Commissioner of Sales-Tax, Madhya
Pradesh Vs. M/S. H.M. Esufall, H. M. Abdulali, Siyaganj, Indore  INSC 84
(18 April 1973)
KHANNA, HANS RAJ
CITATION: 1973 AIR 2266 1973 SCR (3)1005 1973
SCC (2) 137
R 1977 SC 870 (9) RF 1987 SC 793 (7)
Madhya Pradesh Sales Tax Act s.
19--Reassessment of escaped turnover whether can be made on basis of 'best
judgment'--Best judgment' what is--Estimate of turnover in 'best judgment'
assessment--Interference by court when justified.
The assessee was a dealer in Iron and Steel
in Madhya Pradesh. The Sales Tax Officer in making the original assessment for
the period November 1, 1959 to October 20, 1960 accepted the, gross turnover
disclosed by the assessee's accounts. Later the Flying Squad inspected the
business premises of the assessee and found a bill book for the period
September 1, 1960 to September 19, 1960. The bill book showed that the assessee
had effected sales of iron and steel during that period of the value of Rs.31,171.28
P. Those sales had not been entered in the books of account maintained by the
assessee. On the basis of the information provided by the said bill book the
Sales Tax Officer 'initiated proceedings under s. 19(1) of the Madhya Pradesh
General Sales Tax Act 1958 as also under the Central Sales Tax Act 1956 against
the assessee. After hearing the assessee he made reassessments on best judgment
basis and in estimating the assessee's turnover took into consideration the
fact that the assessee had dealings outside his accounts of the value of Rs.
31,171.28P. during a period of 19 days.
After the disposal of appeals filed by the
assessee under the Act a reference was made to the High Court. Inter alia the
High Court held that the estimate of taxable turnover under the local Act and
the Central Act made by the assessing authority for the period from November 1,
1959 to October 20, 1960 on the basis of Rs. 31,171.28 Pas the escaped turnover
for a period of 19 days was illegal and unjustified. According to the High
Court the only moved escapement was Rs. 31,171.28 The penalty imposed on the
assessee in respect of the turnover under the State Act was also set aside by
the High Court. In appeal by the Revenue,
HELD : (i) The distinction between a 'best
judgment' assessment and assessment based on accounts submitted by an assessee
must be borne in mind. Sometime there may be innocent or trivial mistakes in
the accounts maintained by the assessee. There may be even certain unintended
or unimportant omissions in those accounts, but yet the accounts may be
accepted as genuine and substantially correct. In such cases, the assessments
are made on the basis of the accounts maintained even though the assessing
officer may add back to the account price of items that might have been omitted
to be included in the accounts. In such a case, the assessment made is not a
'best-judgment' assessment. It is primarily made on the basis of the accounts
maintained by the assessee. But when the assessing officer comes to the
conclusion that no reliance can be placed on the accounts maintained by the
assessee, he proceeds to assess the assessee on the basis of his 'best-
judgment'. In doing so, he may take such assistance as the assessee's accounts
may afford, he may also rely on other informations gathered by him as well as
on the surrounding circumstances of the case. The assessment Made on the 1006
basis of assessee's accounts and those made on 'best- judgment' basis are
'totally different types of assessments.
[1009 G] In the present case it was proved as
well as admitted that the assessee's ;dealings outside his accounts during a
period, of 19 days were of the nature of Rs. 31,171.28. From this circumstance
it was open to the Sales-tax Officer to infer that the assessee had large scale
dealings outside his accounts. It was obvious that he was maintaining false
accounts to evade payment of sales-tax. In such a situation it was not possible
for the Sales-tax Officer to find out precisely the turnover suppressed. He
could only make an estimate of the suppressed turnover on the basis of the
material before him. So long as the estimate made by him was not arbitrary and
has nexus with facts discovered, the same could ,not be questioned. The High
Court was wrong in assuming that the assessing authority must have material
before it to prove exact turnover suppressed. The basis adopted by the Sales-tax
Officer was a relevant one whether it was the most appropriate or not. Hence
the High Court was not justified in interfering with the same. [1010 D]
Commissioner of Income-tax, Central and U.P. v. Laxminarain Badridas., 5 I.T.R.
