Tamil Nadu General Sales Tax Act (1 of 1959), Sections 12(2) and (3)--Degree of proof for imposition of penalty is of much higher order and different than that required for making a best judgment assessment.
The revision petitioners were carrying on business in handloom cloth and art silk yarn. The Department came to know that the revision petitioners had imported art silk through the Port of Bombay. The assessing authority on estimate basis fixed the petitioners' taxable turn-over and the amount so fixed was assessed at 2 per cent under Section 12(2) of the Tamil Nadu General Sales Tax Act (1 of 1959), and a penalty was also imposed on the petitioners under Section 12(3) of the Act. The appeal preferred by the petitioners against the imposition of penalty to the Assistant Commissioner and the Tribunal failed. The assessee preferred revision petitions to the High Court.
The question that arose for consideration was whether the imposition of penalty under Section 12(3) of the Act was justified.
Held, an estimate of turn-over can be made under various circumstances. More often an estimate, for best-judgment assessment, whether it be for the purpose of imposing sales tax or for the purpose of imposing income-tax under the Income-tax Act, can be based on nothing more than as honest guess. This permissible in law and no one at this distance of time can contend that the assessment to tax on such guesses is unsustainable. But the question then arises whether by virtue of the mere fact that on the basis of best-judgment, the extent of turn-over has been fixed or the income has been fixed, it automatically follows that the assessee had that income or had really sold the goods for the amount of the turn-over. In all the cases this result would not follow.
In order that penalty may be imposed, it must be possible first to come to the conclusion that there was actually turn-over and further that, that turn-over was not disclosed. The mere fact of 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.
Hence the order of the Tribunal was set aside insofar as it had imposed penalty on the revision petitioners.
P. Govindan Nair, C.J.
1. Thvl Kathiresan Yarn Stores, registered dealers under the Tamil Nadu General Sales Tax Act, are the revision petitioners. They were carrying on business in handloom cloth and art silk yarn. The department came to know that the revision petitioners had imported art silk to the value of Rupees 4,25,243, through the Port of Bombay, The assessing authority, on estimate basis, fixed the petitioner's taxable turnover at Rs. 4,67,767-30 by adding 10 per cent of Rs. 4,25,243 to that amount. This addition was towards gross profit to the purchase turnover, The amount so fixed, Rs. 4,67,767-30, was assessed at 2 per cent under Sec tion 12 (2) of the Act, and a penalty of Rs. 14033 was also imposed on the petitioners under Section 12(3) the Act, The appeal taken by the petitioners to the Appellate Assistant Commissioner and the Tribunal failed. Before the Tribunal three points were raised by the petitioners:
1. The assessment was barred by time, as the assessment was beyond the period of five years from the expiry of the year to which the tax related. (The assessment year was 1964-65);
2. The turnover was not liable to tax; and
3. The imposition of penalty was unjustified.
2. The point of limitation was raised on the basis of Section 16(1)(a) of the Act. The Tribunal found that this was not a case of escaped turnover being assessed under Section 16 of the Act. It referred to the initiation of proceedings under Section 12 of the Act to assess the petitioners on a total turnover of Rs. 11,59,309-05 for the year 1964-65 by a notice dated 18-7-1966 and the reply of the petitioners to the notice, dated 1-9-1966. On subsequent occasions the petitioners had also asked for time to produce the accounts before the assessing authority. A further notice was issued on 15-12-1969 by proposing the assessment now in dispute. Later the assessment was confirmed on that basis by an order dated 30-11-1972. No question of limitation can arise where action has been taken under Section 12(2) the Act. The Tribunal therefore rightly negatived the plea of limitation.
3. The second point raised before the Tribunal was based on the contention that, though the art silk was admittedly imported through the port of Bombay, the art silk was never brought to the State of Tamil Nadu, that it was never converted into handloom cloth and that it was never sold in Tamil Nadu. The dealers also contended that the art silk itself was sold in Bombay. But there was no proof of such sale of the art silk in Bombay. In those circumstances, the Tribunal took the view that, the dealers not having established the case pleaded by them, an inference could be drawn that the goods were brought to Madras, converted into handloom cloth and sold in Madras. This view was supported by the decision in State of Madras v. Mohamed Samiulla Sahib and Co., (1973) 32 STC 179 (Mad) relied on also by the Tribunal. We see no reason to interfere with the view taken by the Tribunal on this point.
