1972 (10) TMI 90 - SC - VAT / Sales Tax

Turnover understatement and missing books justified s.21 'reason to believe' for escaped turnover, reassessment upheld

Dominant issue: whether the assessing authority possessed 'reason to believe' under s.21 that part of the turnover had escaped assessment. The court ... Initiation of Proceedings under Section 21 - import of the words 'reason to believe' - 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. - Held that:- 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. 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 turnover of the respondent for sale of atta, maida and sooji amounted to over rupees seventy-five laks. The assessing authority had also 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. 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. Appeal allowed. Issues Involved:1. Whether the assessing officer had an honest belief that the turnover had partially escaped taxation to start proceedings under section 21.2. Whether the preliminary notices asking for the production of accounts could be considered as notices under section 21 for starting the proceedings.Issue-wise Detailed Analysis:1. Honest Belief for Initiation of Proceedings under Section 21:The Supreme Court examined whether the assessing officer had an honest belief that the turnover had partially escaped taxation, justifying the initiation of proceedings under section 21 of the U.P. Sales Tax Act. The court noted that the assessing officer must have 'reason to believe' based on reasonable grounds that the turnover had escaped assessment. This belief must be held in good faith and not be a mere pretence. The court referenced the memorandum dated March 13, 1962, which highlighted that the respondent's sales for the years 1955-56 and 1958-59 were significantly higher than the estimated turnover for 1957-58, suggesting that the turnover for 1957-58 had been under-assessed. Additionally, the respondent's failure to produce account books despite repeated notices further supported the assessing officer's belief. The court concluded that these facts were germane to forming the belief that part of the turnover had escaped assessment, thus validating the initiation of proceedings under section 21.2. Validity of Preliminary Notices as Notices under Section 21:The second issue was whether the preliminary notices dated September 13, 1961, and the memorandum dated March 13, 1962, could be considered as notices under section 21, thereby affecting the limitation period for reassessment. The court agreed with the High Court's view that these preliminary notices were merely for the production of account books and did not constitute formal notices under section 21. The notices only threatened action under section 21 if the respondent failed to comply, and thus could not be construed as initiating reassessment proceedings. The formal notice under section 21 was issued on March 24, 1962, and served on March 26, 1962. The reassessment was completed on March 19, 1963, within one year of the service of the formal notice, and thus was not barred by limitation.Conclusion:The Supreme Court allowed the appeal, discharging the High Court's answer to the first question. The court held that the assessing authority had an honest belief that the turnover had partially escaped taxation, justifying the initiation of proceedings under section 21. The court also affirmed that the preliminary notices could not be considered as notices under section 21, and the reassessment was completed within the prescribed time limit. The appellant was entitled to costs in both the Supreme Court and the High Court.