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TMI Blog1962 (3) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Tribunal affirmed these estimates. Although the impugned assessments were made under section 12(2)(b) of the Sales Tax Act. 1948, since that Act was no longer in force when the Sales Tax Appellate Tribunal made its order, this revision petition is presented under section 23 of the Mysore Sales Tax Act. 1957. To support his declared turnover, the petitioner produced before the assessing authority his accounts of the two eating houses, but these accounts were rejected. But although the Deputy Commissioner thought that the accounts of the Durga Lodge were above reproach, he regarded himself bound by a formula evolved by the Sales Tax Appellate Tribunal in some case before it and estimated the turnover of the Durga Lodge at five times its working expenses and concluded that the estimate made by the assessing authority although by a different process but which did not exceed his own, did not require to be disturbed. But the Deputy Commissioner thought that the accounts of the Krishna Vilas Restaurant were not dependable and proceeded similarly to estimate the turnover of that business on the basis of the same formula which he applied to the Durga Lodge and made a slight modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment. Under section 25 of the Act, Government made rules prescribing the procedure for estimating the turnover in cases in which an unsatisfactory return was furnished. They are rules 12, 13 and 15. The 12th rule directed the assessing authority to make an enquiry before he made an estimate and the 13th rule required him before making an estimate to afford an opportunity to the dealer to produce his accounts and prove the correctness and completeness of his return. These two rules authorised the assessing authority to make a provisional estimate of the dealer's turnover for the purpose of a provisional assessment and these two rules to the extent they empowered the assessing authority to make such provisional assessment have, as pointed out by this Court, no validity. But, although rules 12 and 13 can no longer be used for a provisional best judgment assessment, it is clear that the procedure referred to in those two rules has nevertheless to be adopted before a turnover can be estimated under section 12 (2)(b), and that is the requirement of rule 15(3). What that sub-rule says is that before an estimate is made under section 12(2)(b) that estimate must be preceded by the step ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships of the Privy Council in Lakshminarain's case A.I.R. 1937 P.C. 133; 5 I.T.R. 170. is unnecessary under the Income-tax Act. But, it is, I think, manifest that the advice given by their Lordships of the Privy Council in that case as to how an estimate should be made under the Income-tax Act has equal apposition to an estimate under the Sales Tax Act. This is what their Lordships said at page 138: "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guesswork. In that sense, too, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) of sub-section (2) of section 10 of the Act." If the rule therefore is that an Income-tax Officer who gathers materials for his estimate from any one of the sources referred to by their Lordships of the Privy Council should to the extent permissible disclose those materials to the assessee before he makes the estimate, it is reasonable to think that an estimate under the Sales Tax Act should also be preceded by a similar disclosure to the dealer. The insistence on such disclosure is to my mind plainly implicit in rule 12 which enjoins an enquiry before the estimate. That rule which empowers the assessing authority to make only such enquiry as he considers necessary does not, it is clear, authorise him to dispense with it. The principles applicable to the estimation of a turnover under section 12(2) (b) are thus substantially the same as those applicable to an assessment under section 23(4) of the Income-tax Act, although while in one case an enquiry is imperative, in the other it is not. This discussion demonstrates that under the Sales Tax Act, 1948, the estimate of the turnover of a dealer who has submitted an unsatisfactory return has to be made in the following way: (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over to the best of his judgment, that no formula incorporating any rigid or inflexible rule can be substituted for his judgment. For the purpose of making the estimate, the assessing authority must make his own mind think about it. He should after considering the facts and circumstances of each case and the materials gathered by him estimate the turnover as nearly as it can be done. If that is what he has to do, an estimate on the basis of a formula evolved by someone else would not be his estimate or one to the best of his judgment, although a formula such as the one which has been adopted by the Deputy Commissioner in this case, namely, that the turnover of a hotel-keeper is nearly always five times the working expenses, may be a good working rule