4. The only other point remaining to be considered is whether the imposition of penalty, in the circumstances of the case, was justified. Penalty was imposed under Section 12(3) the Act. Sub-section (3) of Section 12, as it stood at the relevant time, was in these terms:
"When making any assessment under Sub-section (2), the assessing authority may also direct the dealer to pay, in addition to the tax assessed, a penalty not exceeding one and a half times the amount of tax due on the turnover that was not disclosed by the dealer in his return, or, in the case of failure to submit a return one and half times the tax assessed, as the case may be."
5. The sub-section has been amended by Act 31 of 1972, and the words 'not willfully disclosed', were substituted for the words, 'not disclosed.'
6. On the wording of Sub-section (3) it was contended that the sub-section did not require any conscious violation of any provision of the Act and that no mental element to constitute a guilty mind had to be established in order that penalty might be imposed. In cases where a return has been filed, and an estimate had to be made applying Section 12, the difference in the turnover returned and the turnover fixed will be the turnover that was not disclosed and penalty can be imposed to the extent of one and a half times the tax due on that difference. It was further pointed out that in cases, where no return had been filed, penalty could be imposed at one and e half times the tax assessed. When this part of the section comes into operation, there can be no question of any turnover not being disclosed. Dealing with this last submission, we would like to point out that, when no return has been filed, there will be no turnover disclosed, and therefore the turnover fixed can be taken to be the turnover not disclosed. So we see no difference between the first part of SUB-SECTION (3) of Section 12 and the latter part of that Sub-section. The question then is whether, in all cases of an estimate under Section 12(2) of the Act, the authority would be justified in imposing penalty under Section 12(3) of the Act. Counsel for the petitioners relied on a number of decisions of this Court in support of the submission that, when an estimate is made on the amount of turnover not disclosed, no penalty could be imposed. The wording of Section 12(3) was compared with the wording of Section 16(2). Section 16(2) provided that the assessing authority may, if it is satisfied that the escape from assessment is due to willful non-disclosure of assessable turnover by the dealer, direct the dealer to pay, in addition to the tax assessed, a penalty not exceeding one and a half times the tax so assessed. It was stressed that the words 'willful non-disclosure' occurring in Section 16(2) were significantly absent in Section 12(3), which only talks of turnover not disclosed. Reliance was placed on the decisions of this court in Oveekee Textiles v. Dy. Commercial Tax Officer, 27 STC 439: (1971 Tax LR 535) (Mad); Madras Metal Works v. State of Madras, 31 STC 566: (1973 Tax LR 2359) (Mad) and Rajam Textiles v. State of Tamil Nadu (1977) 39 STC 124(Mad). In Oveekee Textiles v. Dy. Commercial Tax Officer, 27 STC 439: (1971 Tax LR 535) (Mad) it has been held that the levy of penalty under Section 16(2) is conditional upon the satisfaction of the authority that the escapement of turnover was the result of an overt culpable act on the part of the assesses, that though such a satisfaction referred to the mental satisfaction of the assessing authority, yet a finding to that effect is the sine qua non for the imposition of penalty under Section 16, that therefore, a penalty levied in the purported exercise of jurisdiction under Section 16, but without such a finding, is unsustainable and that, on the other hand, if the penalty is levied while the assessment is made under Section 12, then it is valid and has to be sustained.
7. In Madras Metal Works v. State of Madras, 31 STC 566: (1973 Tax LR 2359) (Mad) a similar view has been taken (at pp. 2360-61)-
"The learned counsel for the asses-see also contends that there is no justification for the levy of penalty in this case and that, in any event, the quantum of penalty is excessive. It is seen that the penalty originally levied by the assessing authority was Rupees 2230, and this has been reduced by the Tribunal to Rs. 750, having regard to the circumstances of the case. The contention advanced on behalf of the assessee in this regard is that mere suppression of turnover for a particular period during the assessment year will not show that there was a willful suppression of turnover throughout the year and that, unless the assesses is shown to have had sufficient mens rea leading to the inference of willful suppression of turnover, there could be no levy of penalty. We are not able to accept this contention, for, if there was non-disclosure of a portion of the turnover from the regular account books and the turnover has actually been suppressed from the regular account books, it could easily be inferred that the assessee had the necessary mens rea to exclude such turnover from his regular accounts, with a view to evade payment of tax on such turnover. As a matter of fact, Section 12(3) of the Tamil Nadu General Sales Tax Act which empowers the assessing authority to levy penalty in cases of this kind, does not make it a condition that the assesses should have the necessary mens rea before he is found guilty of making certain suppressions. In our view, the imposition of penalty in this case cannot legally be taken exception to."
