1972 (3) TMI 69 - SC - VAT and Sales Tax

Whether under the provisions of the Kerala General Sales Tax Act 1963 the opportunity of being heard which was to be given to the assessees would include within its sweep the right of cross-examination of a third party whose accounts were the basis of the best judgment assessments made by the Sales Tax Officer and the examination of which later on showed that the returns filed by the assessees were incorrect and incomplete? Held that - Appeal dismissed. On a true interpretation of section 17(3) the proviso thereto and rule 15 the inescapable conclusion would be that the assessee has been given a statutory right to prove the correctness of his return by showing that the materials on the basis of which his return is found to be incorrect or incomplete are wrong and if for this purpose the assessee makes an express prayer for cross-examining the wholesale dealers whose accounts formed the sheet-anchor of the notice issued to the assessee he is undoubtedly entitled to cross-examine such wholesale dealers. In view of the language in which the Rules are couched it seems to us that a determinative issue arises in this case-the department taking the stand that the returns filed by the assessees are incorrect and incomplete whereas the assessees contend that their returns are correct and that the accounts of the wholesale dealers which formed the basis of the information of the sales tax authorities were wrong and incorrect.

Issues Involved:
1. Denial of opportunity to cross-examine witnesses.
2. Interpretation of Section 17(3) of the Kerala General Sales Tax Act, 1963.
3. Application of principles of natural justice in tax assessment proceedings.
4. Validity of best judgment assessment based on third-party accounts.

Issue-Wise Detailed Analysis:

1. Denial of Opportunity to Cross-Examine Witnesses:
The core issue in these appeals was whether the assessee was entitled to cross-examine witnesses whose accounts were used by the Sales Tax Officer to determine that the returns filed by the assessee were incorrect and incomplete. The High Court held that the assessee was entitled to such an opportunity, and the Supreme Court affirmed this view. The denial of the opportunity to cross-examine Haji Usmankutty and other wholesale dealers constituted an infraction of the assessee's rights under the second part of the proviso to Section 17(3) of the Kerala General Sales Tax Act, 1963. This provision mandates that the assessee should be given a reasonable opportunity to prove the correctness or completeness of the return, which includes the right to cross-examine witnesses.

2. Interpretation of Section 17(3) of the Kerala General Sales Tax Act, 1963:
Section 17(3) allows the Sales Tax Officer to make a best judgment assessment if no return is submitted or if the submitted return appears to be incorrect or incomplete. The proviso to this section requires that the assessee be given a reasonable opportunity of being heard and to prove the correctness or completeness of the return. The Supreme Court emphasized that the opportunity to prove the correctness of the return includes the right to examine and cross-examine witnesses. This interpretation aligns with the principles of natural justice, ensuring that the assessee can challenge the evidentiary material used against them.

3. Application of Principles of Natural Justice in Tax Assessment Proceedings:
The judgment reiterated that tax authorities, while not bound by technical rules of evidence, must adhere to the principles of natural justice. The rule of audi alteram partem, which requires that no person should be condemned unheard, is fundamental. The Supreme Court cited previous judgments, including Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal, and A.K. Kraipak v. Union of India, to underline that quasi-judicial authorities must act fairly and provide a reasonable opportunity for the affected party to present their case. The right to cross-examine witnesses is a critical component of this fair hearing, especially when the evidence from third-party accounts is used to assess the tax liability.

4. Validity of Best Judgment Assessment Based on Third-Party Accounts:
The Supreme Court scrutinized the process of best judgment assessment, emphasizing that it must be based on honest guess-work supported by evidence. The Sales Tax Officer's reliance on the accounts of Haji Usmankutty and other wholesale dealers without allowing the assessee to cross-examine them was deemed improper. The Court highlighted that cross-examination is an effective method to establish the truth and expose falsehood. The refusal to allow cross-examination vitiated the assessment orders, as it prevented the assessee from proving the correctness of their returns.

Conclusion:
The Supreme Court dismissed the appeals, upholding the High Court's decision that the assessee must be given an opportunity to cross-examine witnesses whose accounts were used to determine the incompleteness or incorrectness of the returns. The judgment reinforced the application of natural justice principles in tax assessment proceedings and clarified the interpretation of Section 17(3) of the Kerala General Sales Tax Act, 1963. The appeals were dismissed with no order as to costs.

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