ANIL K.NARENDRAN J.
The assessee, a dealer in unbranded ceramic tiles, is the revision petitioner in this Revision Petition filed under Section 63 of the Kerala Value Added Tax Act, 2003 (hereinafter referred to as ‘the Act'), aggrieved by Annexure III order of the Kerala Value Added Tax Appellate Tribunal, Ernakulam, dated 6.7.2012, in T.A.VAT.No.1436/2011. The assessment year in question is 2008- 09 and the issue under consideration in this Revision Petition is the legality of the best judgment assessment made under Section 25(1) of the Act on the sole ground of low gross profit.
2. The monthly returns filed by the assessee during the assessment year 2008-09 were accepted by the Department, under Section 21 of the Act. But, on subsequent scrutiny of the returns, with reference to the annual return and the statutory audit report in Form No.13/13A, the assessing authority noticed the following defects.
“(1) The total sales turnover conceded by the assessee is `5,15,54,470/-. The total purchase for the year was `5,35,03,818/-. Out of this 13% is local purchase and 87% inter-state purchase.
(2) The assessee had incurred freight amounting to `93,19,342/- and loading and unloading charges of `6,77,200/-. The assessee has not given separate details of expenses incurred for local and inter-state purchase.
(3) The gross profit considered is only 4.5%. This is too low considering the value of goods and the volume of goods procured from outside the State. By conceding a low gross profit, assessee has suppressed sales to a great extent.
(4) The last month's purchase itself comes to about `50 lakhs. But as per the closing stock inventory, last 3 months' purchase remains as stock.”
According to the assessing authority, the abnormality in the stock can be considered as a result of under valuation/conceding low gross profit. Hence, the assessing authority proposed to complete the assessment under Section 25(1) of the Act by adding 15% gross profit to the purchase value of goods procured from outside State and 10% gross profit to the local goods and estimated the total sales turnover at `5,64,53,950/-. After deducting the conceded turnover, a balance taxable turnover of `48,99,480/- was proposed under Section 25(1) of the Act, which was communicated to the assessee vide notice dated 2.12.2009.
3. On receipt of such notice, the assessee filed reply contending, inter alia, that the proposal to revise the assessment under Section 25(1) of the Act is illegal and unauthorised. Rejecting the contentions raised by the assessee, the assessing authority issued Annexure I assessment order fixing a total sales turnover at `5,64,53,946/-, as against the conceded taxable turnover of `5,15,54,470/-. The total tax due from the assessee was fixed at `71,27,312/- and after deducting `65,12,152/- already on credit, the balance tax due was fixed at `6,15,160/-. The assessee had taken up the matter in appeal, under Section 55 of the Act. But, the 1st appellate authority by Annexure II order dismissed the appeal. The 1st appellate authority concluded that, only if there is omission and suppression on the part of the assessee, the very low gross profit as conceded by the assessee for interstate purchase can be found at this range. Therefore, there is no impropriety in completion of assessment under Section 25(1) of the Act and the same was upheld.
4. Aggrieved by Annexure II order, the assessee filed appeal before the Appellate Tribunal, under Section 60 of the Act, and the Appellate Tribunal by Annexure III order allowed the said appeal in part. The Appellate Authority upheld the rejection of return and accounts, concluding that the facts brought on record would indicate that the assessee had not shown the actual sale value of the goods in the invoice. Regarding the question as to whether on the facts and circumstances of the case the quantum of addition made to the conceded turnover is reasonable, the Appellate Tribunal found that the addition made to the conceded turnover is on a higher side. Therefore, the assessing authority was directed to adopt 5% gross profit in locally purchased goods and 7% gross profit in the goods brought from outside the State and to recompute the turnover.
5. It is aggrieved by Annexure III order of the Appellate Tribunal, the assessee is before us in this Revision Petition. The assessee has raised the following questions of law for our consideration and decision;
(i) As against the facts and circumstances of the case, is Tribunal justified in holding that, “we endorse the view of the lower authorities that the appellant had resorted to under invoicing and sales without bills to suppress a portion of the turnover” seen against the background that there was no inspection, incriminating circumstances like stock variation, compounding or penalty or any other discrepancy in the accounts?
