PETITIONER:
STATE OF KERALA
Vs.
RESPONDENT:
K.T. SHADULI YUSUFF ETC.
DATE OF JUDGMENT15/03/1977
BENCH:
BHAGWATI, P.N.
SARKARIA, RANJIT SINGH
FAZALALI, SYED MURTAZA
CITATION:
1977 AIR 1627 1977 SCR (3) 233
1977 SCC (2) 777
ACT
Kerala General Sales Tax Act, 1963--S. 17(3)--Scope
of--Best judgment assessment made relying on entries in
account books of other dealers--Assessee --If entitled to
cross-examine the dealers.
Natural justice--Scope in tax matters--Best Judgment
assessment made relying on entries in account books of
other dealers---Cross-examination of dealers--If part of
principles of natural justice.
HEADNOTE
Section 17(3) of the Kerala General Sales Tax Act 1963
provides that if the return submitted by an assessee appears
to be incorrect or incomplete. the assessing authority may
assess the dealer to the best of its judgment. The proviso
to the sub-section enacts that before taking action under
the sub-section, the dealer shall be given a reasonable
opportunity of being heard and, where a return has been
submitted, to prove the correctness to completeness of such
return.
Relying on the evidence furnished by entries in the
books of account of some other dealers, the Sales Tax
Officer disbelieved the assessee’s accounts and came to the
conclusion that the return field by him was incorrect and
incomplete and made a best judgment assessment under s.
17(3). The assessee’s request to cross-examine the deal-
ers in regard to the correctness of their accounts was
rejected by the Sales Tax Officer. In revision the High
Court quashed the order of the Sales Tax Officer.
Dismissing the State’s appeal,
(Per Bhagwati and Sarkaria. JJ)
HELD . The assessee was entitled to cross-examine the
dealers under the second part of the proviso to s. 17(3).
The Sales Tax Officer’s refusal to summon the dealers for
cross-examination by the. assessee constituted infraction of
the right conferred on the assessee by the second part of
the proviso and that vitiated the order of assessment made
against him. [239 F]
(1) The rule which requires an opportunity to be heard
to be given to a person likely to be affected by a decision
is not an inflexible rule having a fixed connotation. It
has a variable content depending on the nature of the in-
quiry, the framework of the law under which it is held, the
constitution of the authority holding the inquiry, the
nature and character of the right affected and the coil-
sequences flowing from the decision. The rule of audi
alterem partem does not require in every case a specified
procedure to be followed. In a given case, the rule of
audi alterem partem may import a requirement that witnesses,
whose statements are sought to be relied upon by the author-
ity holding the inquiry, should be permitted to be cross-
examined by the party affected while in some other cases it
may not. The procedure required to be adopted for giving an
opportunity to a person to be heard must necessarily depend
on the facts and circumstances of each case. [237 B-D]
(2) (a) It is only on the existence of one of two condi-
tions, namely, that no return is .submitted by the assessee
or the return submitted appears to be incorrect or incom-
plete that the Sales Tax Officer gets the jurisdiction to
make a best judgment assessment. [237 H]
234
(b) The second part of the proviso lays down that where
a return has been submitted, the assessee should be given a
reasonable opportunity to prove the correctness or complete-
ness of such return. "To prove" means to establish the
correctness or completeness of the return by any mode per-
missible under law. The opportunity to prove would, there-
fore, necessarily carry with it the right to examine wit-
nesses and that would include equally the right to cross-
examine witnesses examined by the Sales Tax Officer. [238
G-H]
In the instant case, the assessee could prove the cor-
rectness and completness of his return only by showing that
the entries in the books of account of the dealers on which
the Sales Tax Officer relied, were false, bogus or manipu-
lated and that his return should not be disbelieved on the
basis of such entries. This could not be done unless an
opportunity to cross examine the dealers was given. [239 B]
Murlimohan Prabhudayal v. State of Orissa, 26 S.T.C. 22
and M. Appukutty v. State of Kerala, 14 S.T.C. 489 approved.
