 30, 1947, he assessed the tax on  a taxable  turnover of Rs. 3,92,000.  The assessee then  moved in  appeal  the  Commissioner of  Commercial  Taxes,  Tirhut Division, but the Commissioner dismissed the appeals by  his order  dated  February 23, 1948.  The Board of  Revenue  was then  moved  in revision but, by its order  dated  July  31, 1948, the Board refused to interfere.  The Board expressed 39 the  view that the finding of the Sales Tax Officer and  the Commissioner  that  the books of account maintained  by  the assessee  were  not dependable was a finding of  fact  which could  not be interfered with in revision ;  -therefore  the assessing  officer was bound to assess to’ the best  of  his judgment.   The Board was then moved under s. 21 of the  Act to refer certain questions of law to the High Court of Patna which,  the assessee contended, arose out of its order.   By its  order dated December 10, 1948, the Board  rejected  the applications for making a reference to the High Court on the same  ground, namely, that no question of law  was  involved and  the  assessment orders were concluded by  a  concurrent finding of fact.  The assessee then moved the High Court and by  its order dated April 27, 1949, passed in  Miscellaneous Judicial  Cases  Nos. 13 to 19 of of 1949,  the  High  Court directed  the  Board  of  Revenue to state  a  case  on  the following question: "  Whether the Sales Tax.Officer is entitled  under  section 10(2)(b) of the Act to make an assessment on any figures  of gross  turnover  without  giving any basis  to  justify  the adoption of that figure ?" The Board of Revenue then stated a case, and the High  Court disposed  of the reference by answering the question in  the affirmative by its judgment and order dated January 8, 1952. The  assessee  then moved this Court  and  obtained  special leave to appeal from the said judgment and order of the High Court.

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The  main contention of the assessee is that the High  Court has  not correctly answered the question of law referred  to it.   Before we proceed to consider this contention  of  the assessee, it is necessary to clear the ground by  delimiting the  precise  scope  of the question referred  to  the  High Court.  It is well settled that the jurisdiction of the High Court in the’ matter of incometax references is an  advisory jurisdiction  and under the Income-tax Act the  decision  of the   Tribunal  on  facts  is  final,  unless  it   can   be successfully  assailed  on  the ground  that  there  was  no evidence  for  the  conclusion  on  facts  recorded  by  the Tribunal or the conclusion was such as no reasonable body of persons  could have arrived at.It is also well settled  that the duty 40 of the High Court is to start with the statement of the case as  the  final  statement of the facts  and  to  answer  the question  of  law  with reference to  that  statement.   The provisions of the Indian Income-tax Act are in pari  materia with the provisions of the Act under our consideration,  the main scheme of the relevant provisions of the two Acts being similar  in nature, though the wording of the provisions  is not  exactly  the same.  Under s. 21 of the  Act,  the  High Court  exercises a similar advisory jurisdiction, and  under sub-s.  (3) of that section, the High Court may require  the Board  of Revenue to state a case and refer it to  the  High Court, when the High Court is satisfied that the refusal  of the Board to make a reference to the High Court under sub-s. (2)  is not justified.  Under sub-s. (5) of s. 21  the  High Court  hears the reference and decides the question  of  law referred  to  it, giving in a judgment the  grounds  of  its decision.  In the case under our consideration, the question which  was  referred  to  the  High  Court  related  to  the assessments  made  under s. 10(2)(b) of the  Act;  in  other words, the question related to those four quarters only  for which  the  assessments were made under  s.  10(2)(b).   The question did not relate to the three quarters for which  the assessee  had  filed no returns and  assessments  were  made under  s. 10(4) of the Act.  At one place in  its  judgment, the  High  Court  referred to a  slight  inaccuracy  in  the question  framed, but it did not reframe the question so  as to widen its scope and include the three quarters for  which assessments  were  made  under s. 10(4)  of  the  Act.   The question,  as  it stood and as it was answered by  the  High Court,  did not relate to the propriety or legality  of  the assessments  made  under  s. 10(4) of  the  Act.   We  must, therefore,  make  it  clear  at the  very  outset  that  the question  relates  to  those four quarters  only  for  which assessments were made under s. 10(2)(b) of the Act, and  the answer given to the question will govern those four quarters only.  