1995-VIL-379-MAD-DT

Equivalent Citation: [1995] 215 ITR 883, 87 TAXMANN 8

MADRAS HIGH COURT

Date: 20.01.1995

COMMISSIONER OF INCOME-TAX

Vs

RAYALA CORPORATION PRIVATE LIMITED

BENCH

Judge(s)  : MISHRA., ALI MOHAMED 

JUDGMENT

The judgment of the court was delivered by

MISHRA J.-- Three questions of law are referred to this court under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), by the Income-tax Appellate Tribunal, 'B' Bench, at Madras, in the case of an assessee, who, according to the Revenue, had earned profit by allegedly over-invoicing of imports for the assessment years 1961-62 and 1962-63 and by receiving kickbacks from a supplier in Sweden. But before we reproduce the questions or reframe the questions for consideration, we propose to briefly recapitulate the facts.

The assessee, a private limited company, has allegedly been carrying on the business of manufacturing and selling typewriters having the trade name of "Halda" typewriters. The returns for the relevant financial years were assessed to tax on the income for the assessment year 1961-62 for the year ending on March 31, 1961, on January 31, 1964, and for the assessment year 1962-63 for the financial year ending on March 31, 1962, on March 26, 1964. In December, 1966, however, the Enforcement Directorate and the Income-tax Department conducted a raid in the premises of the assessee-company and the premises under the occupation of its managing directors and seized documents from their custody, which revealed that the assessee was systematically over-invoicing its imports of raw materials from Sweden and such over-invoiced amounts were credited to the account of Mr. M. R. Pratap, the managing director of the assessee in a Swedish bank, having the name Svenska Handelsbanken. In the pending assessment for the assessment year 1965-66, the Revenue took notice of several documents and the statements of one D. V. Jagga Rao in his deposition given on March 7, 1970, and March 16, 1970, and subsequently, cross-examination by the assessee's representative and made an addition of an income of Rs. 2,45,514 in the hands of the assessee on account of over-invoicing its imports from Sweden. During the appeal proceeding relating to the said year of assessment, some original materials were produced on behalf of the assessee before the Income-tax Officer. The assessee-company's ledgers relating to the assessment year 1961-62 disclosed that the assessee had imported raw materials, components, jigs, etc., from Facit AB to the extent of Rs. 11,80,872 and there was a diary seized in the course of the raid which contained certain entries. It was a diary belonging to Jagga Rao who explained the entries pertaining to the year 1963 in these words :

" The company was importing raw materials and components for manufacture of typewriters from A. B. Ativide-bergs Industries, Sweden (now known as "Facit AB"). The import prices were over-invoiced, The difference between the actual price and the over-invoiced price amounts to 7,56,539 s. k. up to August, 1963. This amount is shown on page opposite to calendar, 1963."

Jagga Rao was till 1971, a manager of the assessee-company and was looking after the import affairs of the company during the relevant period. The Appellate Assistant Commissioner upheld the addition made under over-invoicing substantially for the assessment year 1965-66 and with the approval of the Commissioner of Income-tax (Central), Madras, recourse was taken to section 147(a) of the Act and, accordingly, a notice under section 148 of the Act was issued on March 16, 1971, and duly served upon the assessee on March 16, 1971. The assessee made no response to the said notice and, accordingly, a letter was issued to it on November 9, 1971, reminding it about the return. The assessee, however, gave no response to the letter as well. On July 27, 1973, a fresh letter was addressed to the assessee and it was called upon to produce details regarding the import of raw materials, store items, components, etc., and details regarding the number of typewriters supplied to several distributors and others by it in the assessment years 1961-62 to 1964-65. The assessee sent its reply on August 8, 1973, that all the records including ledgers and vouchers for the period up to March 31, 1968, were with the Deputy Director of the Company Law Board. The Department made enquiries with the Company Law Board only to learn that a few ledgers available with them were of no concern to the Department and no vouchers and invoices, etc., were with them. The assessee, however, submitted no return. A fresh notice on behalf of the Department invoked no new response and the assessee repeated its saying that the records for the period up to March, 1968, were in the custody of the Company Law Board and that it would not be in a position to gather any particulars and furnish any information to the Department. It, however, maintained that full and complete particulars had been furnished already and on the basis of the same, assessment had already been completed. It contended that there was no concealment or escapement of income and the conditions for reopening the assessment were not satisfied. The Income-tax Officer who finally resorted to the best judgment assessment on information which disclosed that the assessee had not made a full disclosure of its income and that substantial income, diverted by it to a foreign bank, had escaped assessment, has recorded in his judgment as follows :

