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TMI Blog1989 (7) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... ations as he thinks fit to the State of Sikkim any enactment which is in force in a State in India on the date of the notification. The Income-tax Act, 1961, was not extended to Sikkim under the aforesaid clause (n) of article 371-F at the relevant time, and so the law of income-tax which was in force on the appointed day was applicable in the State of Sikkim during the relevant period. That law is contained in the Sikkim State Income-tax Manual, 1948. The petitioners are engaged in business and, therefore, only those provisions which relate to assessment of income-tax on business are relevant for the purpose of these petitions. Clause 4 of the Manual provides in sub-clause (i) that income-tax shall e charged on the gross sale proceeds of the previous year of all persons engaged in business at the rate prescribed. Sub-clause (ii) provides that "every person doing business is expected to keep proper accounts and produce it on demand before the Income-tax Officer who, in default or in case of unsatisfactory account, will assess tax according to his discretion". Sub-clause (iii) states that for assessment of tax, all persons doing business shall complete their accounts of the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification No. 2053-200/IT and ST dated August 26, 1966, postulated that any person or firm, intending to transfer out of Sikkim, profits, capital gains and other such allied gains or income, accrued within the territories of Sikkim and arising from trade, business, contract or other transactions carried on therein, will be required to obtain transfer certificate from the office of the Income Tax and Sales Tax Department. The notification stated in paragraph 2 that the Income Tax and Sales Tax Department will issue the necessary certificate after making full verification from the relevant account books or documents that the amount sought to be transferred had been lawfully earned and was otherwise unencumbered. By paragraph 3, the applicant was required to deposit as fee 1 % of the amount to be transferred. Transfer or attempt to transfer without a valid certificate was made a cognizable offence and all police check-posts were empowered to search and seize, on reasonable suspicion, any money, bullion, hundies or other valuable securities, intended to be taken out of Sikkim without a valid transfer certificate. However, it was brought to the notice of the Sikkim 'Darbar by the Merch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lenged (wholly or in part), the party demurring to pay may, within a period of three months, move the court for adjudication. (b) If the court finds the objection frivolous or without proper cause, special costs may be awarded to the Department. 4. If no case is filed in court within the limitation period prescribed under clause (3), it shall be presumed that the legality of the demand is accepted by the defaulter ; and the Officer-in-charge shall proceed to realise the amount as laid down in these rules. 5. Any suit, filed after the expiry of the limitation period of three months calculated from the date of the final writ of demand, shall be summarily dismissed. 6. If there is no response to the final writ of demand issued under clause (2), the Officer-in-charge is hereby invested with civil court's power to realise the amount due, by distraint of movable and landed property of the defaulter in that order, up to the extent of the demand. Gangtok J. S. Lall, I. C. S. 21 St November, 1950. Dewan, Sikkim State." A new procedure for collection of taxes was provided by the enactment of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,500 were made by him during the years 1985-86 and 1986-87 which were quite disproportionate to his income. By this notice, he was required to submit within 5 days proof to show his source of income for making the gifts. He was also required to produce documents and-books of account for the relevant period "in support". Further, he was required to deposit the fee at the rate of 1 % on the amount transferred as per Notification No. 76-92-500/IT and ST along with interest. It was also stated that, in case of failure to comply with the notice, the assessment already made would be reviewed and determined as per clause (4)(ii) of the Income-tax Manual. By another notice bearing No. 117/IT dated March 24, 1987, petitioner No. 2 was asked whether he had obtained a transfer certificate from the office of the Income-tax and Sales Tax Department before the transfer and whether he had deposited the fee of 1% of the amount thus transferred. On the same date, another letter bearing No. 118/IT and ST was sent to petitioner No. 2 by the Income-tax Department stating that in his reply dated March 3, 1987, he had vaguely stated that he had received "certain amounts from other sources of income". H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipt of the order. This assessment order was followed by a preliminary writ of demand dated August 5, 1987, issued by the Tax Recovery Officer calling upon petitioner No. 2 to deposit the amount of Rs. 20,63,568 as