Having  thus  indicated  the  precise  scope  of  the question  referred  to  the High Court, we  proceed  now  to consider the main contention of the assessee.  We must first read the relevant provisions of the statute 41 under  which the assessments were made.  Sub-section (1)  of s.  10  of  the  Act states  that  if  the  Commissioner  is satisfied  without  requiring the presence of  a  registered dealer  or  the production by him of any evidence  that  the returns  furnished in respect of any period are correct  and complete,  he  shall assess the amount of tax due  from  the dealer  on the basis of such returns.  Clause (a) of  sub-s. (2)  states  what the Commissioner shall do, if  he  is  not satisfied  without  requiring the presence of  a  registered dealer  who furnished the returns or production of  evidence

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that  the  returns furnished in respect of  any  period  are correct  and complete; the clause states that in that  event the  Commissioner shall serve on the dealer a notice in  the prescribed  manner requiring him either to attend in  person or to produce or cause to be produced any evidence on  which such dealer may rely in support of his returns.  Then  comes cl. (b) of sub-s. (2) which must be quoted in extenso: "  (b)  On  the  day specified in  the  notice  or  as  soon afterwards  as may be, the Commissioner, after hearing  such evidence as the dealer may produce, and such other  evidence as  the Commissioner may require on specified points,  shall assess the amount of tax due from the dealer." These provisions are similar to the provisions contained  in s.  23 of the Indian Income-tax Act.  Sub-section (1) of  s. 10  of  the Act corresponds to sub-s. (1) of s.  23  of  the Indian Income-tax Act; clause (a) of sub-s. (2) of s. 10  of the  Act  corresponds to sub-s. (2) of s. 23 of  the  Indian Income-tax Act; and clause (b) of sub-s. (2) of S. 10 of the Act corresponds to sub-s. (3) of s. 23 of the Indian Income- tax  Act, though there are some verbal  differences  between the two provisions.  Sub-section (3) of s. 23 of the  Indian Income-tax Act requires the Income-tax Officer to assess the total  income of the assessee and determine the sum  payable by  him  on the basis of such assessment, by  "an  order  in writing";  but  cl. (b) of sub-s. (2) of s. 10  of  the  Act requires  the Commissioner to assess the amount of  tax  due from the dealer and does not impose any liability as to  "an order in writing." In spite of these differences, the 42 two provisions are substantially the same and impose on  the assessing  authority a duty to assess the tax after  hearing such  evidence  as  the dealer may produce  and  such  other evidence as the assessing authority may require on specified points. The  point  for  our  consideration  is-can  the   assessing authority,  purporting to act under s. 10(2)(b) of the  Act, assess  the  amount of tax due from a dealer  more  or  less arbitrarily   or  without  basing  the  assessment  on   any materials whatsoever ? In the question referred to the  High Court,  the expression used is, "make an assessment  on  any figure of gross turnover without giving any basis to justify the adoption of that figure".  That expression is perhaps  a little  ambiguous, but read in the context of the  statement of  the  case,  the question can only  mean  this:  can  the assessing authority adopt a figure of gross turnover by pure guess  and without referring to any materials on  which  the figure  is  based ?  It is clear to us that,  understood  in that  sense,  the  High  Court  has  answered  the  question incorrectly.    The  High  Court  went  into  an   elaborate consideration, by way of comparison and contrast, of  sub-s. (4)  and el. (b) of sub-s. (2) of s. 10 of the Act.   It  is unnecessary for us to make any pronouncement in this  appeal with  regard to the precise scope of sub-s. (4) of s. 10  of the Act, which corresponds more or less to sub-s. (4) of  s. 23 of the Indian Income-tax Act; nor is it necessary for  us to decide if an assessment made under el. (b) of sub-s.  (2) of s. 10 of the Act, when the account books of the  assessee are  disbelieved, stands exactly on the same footing  as  an assessment made under sub-s. (4) of s. 10 when the  assessee has  failed  to  furnish his  returns.   In  some  decisions relating  to  the  corresponding provisions  of  the  Indian Income-tax Act, it has been said that the difference between the  two is one of degree only, the one being  more  summary than  the  other.  These are questions which do  not  really fall  for decision in the present appeal, which is  confined