170, Raghubar Mandal Harihar Mandal v.The State of Bihar, 8 S.T..C. 770, Ganga
Ram Balmokand v.Commissioner of Income-tax, Punjab, 5, I.T.R. 464 and State of
Kerala v. C. Velukutty, 60 I.T.R. 239, applied.
Commissioner of income-tax West Bengal v.
Padamchand Ramgopal, 76 I.T.R. 719, distinguished.
(ii) The contention that in a reassessment
made under s.19(1) of the Act the Sales Tax Officer is not competent to make a
best judgment assessment was rightly rejected by the High Court. Reassessment
is nothing but a fresh assessment, [1014 B] (iii) Since 'the estimate of
turnover made by the Sales Tax Officer in his best judgment assessment was
legal and justified the penalty imposed by him under the State Act must also be
held to be in accordance with Law.
State of Andhra Pradesh v. Bavuri V.
Narasimhan, 16 S. T. C.
54, relied on.
CIVIL APPELLATE JURISDICTION Civil Appeal No.
1068 & 1069 of 1970.
Appeals by special leave from the judgment
and order dated December 2, 1968 of the Madhya Pradesh High Court in
Misc.C.Case No. 84 of 1968.
Ram Panjwani and I. N. Shroff, for the
R. P. Agarwala, for the respondent.
The Judgment of the Court was delivered by
HEGDE J. These appeals by Special leave arise from the decision of the High
Court of Madhya Pradesh in a consolidated Reference under S. 44 of the Madhya
Pradesh General Sales Tax Act, 1958 (to be hereinafter referred to as the
'State Act'). That Reference was made by the Board of Revenue, Gwalior, partly
at the instance of the assessee and partly at the instance of the 1007 Commissioner,
of 'Sales-tax, 'Madhya Pradesh, Four questions of law were refered to the High
Court for its decision.
They 'are "(1) 'Whether on the facts and
circumstances of the case the revised assessment enhancing the taxable turnover
under the State'law by Rs. 2,50,000/'- and the taxable turnover under the
Central law by Rs. 1,00,000/on the basis of the undisputed escape in the amount
31,171.28 by. adopting the said amount of:
escaped turnover as the measure for
determining the quantum of enhancement for the whole year was illegal,
unjustified or excessive? (2) -Whether a best judgment assessment could at all
be made under s. 19(1) 1f the Act or whether revision of the assessment should
be confined to the quantum of proved or admitted escaped turnover ? (3) If the
answer to the previous question is that ,the revision in assessment should be
confined only to the quantum of proved or admitted escape in turnover, was the
'penalty of Rs. 2,000/- imposed on the footing of the revision of the
assessment for the whole year legal and justified? and (4) Whether on the facts
and circumstances of the case the imposition of the penalty under section 19(1)
of the Madhya Pradesh General Sales Tax Act, 1958 read with Section 9(3) of the
Central Sales Tax Act was not legal?' The first three questions were referred
to the High Court at the instance of the assessee and the last one was referred
at the instance of the Commissioner.
The High Court answered the 1st and the 3rd
question in favour of the assessee and the second and the fourth question in
favour of the Department. It opined :
" Our answer to the first question is
that the estimate of taxable turnover under the local Act and the Central Act
made by die assessing authority for the period from 1st November 1959 to 20th
October 1960 on the basis of Rs.31,171.28 as the escaped turnover for a period
of 19 days was illegal and unjustified. The escaped turnover proved in the
present case is only Rs. 31,171.28 and the assessee is liable to be assessed
under both the Acts only on the taxable turnover comprised in the escaped
turnover of Rs. 31,171.28. Our answer to the second question is that there can
be a best- judgment assessment under section 19(1) of the local Act. In a
best-judgment assessment the quantum of escaped turnover would be that which
the assessing authority thinks is proved 1008 or is established. In other
assessments the quantum of escaped turnover would be the one which the
assessing authority finds proved whether on the admission of the assessee or on
the material produced at the enquiry in which the assessee has participated.