income-tax payable by him on or before August 18, 1987, failing which the final writ of demand would be issued and the amount would be recovered by distraint and sale of his movable and immovable properties. A reply was sent by petitioner No. 2 on August 10, 1987, wherein he disputed the validity of the best judgment assessment. Thereafter, he preferred an appeal before the appellate authority but the appeal was dismissed because payment of 50% of the tax assessed by the Income-tax Officer was not paid. Thereafter, petitioner No. 2 received a demand notice dated September 26, 1987, from the Tax Recovery Officer-cum-Inspector requiring him to pay the amount of Rs. 20,93,102 within seven days from the date of the receipt of the notice. It was stated in the notice that in case of his failure to pay the amount, the amount would be recovered as per the provisions of sections 7 and 8 of the Act No. 7 of 1987 by attachment and sale of both movable and immovable properties belon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be made in the year 1987-88. Assessment for the year 1986-87 is challenged on the ground that it is premature for the reason that the accounts for the previous year could be completed only by the end of June, 1987, but the assessment was made before the end of June, on May 14, 1987. It is further contended that, in fact, the proceedings started in the previous year itself since the notice requiring the production of books was dated March 13, 1987. Then, the Income-tax Officer, it is said, failed to appreciate that petitioner No. 1 and Its members had sufficient funds at their disposal to make the gifts aggregating to Rs. 27,21,500 and provide the credit for Rs. 29,53,400 and violated the principles of natural justice in respect of the latter amount since he never called upon petitioner No. 2 to explain the credit provided to Supreme Roadways Ltd., and for this, no show cause notice was issued. Another ground of challenge is that the amount of the gifts and the credit given was included not only in the turnover of the relevant accounting years but also in the turnover of the other accounting years. Assessment of transfer fee is said to be bad for the reason that the gifts were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Officers and appellate authority were made by the State Government, the appointments were without jurisdiction and, consequently, the actions taken by them are also without jurisdiction. 5. Under clause 22 of the Manual, appeal lies to His Highness the Maharaja of Sikkim which expression under the Adaptation of Sikkim Laws. (No. 1) Order, 1975, means the "State Government". According to the petitioners, the "State Government" means the Governor as advised by the council of Ministers, and so the appointment of the appellate authority by the State Government is without the jurisdiction or competence of the State Government and so the appeal would have to be heard either by the Governor or the council of Ministers. 6. The rejection of appeal by the appellate authority for failure of the petitioners to deposit 50% of the tax assessed was unjustified, since there was no such pre-condition stipulated in the notification bearing No. 1220-200/IT and ST dated December 20, 1973, for admission of appeal. In the alternative, there is no such, precondition stipulated in the Manual and no such condition could be imposed by the notification dated December 20, 1973 which is merely an ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that Act is invalid. 15. Action cannot be taken under the Sikkim Income-tax (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, once proceedings have been initiated under the Notification bearing No. 405/50, since the Act does not provide that any proceedings taken under the Notification may be continued under the provisions of the Act. In the counter filed by the respondents, they have defended the assessment order and other orders and have alleged that since there is provision for filing an appeal, the petitioners should not have filed the writ petitions without exhausting the statutory remedy. The validity of the Income-tax Manual and the notifications which were in force on the date of the merger of Sikkim with India is defended on the strength of article 371F and it is stated that the enactment of the Sikkim Income-tax (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987 (hereinafter referred to as Act No. 7 of 1987), was within the legislative competence of the State Legislature because it is an incidental legislation for levy and collection of taxes which were within the legislative competence of the State of Sikkim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the Order of the Chogyal. It is true that none of the copies shows that the originals bore the signature of the Chogyal. It is also true that the original of none of them was produced by the State Government. But merely on these facts, it cannot be said that these did not have the approval of the Chogyal. Whether the Maharaja of Sikkim had any rules of business or any rules of allocation of business is not of any relevance, because, to consider the validity of the pre-merger laws, such questions have not to