(ii) Was it justified in rejecting the findings of the Income-tax Department that accounts and profit declared is acceptable after verification of accounts through computer selection process for the same year and in respect of which the commercial taxes department had taken a totally opposite view without any evidence on record?
(iii) Is the Tribunal justified in law in accepting the ratio adopted by the assessing authority when the ratio was palpably wrong ignoring the pre-sales expenses disclosed in the trading account and adopting wrong proportion of closing stock which occasioned the distortion of the gross profit as pointed out by the appellant in detail?
(iv) Has not the Appellate Tribunal erred when it relied on merely two bills which disclosed sales to customer at dealer price and sale to a customer for less than dealer price. When turnover is a huge amount of `5,15,54,470/- and number of bills used are huge and trends of design are subject to fast variation?
(v) Is the Tribunal justified in coming to the finding that revision petitioner has suppressed turnover based on assumption that interstate purchase must fetch higher gross profit, irrespective of valid reasons shown to the contrary, and substantial turnover that has yielded net profit to the extent of 74% of the total investment made?”
6. Heard the arguments of the learned counsel for the petitioner-assessee and the learned Government Pleader appearing for the respondent-State.
7. The learned Counsel for the petitioner-assessee, relying on the decisions in Classic Marbles v. State of Kerala [(2009) 25 VST 295 (Ker)], B. Ravi v. The State of Tamil Nadu and anther [(1981) 48 STC 274 (Madras)], Ratna Café, Madras v. The State of Madras [(1974) 33 STC 39 (Madras)] and C.O. Devassy v. State of Kerala [(1991) 81 STC 2 (Kerala)] contended that, mere assumptions and presumptions of the assessing authority could not be the basis or reason for best judgment assessment. In the absence of any justifiable materials to show that there was any willful suppression of the taxable turnover, the addition made by the assessing authority is unsustainable. Moreover, a duty is cast on the Revenue to prove that the assessee factually collected more than the ostensible consideration shown in the accounts and the authorities below went wrong in sustaining the assessment without entering into a definite finding to that effect. Though, contentions were advanced before the Tribunal relying on the decisions referred to above, which is evident from Annexure IV memorandum of appeal and Annexure V argument notes, the Tribunal passed Annexure III order, without adverting to any of such legal contentions raised by the assessee.
8. Per contra, the learned Government pleader contended that, the assessment made by the assessing authority in Annexure I assessment order is perfectly legal and the same was rightly upheld by the 1st appellate authority and the Tribunal and hence no interference is called for. Relying on the judgment of the Apex Court in Commissioner of Sales Tax, Madhya
Pradesh v. M/s. H. M. Esufali, H. M. Abdulali, Siyaganji,
Indore [(1973) 32 STC 77], the learned Government Pleader contended that, in estimating any escaped turnover, it is
inevitable that there is some guess work and if the estimate made by the assessing authority is a bonafide estimate and is based on rational basis, the fact that there is no good proof in support of that estimate is immaterial.
9. We have considered the rival submissions made at the Bar.
10. The assessee is a dealer in unbranded ceramic tiles.
Though the monthly returns filed by the assessee during the assessment year 2008-09 were initially accepted under Section 21 of the Act, on a subsequent scrutiny with reference to the annual return and the statutory audit report in Form No.13/13A, the assessing authority noticed certain defects. According to the assessing authority, the abnormality in stock can be considered as a result of under valuation/conceding low gross profit. Hence, the assessing authority proposed to complete the assessment under Section 25(1) of the Act by adding 15% gross profit to the purchase value of goods procured from outside State and 10% gross profit to the local goods and the assessee was issued with a notice dated 2.12.2009. As can be seen from Annexure I assessment order, the proposal made by the assessing authority was based on an analysis of purchase, sales and stock of the assessee during the assessment year 2008-09. In the absence of separate details for freight, loading and unloading charges, the loading and unloading charges was allocated in proportion to the local and inter-state purchase and freight was added to the inter- state purchase turnover. In the assessee’s case the gross profit from local purchase is `15,30,420/-, whereas, that from inter- state purchase is only `7,08,810/-. Normally, the gross profit derived from sale of goods procured from outside the State will be much higher than that derived from local purchase. But, in the assessee's case, the gross profit in the first case is below 2%, whereas, that in the second case is more than 22%. Therefore, according to the assessing authority, it is clear that the assessee had suppressed sales and in such circumstances, the return filed cannot be considered as true, correct or complete.