"After I took charge, I issued a notice under section 142(1) requiring the assessee to produce all account books and invoices, etc., relating to the assessment year 1962-63. The assessee was also asked to specify the exact accounts, ledgers and vouchers taken by the Company Law Board so that I could get the same from them. The assessee was also informed that the return in response to the notice under section 148 had not yet been filed and that the default was continuing. The case was posted for hearing on March 6, 1975. Once again the assessee in its reply dated March 4, 1975, reiterated what it stated in its letter dated August 8, 1973, and merely stated that 'without prejudice to our right to question the jurisdiction we have to state we stand by the return of income already filed by us on the basis of which the assessment had been completed'. Since no valid return has been filed as on date, I have no other option but to complete the assessment under section 144 to the best of my judgment after gathering materials and after perusing the ledgers available in the Company Law Board."

After mentioning about the documents including pro forma invoice dated September 9, 1963, from Assab of Sweden with pencil entries showing that there was an inflation in the charging of imports from this firm by 40 per cent. of the actual price ; Order No. 116 dated October 23, 1963, by the assessee on the basis of the pencil entries in the pro forma invoice and a letter dated March 25, 1965, from Assab to Mr. Schussler, a director on the board of directors of the assessee-company, which revealed that the amounts by which the imports from Assab were inflated by overinvoicing were credited to the account of M. R. Pratap in a Swedish bank and that the total amount as credited was stated to be Sw. Kr. 88,913 as well as a statement as enclosure to the letter showing the invoice-wise particulars of the above sum and Jagga Rao's statements aforementioned in his deposition in March, 1970, he (Income-tax Officer) found as follows :

" Taking into account the circumstances stated above, I have to hold that there was over-invoicing of imports made from Atvida-bergs Industries, Sweden, for the period relevant to the assessment year 1962-63. Taking into account the fact that there was 40 per cent. over-invoicing as revealed by the letter from Assab to L. Schussler dated March 25, 1965, and calculating the quantum of over-invoicing on the basis of the calculation made in the enclosure to the letter, the over-invoiced amounts work out to Rs. 3,37,392.... As a result of the search, it came to light that the assessee has been receiving back the commission paid to some of its agents. This position was accepted by the company and in connection with the assessment for 1966-67, it was held that 'kickback commission' was received from Bangalore Trading Corporation, Chellur Corporation and Sarada Agencies. The managing director of India Manufacturers (Private) Limited, a part of which is Sarada Agencies had also deposed that that company had been returning part of the commission received from the assessee. Shri D. V. Jagga Rao, manager, also deposed that he was surrendering four-fifths of the commission to be paid to him. There was also definite evidence to show that such 'kickback commission' was received during the year relevant for 1962-63 assessment. When Mr. T. V. K. Shastry, an employee of the assessee, was specifically questioned on various selfcheques drawn by the assessee which included the following cheques relating to the accounting year relevant for 1962-63 assessment :

Date of cheque No. of cheque Amount

Rs.