8. The matter was again dealt with' by this court in Rajam Textiles v. State of Tamil Nadu (1977) 39 STC 124 (Mad). There is a more exhaustive review of the case law and the view has been taken that willful non-disclosure is not essential for invoking the power of' imposition of penalty under Section 12(3). The assessee in that case relied on the decision in A. V. Meiyappan v Commr. of Commercial Taxes where it had been held that, though a power to impose penalty for non-disclosure was conferred on the assessing authority, it should not be imposed as a routine matter and that it should be exercised with proper judicial discretion. The Court, however, observed that this decision could not be taken as an authority for the position that a factual willful non-disclosure was essential for invoking Section 12(3),
9. In T. C. Nos. 451 to 455 of 1969 Ponnusami Asari v. State of Tamil Nadu this court dealing with a similar question, observed-
"The next question is whether the orders levying penalty can be upheld in these cases. As already stated, there is no positive material to show that the assesses in fact built the lorry bodies for a lump sum. As a matter of fact, the assessments are based on the fact that the assessee has not established his case that the customers did not supply the material. In such cases, where there is no positive evidence to show that the assessee sold the lorry bodies as such, it cannot be said that the levy of penalty under Section 12(3) is justified. The Tribunal has not separately discussed this aspect of the case. It has merely confirmed the penalty after giving some reduction. We therefore set aside the orders of penalty in these cases, while upholding the assessments on merits."
The above view expressed by this court opens up a line of thinking, which will have to be examined before the justifiability or otherwise of an order imposing penalty under Section 12(3) can be decided. An estimate of turnover can be made under various circumstances. More often an estimate or best judgment assessment, whether it be for the purpose of imposing sales tax or for the purpose of imposing income-tax under the Income-tax Act, can be based on nothing more than an honest guess. This is permissible in law and no one at this distance of time can contend that the assessment to tax on such guesses is unsustainable. But the question then arises whether by virtue of the mere fact that on the basis of best judgment, the extent of the turnover has been fixed or, the income has been fixed, it automatically follows that the assesses had that income or had really sold the goods for the amount of the turnover. In all cases this result would not follow. Though for the purpose of assessment the estimate can stand, we consider that 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; or had earned the income which was fixed by the best judgment method. This is because in all cases of imposition of penalty, a greater degree of proof is insisted upon than in the case of assessments. It is unnecessary to labour this point further, because the matter has been dealt with in detail by the Supreme Court in Commr. of Income-tax West Bengal v. Anwar Ali, . The Supreme Court ruled that
the mere fact that the assessing authority in assessing a person, was satisfied that the return filed by the assessee did not disclose his correct income, and proceeded to make a best judgment assessment, and assessed him on that basis, would not by itself lead to the conclusion that the assessee had concealed the particulars of his income or had furnished inaccurate particulars thereof, in order to attract Section 271(1)(c) of the Income tax Act, 1961. Though the word 'concealed' is not used in Section 12(3), nor the words furnished inaccurate particulars thereof, it would not materially alter the situation. Penalty is for not disclosing. In order that it may be said that there was non-disclosure, it has first to be found that there was turnover or income to disclose. If the existence of the turnover or income is based on the fact that the assessee has not been able to establish the case that he pleaded, that by itself would not prove the positive that there was income or turnover. But the inability to prove the case pleaded would be sufficient to assess the dealer or the person liable to pay tax. In this case itself, the decision to assess has been founded on the principle of the decision in State of Madras v. Mohamed Samiulla and Co., (1973) 32 STC 179. The dealer therein, who was in Madras, had admitted that he had sold goods, but claimed that the situs of the sale was at Bombay where he had no branch. It was held that it was for him to show that the sales, being outside sales, were not taxable under the Tamil Nadu General Sales Tax Act, 1959, it was further held that, if the assessee failed to establish that the sales were outside sales, a presumption could be drawn that the sales had taken place in Madras where the assessee normally carried on business. This inference is possible for the purpose of assessment. But the question is whether such an inference can be drawn for the purpose of imposition of penalty. We do not think so, because it was the inability of the dealer to prove the case pleaded by him that resulted in the assessment. In such circumstances, we consider that the view expressed in the judgment in TC Nos. 451 to 455 of 1969 (Mad) viz., 'where there is no positive evidence to show that the assessee sold the lorry bodies as such, it cannot be said that the levy of penalty under Section 12(3) is justified' is the correct view to take.
