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

Initiation of proceedings under section 21 import of reason to believe upheld; assessing authoritys initiation justified on available turnover and nonproduction evidence

Interpretation of the phrase reason to believe in relation to initiation of proceedings under section 21: the presence of contemporaneous ... Reason to believe - assessment under section 21 - good faith belief - preliminary inquiry notices - notices under section 21 - limitation - one year from service of notice - ex parte assessment not immune from reassessmentReason to believe - assessment under section 21 - good faith belief - ex parte assessment not immune from reassessment - Assessing authority had reason to believe that part of the turnover of the assessee for the year 1957-58 had escaped assessment so as to justify proceedings under section 21 of the U.P. Sales Tax Act. - HELD THAT: - The Court held that 'reason to believe' requires some rational basis germane to formation of belief and held in good faith; sufficiency of reasons is not justiciable though existence and rational nexus of the belief may be examined. Material before the assessing authority - prior account-book turnover for 1955-56, recorded turnover for 1958-59, the fixation of wheat quota based on average grinding and the assessee's repeated refusal to produce account books despite notices and summons - were relevant facts bearing a rational connection to the inference that turnover for 1957-58 had escaped assessment. The Court rejected the contention that an assessment originally made ex parte under rule 41(5) could not be reopened under section 21, observing that the section contains no such restriction and that to hold otherwise would reward contumacy. Applying the established tests from prior decisions on the phrase 'reason to believe', the Court concluded that the assessing authority acted within its jurisdiction and in good faith in initiating proceedings under section 21. [Paras 9, 11, 12, 13, 15]Affirmative - the assessing authority had an honest and rational belief that part of the turnover for 1957-58 had escaped assessment; initiation of proceedings under section 21 was justified.Preliminary inquiry notices - notices under section 21 - limitation - one year from service of notice - Whether the notice dated 13 September 1961 and the memorandum dated 13 March 1962 constituted notices under section 21 so as to make the subsequent reassessment time barred. - HELD THAT: - The Court agreed with the High Court that the September 13, 1961 notice and the March 13, 1962 memorandum were preliminary in character, merely calling for production of account books and warning that proceedings under section 21 might be taken on non-compliance. Such communications lacked the statutory character of a notice under section 21. The formal notice under section 21 was issued on March 24, 1962 (served March 26, 1962), and the assessment under section 21 was completed on March 19, 1963, within one year of service of the section 21 notice, and therefore within the limitation period provided by the proviso to subsection (2). [Paras 14, 15]Negative - the earlier communications were preliminary and not notices under section 21; the assessment was served and completed within the statutory one year period and is not time barred.Final Conclusion: The appeal is allowed. Question (i) is answered in the affirmative: the assessing authority possessed an honest, rational belief that part of the turnover for 1957-58 had escaped assessment and validly initiated proceedings under section 21. Question (ii) is answered in the negative: the earlier communications were preliminary and not notices under section 21, and the reassessment was completed within one year of the service of the statutory notice; the department succeeds and is awarded costs. Issues: (i) Whether the assessing authority had an honest belief (reason to believe) that part of the dealer's turnover for 1957-58 had escaped assessment so as to justify initiation of proceedings under section 21 of the U.P. Sales Tax Act; (ii) Whether the notices dated September 13, 1961 and memorandum dated March 13, 1962 amounted to notices under section 21 so as to render the subsequent reassessment time-barred.Issue (i): Whether the assessing authority had reason to believe that turnover had escaped assessment for 1957-58.Analysis: The assessing authority possessed account-book figures showing substantially higher turnover in 1955-56 and 1958-59 compared with the ex parte estimated turnover for 1956-57 and 1957-58, information about quota fixation based on past grinding averages, and the dealer's repeated failure to produce account books despite notices and summons. These materials were germane to forming a prima facie inference that part of the turnover had escaped assessment. The court's role is limited to examining existence and good faith of the belief and whether reasons have a rational nexus to the formation of that belief; sufficiency of the grounds is not justiciable.Conclusion: In favour of Revenue. The assessing authority had an honest belief that part of the turnover had escaped assessment and was entitled to initiate proceedings under section 21.Issue (ii): Whether the notices of 13 September 1961 and the memorandum of 13 March 1962 were notices under section 21, thereby triggering the one-year period for reassessment.Analysis: The communications of 13 September 1961 and 13 March 1962 were preliminary calls for production of account books and warnings of possible action; they did not constitute formal notices issued under section 21. The first express notice under section 21 was served on 26 March 1962, and the reassessment order dated 19 March 1963 was within one year of that service.Conclusion: In favour of Revenue. The preliminary communications were not section 21 notices and the reassessment was within the statutory one-year period from the section 21 notice.Final Conclusion: The appeal is allowed on the merits concerning both the existence of a bona fide reason to believe escaped turnover and the timeliness of the section 21 notice; the reassessment under section 21 was valid and within limitation.Ratio Decidendi: Where the assessing authority possesses relevant material that bears a rational nexus to the possibility that turnover has escaped assessment and the belief is held in good faith, the authority has jurisdiction under section 21 to issue notice and re-assess; preliminary inquiries or warnings to produce books do not themselves constitute notice under section 21 for limitation purposes.