2-3-1962 951046 5,000

13-3-1962 951890 5,000

30-3-1962 949511 6,000

He explained as follows :

'These cheques were supposed to be commission payments of the company to Mr. A. C. R. Menon, of Messrs. Chellur Corporation, Cochin. But these payments did not reach either Mr. A. C. R. Menon or Chellur Corporation. I can confidently say that these cheques were encashed by an office boy of our office by name A. Sambandan or by one Natarajan, estate manager of the company. These cheques were written by our chief cashier, Mr. V. Kannan. Under instructions from Mr. Pratap, I used to hand over the cheques to the persons mentioned above for encashing them and returning them to me so that I can disburse the amount to various persons as per Mr. Pratap's specific instructions. He never gave me instructions in writing ; but orally gave me instructions to make payments to various persons. I have got vouchers to support the payments made to some of the parties which I am producing it before you now. These specific instructions as to how the amounts should be disbursed were mostly communicated to me directly. But sometimes they were communicated to me through Mr. Jagga Rao, general manager of the company.' Again with reference to the above cheques Mr. Jagga Rao was examined on oath. He deposed in his statement dated March 7, 1970, that these were discounts allowed mostly to Chellur Corporation and Sarada Agencies which were, however, not paid to them. According to him, these were claimed as discounts and cheques were encashed. He further stated :

'These cheques were prepared at the instance and direction of Mr. Pratap, managing director of the company. The encashed amounts were given to Mr. T. V. K. Shastry who disbursed the amount as per Mr. Pratap's instructions.'

In view of the clear evidence available, I hold that the assessee has been receiving 'kickback commission' during this year also. The total commission paid to the three agents was Rs. 97,259. The exact number of machines sold to them is not ascertainable. However, it is gathered that out of the total sale of 4,468 typewriters about 30 per cent. would be the sales to these agents. On this basis, the number of machines sold to these persons could be taken at 1,340. At Rs. 40 per machine, the amount of 'kickback commission' is fixed at Rs. 53,600. To this four-fifths of the commission paid to Mr. Jagga Rao, viz., four-fifths of Rs. 28,145 or Rs. 22,516 shall be added."

The assessee preferred an appeal. The Appellate Assistant Commissioner found some reasons to hold as follows :

"In view of the evidence gathered by the Income-tax Officer, I hold that the assessee has been receiving 'kickback commission' during the year under consideration. There is no dispute that the total commission paid to three agents was in the order of Rs. 97,259. In the absence of further particulars, the Income-tax Officer estimated that 30 per cent. of the total sales would relate to the sales to the agents. On the basis thereof the number of machines sold to these three agents worked out to about 1,340 machines. The 'kickback commission' was accordingly estimated to Rs. 53,600, i.e., at Rs. 40 per machine. To this 4/5ths of commission paid to Sri Jagga Rao of Rs. 28,145 has been added. From the above, it is clear that the Income-tax Officer had some basis in estimating the 'kickback commission' received by the assessee at Rs. 76,116. The addition is accordingly, confirmed.

With regard to the addition on account of inflation in imports, the materials referred to in the assessment order for the said addition are the same as referred to by the Income-tax Officer in his order of assessment for the year 1961-62. The very same issue came up for consideration in the appeal filed by the assessee in respect of the assessment year 1961-62 and in my order in Income-tax Appeal No. 31 of 1974-75 of even date I have held as under :

'Pro forma invoice dated September 9, 1963, order dated October 23, 1963, and letter dated March 25, 1965, do not have any relevance to the imports made by the company in the relevant accounting year for the assessment year 1961-62.

Sri D. V. Jagga Rao's statement does not go to establish that there has been over-invoicing of imports by the company or its managing director in the accounting year 1960-61, relevant to the assessment year 1961-62. . . .

Shri Jagga Rao's statement does not go to establish that there has been over-invoicing of imports by the company in the accounting year 1961-62 relevant to the assessment year 1962-63. That is so even in the adjudication proceedings before the Enforcement Directorate. In the above circumstances, and having regard to the fact that the Income-tax Officer has failed to establish that there has been over-invoicing by the company in the accounting year relevant to the assessment year 1962-63, I am of the opinion that no case has been made out by the Income-tax Officer to add a sum of Rs. 3,37,392 as inflation in imports. The addition is accordingly deleted."

