Raghubar Mandal Harihar Mandal vs The State of Bihar
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: supreme-court
Case Number: Civil Appeal No. 249 of 1954
Decision Date: 22 May, 1957
Coram: S.K. Das, Natwarlal H. Bhagwati, J.L. Kapur
In this matter, the Court recorded that the petition was filed by the firm consisting of Raghubar Mandal and Harihar Mandal against the State of Bihar. The judgment was delivered on 22 May 1957 and was authored by Justice S.K. Das, who was joined by Justices Natwarlal H. Bhagwati and J.L. Kapur. The case appeared as Civil Appeal No. 249 of 1954 and was taken on special leave from the judgment and order dated 8 January 1952 of the Patna High Court in Miscellaneous Judicial Cases Nos. 13, 14, 15, 16, 17, 18 and 19 of 1949. The official citation of the decision is 1957 AIR 810 and 1958 SCR 37. The statutory framework involved the Bihar Sales Tax Act, 1944 (Bihar Act VI of 1944) and, for reference, Section 23(3) of the Indian Income-Tax Act, 1922. The principal issue presented in the headnote was that the appellant had filed the returns required under the Bihar Sales Tax Act and had produced its books of account, but the Sales Tax Officer deemed those books unreliable, rejected both the books and the returns, and then estimated the gross turnover by a figure arrived at through pure conjecture, without any reference to evidence or material, and made an assessment under Section 10(2)(b) of the Act. The Court held that under Section 10(2)(b) a duty is imposed on the assessing authority to hear any evidence that the assessee may produce and any other evidence the authority deems necessary on specified points, and that when the returns and books are rejected the authority must make an estimate based on the material before it, including the assessee’s circumstances, knowledge of previous returns and any other matters that will assist in arriving at a fair and proper estimate. The Court relied upon the decisions in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal (1955) 1 SCR 941 and Income-Tax Commissioner v. Badridas Ramrai Shop, Akola (1937) LR 64 IA 102.
The factual background detailed by the Court showed that the appellant, identified as a firm of bullion dealers operating at Laheriasarai in the district of Darbhanga, Bihar, had been assessed for sales tax for seven consecutive quarters ending on 31 December 1945, 31 March 1946, 30 June 1946, 30 September 1946, 31 December 1946, 31 March 1947 and 30 June 1947. For three of those quarters – those ending on 31 December 1945, 31 March 1947 and 30 June 1947 – the firm failed to file the returns required by the Bihar Sales Tax Act, 1944, which was the operative legislation for the period in question; consequently, the firm was assessed for those three quarters under subsection (4) of section 10 of the Act. For the remaining four quarters the firm did file returns, but the Sales Tax Officer rejected both the returns and the books of account that had been filed for all seven quarters, and proceeded to assess the firm under clause (b) of subsection (2) of section 10 of the Act. The Officer issued separate orders assessing tax for all seven quarters on a single date, 9 October 1947. In those orders the Officer fixed a taxable turnover of Rs 2,94,000 for each of five quarters – namely the quarters ending on 31 December 1945, 31 March 1946, 30 September 1946, 31 December 1946 and 31 March 1947 – and for the two quarters ending on 30 June 1946 and 30 June 1947 the Officer assessed the tax on a taxable turnover of
During the year 1947 the assessee, which was a bullion-dealing firm, did not submit the sales-tax returns that were required by the Bihar Sales Tax Act, 1944, the statute that governed the period in question. Because of that failure, the assessing authority imposed liability for the three quarters that ended on 31 December 1945, 31 March 1947 and 30 June 1947 by invoking subsection 4 of section 10 of the Act. For the other four quarters within the same period the assessee did file the prescribed returns, but the Sales Tax Officer rejected those returns together with the books of account that had been filed for all seven quarters. The officer then proceeded to assess the liability on the basis of subsection (b) of subsection 2 of section 10 of the Act. On 9 October 1947 the officer issued separate assessment orders covering each of the seven quarters at the same time. He fixed a taxable turnover of Rs 2,94,000 for each of five quarters—those ending on 31 December 1945, 31 March 1946, 30 September 1946, 31 December 1946 and 31 March 1947. For the two remaining quarters—those ending on 30 June 1946 and 30 June 1947—he fixed a higher taxable turnover of Rs 3,92,000 for each.