11. On receipt of notice, the assessee filed reply contending that, in the proposal made the assessing authority has not pointed out any escape of turnover from the assessment already completed under Section 21 of the Act. The assessee had filed statutory audit report in Form 13/13A and the assessing authority has not detected or pointed out any omission, mistake or suppression in that audit report. Moreover, the assessing authority has not even called for the books of accounts so as to verify whether the auditors relied on the very same books of accounts, in order to verify the genuineness of the same. Therefore, the proposal to revise the assessment under Section 25(1) of the Act is illegal and unauthorised.
12. Rejecting the contentions raised by the assessee, the assessing authority issued Annexure I assessment order fixing a total sales turnover at `5,64,53,946/- as against the conceded taxable turnover of `5,15,54,470/-. The total tax due from the assessee was fixed at `71,27,312/- and after deducting `65,12,152/- already on credit, the balance tax due from the assessee was fixed at `6,15,160/-. Though the assessee had taken up the matter in appeal, the 1st appellate authority by Annexure II order dismissed that appeal. As borne out from Annexure II order, the assessee contended before the 1st appellate authority that, the assessing authority has no clear case of any offence of evasion of tax or under valuation. The assessee being a whole sale dealer, the goods were directly purchased from Gujarat and transported through ship to Cochin Port and cleared by paying advance tax, and that the assessing authority has not verified the corresponding purchase bills and sales bills of both inter-state and local purchase and that the gross profit arrived at is only 4.5%. The assessing authority has estimated the freight and loading charges incurred in proportion of 15%: 87% and estimated sales turnover without establishing a clear case warranting assessment under Section 25(1) of the Act. The 1st appellate authority has also taken note of the contention of the Revenue that, as the customer bill and dealer bill figures the same amount in respect of floor tiles and the customer bill is less than the dealer bill in respect of wall tiles, the possibility of suppression cannot be ruled out, as apprehended.
13. Aggrieved by Annexure II order passed by the 1st appellate authority, the assessee filed appeal before the Appellate Tribunal. But, the Appellate Tribunal by Annexure III order allowed the appeal only in part. The Tribunal upheld the rejection of return and accounts, concluding that, the facts brought on record would indicate that the assessee had not shown the actual sale value of the goods in the invoice. Therefore, the Appellate Tribunal endorsed the view of the assessing authority as well as the 1st appellate authority that, the assessee had resorted to under invoicing and sales without bills to suppress a portion of the turnover. Regarding the question as to the quantum of addition made to the conceded turnover, the Appellate Tribunal directed the assessing authority to adopt 5% gross profit in locally purchased goods and 7% gross profit in the goods brought from outside the State and to re- compute the turnover. As borne out from Annexure IV memorandum of appeal and Annexure V argument note, the assessee raised specific contentions before the Tribunal relying on the decisions of this Court as well as that of the Madras High Court in Classic Marbles’s case, B. Ravi’s case, Ratna Café’s case and C.O. Devassy’s (supra), but, the Tribunal passed Annexure III order, without adverting to any of the legal contentions raised by the assessee, relying on those decisions.
14. In Classic Marbles v. State of Kerala [(2009) 25 VST 295 (Kerala)], this Court held that, in best judgment assessment the assessing authority is expected to assign valid reasons for rejecting the books of accounts and the return filed by the assessee and it cannot make additions to the admitted turnover or conceded gross profit in the return filed, on the basis of mere assumptions and presumptions. Paragraphs 7 and 8 of the order read thus;
“7. One thing is clear that even in the case of best judgment assessment, the assessing authority is expected to assign valid reasons, firstly, for rejecting the books of accounts and the return filed by the assessee. Secondly, even the best judgment assessment is also an assessment and therefore, the assessing authority, on mere assumptions and presumptions, is not expected to make additions to the conceded turnover and also to the conceded gross profit in the return filed. There must be valid reason for the assessing authority to reject the returns filed and to proceed for the best judgment assessment.