be gone into. The only relevant factor which has to be considered is as to whether the pre-existing laws were in force immediately before the date of the merger. The fact that the Law Commission has not been able to publish the Manual and the notifications do not lead to the inference that the Commission was not sure of the correctness and authenticity of the Manual and the notifications. There can be no doubt about the factual position that the Income-tax Manual was in force in the State of Sikkim prior to the merger, since the Government employees and the businessmen were paying income-tax under no other law than the Manual of 1948. Transfer fee was also collected und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the Ruler to act in any capacity he liked ; he would be the supreme Legislature, the supreme Judiciary and the supreme head of the Executive, and all his orders, however issued, would have the force of law and would govern and regulate the affairs of the State including the rights of its citizens. Thus, this contention has no merit. The next contention of the petitioners is that since Parliament has the exclusive power to make laws with respect to income-tax, the subject of income-tax falling in the Union List, the State Income-tax Manual is not valid law. However, this contention is contrary to the law contained in clause (k) of article 371 F which provides that notwithstanding anything in the Constitution, all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority. There is nothing in the provision to suggest that in order to be valid, the subject with which the pre-existing law dealt, must be within the legislative competence of the State Legislature. On the other hand, the non obstante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he State, and for the allocation among Ministers of the said business in so far as it is not business with respect to which the Governor is by or under the Constitution required to act in his discretion. Now, if, under the allocation of business rules made by the Governor under clause (3) of article 166, the Finance Secretary is appointed as the appellate authority, that would meet the requirement of the State Government being the appellate authority. There is also no merit in the argument that since clause 22 requires the appeal to be filed through the Department concerned, it would not be logical that the appeal should lie to the Secretary, Finance, through the Department which is headed by him. No practical significance can be attached to the requirement of the appeal being filed through the Department concerned under the changed constitutional set up. Under the rule of the Maharaja, it could have been to the convenience of the Maharaja, if the appeal came to him through the Department concerned, but under the present system, appeal has to lie to the authority concerned direct without there being any necessity of its being routed through any Department. Therefore, there is no me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been expressly stated that the rule which requires the exhaustion of alternative remedies is a rule of convenience and discretion rather than rule of law. At any rate, it does not oust the jurisdiction of the court." Further, it was pointed out that "it should be made specifically clear that where the order complained against is alleged to be illegal or invalid as being contrary to law, a petition, at the instance of a person adversely affected by it, would lie to the High Court under article 226 and such a petition cannot be rejected on the ground that an appeal lies to a higher officer or the State Government. An appeal, in all cases, cannot be said to provide, in all situations, an alternative effective remedy keeping aside the nice distinction between jurisdiction and merits." In the present petitions, the impugned orders have been challenged on various grounds of alleged illegalities having been committed. Further, the requirement contained in Notification No. 1220-200/IT and ST, dated December 20, 1973, for the deposit of 50% of the amount assessed as. condition precedent for an appeal makes the remedy of appeal illusory in many of the cases because of the assessments h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatute take their colour from the reason for it .... No provision in the statute and no word of the statute may be construed in isolation. Every provision and every word must be looked at generally before any provision or word is attempted to be construed. The setting and the pattern are important". Certain broad propositions about the difference between mandatory and directory rule were summarised by E. S. Venkataramiah J. (as he then was) in Sharif-ud-Din v. Abdul Gani Lone, AIR 1980 SC 303, as under (at page 305) : "The difference between a mandatory rule and a directory rule is that while the former must be strictly observed, in the case of the latter, substantial compliance may be sufficient to achieve the object regarding which the rule is enacted. Certain broad propositions which can be deduced from several decisions of courts regarding the rules of construction that should be followed in determining whether a provision of law is