The assessee appealed the assessment to the Commissioner of Commercial Taxes for the Tirhut Division, but the Commissioner dismissed the appeal by order dated 23 February 1948. The assessee then sought revision before the Board of Revenue, which, by an order dated 31 July 1948, declined to interfere with the assessment. The Board explained that the conclusions of the Sales Tax Officer and the Commissioner that the assessee’s books of account were unreliable amounted to findings of fact, and such factual findings could not be altered on revision; consequently, the assessing officer was required to assess according to his best judgment. Subsequently the assessee invoked section 21 of the Act and requested that certain questions of law be referred to the Patna High Court. The Board, by order dated 10 December 1948, refused to make the reference, holding that no legal question arose because the assessment orders were based on a concurrent factual finding. The assessee then approached the High Court, which on 27 April 1949, in Miscellaneous Judicial Cases Nos 13-19 of 1949, directed the Board of Revenue to state a case on whether, under section 10(2)(b) of the Act, the Sales Tax Officer could assess tax on any gross turnover figure without providing any basis for that figure. After the Board stated its case, the High Court answered the question affirmatively in its judgment and order dated 8 January 1952. Following that decision the assessee obtained special leave to appeal to this Court, contending primarily that the High Court had not correctly answered the legal question that had been referred.
The assessee alleged that the High Court had failed to answer correctly the question of law that had been referred to it. Before the Court could address that allegation, it first needed to define the exact limits of the question that the High Court had been asked to consider. It is well settled that, in matters involving references under the income-tax legislation, the High Court possesses only an advisory jurisdiction. Under the Income-tax Act, the findings of fact made by the tribunal are conclusive, except where the tribunal’s conclusions can be successfully challenged on the ground that there was no evidential basis for those factual conclusions or that the conclusions were so unreasonable that no reasonable person could have reached them. The High Court’s role, therefore, is to begin with the case statement as the final statement of facts and to resolve the legal question that arises from that factual matrix. The provisions of the Indian Income-tax Act are substantially similar, pari materia, to the provisions of the Act that is the subject of the present appeal; although the wording is not identical, the overall scheme of the corresponding provisions in the two statutes is alike. Section 21 of the Act confers a comparable advisory jurisdiction on the High Court, and subsection (3) of that section authorises the High Court, when it is satisfied that the Board of Revenue’s refusal to refer a matter under subsection (2) is unjustified, to direct the Board to state a case and forward it for the Court’s consideration. Subsection (5) of section 21 requires the High Court, once it has heard the reference, to decide the referred question of law and to set out the reasons for its decision in a judgment. In the present matter, the question that had been referred to the High Court concerned assessments made under section 10(2)(b) of the Act; in other words, the enquiry was limited to the four quarters for which assessments had been issued pursuant to section 10(2)(b). The question did not extend to the three quarters during which the assessee had not filed any returns and for which assessments were made under section 10(4) of the Act.
The High Court, in its judgment, noted a minor inaccuracy in the way the question had been framed, but it did not modify the question to broaden its scope to include the three quarters assessed under section 10(4). Consequently, the question as presented and as answered by the High Court remained confined to the four quarters subject to assessment under section 10(2)(b). The Court’s answer therefore did not address the propriety or legality of the assessments made under section 10(4). The Court therefore clarified at the outset that the legal issue under consideration pertained solely to the four quarters assessed under section 10(2)(b) and that the judgment’s answer would apply only to those four quarters. Having indicated this precise scope, the Court was then prepared to examine the assessee’s principal contention regarding the adequacy of the High Court’s legal answer.