The Tribunal has, however, found as follows:

" It is no doubt true that he had not specifically mentioned that such over-invoicing had been made by the assessee in the two previous years relevant to the assessment years 1960-61 and 1961-62. But then, the statement was that such over-invoicing amounted to 7,56,539 Sw. Krs. up to August, 1963, and according to him, it was that figure which he had noted in the diary in the page opposite to calendar August, 1963. The above statement, in our opinion, was sufficient and could have led the Income-tax Officer to believe that income had escaped assessment for the assessment years 1961-62 and 1962-63 also. The Appellate Assistant Commissioner is not justified in saying that Jagga Rao's statement did not go to establish that there had been over-invoicing of imports in the accounting year 1960-61, relevant to the assessment year 1961-62. He has observed after extracting the relevant portion of the statement that one could not presume, therefore, that the assessee-company had been over-invoicing the imports from the commencement of its business. It may be true. But the question is not whether the evidence is sufficient to establish that the assessee had got over-invoiced its imports from AB Atvidabergs Industries during the relevant previous years. The question is whether what Jagga Rao had stated could have made the Income-tax Officer to entertain a reasonable belief that the assessee might have got over-invoiced the imports made by it from the above company during the two relevant previous years. In our opinion, the above statement could have led the Income-tax Officer to entertain such a belief. We are, therefore, of the opinion that the reopening of the assessment for the assessment year 1961-62 under section 147(a) is proper and the contrary view of the Appellate Assistant Commissioner is not correct."

About the assessment year 1962-63, the Tribunal has, however, noted as follows :

" As already mentioned, Jagga Rao had stated there that the total amount of over-invoicing was Sw. Krs. 7,56,539 up to the end of August, 1963, and that the same was transferred to the personal account of Sri Pratap in the Swedish bank in September, 1963. There is nothing, however, therein to show that invoices made by the assessee-company from AB Atvidabergs Industries, Sweden, during the previous year relevant to the two assessment years under consideration had been over-invoiced. The said sum represents the over-invoicing made in respect of imports made in the earlier years. The Departmental representative also referred to certain answers given by Jagga Rao when he was cross-examined by the assessee's counsel on December 16, 1972. But, then, we find there is nothing therein to show that such over-invoicing had been made in respect of imports effected during the two relevant previous years."

The Tribunal, however, has rejected the assessee's contention that the Department had no case for the reopening of the assessment on the ground of concealment or escapement for the assessment year 1962-63, but interfered with the addition of Rs. 76,116 for the said assessment year in the income of the assessee on the ground that the Income-tax Officer had relied upon the statement of T. V. K. Shastry and Jagga Rao in respect of this matter and stated as follows:

"As already stated, the Income-tax Officer has relied upon the statements of T. V. K. Shastry and Jagga Rao in respect of this matter. But it is pointed out by the assessee that the affidavits filed by Messrs. Sarada Agencies, Chellur Corporation and Bangalore Trading Corporation to the effect that the entire commission due to them had been received by them and that no portion was paid back. The affidavit filed by R. S. Vengeswaran, the former chief accountant of the assessee-company, narrating the circumstances under which Rs. 3,75,908 was returned as income for the assessment year 1966-67 and the affidavit of Sri Pratap relating to the assessment year 1965-66 had not been referred to. He further stated that though T. V. K. Shastry had been examined by the Additional Director of Inspection as early as March 9, 1970, the assessee was not informed of the same, even though the Income-tax Officer required the assessee, by his letter dated July 27, 1973, to furnish the details of overriding commission paid to the agents. We find that the Income-tax Officer and the Appellate Assistant Commissioner had not considered all the materials relating to this matter. We think that, in the interest of justice, this question has to be considered afresh. We, accordingly, direct the Appellate Assistant Commissioner to consider the propriety of the addition of Rs. 76,116 taking into consideration only such materials as are available on record."

The Revenue has questioned the proceedings before the Appellate Assistant Commissioner and the Tribunal and obtained a reference on the following questions of law:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in deleting the addition of Rs. 3,37,392 representing the profit earned on the over-invoicing of imports for the assessment year 1962-63 ?