Fazal Ali, J. (concurring).
Section 17(3) with the proviso thereto and r. 15, have
given a statutory right to the assessee to prove the cor-
rectness of his return and the assessee was entitled to
cross-examine the wholesale dealers, relying on whose ac-
counts the Sales Tax Officer made a best judgment assess-
ment. [247 E]
(1) The well-settled rules in regard to best judgment
assessment are (i) The taxing authority must not act dis-
honestly or vindictively or capriciously. He must make what
he honestly believes to be a fair estimate, of the proper
figures of assessment and for this purpose, he must be able
to take into consideration all matters which he thinks will
assist him in arriving at a fair and proper estimate.
Though it must necessarily be guess work it must be honest
guess work. [241 E]
(ii) Although tax proceedings are quasi-judicial and the
Sales Tax Officer is not bound strictly by rules of evi-
dence, yet he must base his order on materials known to the
assessee and after he has been given a chance to rebut the
same. [244 E]
(iii) Admissibility of a document or material in evi-
dence is quite different from the value which the authority
would attach to such material. The tax authority can even
base its conclusion on private opinion or assessment provid-
ed the same is fully disclosed to the assessee and he is
given an opportunity to rebut the same. [242 E]
Income-tax Commissioner v. Badridas Ramrai Shop, Akola
(1937) 64 I.A. 102, 114, 115 and Dhakeswari Cotton Mills
Ltd. v. Commissioner of Incometax, West Bengal, [1955] 1
S.C.R. 941 followed.
Raghubar Mandal Harihar Mandal v. State of Bihar 8
S.T.C. 770 and C. Vasantilal & Co. v. C.I.T. Bombay City
45/.T.R. 206 referred to.
Seth Gurmukh Singh v. Commissioner of Income-tax Punjab,
[1944] 12 I.T.R. 393 approved,
2(a) The words "opportunity of being heard" in s. 17(3)
are of very wide amplitude. All that the court has. to see
is whether the assessee had been given a fair hearing.
Whether the hearing would extend to the right of demanding
cross-examination of witnesses or not, would depend upon the
nature of the materials relied upon by the tax authorities,
the manner in which the assessee can rebut those materials
and the facts and circumstances of each case. [234F-G]
235
The second part of the proviso confers benefit on the asses-
see for giving him an opportunity not only of being heard
but also of proving the correctness or completeness of his
return. Secondly, r. 15 clearly shows that where the
return of the assessee is incorrect or incomplete he must be
called upon to prove. the correctness or completeness of the
same. It also enjoins on the Sales Tax Officer that a
reasonable opportunity of being heard should be given to
the assessee to prove the correctness and completeness of
the return. The requirement of the second part of the
proviso to s. 17(3) is reiterated in r. 15. [244 F; 247 D]
In the instant case, if the assessee desired the dealers
whose accounts were used against him to be cross-examined to
prove that his return was not incorrect or incomplete, he
could not be denied this opportunity. The dealers might
have made the entries to embarrass the assessee or they
might have animus or business rivalry with the assessee.
The assessee could establish the correctness of his return
only if he was allowed to cross examine the dealers. [244 H]
Jayantilal Thakordas v. State of Gujarat 23 S.T.C. 11 dis-
tinguished.
M. Appukutty v. State of Kerala, 14 S.T.C. 489 and
Muralimohan Prabhudayal v. State of Orissa, 26 S.T.C. 22
approved.
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 572-574
and 575 of 1972.
(Appeals by Special Leave from the Judgment and Order
dated 13-7-1971 of the Kerala High Court in Tax Revision
Cases Nos. 42, 45, 58 and 44 of 1970.)
S.V. Gupte (In CA No. 572/72), K. M, K. Nair and A. C.I
Pudissery for the appellant in all the appeals
T. A. Ramachandran, for the respondents in all the appeals.
The Judgment of P.N. Bhagwati and R.S. Sarkaria, JJ.
was delivered by Bhagwati, J., S. Murtaza Fazal Ali, J. gave
a separate opinion.