generally. It would be for the assessing authority to consider whether that rule if applied to the case before him is likely to yield a just and proper result and to refuse to apply it if he thinks it does not. It would be equally open to the dealer to demonstrate that that working rule which might normally be considered to be a satisfactory basis causes hardship to him and should therefore be discarded. No rule, not even a rule which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. since the decision of Wilson's case(1), the method of assessing fire and accident companies has been that adopted by the Commissioners in the present case. It is not scientifically unassailable, for it obviously proceeds upon the supposition that the unexpired risks at the beginning and at the end of each year are in substance the same, or that, if an average of three years is taken, they are upon an average the same. But no method is scientifically unassailable that does not enter into an analysis of the contracts made and contracts current in each year so minute that it is in a business sense impracticable. I think the, particular correction sought by the appellants in this case is quite indefensible upon the materials before us, and further that the method adopted by the Commissioners is a good working rule in the present instance and generally. If in any particular case an insurance company can show it works hardship, no doubt the rule ought to be modified, so that the real gains and profits may be ascertained as near as may be. I am for dismissing this appeal with costs." But Lord Macnaghten said this: "My Lords, I think your Lordships would probably agree with Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'A good working rule generally.' That does not mean that it is to be adopted in every case. If there be a case where you really can arrive at the fair value instead of a rule of thumb value there is no law, as I understand it, which prevents you taking the real value instead of a rule of thumb value." But this decision of Bray, J., was reversed by the Court of Appeal which considered itself to be not at liberty to depart from the rule laid down by the House of Lords in M'Gowan's case(1). Cozens-Hardy, M.R., referring to the decision of the House of Lords said this at page 69: "I can only say that I read the judgment of the noble Lords as meaning and deciding that the view taken by the Court below in the Scotch Court. which was based upon a general principle and not in the least upon any inadequacy of proof that 33 1/3 was proper...... I take the judgment of the House of Lords as assent to the argument on the part of the Crown and a dissent from the argument on the part of the appellants. Then is it possible now for us to say that we can distinguish the present case because in the M'Gowan case(1) no actual deduction had been made in the accounts of the company of 33 1/3 per cent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Lords by whose dictum it considered itself bound would explain that the decision in M'Gowan's case[1907-8] 5 Tax Cas. 307. was not founded on any general rule of universal application, turned out prophetic. The company appealed to the House of Lords and the Lord Chancellor (Lord Loreburn) who also decided the M'Gowan case[1907-8] 5 Tax Cas. 307. made it perfectly clear that it did not in M'Gowan's case[1907-8] 5 Tax Cas. 307. intend to lay down any general rule of universal application that no part of the premiums received by a fire insurance company could be carried forward towards the estimated losses on unexpired risks. The company's appeal was allowed and the decision of Bray, J., was restored and in doing so, Lord Loreburn, L.C., observed at page 75: "If that be so. it follows that in assessing such fire insurance companies, you must proceed wholly or in part by estimate. An estimate being necessary and the arriving at it by in some way using averages being a natural and probably inevitable expedient, the law, as it seems to me, cannot lay down any one way of doing this. It is a question of fact and of figures whether what is proposed in each case is fair both to the Crow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the statute is, in my opinion, irrefutable. Indeed. that was what the House of Lords said in the year 1956, in the Southern Railway of Peru Ltd. v. Owen [1957] A.C. 334; 32 I.T.R. 737., in which at page 347, Lord MacDermott referring to the earlier decision of the House in the Sun Insurance Office case(1) remarked: "It was said that that decision related only to insurance business and had no application to the facts of this appeal, I see no reason for confining the scope of the decision in this way, Its ratio is much wider than that, and is, in my view, applicable to cases producing the same sort of problem, whether they relate to contracts of insurance or not," Lord Radcliffe reiterating the view expounded by Lord Loreburn in the Sun Insurance Office(1), rejected the submission made on behalf of the Crown that in ascertaining the profits chargeable to income tax there was some rule of law to which adherence was necessary. At