(2) Whether the Tribunal having directed the Appellate Assistant Commissioner to consider whether an addition as warranted towards overinvoicing of imports for the assessment year 1961-62 was justified in deciding the same issue for the assessment year 1962-63 on merits thereby leaving no option to the Appellate Assistant Commissioner to dispose of the appeal, for 1962-63 on merits ?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in restoring the assessee's appeal for the year 1962-63 with regard to the assessment of kickback commission to the file of the Appellate Assistant Commissioner for fresh consideration especially when the assessment made for the year 1962-63 was a best judgment assessment under section 144 of the Income-tax Act and after considering all the materials available in the records ? "

We are not surprised by the revelations in the instant proceeding that the assessee who was importing certain raw materials/components for manufacturing typewriters indulged in over-invoicing the import and got a substantial sum of money stacked as deposit in the name of its managing director in a foreign bank. It received kickbacks from its agents and maintained under-account for it, It passed through the yearly exercise of submission of returns and assessments and even payment of tax until the Enforcement Directorate acted and discovered that it (assessee) had received contributions from its foreign suppliers on account of overinvoicing of the imports by way of deposits in a foreign bank and that it had developed a system of kickbacks from its agents as a method of keeping a regular inflow of concealed income for which it never cared to account. What has surprised us, however, in the instant case, is the way the Appellate Commissioner has ignored the defiance of the assessee that in spite of the repeated notices and letters it never appeared before the Income-tax Officer with any information or material in response to the notice under section 148 of the Income-tax Act and the letters sent to it in this behalf.

The Appellate Tribunal is not a court. Its powers, however, are expressed in the widest possible terms under section 254 of the Act, "may after giving both the parties to the appeal an opportunity of being heard, and pass such orders thereon as it thinks fit". Its powers, thus, are almost similar to the powers of an appellate court under the Code of Civil Procedure. A wide power, however, is not such that it can be exercised in any manner. The Tribunal can interfere with the orders of the lower authorities, but can do so only on judicial considerations and on the basis of reasons that suggest clearly that the lower authorities had committed an error of law or such fact that had vitiated its considerations and gone perverse for such reasons. The appellate courts which exercise wide powers to hear appeals both on issues of law as well as issues of fact, exercise the well known refrain that if two opinions are possible and one opinion is formed by the lower authority or court, although it is to arrive at a different opinion it shall not interfere with the order of the lower authority or reverse the order of the lower authority. The test which the courts apply for interference when an error of law is not evidenced is whether a reasonable person can take the opinion which the authority has, through the order under appeal, taken. Once it is found that a reasonable person could form the opinion, which the lower court or the authority had formed, the appellate court or authority shall desist from interfering with its order.

We have chosen to make some observations as to the role of the Appellate Tribunal, because the stage at which it comes to examine the contentions of the assessee or the Revenue is one after all the proceedings under the law, an enquiry before assessment, an enquiry after assessment, if any, under section 143 of the Act and hearing, if any, of the assessee by the Income-tax Officer are completed and the remedy of a statutory appeal before the Appellate Assistant Commissioner is availed of by the assessee or the Revenue ? Its primary task is not to go into the return of the assessee and decide what amount of tax should be levied upon his income, but to see whether the taxing authorities, including the Appellate Assistant Commissioner have committed any error of law or of fact and on account of such error, the assessee has suffered. A greater protection is extended by the law to the Revenue in the sense that, in cases where tax is found to have been short-levied, discretion is given to the competent authority (Commissioner) to reopen the whole matter, if it is in public interest to do so. The Tribunal has got to protect, on the one hand, the interest of the assessee in the sense that he is not subjected to any amount of tax in excess of what he is bound to pay, and on the other hand, it has a duty to protect the interests of the Revenue and to see that no one dodged the Revenue and escaped without paying the tax. We shall advert later to see whether, on the facts involved in the instant proceeding, the court should also decide a further question whether the Appellate Tribunal is right in entering into the evidence and for the reasons adduced under-assessment of evidence in setting aside the order of the Income-tax Officer and the Appellate Assistant Commissioner. We proceed further to recapitulate how the assessee and the Revenue have accorded in the instant proceeding leading to the discovery of facts. In a raid by the Officers of the Enforcement Directorate and the Income-tax Department, in December 1966, it was found that the assessee had received money in a foreign land by over-invoicing its imports and manipulating accounts of payment of commission by it and also received kickbacks. A decision was taken to have recourse to section 147 of the Act and, accordingly, a notice was issued to the assessee under section 148 of the Act. The assessee received the notice but ignored the same. The Income-tax Officer's insistence to the assessee to produce details regarding the import of raw materials, components, store items for the assessment years 1961-62 to 1964-65 and also details regarding the number of typewriters supplied to its southern distributors was also ignored by the assessee, Except for a reply letter at some stage that it (assessee) had submitted in the concerned assessment years' returns and it accordingly had been assessed, the assessee kept itself away from the proceedings before the Income-tax Officer. The Income-tax Officer took recourse to the best judgment assessment, as contemplated under section 144 of the Act.