The third question is answered by saying that the imposed penalty of Rs.
2,000/- is, in view of our answer to the first question, not legal.
Our answer to the fourth question is that a
penalty for escaped assessment under the Central Act can be imposed under
Section 19(1) of the local Act." Aggrieved by the decision of the High
Court, the Commissioner has brought these appeals. The assessee has not
appealed against that portion of the decision which went against him.
The facts of the, case necessary for deciding
the questions of law arising for decision in these appeals, as could be
gathered from the Statement of the case may now be set out.
The assessee was a registered dealer under
the 'State Act' as well as the Central Sales Tax Act (which will hereinafter be
referred to as the 'Central Act'). He was a dealer in Iron and Steel. In these
appeals, we are concerned with his turnover for the period November 1, 1959 to
October 20, 1960. In that year he declared a gross turnover of Rs.
3,97,356/18 and taxable turnover of Rs.
1,10,246/63P. The Sales-tax Officer determined his gross turnover at Rs.3,97,357/-
and taxable turnover at Rs. 1,21,567/-. Under the 'State Act' he assessed him
in the sum of Rs. 3,743.34P.
on November 20, 1961. The assessee had not
declared his gross or taxable turnover in respect of the year in question under
the 'Central Act'. But the Sales-tax Officer deter- mined his turnover under
the 'Central Act' by his order dated December 8, 1962 at Rs. 22,916/- and
levied on him a tax of Rs. 252.04. The assessee did not appeal against these
orders. It appears that on September 19, 1963 the Flying Squad inspected the
business premises of the assessee and found a Bill book for the period
September 1, 1960 to September 19, 1960. The Bill book showed that the assessee
had affected sales of iron and steel during that period of the value of Rs.
31,171.28P. Those sales had not been entered- in the books of account
maintained by the assessee.
On the basis of the information provided by
the bill book seized, the Sales-tax Officer initiated proceedings under s.
19(1) of the 'State Act' on January 15, 1964
by issuing the prescribed notices to the assessee. He also initiated
proceedings under that section under the 'Central Act' on March 15, 1964. The
notices in question were served on the assessee on April 17, 1964 and March 19,
In response to these notices, the assessee
submitted an explanation denying that the; bill book in question pertained to
his dealings. Further, he also disputed the correctness of the estimates made
by the Sales-tax Officer of 1009 his turnovers in the notices issued to him. After
hearing the assessee, the Sales-tax Officer reassessed the assessee under the
'State Ace on April 20, 1964 and under the 'Central Act' on April 30, 1964. The
reassessments were made on the basis of 'best judgment. In estimating the
assessee's turnover, the Sales-tax Officer took into consideration the fact
that the assessee had dealings outside his accounts of the value of Rs.
31,171.28 during a period of 19 days. On the basis afforded by the facts
discovered, the Sales-tax Officer estimated the assessee's turnover under the
'State Act' for the assessment period in question at Rs.6,47,357/(3,97,357, +
2,50,000). Similarly he reopened the assessee's assessment under the 'Central
Act, and estimated the turnover of the assessee under that Act at Rs. 1,22,916/-
(22,916+1,00,000). He also imposed on the assessee a penalty of Rs. 2,000/-
under the 'State Act' and a penalty of Rs. 1,500/- under the 'Central Act' The
assessee appealed against the reassessments made on him as well as against the
penalties imposed on him. Those appeals were dismissed by the Appellate
authority. The assessee took up the matter in second appeal to the Board of
Revenue, Madhya Pradesh, Gwalior. The Board of Revenue set aside the penalty of
Rs. 1500/-imposed under the 'Central Act, but in other respects. it rejected
the appeal of the assessee.
Thereafter the Board, partly at the instance
of the assessee and partly at the instance of the Commissioner, submitted the
four questions set out earlier to the High Court.
Before proceeding to examine the contentions
advanced on behalf of the parties, it is necessary to clarify certain aspects.