8. In the instant case, as we have already noticed, it is not the case of the assessing authority that the statutory audit report filed by the assessee cannot be accepted and it is also not the case of the assessing authority that the books of accounts maintained by the dealer cannot be accepted, since they are not maintained in the form required under the provisions of KGST Act and CST Act. Further, it is not the case of the assessing authority that though the assessee has earned more gross profit, he has not conceded the same or has not declared the same in the annual return filed for the assessment year in question. On mere ipse dixit the assessing authority proceeds to hold that in the line of business the assessee is carrying on, the gross profit must be on a higher side. This reasoning, in our opinion, is arbitrary but also capricious. Therefore, this reasoning of the assessing authority cannot be accepted.”
15. In B. Ravi v. The State of Tamil Nadu and anther [(1981) 48 STC 274 (Madras)] it was held that, in a case where neither the assessing authority nor the appellate authorities found any particular sale or purchase omission, there was no material to justifiably say that the addition made by the assessing authority to the purchase turnover of the assessee was reasonable and also to conclude that there was any willful suppression of the taxable turnover, warranting addition of gross profit in locally purchased goods and that in the goods brought from outside the State, warranting re-computation of turnover. The relevant paragraph of the judgment reads thus;
“A look at the trading account leaves us an impression that the assessing officer seems to have an unreasonable suspicion and there was no real basis for rejection of the return submitted by the assessee. It may also be pointed out that neither the assessing officer nor the appellate authorities have found any particular sale or purchase omission. It is only on the general impression that 20 per cent profit should have been derived by the assessee that the account books were rejected and the taxable turnover was determined at best of judgment basis. Even for adopting 20 per cent as the normal gross profit for such transaction, we do not have any evidence or comparable data with reference to the business of other dealers in this line. This Court has been repeatedly pointing out that even a best judgment assessment cannot be a wild guess but a reasonable and justifiable guess based on some material at least. As we have pointed out earlier, in this case there was absolutely no material by which one can justifiably say an addition of 20 per cent to the purchase turnover was reasonable. Further, in the Full Bench judgment in Kathiresan Yarn Stores v. State of Tamil Nadu [(1978) 42 STC 121 (F.B.)], this Court had held that the mere fact that there is a best judgment assessment, particularly when the assessment is based on the inference flowing from the inability of the assessee to establish the case pleaded by him, will not be sufficient for the purpose of imposition of penalty, for the degree of proof required for the imposition of penalty is quite different from and is of a much higher order than that required for the purpose of making a best judgment assessment. The Full Bench further observed that though an estimate made on best judgment basis may be legal, for the purpose of imposing penalty something more concrete is required which would enable the judicial mind to reach the conclusion that the dealer actually had the turnover which was fixed by best judgment. As we have already pointed out, no such material is available for us to conclude that there was any willful suppression of the taxable turnover warranting a penalty under Section 12(3). Therefore, the order of the Tribunal imposing penalty is not sustainable and accordingly we set aside the penalty and allow the tax revision case.”
16. In C.O. Devassy v. State of Kerala [(1991) 81 STC 2 (Kerala)] this Court held that, a duty is cast on the Revenue to prove that the assessee factually collected more than the ostensible consideration shown in the accounts and the authorities below went wrong in sustaining the assessment without entering into a definite finding that the assessee in fact collected or obtained more than the amount shown in the accounts. Paragraph 14 of the judgment reads thus;
“14. In the light of the above decision of the Supreme Court and of the Andhra Pradesh High Court, a duty was cast on the Revenue to prove that the assessees factually collected more than the ostensible consideration shown in the accounts. There is no finding in any of the orders of the statutory authorities that the revision-petitioners/assessees factually collected or obtained more than the amount shown in the accounts or bills. Such a finding is essential to sustain the assessments under Section 19B of the Act. In the absence of such a finding, we hold that reliance placed on Section 19B of the Act was misplaced. On this ground as well, the assessments made by invoking Section 19B of the Act are illegal. The Appellate Tribunal was in error in sustaining the assessments under Section 19B of the Act without entering a definite finding that the assessees in fact collected or obtained more than the amount shown in the accounts or bills.”