The Court first clarified the precise scope of the question that had been referred to the High Court and then turned to examine the principal contention raised by the assessee. It began by setting out the statutory provisions that governed the assessments under dispute. Sub-section (1) of section 10 of the Act provides that when the Commissioner is satisfied, without needing to call the registered dealer or obtain any evidence from him, that the returns filed for a particular period are correct and complete, the Commissioner may assess the tax payable by the dealer on the basis of those returns. Clause (a) of sub-section (2) explains the procedure to be followed when the Commissioner is not satisfied on that basis; in such a case the Commissioner must serve a notice, in the manner prescribed, on the dealer requiring the dealer either to appear in person or to produce, or to cause to be produced, any evidence on which the dealer intends to rely in support of the returns. Clause (b) of sub-section (2) (quoted in full) states that on the day specified in the notice, or as soon thereafter as practicable, the Commissioner, after hearing the evidence produced by the dealer and any additional evidence that the Commissioner may require on specified points, shall assess the amount of tax due from the dealer. The Court observed that these provisions closely resemble those contained in section 23 of the Indian Income-Tax Act. Specifically, sub-section (1) of section 10 corresponds to sub-section (1) of section 23; clause (a) of sub-section (2) of section 10 corresponds to sub-section (2) of section 23; and clause (b) of sub-section (2) of section 10 corresponds to sub-section (3) of section 23, although there are minor verbal differences between the two statutes. Under sub-section (3) of section 23, the Income-Tax Officer must assess the assessee’s total income and determine the amount payable by him, doing so by an order in writing. By contrast, clause (b) of sub-section (2) of section 10 obliges the Commissioner merely to assess the tax due from the dealer and does not require an order in writing. Despite these distinctions, the Court held that the two statutory schemes are substantially similar, each imposing on the assessing authority a duty to determine the tax liability after hearing the dealer’s evidence and any further evidence that the authority may deem necessary on the points specified. The issue before the Court, therefore, was whether the assessing authority, acting under section 10(2)(b) of the Act, could lawfully assess the tax payable by a dealer in a manner that was more or less arbitrary, i.e., without basing the assessment on any material evidence.
The Court examined whether the assessing authority could determine a dealer’s gross turnover arbitrarily or without relying on any material at all. In the reference made to the High Court, the wording employed was “make an assessment on any figure of gross turnover without giving any basis to justify the adoption of that figure.” Although that wording might appear somewhat unclear, when read together with the statement of the case it could only be understood to ask whether the authority could adopt a turnover figure purely by guesswork and without referring to any supporting material. The Court found that, if the question is understood in that manner, the High Court had answered it incorrectly.
The High Court had undertaken an extensive analysis, comparing and contrasting sub-section (4) with element (b) of sub-section (2) of section 10 of the Act. The Court held that it was unnecessary to pronounce on the exact scope of sub-section (4) of section 10, which roughly corresponds to sub-section (4) of section 23 of the Indian Income-tax Act. It was also unnecessary to decide whether an assessment made under element (b) of sub-section (2) of section 10, when the assessee’s account books are not believed, is exactly the same as an assessment made under sub-section (4) of section 10 when the assessee fails to file returns. Some decisions relating to the analogous provisions of the Indian Income-tax Act had described the distinction between the two as one of degree only, with one method being somewhat more summary than the other. These points did not fall within the matters for determination in the present appeal, which was limited to interpreting the true nature and scope of element (b) of sub-section (2) of section 10 of the Act.
Turning to the analogous provision in sub-section (3) of section 23 of the Indian Income-tax Act, the Court identified a precedent that, in its opinion, answered the issue. The precedent was Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal (1). In that decision the 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-section (3) of section 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).” The Court concluded that the observations in that decision clearly demonstrated that the High Court’s answer to the question was erroneous.
The Court observed that the High Court had erred in its approach to the question that had been referred. First, the High Court treated the question as a pure question of fact. If the question were indeed factual, the High Court should have declined to entertain the reference because it lacked competence to decide a factual issue. Instead, the High Court proceeded to examine several decisions interpreting sub-sections (3) and (4) of section 23 of the Indian Income-tax Act and concluded that there was no distinction between an assessment made under sub-section (3) and one made under sub-section (4). The High Court then extended that same analogy to the comparison between clause (b) of sub-section (2) and sub-section (4) of section 10 of the Act, and on that basis declared that the answer to the referred question must be affirmative. The Court held that this line of reasoning was faulty. The answer rendered by the High Court relied solely on sub-section (4) of section 10, but the correct inquiry should have concerned the true scope and effect of clause (b) of sub-section (2) of section 10. Consequently, the Court found the High Court’s answer to be vitiated by its erroneous approach.
