2023 (9) TMI 1732 - HC - VAT / Sales Tax

Desk-audit VAT reassessment and best-judgment gross profit hike without evidence or shared audit report set aside as arbitrary.

The dominant issue was whether the revised VAT assessment based on a desk audit could sustain a best-judgment addition without supporting material. The HC ... Revision of assessment for the reason that the petitioner's accounts were selected for Desk Audit - audit unknown to the provisions of the TNVAT Act, 2006 - bar of time limitation - violation of principles of natural justice - HELD THAT:- The respondents have clearly stated in the assessment order the gross profit earned has been taken as 54.91% along with 15% which is not on rational basis - even a best judgment assessment cannot be a wild guess but a reasonable and justifiable guess at least based on some material. In the present case the respondents have not found any such evidence. It is only on the general impression the books of account was rejected and the taxable turnover was determined at best of judgment basis. Even for adopting some percent as the normal gross profit for such transaction, there is no evidence. As stated in the various judgment, the Courts have repeatedly pointed out that even a best judgment assessment cannot be a wild guess but a reasonable and justifiable guess based on some material at least. In the present case there is absolutely no material for an addition of 54.91% along with 15% turnover. Therefore, this Court is of the considered opinion, that the impugned order cannot be sustained. Even though it is based on the deemed assessment, the respondents ought to have applied reasonable addition based on the real evidence. Therefore, this Court is of the considered opinion the impugned order is liable to be quashed. Grant of desk audit report to the petitioner - section 85 of TNVAT Act - HELD THAT:- This Court directed the respondents to submit the report before this Court in order to scrutinize whether it is covered under section 85 of TNVAT Act. The respondents have produced the same and on perusing the said desk audit report, it is seen that the report has taken the order-in-original passed by the Commissioner of GST and Central Excise and the show cause notice issued by the said authorities. These two orders cannot be stated as a secret document. Therefore, the respondents cannot claim the show cause notice and the orderin- original passed by the Commissioner of GST as secret document covered under section 85 of TNVAT Act. Hence the claim of the respondents cannot be legally sustained and the impugned order is liable to be quashed. Order passed by the Commissioner of Central Excise and Customs authority can be taken as such or not - HELD THAT:- It is settled proposition of law that the order passed by one tax authority cannot be the basis for levying tax by another authority. The tax ought to be levied based on the relevant provisions of law. Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the reassessment could be sustained when the assessing authority rejected the petitioner's accounts and adopted a gross profit figure (54.91% plus 15%) for computing taxable turnover without any rational basis or supporting material. (ii) Whether the tax authority was justified in refusing to furnish the 'desk audit report' on the plea of confidentiality under section 85 of the TNVAT Act, when the report was founded on documents such as a show cause notice and an order-in-original issued by another department. (iii) Whether the assessing authority could base the impugned assessment on an order passed by another tax authority (GST/Central Excise), instead of levying tax strictly under the relevant provisions applicable to the assessment. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Sustainability of reassessment based on adoption of gross profit (54.91% plus 15%) and rejection of accounts Legal framework (as discussed by the Court): The Court assessed the legality of a 'best judgment' style determination and emphasised that any such estimation must be a reasonable and justifiable guess based on some material, and not a 'wild guess'. Interpretation and reasoning: The Court noted that the assessment order itself disclosed that the gross profit was taken at 54.91% along with an additional 15%, but the adoption of this figure was not on a rational basis. The Court found that the authorities had not identified any concrete evidence of suppression or other material justifying rejection of the accounts and replacement of declared figures with the adopted gross profit method. The Court treated the approach as founded on a general impression rather than evidence-based determination. Conclusion: In the absence of material supporting the addition of 54.91% along with 15% turnover, the impugned assessment was held unsustainable and liable to be quashed, even though it followed a deemed assessment regime; the authority was required to make additions, if any, only on a reasonable basis supported by real evidence. Issue (ii): Refusal to furnish desk audit report citing section 85 confidentiality Legal framework (as discussed by the Court): The respondents relied on section 85 of the TNVAT Act to contend that records prepared for the purposes of the Act are confidential and need not be disclosed. Interpretation and reasoning: The Court required production of the desk audit report for its own scrutiny to determine whether section 85 applied. Upon perusal, the Court found the report relied upon (a) an order-in-original passed by the Commissioner of GST/Central Excise and (b) a show cause notice issued by those authorities. The Court held that such documents cannot be treated as secret documents merely by being referred to in the desk audit report, and therefore could not be withheld under section 85 on a claim of confidentiality in the circumstances. Conclusion: The confidentiality objection under section 85 was rejected as legally unsustainable on the facts; the Court held that the respondents could not treat the show cause notice and order-in-original as secret documents covered by section 85. This supported the Court's decision to quash the impugned assessment. Issue (iii): Reliance on another tax authority's order as the basis for levying tax Interpretation and reasoning: The Court accepted the petitioner's contention that an order passed by one tax authority cannot, by itself, be adopted as the basis for levying tax by another authority. The Court treated it as a settled proposition that tax must be levied based on the relevant provisions of law applicable to the assessing authority, and not merely by following another department's order. Conclusion: The Court held that reliance on the other authority's order as such was impermissible, reinforcing the conclusion that the impugned assessment could not stand and was liable to be quashed.