directory or mandatory may be summarised thus : The fact that the statute uses the word 'shall' while laying down a duty is not conclusive on the question whether it is a mandatory or directory provision. In order to find out the true character o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if accounts are not maintained or are misleading and the Income-tax Officer does not come to know of a particular business in respect of which there is no mention in the accounts produced before him, can it be said that the intention was that if the Income-tax Officer comes to know of the escaped income subsequent to the close of the financial year, that income would get immunity from tax liability. In this connection, reference may be made to clause 20 of the Manual which says that if a person makes a statement or a verification in an income-tax return which is false or which he either knows or believes to be false or does not believe to be true, he shall be liable on conviction to a fine which may extend to Rs. 1,000. When evasion of income-tax liability on the basis of a false statement or verification in an income-tax return has been made punishable, it would amount to doing great violence to the scheme of the Manual to say that once income has escaped from being assessed in any relevant financial year, it cannot be assessed in any subsequent year. The requirement that assessment of the income of the previous year shall be, made in the financial year is procedural and the defe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court pointed out in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 124, that though arbitrariness cannot be avoided in such estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case. In the present cases, the petitioners did not produce account books from which turnover of the amounts of gifts or loans could be ascertained. The Income-tax Officer had, therefore, to make an estimate on the basis of the experience gained from the assessments of earlier years. It cannot be said that the assessment of turnover at 10 times the amount of gifts or loans was without any basis. Several petitioners have taken the plea that gifts were given from capital or wealth or inheritance, but they did not produce any documents to prove their allegation. The Income-tax Officer could reasonably presume that huge amounts running into lakhs or millions of rupees would not have been kept in cash by the petitioners in their homes, and, therefore, if they did not constitute income that had escaped tax, they ought to have proved from where the amounts had been withdrawn for making the gifts ; and it was not enough to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Sanjay Enterprises, M. G. Marg, Gangtok (Sikkim). The genuineness of this gift has been verified by the undersigned and the same has been found to be correct and in order. (Sd.) Illegible, (Sd.) Illegible, 24-12-1986 24-12-1986 Income-tax Officer Income-tax Officer Income Tax and Sales Tax Depart., Income Tax and Sales Tax Depart., Government of Sikkim, Government of Sikkim, Gangtok. Gangtok." On the other hand, a transfer certificate as contemplated under Notification No. 2053-200/IT and ST dated August 26, 1966 is also on the same file and is reproduced as under : "GOVERNMENT OF SIKKIM INCOME TAX AND SALES TAX DEPARTMENT MONEY TRANSFER CERTIFICATE NO. 3/IT This is to certify that Rameshor Lall Kandoi of Dikchu Bazaar, East Sikkim is hereby allowed to transfer a sum of Rs. 2,00,000 (Rupees two lakhs) only from Sikkim to Rajasthan out of the income accrued to him from his business in Sikkim. Gangtok, (Sd.) Illegible, The 2nd April, 1981 Senior Income Tax and Sales Tax Officer, Income Tax and Sales Tax Department, Government of Sikkim, Gangtok." Certificates of the former category are not exactly transfer certificates as contemplated under the notification and we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idity they have not to depend upon the legislative competence of the State Legislature. The question as to whether no transfer fee is liable to be paid on any money transfer, where a transfer certificate has not been applied for, is of great importance. In view of the importance of the matter, Notification No. 2053-200/IT and ST dated August 26, 1966, is reproduced as under "GOVERNMENT OF SIKKIM INCOME TAX AND SALES TAX DEPARTMENT Notification No. 2053-2001IT and ST It is hereby notified for the information of all concerned that any person or firm, intending to transfer out of Sikkim, profits, capital gains and other such allied gains or income, accrued within the territories of Sikkim and arising from any trade, business, contract or other transactions carried on therein will be required to obtain a transfer certificate from the office of the Income Tax and Sales Tax Department. 2. The Income Tax and Sales Tax Department will issue the necessary certificate after making full verification from the relevant account books and documents that the amount sought to be transferred has been lawfully earned and is otherwise unencumbered. 