Counsel for the respondent advanced two principal points to support the High Court’s answer. The first point asserted that, when the assessment orders and the Commissioner’s orders are read properly, it appears that the gross turnover for the quarters in question was derived from specific material, and therefore the figure was not arbitrarily chosen nor adopted without any evidential basis. The Court examined the assessment orders, which formed part of the statement of the case, and concluded that the Sales Tax Officer and the Commissioner had, for certain reasons, deemed the assessee’s returns and the books of account to be inaccurate and unreliable. The Court accepted the factual finding of the assessing authorities that the returns and books could not be depended upon. The authorities highlighted that several transactions were omitted from the books, that a surprise inspection on 15 July 1947 uncovered unrecorded dealings with a Bombay firm identified as Messrs Kishundas Lekhraj, and that the assessee had been importing silver in the names of five associates to conceal transaction details. The assessing authorities further pointed out that there was
The Court observed that there was a clear discrepancy between the return filed for the quarter ending 30 June 1946 and the accounts submitted in support of that return. The return indicated a gross turnover of Rs 2,28,370-12-0, whereas the accompanying accounts reflected a gross turnover of only Rs 1,48,204. The Court accepted these figures as correct. After rejecting both the returns and the books of account, the assessing authorities moved to estimate the gross turnover. In doing so, they did not consult any material or evidence. Instead, the authorities engaged in a pure guess, adopting a figure without reference to any evidence or material whatsoever. To illustrate this, the Court cited the assessment order for the quarter ending 30 June 1946, in which the Sales Tax Officer stated: “I reject the dealer’s accounts and estimate a gross turnover of Rs 4,00,000. I 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 subsequent quarter ending 30 September 1946, the Sales Tax Officer similarly declared: “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.” The Court noted that these orders, and others of the same nature, failed to demonstrate that the assessment was based on any evidence or material. Rather, they revealed that, after discarding the books of account, the assessing authorities indulged in a pure guess and made an assessment without any evidentiary support. The Court held that such actions were not authorised under clause (b) of sub-section (2) of section 10 of the Act.
Further, the Court recorded that counsel for the respondent had referred several decisions on which the High Court had relied and had argued that, based on those decisions, the High Court’s answer to the referred question was correct. The Court indicated its intention to examine briefly some of those decisions, while emphasizing that the real answer lay in the observations made by this Court in Dhakeswari Cotton Mills case (1). The Court identified the first decision for consideration as the Privy Council judgment in Income-Tax Commissioner v. Badridas Ramrai Shop, Akola (2). In that judgment, Lord Russell of Killowen, delivering the opinion of the Privy Council, made observations concerning a “best of judgment” assessment under section 23(4) of the Indian Income-Tax Act. He stated: “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.” The Court highlighted that these observations required the officer to base his estimate on honest judgment and relevant material, not on unfounded speculation.
The Court observed that the assessing officer may consider the assessee’s earlier returns, prior assessments, the assessee’s circumstances, knowledge of those returns and any other matters that may help him reach a fair and proper estimate; although some degree of guess-work is inevitably involved, that guess-work must be honest. The Court found no inconsistency between these observations and the earlier pronouncements in Dhakeswari Cotton Mills case. It recognized that when the returns and books of account are rejected, the officer is required to form an estimate, which indeed involves a guess, but that guess must be anchored in some evidence or material and cannot be based merely on suspicion. Quoting Lord Russell of Killowen, the Court reiterated that the officer must make what he honestly believes to be a fair estimate of the proper assessment figure, taking into account the materials before him, including the assessee’s situation, knowledge of previous returns and any other relevant factors. The Court noted that in the present matter the assessing officer failed to apply this principle, and that failure gave rise to the assessee’s grievance.