page 365 of the report, he observed: "But there is no difficulty if we accept the main argument of the Crown. That argument is that, quite simply, there is a rule of law which forbids the introduction of any provision for future payments in or payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g no rule of law as to a proper way of making an estimate. The ratio of this rule is obvious. A working rule yielding a satisfactory result in the case of one dealer might produce injustice and hardship in the case of another and even in the case of the same dealer when it is applied to him again. An assumption, for example, that the turnover of every hotel keeper is generally five times his working expenses or that there is invariably some ratio between the working expenses of a trader and his profits can lead to imperfect and unjust results where by force of circumstances or otherwise, the working expenses of a person are higher or have increased without a corresponding expansion of his turnover or profits. The application of any ratio or rule should, as Lord Loreburn in Sun Insurance Office case [1910-12] 6 Tax Cas. 59; [1912] A.C. 443. observed, depend on the facts and figures of each case, and not on any general classification. No ratio between the working expenses and the turnover or profits can be constant or immutable and judged by the rules of economics or accountancy no working rule however evolved can survive the test of infallibility. To replace the duty to make an es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax since the appellant could not be given an opportunity of examining the files from which the figures of the other bus companies were extracted or to ascertain which companies they were. That complaint was rejected as groundless since the taxing authorities had in fact disclosed to the appellant the figures relating to the expenditure and the profits of the other companies, extracting those entries anonymously from the official files. Discarding the argument that the production of the document containing those figures was a breach of section 4(1) of the Ceylon Income Tax Ordinance. Viscount Simon on page 579 observed: "But rule 14 does not necessarily make a disclosure of the affairs of any person, within the meaning of the section, for it contains no name except that of the appellant company, and the other entries are extracted anonymously from numbered official files. Their Lordships would strongly deprecate the production or use of such a document if it did in effect disclose information about other identified or identifiable taxpayers, but it is obvious that the document was prepared and produced not for this purpose but to help to show that the ratio above referred to bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not accurately kept, and that their returns required to be rejected. Each taxpayer is entitled to have his assessment fixed, if his own return is not accepted, at a figure which the taxing authorities honestly believe to be proper in his individual case, and no argument that in this class of business the figure of return is habitually understated can be used to prove that this happened in his case also." These observations emphasizing as they do the duty of the taxing authorities in cases in which the taxpayer's return is not accepted, to make an estimate which they honestly believe to be proper in his individual case, demonstrate the unsustainability of the submission that a ratio between the working expenses and the profits which has been discovered to exist in tile case of certain persons carrying on a particular class of business can be of universal application. There is, I think, in rule 19 of the rules made under the Mysore Sales Tax Act, 1948, an unmistakable indication that an estimate can be made under section 12(2)(b) of that Act merely on the basis of a general working rule formulated in other proceedings. That rule requires the assessing authority in all cases in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Orissa[1958] 33 I.T.R. 843., was a case in which an Income-tax Officer rejecting the accounts of the assessee and taking into consideration the materials before him estimated the profits of the assessee at a flat rate. That was not therefore a case in which there was any mechanical adoption of a flat rate evolved in some other proceeding. In In re Ganeshi Lal Sons, Agra[1938] 6 I.T.R. 390.; A.I.R. 1933 All. 367., their Lordships of the High Court of Allahabad upheld an assessment which was made on a similar flat rate basis. The principle of flat rate being incontestable, their Lordships were of the view that the amount of the flat rate determined by the assessing authority was beyond criticism since the amount of the flat rate was based on an uncontested determination during a previous year. This is what they said at page 369 of the report: "Under section 13 of the Act, the Income-tax Officer had discretion to accept or reject the assessee's books, and he rejected them. There is nothing apparently unreasonable or arbitrary in applying the rate of 30 per cent. upon sale proceeds, especially