It may be noted that the first assessments were made by the Sales-tax Officer
primarily on the basis of the returns submitted by the assessee. In the proceedings
relating to those assessments, the Sales-tax Officer relied on the books of
account of the assessee. While making reassessments on the basis of the
information gathered from the bill book seized, the Sales-tax Officer rejected
the accounts maintained by the assessee as unreliable and assessed the assessee
on the basis of his 'best judgment'.
The distinction between a 'best judgment'
assessment and assessment based on the accounts submitted by an assessee must
be borne in mind. Sometime there may be innocent or trivial mistakes in the
accounts maintained by the assessee.
There may be even certain unintended or
unimportant omissions in those accounts; but yet the accounts may be accepted
as genuine and substantially correct. In such cases, the assessments are made
on the basis of the accounts maintained even though the assessing officer may
add back to the accounts price of items that might have been omitted to be
included in the accounts. In such a case, the assessment made is not a
'best-judgment' assessment. It is primarily made on the basis of the accounts
maintained by the assessee. But when the assessing 1010 officer comes to the
conclusion that no reliance can be placed on the accounts maintained by the
assessee, he Proceeds to assess the assessee on the basis of his 'best-
judgment'. In doing so, he may take such.assistance as the assessee's accounts
may afford, he may also rely on other information gathered by him- as well as
an the surrounding. Circumstances of the case. The assessments made on the basis
of assessee's accounts and those made on 'best- judgment basis are totally
different types of assessments.
Now coming to the facts of this case it is
necessary to remember that at the initial stage, the assessee denied that the
bill book seized was his bill book and the entries therein related to his
dealings. He asserted that he had nothing to do with the bill book in question
and the entries therein do not relate to his dealings. But at a later stage, he
conceded that that 'bill book was his and the entries therein related to his
dealings. It is now proved as well as admitted that his dealings outside his
accounts during a period of 19 days were of the value of Rs. 31,171.28. From
this circumstance, it was open to the Sales- tax Officer to infer that the
assessee bad large scale dealings outside his accounts. The assessee has
neither pleaded nor established only justifiable reason for not entering in his
accounts the dealings noted in the bill book seized. It is obvious that he was
maintaining false accounts to evade payment of sales-tax. In such a situation
it was not possible for the Sales-tax Officer to find out precisely the
turnover suppressed. He could only make an estimate of the suppressed turnover
on the basis of the material before him. So long as the estimate made by him is
not arbitrary and has nexus with facts discovered, the name cannot be
questioned. In the very nature of things the estimate made may be an
over-estimate or an under,-estimate.
But that is no ground for interfering with
his 'best judgment'. It is true that the basis adopted by the officer should be
relevant to the estimate made. The High .Court was wrong in assuming that the
assessing authority must have material before it to prove the exact turnover
If that is true there is no question of best-,
judgment. The assessee cannot be permitted to take advantage of his own illegal
acts. It was his duty to place all facts truthfully before the assessing
authority. If he fails to do his duty, he cannot be allowed to call upon the
assessing authority to prove conclusively what turnover, he had suppressed.
That fact must be within his personal knowledge. Hence the burden of proving
that fact is on him. No circumstance has been placed before the assessing
authority to show that the assessee's dealings during 1-9-1960 to 19-9-1960
outside his accounts were due to some exceptional circumstance or that they
were proportionately more than his dealings outside his accounts, during the
remaining periods. The assessing authority could not have been in possession of
any correct measure to find out the escaped 1011 turnover during the periods
1-11-1959 to 31-8-1960 and 20-9- 1960 to 20-10-1960. The task of the.assessing
authority in finding out the escaped turnover was by no means easy. In
estimating any escaped turnover it is inevitable that there is, some guesswork.