Turning to the decision in Ganga Ram Balmokand v. Commissioner of Income Tax, Punjab, the Court explained that the Board held that where the income-tax authorities are not satisfied with the correctness or completeness of the assessee’s accounts, and after considering the general circumstances—including the existence of a large business and an unusually low profit compared with other local operators— the authorities may compute taxable income by applying a flat rate of seven per cent. The Court said that the authorities were justified in using such a flat rate and that the burden of rebutting the estimate rested on the assessees. That estimate, the Court observed, was not a pure guess but was based on material available to the Income-Tax Officer. Justice Din Mohammad, delivering the leading judgment, remarked that some material must inevitably be before the officer to support his estimate, though no rigid rule can be prescribed as to the exact nature of that material. The Court agreed with this view. Consequently, the Court held that if, in the present case, the Sales-Tax authorities had grounded their estimate on material before them, there would be no ground for objection. However, the question before the High Court—arising from the assessment orders—was whether the authorities could determine a gross turnover figure without referring to any material to justify that figure.
The Court observed that the High Court had answered the question affirmatively and, by doing so, had effectively given an unrestricted licence to the Sales Tax authorities to adopt a turnover figure without showing how that figure was justified. In the Court’s view this approach misapprehended the true scope and effect of clause (b) of sub-section (2) of section 10 of the Act. The next authority cited was the decision of Gunda Subbayya v. Commissioner of Income-tax, Madras. That decision did not assist the respondent because it held that, although the Indian Income-tax Act does not impose a statutory duty on an Income-tax Officer making an assessment under section 23(3) to disclose the material on which he proposes to act, the principles of natural justice require the officer to bring that material to the assessee’s attention, to give the assessee an opportunity to demonstrate that the officer’s information is erroneous, and to record in the order the material on which the estimate was based. The Court noted that this ruling actually worked against the respondent and was not inconsistent with the observations made by this Court in the Dhakeswari Cotton Mills case.
The Court then turned to the decision of the Lahore High Court in Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab, which had been expressly approved by this Court in the Dhakeswari Cotton Mills case. The rules articulated in that decision were explained in detail. First, while proceeding under sub-section (3) of section 23 of the Income-tax Act, the Income-tax Officer is not compelled to rely on evidence produced by the assessee if he considers that evidence to be false. Second, if the officer intends to make an estimate in disregard of oral or documentary evidence presented by the assessee, he must, in the interests of fairness, disclose to the assessee the material on which the estimate will be based. Third, the officer is not prohibited from relying on private sources of information, and he may keep those sources undisclosed to the assessee. Fourth, where the officer intends to use the result of any private inquiries he has conducted, he must communicate to the assessee the substance of that information to such an extent that the assessee is placed in possession of full particulars of the case he is expected to meet, and he must also provide the assessee with a reasonable opportunity to meet that case, if possible. The Court emphasized that none of these rules permits an Income-tax Officer to make an estimate purely on guesswork without reference to any material or evidence before him.
Finally, the Court considered the decision cited as Malik Damsaz Khan v. Commissioner of Income-tax, a Privy Council judgment. In that case the validity of an assessment made under section 23(3) of the Indian Income-tax Act was not contested by the assessee, and the Court noted that the observations in that decision did not aid the respondent in the present matter.
The Court observed that the dispute between the assessee and the revenue was confined solely to the quantum of the assessment. It held that, on the facts of the present matter, the Income-tax Officer was plainly empowered to treat the return filed by the assessee as a valid return and to proceed with the assessment either under section 23(1) or under section 23(3), depending on the circumstances. Because the Officer was not convinced that the return was both correct and complete, he could not lawfully rely on section 23(1). Consequently, as the face of the assessment itself revealed, the Officer correctly opted to make the assessment under section 23(3). The Court further stated that the mere incompleteness of the return, or the fact that the appellant described his own return as an estimate in any accompanying statement, could not be taken as a justification for the argument that the assessment was invalid or that the Appellate Assistant Commissioner lacked jurisdiction to entertain the appeal that the appellant himself had initiated. The observations quoted from the earlier decision, ‘But it appears to them that it was clearly competent for the Income-tax Officer…’, followed by the citation (1) [1947] 15 I.T.R. 445, were therefore considered not to assist the respondent in any manner.
The Court further concluded that the cited observations did not introduce any rule that conflicted with the principles articulated in Seth Gurmukh Singh’s case (1). Accordingly, the Court found that the High Court had erred in its answer to the reference made to it. On this basis, the appeal was allowed, the judgment and order of the High Court were set aside, and the answer to the question referred to the High Court was held to be negative. The appellant was awarded costs in both this Court and the High Court, and the appeal was consequently allowed.