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to interpreting the true nature and scope of el. (b) of sub- s.   (2)  of  s.  10  of  the  Act.   With  regard  to   the corresponding provision in sub-s. (3) of s. 23 of the Indian Income-tax Act, there is a decision of this 43 Court which, in our opinion, answers the question before us. The  decision  is that of Dhakeswari Cotton  Mills  Ltd.  v. Commissioner  of  Income Tax, West  Bengal(1).   This  Court observed: "As  regards  the  second  contention,  we  are  in   entire agreement  with the learned Solicitor-General when  he  says that  the  Income-tax Officer is not fettered  by  technical rules of evidence and pleadings, and that he is entitled  to act  on material which may not be accepted as evidence in  a Court  of law, but there the agreement ends; because  it  is equally clear that in making the assessment under sub-s. (3) of s. 23 of the Act, the Income-tax Officer is not  entitled to  make  a  pure  guess  and  make  an  assessment  without reference  to  any evidence or any material at  all.   There must  be something more than bare suspicion to  support  the assessment under s. 23(3)." In  our view, the aforesaid observations clearly  show  that the High Court was in error in answering the question in the affirmative.   Firstly, the High Court treated the  question referred to it as a pure question of fact; if that were  so, then  the High Court should have rejected the  reference  on the ground that it was not competent to answer a question of fact.   Then, the High Court proceeded to  consider  certain decisions relating to the interpretation of sub-ss. (3)  and (4)  of  s. 23 of the Indian Income-tax Act, and  held  that there  was no difference between an assessment under  sub-s. (3)  and an assessment under sub-s. (4) of s. 23.  The  High Court applied the same analogy and on that footing held that there  being no difference between an assessment  under  cl. (b)  of sub-s. (2) and an assessment under sub-s. (4) of  s. 10  of  the Act, the answer to the question must be  in  the affirmative.  In our view, the approach of the High Court to the  question  referred to it was erroneous and  the  answer given  to the question by it solely on the basis  of  sub-s. (4) of s. 10 of the Act was vitiated by that wrong approach. It  was  not sub-s. (4) of s. 10 of the Act which  the  High Court had to consider; it had to consider the true scope and effect of cl. (b) of sub-s. (2) of s. 10 of the Act. (1)  [1955] 1 S.C.R. 941, 949. 44 Learned  counsel for the respondent has strongly  urged  two points  in support of the answer which the High Court  gave. Firstly,  he has contended that, on a proper reading of  the assessment  orders  and the orders of the  Commissioner,  it would  appear  that the gross turnover for the  quarters  in question  was  based on certain  materials;  therefore,  the argument of learned counsel is that it is not correct to say that the figure of gross turnover was arbitrarily adopted or was  adopted  without  reference  to  any  evidence  or  any material at all.  We have examined the assessment orders  in question, which form part of the statement of the case.   It is  clear  to  us that what the Sales Tax  Officer  and  the Commissioner did was to hold, for certain reasons, that  the returns made by the assessee and the books of account  filed by it were incorrect and undependable.  It is not  necessary to repeat those reasons, because we must accept the  finding of  fact  arrived at by the assessing authorities  that  the returns  and the books of account were not dependable.   The assessing  authorities  rightly  pointed  out  that  several transactions were not entered in the books of account; and a

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surprise inspection made on July 15, 1947, disclosed certain transactions with a Bombay firm known as Messrs.   Kishundas Lekhraj,  which were not mentioned in the books of  account; and  finally, the assessee Was importing silver in the  name of five confederates in order to suppress the details of the transactions etc.  The assessing authorities further pointed out  that there was a discrepancy between the  return  filed for the quarter ending June 30, 1946, and the accounts filed in support of it; the return showed a gross turnover of  Rs. 2,28,370-12-0  while the accounts revealed a gross  turnover of  Rs.  1,48,204.   All these we must  accept  as  correct. Having  rejected the returns and the books of  account,  the assessing  authorities  proceeded  to  estimate  the   gross turnover.  In so estimating the gross turnover, they did not refer  to  any  materials  at all.  On  the  contrary,  they indulged  in  a  pure guess and  adopted  a  figure  without reference  to any evidence or any material at all.   Let  us take,  for  example, the assessment order  for  the  quarter ending June 30, 1946. 45 The Sales Tax Officer said: "I reject the dealer’s  accounts and  estimate  a gross turnover of Rs. 4,00,000. 