The assessing authority while making the 'best-judgment' assessment no doubt
should arrive at its conclusion without any bias and on 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 of any-one else's. The High Court could not
substitute its 'best-judgment' for that of the assessing authority. In the case
of 'best-judgment' assessments, the courts will have to first see whether the
accounts maintained 'by the assessee were rightly rejected as unreliable. If
they come to the conclusion that they were rightly rejected, the next question
that arises for consideration is whether the basis adopted in estimating the
turnover has a reasonable nexus with the estimate made. If the basis adopted is
held to be a relevant basis even though the courts may think that it is not the
most appropriate basis, the estimate made by the assessing authority cannot be
disturbed. In the present case, there is no dispute that the assessee's
accounts were rightly discarded. We do not agree with the High Court that it is
the duty of the assessing authority to adduce proof in support of its estimate.
The basis adopted by the Sales-tax Officer was a relevant one whether it was
the most appropriate or not. Hence the High Court was not justified in
interfering with the same,.
The jaw relating to 'best-judgment'
assessment is the same both in the case of income-tax assessment as well as in
the case of sales-tax assessment. The scope of 'best-judgment' assessment under
the income-tax law came up for consideration before the Judicial Committee as
early as 1937 in Commissioner of Income-tax, Central and U.P. v.Laxminarain
Badridas. (1). Therein Lord Russel of Killowen speaking for the Judicial
Committee observed (at p. 180) :
"The Officer is to make an assessment to
the best of hi,; judgment against a person who is in default as regards
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 Lordship think, be able to take
into consideration local knowledge and repute in regard to the assessee's
circum- 5.1.7.R 70.
1012 stances, and his own knowledge of
previous returns by land assessments of the assessee, and all other matters
which he thinks will assist him in arriving at a fair and proper estimate, and
though there must necessarily be .guess-work in the matter, it must be honest
guess-work. In that sense, too, the assessment must be to some extent
arbitrary." In Raghubar Mandal Harihar Mandal v. The State of Bihar(1) ,a
case arising under the Bihar Sales Tax Act, 1944, the law relating to
'best-judgment' assessment was examined at length by this Court. Therein S. K.
Das J. speaking for the Court observed (at p. 778) :
"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 Ruessel 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." (emphasis supplied) Proceeding further the learned judge quoted
with approval the observations of Din Mohamad J. in Ganga Ram Balmokand v.Commissioner
of Income-tax, Punjab(2) :
"It cannot be denied that there must be
some material before the Income-tax Officer on which 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." After quoting
those observations, the learned judge proceeded to observe :
',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." Applying4 the rule laid down in Raghubar Mandal Harihar
Mandal's case (supra), to the facts of the present case it, is seen (I)
8S.T.C-770. (2) 51.T.R. 464.
1013 that the Sales-tax Officer had material
before him to find out, how. much turnover had escaped assessment during a
period of 19 days. On the basis of that material he estimated the escaped
turnover for the entire year. Hence it cannot be said that there was no basis
for the estimate made by the Sales-tax Officer. It may be that his estimate was
an over-estimate or an under-estimate but it cannot be said that the estimate
was without any basis. In making that estimate, there was an element of
guess-work which was inevitable in the circumstances of the case. If the Sales-
tax Officer was compelled to adopt a rule of thumb which in a sense is an
arbitrary rule, assessee was entirely responsible for that situation.
In State of Kerala v. C. Velukutty,(1) this
Court speaking through Subba Rao J. (as he then was) observed (at p. 244 of the
"The limits of the power are implicit in
the expression "best of his judgment". Judgment is a faculty to
decide matters with wisdom truly and legally. Judgment does not depend upon the
arbitrary caprice of a judge, but on settled and invariable principles of
Though there is an element of guesswork in a
"best judgment assessment". It shall not be a wild one, but shall
have a reasonable nexus to the available material and the circumstances of each
case." The question before us is whether there is a reasonable nexus
between the basis adopted by the assessing authority and the estimate of
escaped turnover made. We have no doubt that there is such a nexus.
On behalf of the assessee, reliance was
placed on the decision of this Court in Commissioner of Income-tax., West
Bengal v. Padamchand Ramgopal(1). Therein, while investigating into the case of
the assessee, the Income-tax Officer found two insignificant mistakes in the
assessees accounts relating to the assessment year 1953-54. No mistakes were
found in the accounts relating to the assessment years 1954-55 to 1957-58.