3. The applicant will have to deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ST was issued in modification of Notification dated August 26, 1966, and it was notified for the information of all concerned that "any person or firm may apply for a transfer certificate from the office of the Income Tax and Sales Tax Department, when seeking to transfer out of Sikkim profits, capital gains or other such allied gains or income, accrued within the territories of Sikkim and arising from any trade, business, contract or other transactions carried therein." Paragraph 2 stated that "the applicant will have to deposit as fee one per cent. of the amount to be transferred". Paragraph 3 required such an application to be made on a Darbar Paper of the value of Re. 1. Now the question whether the requirement of deposit as fee 1 % of the amount to be transferred is to apply even to a case where no transfer certificate is needed has to be answered by ascertaining the real intention of issuing the notification dated May 1, 1967. It would appear from the context that if one were required to deposit the fee even when no certificate was applied for, it would follow that no purpose was intended to be achieved by Notification dated May 1, 1967. If the fee was to be paid in eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urthermore, as brought to the notice of the court by some of the petitioners, Shri K. C. Pradhan, then Secretary, Department of Finance, stated in his objection filed on May 30, 1983, in Writ Petition No. 10 of 1983, Ashok Tshering Bhutia V. State of Sikkim, that the department was of the view that Notification dated August 26, 1966, has not been in force in Sikkim after Sikkim became a part of India. Relevant portion is produced as under : "8. That the Notification No. 2053-200/IT and ST dated 26-8-1966 was a measure which was in force when Sikkim was not part of India. After Sikkim has become a part of India, the Government has not been enforcing the said notification and no such cases have been brought to law courts after Sikkim has become a part of the country.. . " Furthermore, in Writ Petition No. 15 of 1988, it was pleaded in paragraph 30 that, during the early period of May, 1987, the Finance Department issued instructions to the nationalised banks in Sikkim not to issue bank drafts without the permission of the Finance Department or the State Government but, subsequently, the instructions were withdrawn. These allegations have not been controverted in the counter fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined under section 3(b) as meaning a notification published in the Official Gazette. Section 4 says that the Government "shall appoint one or more Inspectors for the purpose of this Act for such areas as may be specified in the notification. Section 5 states that every tax due to the Government of Sikkim shall be collected by the Inspector by distraint and sale of movable and immovable properties. The Inspector has been given wide powers under sections 7, 8 and 9 of the Act inasmuch as he has the power to attach movable and immovable properties, to sell properties by public auction, to enter upon the premises of any person for inspection of books of account and any other relevant records connected with business, trade occupation or profession and seize such books or records. It is on account of the wide powers having been given to an Inspector that provision has been made in section 3 that "Inspector" means any officer appointed as an Inspector by publication in the Official Gazette. Respondents were given several opportunities to produce the Gazette Notification to show that the appointment of Inspectors was made by publication in the Official Gazette but no such notification coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be submitted. Petitioner No. 2 was also asked to pay the transfer fee at the rate of 1% as per notification No. 7692-500/ IT and ST. Another letter bearing No. 118/IT dated March 24, 1987 was sent to petitioner No. 2 by the Joint Secretary, Income-tax and Sales Tax Department, stating that he had vaguely stated in his reply that he had certain amounts from other sources of income. By this notice, petitioner No. 2 was required to appear before the sender on March 26, 1987, and produce the necessary records or books of account showing the receipt of the amounts and also to answer the necessary queries. On the same date, another letter was also sent to petitioner No. 2 enquiring from him whether he had obtained transfer certificate from the office of the Income-tax and Sales Tax Department and whether transfer fee at the rate of 1% had been deposited. In reply to both these letters, a letter dated March 26, 1987 was sent by petitioner No. 2 to the Joint Secretary, Income-tax and Sales Tax Department, wherein, he gave details of several businesses carried on by the Hindu undivided family which is petitioner No. 1 and of which he himself is a member and said that the family had good sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the amount had been paid to the manufacturers of Tata Diesel vehicles as the price of 20 vehicles on behalf of Supreme Roadways Ltd., who had placed an order with them and, therefore, this was on account of credit advanced in the normal course of business and not as loan. The petitioners have alleged, in