17. In the judgment of the Apex Court in Commissioner
of Sales Tax, Madhya Pradesh v. M/s. H. M. Esufali, H. M.
Abdulali, Siyaganji, Indore [(1973) 32 STC 77], relied on by the learned Government Pleader, the Apex Court held that, in estimating any escaped turnover, it is inevitable that there is some guess work and if the estimate made by the assessing authority is a bonafide estimate and is based on rational basis, the fact that there is no good proof in support of that estimate is immaterial. Paragraph 8 of the said judgment reads thus:
“8. …………. The task of the assessing authority in finding out the escaped turnover was by no means easy. In estimating any escaped turnover, it is inevitable that there is some guesswork. The assessing authority while making the 'best judgment' assessment no doubt should arrive at its conclusion without any bias and on rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis. The fact that there is no good proof in support of that estimate is immaterial. Prima facie the assessing authority is the best Judge of the situation. It is his 'best judgment' and not of anyone else's. The High Court could not substitute its 'best judgment' for that of the assessing authority. In the case of 'best judgment' assessments the Courts will have to first see whether the accounts maintained by the assessee were rightly rejected as unreliable. If they come to the conclusion that they were rightly rejected the next question that arises for consideration is whether the basis adopted in estimating the turnover has a reasonable nexus with the estimate made. If the basis adopted is held to be a relevant basis even though the Courts may think that it is not, the most appropriate basis, the estimate made by the assessing authority cannot be disturbed. In the present case, there is no dispute that the assessee's accounts were rightly discarded. We do not agree with the High Court that it is the duty of the assessing authority to adduce proof in support of its estimate. The basis adopted by the Sales Tex Officer was a relevant one whether it was the most appropriate or not. Hence the High Court was not justified in interfering with the same.”
18. In the light of the principles laid down in the decisions referred to above, we have to conclude that, in best judgment assessment the assessing authority is expected to assign valid reasons for rejecting the books of accounts and the return filed by the assessee and it cannot make additions to the admitted turnover or to the conceded gross profit in the return filed on the basis of mere assumptions and presumptions. A duty is cast on the Revenue to prove that the assessee factually collected more than the ostensible consideration shown in the accounts and a definite finding to that effect is essential in order to sustain such an assessment. At the same time, in estimating any escaped turnover, it is inevitable that there is some guess work and if the estimate made by the assessing authority is a bonafide estimate and is based on rational basis, the fact that there is no good proof in support of that estimate is immaterial.
19. After hearing counsel for both sides and after going through Annexure III order of the Appellate Tribunal, we are of the view that in principle the said order is unsustainable as the Tribunal upheld the rejection of return and accounts of the assessee, even without adverting to the contentions raised by the assessee relying on the principles laid down in the decisions referred to above. The Tribunal failed to note that, a definite finding to the effect that, the assessee had factually collected more than the ostensible consideration shown in the accounts is essential in order to sustain an assessment under Section 25(1) of the Act and that, additions cannot be made on the basis of mere assumptions and presumptions of the assessing authority.
20. In such circumstances, we set aside Annexure III order of the Appellate Tribunal and T.A.(VAT)No.1436/2011 is remanded back to the Tribunal for fresh disposal. The Appellate Tribunal shall dispose of the appeal as directed above, taking note of the observations made in this order, with notice to both sides and giving them a reasonable opportunity of being heard, as expeditiously as possible, at any rate, within a period of 4 months from the date of receipt of a copy of this order.
The Revision Petition is disposed of. No order as to costs.
ANTONY DOMINIC, JUDGE dsn ANIL K.NARENDRAN, JUDGE