There is no error in the procedure adopted by the Income-tax Officer, as a notice under section 148 of the Act was issued by him and since such a notice is guided by all the consequences of a notice under sub-section (2) of section 139 of the Act and in the case of an assessee, who has failed to make the return, required by a notice issued under sub-section (2) of section 139 of the Act procedure under sub-section (4) or sub-section (5) of that section can be followed and the Income-tax Officer can proceed to make the assessment of the total income or loss to the best of his judgment and to determine the sum payable by the assessee accordingly only if the assessee has not cared to act in response to the notice. Since the assessee is a defaulter, who has not responded to the notice under section 139(2) of the Act and who has also not chosen to take advantage of the filing of the return or to respond to the notices and the letters of the Incometax Officer, he alone created the situation that the proceedings were taken under section 144 of the Act only on such materials, which the Income-tax Officer had gathered. The materials gathered by the Income-tax Officer are the documents found in the Enforcement Directorate's and the Department's raid, including the diary maintained by Jagga Rao who was then employed as the general manager of the assessee. Jagga Rao's statements during the course of various enquiries and some other material including the pro forma invoice dated September 9, 1963, with pencil-marked entries showing that there was an inflation in the charging of imports by 40 per cent. of the actual price (dated September 9, 1963), order on the basis of the pencil entries in the pro forma invoice dated October 23, 1963, and the confirmation letter from Assab to Mr. Schussler, a director of the board of directors of the assessee-company, that the amount covered by over-invoicing was credited to the account of M. R. Pratap of the assessee-company in a Swedish bank, are particularly referred to an inference is drawn on the basis of such transactions of over-invoicing during the relevant accounting years by him for assessment and levy of tax and penalty under section 271(1)(c) of the Act. About kickbacks, there has undoubtedly been clear evidence and a reference to such evidence has been made by the Tribunal in its order. The Tribunal has taken evidence brought in the first instance before it by way of affidavits on behalf of the assessee and entertained arguments on behalf of the assessee that there were some materials before the Additional Director of Inspection, and the affidavit filed by M. R. Pratap in the assessment year 1965-66 which were not considered by the Income-tax Officer in these words :

"We find that the Income-tax Officer and the Appellate Assistant Commissioner have not considered all the materials relating to the matter. We think that in the interest of justice, this question has to be considered afresh."

The Supreme Court, in CIT v. Karam Chand Thapar and Brothers P. Ltd. [1989] 176 ITR 535, after considering the two earlier judgments, following the judgment in CIT v. Dalmia Jain and Co. Ltd. [1972] 83 ITR 438, has pointed out :