paragraph 32 of the petition, that he was never called upon to explain about this amount advanced as credit to Supreme Roadways Ltd., and thus, the principles of natural justice were violated. This allegation was not controverted by the respondents in their counter, and during arguments also, it was not challenged that the petitioners were not given any notice or any opportunity to explain about this amount. Therefore, an assessment regarding this amount was in violation of the principles of natural justice and, therefore, the impugned best judgment assessment is to be quashed regarding this amount, though the AK matter shall be again considered regarding this amount by the Income-tax Department. Petitioner No. 2 was also directed to pay transfer fee by the impugned order. There is no doubt that he had not applied for any transfer certificates. It has already been held above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be no justification for treating the same figure as the turnover of other years also. The Income-tax Officer was very much within his jurisdiction in treating the amount of loan of Rs. 15 lakhs as the amount advanced by the petitioner and not as benamidar for Chand Kumar Barma and thus to assess tax according to his best judgment by treating the turnover at ten times the loan amounts for the year 1982-83. But there could certainly be no justification for treating the same turnover for the subsequent years also. The fact that a loan of Rs. 15 lakhs was advanced in one particular year does not necessarily mean that that much of the amount was earned in that very particular year. But since no accounts were produced to show when the amount was earned, the Income-tax Officer was within his jurisdiction to assess tax on that amount in one particular year. This would be so because there was no other basis to proceed, even if, in fact, the amount might have been earned in several previous years. Thus, the assessment of income for the year 1982-83 was within his jurisdiction but the assessments for the years 1983-84, 1984-85 and 1985-86 being based on no rational principle are liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amount, During the arguments, however, it was pointed out that there was some error of calculation in the best judgment assessment. On behalf of the respondents also, it was conceded that there was some error. It is, therefore, directed that a corrigendum shall be issued by the Income-tax Officer in order to correct the error in calculation in the best judgment assessment. In view of the fact that no transfer fee is liable to be paid where a transfer certificate is not applied for, the petitioner shall be entitled to refund of the transfer fee already deposited. Recovery proceedings are quashed. A fresh demand notice shall be issued, if necessary, after the correction is made in the best judgment assessment giving adjustment for the income-tax already deposited and the transfer fee which is liable to be refunded. Writ Petition No. 40 of 1987: In Writ Petition No. 40 of 1987, a notice dated March 13, 1987, was issued by Pema Wangyal, Income-tax Officer, to the effect that a sum of Rs. 35,75,000 was given in gift by petitioner No. 2 during the years 1985-86 and 1986-87, which was quite disproportionate to his income from the volume of business as per his annual return file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled in view of the earlier discussion. Demand notice issued under Act No. 7 of 1987 is quashed and a fresh notice may, if necessary, be issued after giving adjustment for the incometax already deposited and for the transfer fee which is liable to be refunded. Writ Petition No. 41 of 1987: In Writ Petition No. 41 of 1987, a notice dated March 13, 1987, was issued by Pema Wangyal, Income-tax Officer, to petitioner No. 2 stating that he had made gifts amounting to Rs. 12,75,000 during 1985-86 and 1986-87 which were quite disproportionate to his income from the volume of his business as per the annual returns filed/assessments made. He was directed to submit within five days proof to show his source of income for making the gifts and also to submit the documents and books of account maintained for the relevant period. He was also required to deposit transfer fee at the rate of one per cent. of the amount transferred. It was made clear that, in the event of his failure to comply with the notice by the due date, assessment of income-tax already made would be reviewed and would be determined as per clause 4(ii) of the Income-tax Manual. This was followed by another notice date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not liable to be interfered with as regards the amount of income-tax. However, in view of the earlier discussion, the best judgment assessment is quashed as regards the transfer fees and petitioner No. 2 is entitled to all that he has paid on that account. Demand notice issued under Act No. 7 of 1987 is quashed. If necessary, fresh demand notice may be issued after giving adjustment for the amount of income-tax already paid and the transfer fee which is liable to be refunded. Writ Petition No. 42 of 1987: In Writ Petition No. 42 of 1987, a, notice dated March 13, 