1972 (10) TMI 90 - SC - VAT and Sales Tax

Whether the assessing officer under these circumstances could be said to have had an honest belief that the turnover had partially escaped taxation so as to start proceedings under section 21? Whether the aforesaid two preliminary notices asking for the production of accounts can be taken to be notices under section 21 for the starting of the proceedings so as to warrant passing of the assessment within one year of the service thereof? Held that - Appeal allowed and discharge the answer given by the High Court to question No. (i). In our opinion, the assessing authority had an honest belief that the turnover of the respondent had partially escaped taxation so as to justify initiation of proceedings under section 21 of the Act. We accordingly answer the said question in the affirmative and in favour of the department. The appellant shall be entitled to the costs of this court as well as in the High Court.

Issues Involved:
1. Whether the assessing officer had an honest belief that the turnover had partially escaped taxation to start proceedings under section 21.
2. Whether the preliminary notices asking for the production of accounts could be considered as notices under section 21 for starting the proceedings.

Issue-wise Detailed Analysis:

1. Honest Belief for Initiation of Proceedings under Section 21:
The Supreme Court examined whether the assessing officer had an honest belief that the turnover had partially escaped taxation, justifying the initiation of proceedings under section 21 of the U.P. Sales Tax Act. The court noted that the assessing officer must have "reason to believe" based on reasonable grounds that the turnover had escaped assessment. This belief must be held in good faith and not be a mere pretence. The court referenced the memorandum dated March 13, 1962, which highlighted that the respondent's sales for the years 1955-56 and 1958-59 were significantly higher than the estimated turnover for 1957-58, suggesting that the turnover for 1957-58 had been under-assessed. Additionally, the respondent's failure to produce account books despite repeated notices further supported the assessing officer's belief. The court concluded that these facts were germane to forming the belief that part of the turnover had escaped assessment, thus validating the initiation of proceedings under section 21.

2. Validity of Preliminary Notices as Notices under Section 21:
The second issue was whether the preliminary notices dated September 13, 1961, and the memorandum dated March 13, 1962, could be considered as notices under section 21, thereby affecting the limitation period for reassessment. The court agreed with the High Court's view that these preliminary notices were merely for the production of account books and did not constitute formal notices under section 21. The notices only threatened action under section 21 if the respondent failed to comply, and thus could not be construed as initiating reassessment proceedings. The formal notice under section 21 was issued on March 24, 1962, and served on March 26, 1962. The reassessment was completed on March 19, 1963, within one year of the service of the formal notice, and thus was not barred by limitation.

Conclusion:
The Supreme Court allowed the appeal, discharging the High Court's answer to the first question. The court held that the assessing authority had an honest belief that the turnover had partially escaped taxation, justifying the initiation of proceedings under section 21. The court also affirmed that the preliminary notices could not be considered as notices under section 21, and the reassessment was completed within the prescribed time limit. The appellant was entitled to costs in both the Supreme Court and the High Court.

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