when no objection to the application of such rate for the year 1932-33 was made. If we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 S.C. 729., was a case in which the Tribunal after taking into consideration the materials before it for the purpose of deducing the income of the assessee adopted a flat rate of 15 per cent. in regard to one class of transactions and 12 per cent. in respect of another. It incidentally remarked that in certain other cases which had come to its notice, the rate of profits "went up to 20 per cent." The argument presented before the Supreme Court was that the Tribunal had violated the rule of natural justice in taking into consideration the rate of profits in other cases which had come to its notice without giving an opportunity to the assessee to explain those cases and relied in support of that contention on Dhakesivari Cotton Mills Ltd. v. Commissioner of Incometax, West Bengal [1954] 26 I.T.R. 775; A.I.R. 1955 S.C. 65. That complaint was held by their Lordships to be groundless since the estimate of the profits did not in their opinion rest on that information which the Tribunal had acquired but upon other materials which had been previously disclosed to the assessee. The elucidation by their Lordships that the flat rates adopted in other cases did not in fact form the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax[1958] 33 I.T.R. 843. It cannot be said that the working expenses bear no relationship to gross or net turnover. It may or may not be a safe guide. In those Since reported as Rangappa Pandurang Kamath v. State of Mysore [1962] 13 S.T.C. 714. matters, we ought to depend upon the experience of the taxing authorities apart from the fact that it is their judgment, and not ours. In Anwari Hotel v. State of Mysore C.R.P. No. 258 of 1959. , a Bench of this Court observed: 'If the Commercial Tax Officer, who was proceeding to assess the petitioner according to his best of judgment had proceeded to base his estimation on the basis that his turnover should have been five times the working expenses of the firm. it would not be open for Mr. Srinivasan to contend that such an order was illegal or it cannot be supported., We respectfully agree with that view. Hence we cannot agree with Sri T. Krishna Rao, that the formula adopted for arriving at the turnover is an arbitrary or a capricious formula." I do not understand these observations as laying down a rule that when a hotel keeper's declared turnover is discarded, it would be open to the Commercial Tax Officer by the applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court, who deprecated the procedure adopted by the Commercial Tax Officer which in their opinion was contrary to the principles of natural justice and was calculated to undermine the confidence of the public in the impartial and fair administration of the sales tax department, pointed out that it was the duty of the Commercial Tax Officer to make the assessment supporting it by his own reasons and not to the dictation of the Assistant Commissioner. Now, in the case before us, when the Deputy Commissioner estimated the turnover of the petitioner at five times his working expenses, he merely adopted a ratio which according to the Tribunal existed between the working expenses and the turnover in certain other cases. The figures in those other cases were not disclosed to the petitioner and he was not asked why that ratio should not be applied to his case. The Deputy Commissioner appears to have regarded the decision of the Tribunal in other cases as a mandate that in the case of all hotel keepers the turnover has to be estimated by the application of that ratio. It is clear that it was not legitimate for the Deputy Commissioner to make the estimate in that way. It was for him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d just like shop keepers, he has maintained bills in duplicate and these duplicates are very safely kept and produced for my examination. At the end of the day all the sales are totalled and noted in the sales book. Sales and purchases are very well maintained and it is satisfactory with the exception of a few defects in the purchase accounts." If he said that the conclusion was inescapable that the turnover declared by the petitioner which was supported by those accounts was his real turnover. But the Commercial Tax Officer who should have accepted that return discarded it for a strange reason. He thought that the accounts of the restaurant in which, according to him, every item of sale was entered did not contain an accurate record of the purchases made by the petitioner. He reached that conclusion for the reason that the petitioner had not produced vouchers for certain purchases made by him. He was of the view that the account books did not contain a record of all the coffee powder purchased by him. This defect in his opinion justified the rejection of the petitioner's accounts. It should have been obvious to the Commercial Tax Officer that the turnover of the petitioner was t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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