10, In this connection, it will be useful to refer to the observation in the judgment in A. V. Meiyappan v. Commr. of Commercial Taxes. . Considering Ss. 12 (3) and 16 (2) of the Act, it was observed in that case (at p. 298)-
"Sub-section (2) of Section 16 provides for the imposition of a penalty and a penalty not exceeding 11/2 times the tax so assessed is leviable in case the assessing authority is satisfied that the escape from assessment is due to willful non-disclosure of assessable turnover by the dealer. The mere fact that the turnover has escaped assessment does not invite the imposition of the penalty. Under this provision, the assessing authority has to find that there has been an evasion of the tax due to willful non-disclosure of turnover which should have been disclosed. Section 12(3), on the other hand, does not appear to require any such finding of willful non-disclosure in the return. The mere fact that some item of turnover has failed to be included in the return would appear to confer upon the assessing authority the jurisdiction to impose a penalty. It seems to us that even in the case covered by Section 12(3) of the Act, a deliberate non-disclosure is really contemplated. The section refers to the imposition as a penalty and a penal provision of this nature cannot have been intended to apply to cases other than where a deliberate concealment by non-disclosure is involved. But, on the question, whether such a provision is unconstitutional, we are unable to agree with the learned counsel. It is well recognised that a power to penalise evasion of tax which is lawfully due is ancillary to the taxing power and the provision cannot therefore be struck down. On the further part of the argument of the learned counsel that mere non-disclosure cannot invite the levy of penalty, we agree. Having regard to the underlying intent of the section, it is still necessary for the assessing authority to be satisfied that the non-disclosure is willful and is designed to evade the tax. It can hardly be that the Legislature thought that an innocent omission by oversight or some such reason should still invite penal consequences."
11. The above passage was referred to by this court in Rajam Textiles v. State of Tamil Nadu,(1977) 39 STC 124 (Mad), but it was not accepted, apparently because it was felt that the reasoning in the paragraph that followed the one that we have extracted above was the real reason for relieving the assessee of the liability for penalty. That passage runs thus-
"But it is a point worthy of note that between 1956 when the Sales Tax Appellate Tribunal rendered its decision and the date on which these impugned orders were passed, everyone concerned, including the department, was under the view that turnovers of this description were not liable to be included in the turnover of the dealer. It is in that context that we have to examine whether the levy of the penalty for non-disclosure of the alleged turnover in the return is justified."
12. We do not think that it will be a correct approach to belittle the importance of the observations in the earlier paragraph in the judgment, by referring to the subsequent paragraph. Both the passages contain very valid reasons for holding that the imposition of penalty was not justified, and they are to have cumulative effect. This does not mean that the earlier reasoning is less important. The observations in the judgment in TC Nos. 451 to 455 of 1969 (Mad) appeal to us. So also the reasoning in A. V. Meiyappan v. Commr. of Commercial Taxes, . These observations are in consonance with what the Supreme Court has held in Commr. of Income-tax West Bengal v. Anwar AH, . We therefore prefer to rest our decision on such
reasoning. With great respect, we are not able to agree with the views expressed in Oveekee Textiles v. Dy. Commercial Tax Officer, 27 STC 439 : (1971 Tax LR 535) (Mad), Madras Metal Works v. State of Madras, 31 STC 566 : (1973 Tax LR 2359) (Mad) and Rajam Textiles v. State of Tamil Nadu, (1977) 39 STC 124 (Mad), when it is said that the process of imposition of penalty is almost an automatic one whenever an estimate is made when it is found that no return has been filed or that the return filed did not indicate the turnover to the extent fixed on the basis of the best judgment basis. All the circumstances of the case will have to be carefully scrutinised and the question whether penalty should be imposed must be considered on the basis of the judicial determination of the question whether grounds exist for the imposition of such penalty. In order that penalty may be imposed, it must be possible first to come to the conclusion that there was actually turnover and further that that turnover was not disclosed. The mere fact of 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.
13, In the light of the above, we set aside the order of the Tribunal, in so far as it has imposed penalty on the revision petitioners. We allow the revision petition to this extent and dismiss it in other respects. We direct the parties to bear their respective costs.
14. Order accordingly.