2016 (10) TMI 785 - HC - VAT and Sales Tax

Tax liability - assessment proceedings - Entry tax - Best judgement assessment - tax evasion - survey of premises - rejection of books - discrepancies in the recorded quantities of raw material and finished products - entries in the RG-1 Register did not match with what was actually found during the course of the survey operations - Held that - Section 28 of the Act empowers the assessing authority to reject the books of account of an assessee where it finds that the same are not worthy of credence. The provision when it empowers the assessing authority to reject the turnover of sales and purchases as declared casts a duty to come to a positive conclusion that the assessee is undertaking operations without all transactions being dutifully and faithfully recorded in the books of account. It is only when he comes to form an opinion that no credence at all can be laid upon the disclosures made by the assessee that the books of accounts are to be rejected - the authority must come to a conclusion that the books of accounts as maintained and as a whole cannot be relied upon or held worthy of confidence. The difference itself was of only 0.67 per cent. This, in the opinion of the Court, did not form sufficient ground to come to a conclusion that the books maintained by the assessee were not worthy of credence or that the transactions were not faithfully or dutifully recorded in the account books. Pausing here, it becomes relevant to clarify that this Court does not intend to lay down as a broad proposition that a singular transaction cannot in all situations be sufficient to reject the books of account. There may be a case where the singular discrepancy may be of such vital import that it cannot be brushed aside or ignored. What would have to be necessarily be borne in mind is the significance of the infraction and whether the same is indicative or evidence of a deliberate attempt to suppress and conceal turnover. Estimation of turnover - the Court finds that although the Tribunal accepts the submission of the revisionist that all the thirty eight machines were not functioning in May 2008, it has proceeded to estimate the escaped turnover to be ₹ 1,40,00,000/-. On what basis this figure has been arrived at is neither noted nor elaborated upon by the Tribunal. While it is true that a best judgment assessment would necessarily entail a certain degree of guess work, the guess itself which is arrived at by the authority must be fair, informed, intelligent and referable to some valid or cogent basis for arriving at the figure of escaped turnover. It can neither be arbitrary, fanciful or based wholly on conjecture. For the purposes of arriving at the figure of escaped turnover to be ₹ 1,40,00,000/-, the Tribunal neither refers to the scale of operations in the succeeding months nor does it rest its estimation upon any material or contemporaneous record which may have been found in the course of the survey operations. On both scores, therefore, this Court is unable to sustain the orders passed by the assessing authority as well as the Tribunal. The assessment under the Entry Tax enactment is based solely upon the assessment undertaken under the Act. For the reasons recorded above, the same must also necessarily fall. Revision allowed - decided in favor of assessee.

Issues Involved:
1. Rejection of books of account by the assessing authority.
2. Best judgment assessment undertaken by the assessing authority.
3. Estimation of escaped turnover.
4. Assessment under the Entry Tax enactment.

Detailed Analysis:

1. Rejection of Books of Account by the Assessing Authority:
The assessing authority rejected the books of account maintained by the assessee, a partnership firm engaged in the manufacture and sale of Gutkha, based on discrepancies found during survey operations. The survey revealed a difference in the quantity of raw material and finished product recorded and actually found. The assessee argued that the discrepancy in raw material was minuscule (0.67%) and that the finished product discrepancy was due to the day's production being added by the survey team. The court noted that all relevant documents were produced for inspection, and there was no certification that any demanded documents were not provided. The court emphasized that the rejection of books of account must be based on a significant infraction indicative of deliberate suppression, which was not evident in this case. The court found the explanations provided by the assessee reasonable and plausible, and thus, the rejection of books of account was not justified.

2. Best Judgment Assessment Undertaken by the Assessing Authority:
The assessing authority undertook a best judgment assessment under Section 28 of the U.P. VAT Act, 2008, forming an opinion that the turnover disclosed by the dealer was not "worthy of credence." The court highlighted that a best judgment assessment should be based on facts and figures gathered during the survey and should consider the reasonableness of the explanations provided by the assessee. The court found that the minuscule discrepancy in raw material and the plausible explanation for the finished product discrepancy did not warrant the rejection of the books of account. The court emphasized that a best judgment assessment must be based on a positive conclusion that the books of account are not reliable, which was not established in this case.

3. Estimation of Escaped Turnover:
The Tribunal had reduced the escaped turnover from ?2,35,00,000/- to ?14,00,000/-. However, the court found that the estimation of escaped turnover by the Tribunal was not based on any empirical exercise or material record. The court noted that although the Tribunal accepted that the assessee's machines were not functioning at the time of the survey, it still estimated the escaped turnover at ?1,40,00,000/- without any valid or cogent basis. The court emphasized that a best judgment assessment involves a degree of guesswork, but the guess must be fair, informed, intelligent, and referable to some valid basis. The court found the Tribunal's estimation arbitrary and not sustainable.

4. Assessment Under the Entry Tax Enactment:
The assessment under the Entry Tax enactment was based solely on the assessment undertaken under the U.P. VAT Act. Since the court found the assessment under the VAT Act unsustainable, the assessment under the Entry Tax enactment also necessarily fell.

Conclusion:
The court allowed the revision, setting aside the orders passed by the assessing authority, the first appellate authority, and the Tribunal. The questions referred were answered in favor of the assessee and against the Revenue.

← Previous Next →