1987 was issued by Shri Pema Wangyal, Income-tax Officer, to petitioner No. 1 stating therein that he had made a gift/loan of Rs. 22,99,000 during the year 1986-87 which was quite disproportionate to his income from the volume of his business, as per the annual returns filed/assessments made. He was directed to submit within five days proof to show his source of income for making the gift/loan and to submit documents and books of account maintained during the relevant period in support. Further, he was required to pay the transfer fee at the rate of one per cent. of the amount transferred. It was made clear that, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment on that amount. Though petitioner No. 1 stated that he had received all the wealth from his father, after his death, yet no proof was submitted to prove this assertion. However, since no notice whatsoever had been issued for the amount of loan of Rs. 2 lakhs and of the other gifts of Rs. 5 lakhs, the best judgment assessment is liable to be quashed for these amounts on account of the violation of the principles of natural justice. Petitioner No. 1 is entitled to refund of the transfer fee already deposited. In the result, the best judgment assessment dated May 14, 1987, is quashed, both as regards the income-tax as well as transfer fee. However, another assessment order shall be passed regarding the income-tax liability on the gift amount of Rs. 22,99,000. The matter regarding the loan amount of Rs. 2 lakhs and the further gifts of Rs. 5 lakhs shall again be considered after giving reasonable opportunity. Petitioner No. 1 shall be given adjustments for the amount of income-tax already deposited and the amount of transfer fee paid, except in respect of the amount of Rs. 2 lakhs for which transfer certificate dated April 2, 1981 was issued. Recovery proceedings taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from his ancestors, there was no question of reopening the assessment. However, there is no merit in the contention for the reason that petitioner No. 1 had failed to prove that the gifts had been made out of the wealth so received. He did not produce any evidence before the Income-tax Officer to show from where he had withdrawn the amounts. The Income-tax Officer was within his jurisdiction to treat the amounts of gift as escaped income and to assess tax according to his best judgment taking the turnover at ten times the gift amounts. Petitioner No. 1 deposited a certain amount as transfer fee, which, in view of the earlier discussion, is liable to be refunded to him. Demand notice under section 6 of Act No. 7 of 1987 is bad, as no Inspector as contemplated under section 3 (a) of the Act, was appointed. In the result, the demand notice issued under section 6 of Act No. 7 of 1987 is quashed. A fresh demand notice may be issued by a duty appointed Inspector giving adjustment for the amount of income-tax already paid and the amount of transfer fee liable to be refunded to petitioner No. 1. Writ Petition No. 44 of 1987 : In Writ Petition No. 44 of 1987, a notice dated Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lenged the impugned order of assessment on the legal pleas which have already been discussed. There is no reason to interfere with the best judgment assessment regarding income-tax liability. In view of the earlier discussion, the best judgment assessment is quashed as regards the transfer fee and the petitioner is entitled to the refund of whatever transfer fee he has paid. Demand notice issued under section 6 of Act No. 7 of 1987 is quashed. Fresh demand notices may be issued after giving adjustment for the income-tax already paid and the transfer fee which is liable to be refunded to the petitioner by a duly appointed Inspector. Writ Petition No. 45 of 1987: In Writ Petition No. 45 of 1987, a show-cause notice dated March 17, 1987, was issued by the Income-tax Officer to the petitioner to the effect that an amount of Rs. 5 lakhs was transferred by him in the year 1986-87 by way of gift/loan, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. The petitioner was required to submit within five days proof to show his source of income for making the gift/loan and also to produce documents and books of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. He was asked to submit within, five days proof to show his source of income for making the gift/loan and to produce documents and books of account in support. Ho was also required to deposit the transfer fee at the rate of one per cent. of the amount transferred. It was made clear that, in the event of his failure to comply with the notice, assessment of income-tax would be reviewed and determined as per clause 4(ii) of the Income-tax Manual. A reply dated March 17, 1987, was sent by the petitioner stating therein that the gift made by him to his relatives and friends did not have any bearing on his annual turnover, since he made the gift from his capital which he inherited from his ancestors. Thereafter, another notice dated March 23, 1987, was issued by the Joint Secretary, Income Tax and Sales Tax Department, to the petitioner. In this notice, it was stated that the petitioner had vaguely stated that he