1  allow  a deduction  at  2%  on the turnover and  assess  him  on  Rs. 3,92,000  to  pay sales tax of Rs. 6,125." For  the  quarter ending on September 30, 1946, the Sales Tax Officer said: "I reject  his irregular account and estimate a gross  turnover of  Rs.  3,00,000  for the quarter and  assess  him  on  Rs. 2,94,000  to pay tax of Rs. 4,593-12-0." These  and  similar orders  do  not  show  that the  assessment  was  made  with reference to any evidence or material; on the contrary, they show  that  having  rejected  the  books  of  account,   the assessing  authorities indulged in -pure guess and  made  an assessment without reference-to any evidence or any material at all.  This the assessing authorities were not entitled to do under cl. (b) of sub.s. (2) of s. 10 of the Act. Secondly, learned counsel for the respondent has referred us to several decisions on which the High Court relied and  has argued that on the basis of those decisions, it must be held that  the  answer given by the High Court  to  the  question referred to it was a correct answer.  We propose to  examine briefly  some of those decisions, though, as we have  stated earlier, the question is really answered by the observations made  by  this Court in Dhakeswari Cotton Mills’  case  (1). The first decision is the Privy Council decision in  Income- tax  Commissioner v. Badridas Ramrai Shop, Akola (2).   Lord Russell  of  Killowen in delivering the  judgment  of  their Lordships  made the following observations as respects  a  " best  of judgment " assessment within the meaning of  s.  23 (4) of the Indian Income-tax Act: "  The officer is to make an assessment to the best  of  his judgment  against  a  person who is in  default  as  regards supplying  information.   He must not  act  dishonestly,  or vindictively  or  capriciously,  because  he  must  exercise judgment  in  the  matter.  He must make  what  he  honestly believes  to  be  a fair estimate of the  proper  figure  of assessment,  and for this purpose he must,  their  Lordships think,  be able to take into consideration  local  knowledge and  repute in regard to the assessee’s  circumstances,  and his  own knowledge of previous returns by,  and  assessments of, the assessee, (1) [1955] S.C.R. 94I, 949. (2) (1937) 64 I.A. 102, 114-115. 46 and  all  other matters which he thinks will assist  him  in arriving  at  a fair and proper estimate: and  though  there

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must  necessarily  be guess-work in the matter, it  must  be honest guess-work.  " We find nothing in those observations which runs counter  to the  observations made in Dhakeswari Cotton Mills’  case(1). No  doubt it is true that when the returns and the books  of account  are  rejected, the assessing officer must  make  an estimate,  and to that extent he must make a guess; but  the estimate must be related to some evidence or material and it must  be  something more than mere suspicion.   To  use  the words of Lord Russell of Killowen again, " he must make what he  honestly  believes to be a fair estimate of  the  proper figure of assessment" and for this purpose he must take into consideration  such materials as the assessing  officer  has before   him,   including  the   assessee’s   circumstances, knowledge  of previous returns and all other  matters  which the assessing officer thinks will assist him in arriving  at a  fair  and  proper  estimate.   In  the  case  under   our consideration, the assessing officer did not do so, and that is where the grievance of the assessee arises. The next decision is Ganga Ram Balmokand v. Commissioner  of Income Tax, Punjab (2).  It was held therein that where  the income-tax   authorities   were  not  satisfied   with   the correctness or completeness of the assessees’ accounts  and, taking  into consideration the state of affairs  in  general and the fact that the assessees had a large business and the profit  shown by them was abnormally low in comparison  with that  of other persons carrying on the same business in  the locality,  calculated the taxable income by applying a  flat rate  of  7  per cent., the authorities  were  justified  in applying  such  a  flat  rate, and the  burden  was  on  the assessees  to  displace  the  estimate.   There  again,  the estimate  made  was not a pure guess and was based  on  some materials which the Income-tax Officer had before him.   Din Mohammad  J. who gave the leading judgment, observed:  "  It cannot be denied that there must be some material before the Income-tax Officer on which (1) [1955] 1 S.C.R. 941, 949. (2) [1937] 5 I.T.R. 464. 47 to base his estimate, but no hard and fast rule can be  laid down  by  the  Court  to define what  sort  of  material  is required  on which his estimate can be founded."  With  that observation we generally agree.  