" In CIT v. Dalmia Jain and Co. Ltd. [1972] 83 ITR 438, this court held that whether a particular loss is a trading loss or a capital loss is primarily a question of fact. Where the Tribunal has come to a conclusion that the loss incurred by the assessee in the sale of shares held by it was a trading loss and it is not the case of the Department that in arriving at its decision, the Tribunal had taken into consideration any irrelevant material or failed to take into consideration any relevant material, there is no room for interference by the court. It is well-settled that the Tribunal is the final fact-finding body. The questions whether a particular loss is a trading loss or a capital loss and whether the loss is genuine or bogus are primarily questions, which have to be determined on an appreciation of facts. The findings of the Tribunal on these questions are not liable to be interfered with unless the Tribunal has taken into consideration any irrelevant material or has failed to take into consideration any relevant material or the conclusion arrived at by the Tribunal is perverse in the sense that no reasonable person, on the basis of the facts before the Tribunal, could have come to the conclusion to which the Tribunal has come. It is equally settled that the decision of the Tribunal is not to be scrutinised sentence by sentence merely to find out whether all the facts have been set out in detail by the Tribunal or whether some incidental fact which appears on the record has not been noticed by the Tribunal in its judgment. If the court, on a fair reading of the judgment of the Tribunal, finds that it has taken into account all relevant material and has not taken into account any irrelevant material in basing its conclusions, the decision of the Tribunal is not liable to be interfered with, unless, of course, the conclusions arrived at by the Tribunal are perverse."

The Tribunal's case in the instant case, when examined on the above touchstone discloses not only an overstepping of the constraints of law to catch hold of the materials that the assessee desired to adduce for the first time, but also putting into a proceeding under section 144 of the Act, the elements of an enquiry under section 143(3) of the Act and adding to the materials gathered by the Income-tax Officer, additional materials produced before it in the proceeding. Whether the Income-tax Officer has committed any error in his judgment under section 144 of the Act can be decided only on the basis of the materials gathered by him and not on the basis of any materials that are later produced by the assessee. There cannot be a procedure wherein the best judgment of the Income-tax Officer is subjected to the discretion of the assessee to produce evidence/material at the appellate stage and thus convert the proceeding of best judgment into a proceeding for regular assessment in which the assessee is served with a notice under section 139(2) of the Act.

A best judgment assessment is called for only when all the materials asked for the assessment are not available with the Income-tax Officer. The Income-tax Officer relies on the information gathered by him as well as the surrounding circumstances of the case. In the words of the Supreme Court in Commissioner of Sales-tax v. H. M. Esufali H. M. Abdulali [1973] 90 ITR 271, the assessments made on the basis of the assessee's accounts and those made on "best judgment" basis are totally different types of assessments. The Supreme Court in that case considered the scope of a "best judgment" under section 19(1) of the M. P. General Sales Tax Act, 1958, and observed as follows :

" Now, coming to the facts of this case, it is necessary to remember that at the initial stage, the assessee denied that the bill book seized was his bill book and the entries therein related to his dealings. He asserted that he had nothing to do with the bill book in question and the entries therein do not relate to his dealings. But, at a later stage, he conceded that that bill book was his and the entries therein related to his dealings. It is now proved as well as admitted that his dealings outside his accounts during a period of 19 days were of the value of Rs. 31,171.28. From this circumstance, it was open to the Sales Tax Officer to infer that the assessee had large-scale dealings outside his accounts. The assessee has neither pleaded nor established any justifiable reason for not entering in his accounts the dealings noted in the bill book seized'. It is obvious that he was maintaining false accounts to evade payment of sales-tax. In such a situation, it was not possible for the Sales Tax Officer to find out precisely the turnover suppressed. He could only make an estimate of the suppressed turnover on the basis of the material before him. So long as the estimate made by him is not arbitrary and has nexus with facts discovered, the same cannot be questioned. In the very nature of things the estimate made may be an overestimate or an underestimate. But, that is no ground for interfering with his 'best judgment'."