had got certain amounts from other sources of income and he was required to produce necessary books of account and to answer necessary queries to the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax and Sales Tax Department, issued another letter dated March 24, 1987, stating that in her reply, petitioner No. 1 had vaguely stated that she had certain amounts from other sources of income. By this letter, she was required to appear before the sender on March 26, 1987, and to produce necessary records or books of account showing the receipt of the amounts and also to answer necessary queries. The Joint Secretary cum-Income-tax Officer again issued notice dated May 15, 1987, requiring petitioner No. 1 to show cause why her annual turnover for the years 1984-85 and 1986-87 be not deemed to be ten times the money transferred and assessment of tax be made accordingly. In her reply, petitioner No. 1 stated that the gift had been made from her stridhana and had no connection with the annual turnover. A best judgment assessment was made on June 8, 1987, stating that her reply that the transfers had been made out of her earnings from the business earlier assessed was not justified. This is a case where the Income-tax Officer did not apply his mind inasmuch as in the reply sent in response to the notice dated May, 15, 1987, as also in her earlier reply she never stated that the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reply dated March 21, 1987, he had vaguely stated that he had certain amounts from other sources of income. He was required to appear before the sender on April 8, 1987, to produce necessary records or books of account showing the receipt of the amount and also to answer the necessary queries. On April 8, 1987, the statement of petitioner No. 1 was recorded wherein he admitted to having made the gift to his business friends. There is nothing in the statement to show the source from which the gift was made. Thereafter, a show cause notice dated May 15, 1987, was sent by the Joint Secretary-cum-Income-tax Officer to petitioner No. requiring him to show cause why his turnover should not be treated at ten times the transferred amount, during the year 1986-87. A best judgment assessment was made on June 15, 1987, stating that the statement of petitioner No. 1 that the gift was made from out of his earnings from the business earlier assessed by the Department was not found justified. The petitioners have stated in the writ petition that petitioner No. 1 had made the gifts out of money inherited from his ancestors and that he nowhere admitted that gifts had been made out of his earnings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be deemed to be ten times the money transferred and assessment be made accordingly. Reply was sent by the petitioner on May 21, 1987, where again he stated that the gifts had been made from his capital and wealth to which section 4(ii) of the Manual did not apply. Vide letter dated June 9, 1987, of the Joint Secretary, the petitioner was directed to appear before him and answer some questions. On June 16, 1987, a best judgment assessment was made by the Joint Secretary stating therein that in view of the admitted position that a sum of Rs. 7 lakhs had been transferred out of the State and also because his case that the transfers were made out of the earnings from the business earlier assessed was found not justified. A best judgment assessment was made taking the turnover at ten times the transfer amount. In view of the stand taken by the petitioner that gifts had been made from his capital and wealth and also because he did not produce any documentary evidence to show from where the money was withdrawn for making the gifts, the Income-tax Officer was within his jurisdiction in concluding that the gifts had been made from income which had escaped tax. There is no reason to inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had been made out of his earnings from the business earlier assessed was not found justified. From the case of the petitioner that the gifts had been made from capital and wealth, the Income-tax Officer could infer that the gifts had been, according to the petitioner, given from the earnings earlier assessed. Since the petitioner did not produce any books of account and did not prove from where the money was withdrawn for making the gifts, the Income-tax Officer was within his jurisdiction to treat the gift amount as income that escaped tax and to make the best judgment assessment as he did. There is no reason to interfere with the impugned judgment. However, the petitioner shall get, in view of the earlier discussion, refund of the transfer fee deposited by him. The recovery proceedings under Act No. 7 of 1987 are quashed. Fresh proceedings, if necessary, may be initiated by a duly appointed Inspector, after giving adjustment for the amount of transfer fee liable to be refunded. Writ Petition No. 31 of 1987: This petition has been filed to quash the complaint bearing No. 339/IT dated August 7, 1987, filed by the Joint Secretary and Income-tax Officer before the Officer- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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