If, in this case, the Sales Tax  authorities had based their estimate on  some  material before  them,  no objection could have been taken;  but  the question  which  was referred to the High, Court  and  which arose  out  of the orders of assessment was whether  it  was open  to  the said authorities to make an  assessment  on  a figure   of  gross,  turnover,  without  referring  to   any materials  to  justify  the adoption  of  that  figure.   In answering  that question in the affirmative, the High  Court has  given a carte blanche to the Sales Tax authorities  and has, in our opinion, misdirected itself as to the true scope and effect of cl. (b) of sub-s. (2) of s. 10 of the Act. The  next  decision  is Gunda Subbayya  v.  Commissioner  of Income-tax,  Madras (1).  This decision also does  not  help the  respondent.  It was held in that decision  that  though there is nothing in the Indian Income-tax Act which  imposes a  duty  on an Incometax Officer, who  makes  an  assessment under s. 23 (3), to disclose to the assessee the material on which  he proposes to act, natural justice requires that  he should  draw the assessee’s attention to it and give him  an opportunity to show that the officer’s information is  wrong and  he  should also indicate in his order the  material  on which  he  has made his estimate.  This decision  is  really

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against the respondent and does not lay down any rule  which may be said to be inconsistent with the observations made by this Court in Dhakeswari Cotton Mills’ case (2). The decision of the Lahore High Court in Seth Gurmukh  Singh v.  Commissioner of Income-tax, Punjab (3) was  specifically approved by this Court in Dhakeswari Cotton Mills’ case (2). The  rules laid down in that decision were these: (1)  While proceeding under sub-s. (3) of s. 23 of the Income-tax  Act, the  Income-tax  Officer  is  not bound  to  -rely  on  such evidence  produced  by the assessee as he  considers  to  be false; (2)  if he proposes to make an estimate in disregard of (1)  [1939] 7 I.T.R. 2 1. (2)  [1955] 1 S.C.R. 941, 949. (3)   [1944] 12 I.T.R. 393. 48 the  evidence, oral or documentary, led by the assessee,  he should in fairness disclose to the assessee the material  on which  he  is going to found that estimate; (3)  he  is  not however   debarred  from  relying  on  private  sources   of information,  which  sources  he may  not  disclose  to  the assessee at all; and (4) in case he proposes to use  against the  assessee  the result of any private inquiries  made  by him,  he must communicate to the assessee the  substance  of the information so proposed to be utilised to such an 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.   The  decision does not lay down that it is open to the Income-tax  Officer to  make an estimate on pure guess and without reference  to any material or evidence before him. The  last  decision to which we have been  referred  is  the decision in Malik Damsaz Khan v. Commissioner of  Income-tax (1).   That  again is a decision of the Privy  Council.   In that case, the validity of the assessment under s. 23 (3) of the Indian Income-tax Act was not challenged by the assessee and  the  appeal  was  directed  solely  to  the  amount  of assessment.  Their Lordships observed: ’But  it appears to them that it was clearly  competent  for the  Income-tax Officer in the circumstances of the  present case  to accept the return as a valid return and proceed  to assessment  under  section 23 (1) or section 23 (3)  as  the case  might be.  Since he was not satisfied that the  return was correct and complete he could not proceed under  section 23  (1);  he, therefore, as appeared upon the  face  of  the assessment, proceeded under section 23 (3).  Neither in  the incompleteness  of  the return nor in the fact that  in  any accompanying statement the appellant referred to his  return as  an  estimate  can  their  Lordships  find  any  possible justification   for  the  plea  that  the   assessment   was incompetent or that the Appellate Assistant Commissioner had no  jurisdiction to entertain the appeal  proceedings  which the appellant himself initiated.  " (1)  [1947] 15 I.T.R. 445. 49 These  observations do not help the respondent in  any  way; nor  do  they lay down any rule contrary to the  rules  laid down in Seth Gurmukh Singh’s case (1). For these reasons we hold that the High Court, was in  error in  answering  the question referred to it.  The  appeal  is accordingly  allowed and the judgment and order of the  High Court are set aside.  The answer to the question referred to the  High Court is in the negative.  The appellant  will  be entitled  to  its costs both in this Court and in  the  High Court.

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Appeal allowed.