Merely because there were some insignificant mistakes in the accounts
maintained by the assessee for the assessment year 1953-54, the Income- tax
Officer rejected the accounts of the assessee for all the concerned assessment
years and added to the income returned half the amount of gross receipts shown
by the assessee under the head "interest" for each of the years as
escaped income. The Tribunal upheld the addition 'but the High Court came to
the conclusion that the additions made by the Income-tax Officer were quite
arbitrary. This Court agreed with that view. We do not think that the said
decision lends any support to the assessee's contention.
(1) 60 I.T.R.239 (1) 76 I.T.R.719.
1014 For the reasons mentioned above, We are
unable to agree with .the High Court that the Sales.-tax Officer. had
arbitrarily assessed the assessee.
It was next contended that in are assessment
under,s. 19(1) of the Act, Sale-tax Officer was- not competent to- make.
'best. judgment assessment' as no such power
was conferred on him under the said section. This contentions had been rejected
by the; High Court and the assessee had not appealed against that part of the
judgment. Be that as it may, even though s. 19 does not in specific terms
confer on the assessing authority power to make 'best-judgment assessment' that
section specifically says that the .assessment made under that section is a
Section 18 deals with assessment of tax.
Section 18 (4) says "If a registered dealer- X X (a) x x x x (b) x x x x
(c) x x x x (d) has not maintained any account or has not regularly employed
any method of accounting, or if the.method employed is such that in the opinion
of the Commissioner assessment cannot properly be made on the basis thereof;
the Commissioner shall in the prescribed manner assess the dealer to the best
of his judgment." What is true of the assessment must also be true of
reassessment because reasessment is nothing but a fresh assessment. When
reassessment is made under s. 19, the former assessment is completely reopened
and in its place fresh assessment is made. While reassessing a dealer, the
assessing authority does not merely assess him on the escaped turnover but it
assesses him on his total estimated turnover. While making reassessment under
s. 19, if the assessing authority has. no power to make best judgment
assessment, all that the assessee need do to escape reassessment is to refuse
to file a return or refuse to produce his account-books. If the contention
taken on behalf of the assessee, is correct, the assessee can escape his
liability to be reassessed by adopting an obstructive attitude. It is difficult
to conceive that such could be the position in law.
Before making reassessment, the assessing
authority has to, under rule 33(1) framed under the Act call upon the assessee
to produce his books of account and other documents which the assessing
authority may require and any evidence which the dealer may wish to produce in
support of his objection.
When such a notice is issued to the dealer,
he may appear before the assessing authority on the date fixed in the notice
and prefer his objections 1015 and produce such evidence as he may think
necessary. Sub- rule (2) of rule 33 provides that if the assessee appears in
response to the notice under s. 3 3 (1)., the assessing authority may make
reassessment, if necessary, only after, considering the objections raised by
the dealer and after, examining such evidence as may be produced by,, him,. It
is important to, note that in the notice which the assessing authority is
required to issued to the dealer in form 16, the extent of the escaped turnover
as estimated, by the assessing authority has to be specified. The procedure
laid down in rule 33 could not have been a mere empty formality.
If the assessee's contention is right in
order to escape reassessment all that the assessee need do is to ignore the
notice issued under rule 33(1) and refuse to co-operate with the assessing
authority in the reassessment proceedings. We are unable to accept that is the
true position in law.
In our opinion the decision of the Andra
Pradesh High Court in State of Andhra Pradesh v. Bavuri V. Narasimhan, (1)
relied on by the assessee was not correctly decided.
For the reasons mentioned above, we allow
these appeals, vacate the answers given by the High Court to Questions Nos.1
and 3 and answer those questions in favour of the Department i.e. that the
estimate of taxable turnover under the 'State Act and the 'Central Act' made by
the assessing authority for the period from November 1, 1959 to October 20,
1960 on the basis of Rs. 31,171.28 as the escaped turnover for a period of 19
days was legal and justified and consequently the penalty of Rs. 2,000/imposed
on the assessee was in accordance with law. The assessee shall pay the costs of
the Department both in this Court and in the High Court.