2008 (5) TMI 625 - HC - VAT and Sales Tax

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in rejecting the accounts and estimating the turnover only on the basis of alleged low gross profit? Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in observing that the burden of proof is on the assessee when actually the burden is on the Revenue to prove the higher rate of profit based on which assessment has been completed. Is it justified to ask the assessee to prove the negative fact? Whether, on the facts and in the circumstances of the case, the addition is justified when there is no inspection, stock variation, penalty, compounding or any other discrepancy in the accounts and actually the gross profit and the volume of trade showed a better trend than the previous year? Held that - The questions of law framed by the assessee is answered in favour of the assessee and against the Revenue. Accordingly, we allow the revision petition. We direct the assessing authority to accept the conceded gross profit declared by the assessee in its annual returns filed for the assessment year 2002-03 and pass fresh assessment order in accordance with law, as expeditiously as possible, at any rate, within four months from today and issue a fresh demand notice.

Summary

Issues involved:
Assessment based on best judgment, Rejection of returns, Addition of gross profit, Burden of proof on assessee, Justification of addition without discrepancies.

Assessment based on best judgment:
The revision petition challenged the orders of the Sales Tax Appellate Tribunal for the assessment year 2002-03. The assessee, a dealer in marbles, maintained regular books of account as required by law. The assessing authority rejected the returns filed by the assessee and issued a pre-assessment notice proposing a best judgment assessment due to low conceded gross profit. The assessee objected, explaining the reasons for the declared profit and requesting a regular assessment instead of best judgment. The assessing authority rejected the objections, adding 10% gross profit to the declared amount. The High Court emphasized that for best judgment assessment, valid reasons must be provided for rejecting returns and making additions to turnover and profit. In this case, the assessing authority's reasoning was deemed arbitrary and capricious, leading to the court's decision in favor of the assessee.

Rejection of returns and addition of gross profit:
The assessing authority rejected the assessee's explanation and confirmed the proposal to increase the gross profit by 10%. The court noted that the authority failed to provide valid reasons for rejecting the statutory audit report or the maintained books of account. Additionally, there was no evidence to suggest that the declared profit was inaccurate or that the business nature warranted a higher profit margin. The court found the assessing authority's reasoning arbitrary and unsupported, leading to the decision in favor of the assessee.

Burden of proof on assessee:
The assessee raised concerns regarding the burden of proof, questioning the Tribunal's justification for placing the burden on them to prove a negative fact regarding profit margin. The court ruled in favor of the assessee, emphasizing that the burden lies on the revenue to substantiate any claims of higher profit rates, especially when no discrepancies or penalties were found in the accounts.

Justification of addition without discrepancies:
The Tribunal's decision to add profit without any evidence of inspection, stock variation, penalties, or discrepancies was challenged by the assessee. The court found the addition unjustified, especially considering the positive trend in profit and trade volume compared to the previous year. The court ruled in favor of the assessee, directing the assessing authority to accept the conceded gross profit and issue a fresh assessment order promptly.

In conclusion, the High Court's judgment favored the assessee, highlighting the importance of providing valid reasons for best judgment assessments, rejecting arbitrary additions to declared turnover and profit, and emphasizing the burden of proof on the revenue authorities.