The Supreme Court has clearly indicated that so long as the estimate made by the assessing authority is not arbitrary and has nexus with the facts discovered the same cannot be questioned. In the very nature of things the estimate made may be an over-estimate or an under-estimate. But, that is no ground for interfering with his best judgment. The Supreme Court also has pointed out that the assessee cannot be permitted to take advantage of his own illegal acts and that it was his duty to place all the facts truthfully before the assessing authority. If he fails to do his duty, he cannot be allowed to call upon the assessing authority to prove conclusively what turnover he had suppressed. That fact must be within his personal knowledge. Hence, the burden of proving that fact is on him. The Supreme Court disapproved the interference by the High Court in the best judgment assessment, saying 'the High Court was wrong in assuming that the assessing authority must have material before it to prove the exact turnover suppressed'. Speaking on the principle of it, the Supreme Court further held that in estimating any escaped turnover, it is inevitable that there is some guesswork. The assessing authority, while making the "best judgment" assessment, no doubt, should arrive at its conclusion without any bias and must act on a rational basis. The authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his "best judgment" and not of any one else. The High Court could not substitute its "best judgment" for that of the assessing authority. In the case of "best judgment" assessments, the courts will have to first see whether the accounts maintained by the assessee were rightly rejected as unreliable. If they come to the conclusion that they were rightly rejected, the next question that arises for consideration is whether the basis adopted in estimating the turnover has reasonable nexus with the estimate made. If the basis adopted is held to be a relevant basis even though the courts may think that it is not the most appropriate basis, the estimate made by the assessing authority cannot be disturbed. The Supreme Court has pointed out that "the law relating to 'best judgment' assessment is the same both in the case of income-tax assessment as well as in the case of sales-tax assessment."

Learned counsel at the Bar have brought to our notice several other authorities in the periphery of the issues we have dealt with in the case. They do not appear to us very relevant except that they tell us that the income-tax authorities perform a judicial function under the Income-tax Act and they are invested with an authority to determine finally all questions of fact and that the Tribunal must, in deciding an appeal, consider with due care all the material facts and record its findings on all the contentions raised by the assessee and the Commissioner in the light of the evidence and the relevant law. We have however found that the Tribunal in the instant case assumed a role which it would advisedly have avoided for, although it was sitting in appeal, it was in a proceeding arising out of a best judgment assessment under section 144 of the Act. The materials which otherwise were with the assessee, but he avoided to produce before the Income-tax Officer by not responding to the notice under section 148 of the Act thus, were alien to the proceeding. The Tribunal has confused a proceeding where it had to see whether on the materials before the Income-tax Officer it was possible to say he had acted with bias whether he had no rational basis, whether he was vindictive or capricious, whether the estimate by him was bona fide, etc., with proceedings in which the assessee had appeared and produced the relevant materials, but those materials were not considered by the assessing authority/Income-tax Officer or some materials by oversight or for some other valid reason were not produced before the Income-tax Officer. One question which is enough for the present, whether the Tribunal has committed any error in entering into a reappraisal of evidence after taking into consideration the additional evidence produced by the assessee before it in a proceeding arising out of a best judgment assessment under section 144 of the Act, must be answered in the affirmative. We accordingly answer the question against the assessee and in favour of the Revenue. This is a case, in our opinion, which must go back to the Tribunal for a fresh consideration of the matter in all its aspects strictly in accordance with law and for a decision whether the Income-tax Officer has committed any error in his best judgment assessment under section 144 of the Act by relying upon the materials that were available to him and drawing an inference from such materials.

We have felt in this case, that while operating as an importer, the assessee-company was involved in siphoning valuable foreign currency to a named account in Sweden. It has been doing so, by over-invoicing to the extent of 40 per cent. of the value of the goods that it intended to import or imported and by receiving excess money in foreign currency and keeping it clandestinely in a bank in Sweden. The Enforcement Directorate and the Income-tax Department got some clue about the dealings of the assessee and as a result of the raid, startling disclosures followed. The assessee when called upon to produce materials for assessment in accordance with law by a notice under section 148 of the Act declined to the extent that it gave no care to any of the notices and letters of the Income-tax Officer. The Appellate Tribunal, instead of taking notice of the assessee's recalcitrance, has treated it as a wronged person. Thus the assessee has received a premium at the hands of the Tribunal upon its recalcitrance. We hope and trust in proceeding further, the Tribunal shall keep in mind the conduct of the assessee and evaluate accordingly whether there is any error in estimates of its income by the Income-tax Officer under section 144 of the Act.

The instant case is accordingly disposed of. The case is remitted back to the Tribunal for a further hearing and disposal in accordance with law.

 

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