Proved illegal sales may affect taxable income, but not on mere presumption of higher realised price.

Tax authorities could not adopt a higher notional price for paddy on the mere presumption that sales exceeded the controlled maximum price; a best judgment assessment still required evidentiary support, and the revenue had to prove the actual realisation before taxing on that basis. The Tribunal's broad view that illegal sales could never be considered for assessment was also incorrect, because proved unlawful transactions may still enter income computation. Even so, the assessment failed on the facts found, as there was no proof that the assessee actually received more than the fixed price.

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Issues: (i) Whether, in computing agricultural income from paddy, the taxing authorities could presume sales above the legally fixed maximum price and adopt a higher notional price on that basis; (ii) Whether the Tribunal was right in holding that sales allegedly made in contravention of the Maximum Prices Orders could not be taken cognizance of for tax assessment purposes.

Issue (i): Whether, in computing agricultural income from paddy, the taxing authorities could presume sales above the legally fixed maximum price and adopt a higher notional price on that basis.

Analysis: A best judgment assessment must rest on some evidentiary basis and not on mere conjecture, suspicion, or general notoriety. The mere possibility that paddy might have fetched a higher price in the market does not establish that the assessee actually sold it at a price above the controlled maximum. There is no presumption that a transaction was unlawful, and the burden remains on the revenue to show that the assessee in fact realised the higher price.

Conclusion: The authorities were not justified in fixing a higher notional price merely on the assumption that unlawful sales could have taken place.

Issue (ii): Whether the Tribunal was right in holding that sales allegedly made in contravention of the Maximum Prices Orders could not be taken cognizance of for tax assessment purposes.

Analysis: Illegal transactions, if proved, are not outside the taxing statute and may be relevant in computing taxable income. However, that principle does not permit the revenue to assume illegality without proof or to value produce on a speculative basis. The Tribunal's broad statement on non-cognizance of illegal sales was erroneous, but the assessment still failed because the officer had not found actual sales above the controlled price.

Conclusion: The Tribunal's reasoning on this point was incorrect, but the assessment could not be sustained on the facts found.

Final Conclusion: The reference was answered by holding that the taxing authorities could not adopt a higher market price on mere presumption of illegal sales, and the assessments had to be determined with reference to the controlled rates or actual receipts where proved.

Ratio Decidendi: In a tax assessment, illegality of transactions may be relevant if actually proved, but a higher taxable value cannot be fixed on mere conjecture or presumption of unlawful sales; the revenue must establish the real price or basis of valuation by evidence.

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