BHAGWATI, J. The facts giving rise to these appeals
are set out in the judgment about to be delivered by our
learned brother S. Murtaza Fazal Ali and we do not think it
necessary to reiterate them. So far as Civil Appeals 572-574
of 1972 are concerned, it would be sufficient to state
briefly the following facts as these are the only facts
necessary for appreciating the question of law which arises
for determination in these appeals. In the assessments of
the assessee to sales tax for three assessment years. the
returns filed by him on the basis. of his books of account
appeared to the Sales Tax Officer to be incorrect and
incomplete since certain sales appearing in the books of
account of one Haji P.K. Usmankutty as having been effected
by the assessee in his favour were not accounted for in the
books of account maintained by the assessee. The assessee
applied to the Sales Tax Officer for affording him an oppor-
tunity to cross-examine Haji Usmankutty in regard to the
correctness of his accounts, but this opportunity was
denied to him and the Sales Tax Officer proceeded to make a
best judgment assessment under section 17, sub-section (3)
of the Kerala General Sales Tax, 1963. The assessee ap-
pealed but without success and this was followed by a revi-
sion application to
236
the High Court. The High Court took the view that the
assessee was entitled to an opportunity to cross-examine
Haji Usmankutty before any finding could be arrived at by
the Sales Tax Officer that the returns filed by the assessee
were incorrect and incomplete so as warrant the making of
’the best judgment assessment and since no such opportunity
had been given to the assessee, the High Court quashed the
order of the Sales Tax authorities and remanded the case to
the Sales Tax Officer for making fresh assessments according
to law after giving an opportunity to the assessee to
cross-examine Haji Usmankutty. The facts in Civil Appeal
No. 575 of 1972 are almost identical, save that instead of
Haji Usmankutty, certain wholesale dealers were sought to
be cross-examined in that case and the opportunity to
cross-examine them was denied by the Sales Tax authorities.
Since the High Court quashed the orders of assessments in
both cases, the State preferred an appeal by special leave
in each case challenging the correctness of the view taken
by the High Court.
Now, the law is well settled that tax authorities entrusted
with the power to make assessment of tax discharge quasi-
judicial functions and they are bound to observe principles
of natural justice in reaching their conclusions. It is
true, as pointed out by this Court in Dhakeswari Cotton
Mills Ltd. v. Commissioner of Income Tax, West Bengal(1)
that a taxing officer "is not lettered by technical rules of
evidence and pleadings, and that he is entitled to act on
material which may not be accepted as evidence in a court of
law", but that does not absolve him from the obligation to
comply with the fundamental rules of justice which have come
to be known in the jurisprudence of administrative law as
principles of natural justice. It is, however, necessary to
remember that the rules of natural justice are not a con-
stant: they are not absolute and rigid rules having univer-
sal application. It was pointed out by this Court in Suresh
Koshy George v. The University of Kerala & Ors.(2) that "the
rules of natural justice are not embodied rules" and in the
same case this Court approved the following observations
from the judgment of Tucker, L.J. in Russel v. Duke of
Norfolk and Ors.(3):
"There are in my view, no words which are
of universal application to every kind of
inquiry and every kind of domestic tribunal.
The requirements of natural justice must
depend on the circumstances of the case, the
nature of the inquiry, the rules under which
the tribunal is acting, the subject matter
that is being dealt with, and so forth.
Accordingly, 1 do not’ derive much assistance
from the definitions of natural justice which
have been from time to time used, but, whatev-
er standard is adopted, one essential is that
the person concerned should have a reasonable
opportunity of presenting his case."
One of the rules which constitutes a part of the prin-
ciples of natural justice is the rule of audi alterem
partera which requires that
(1) [1955] 1 S.C.R. 941.
(2) [1969] 1 S.C.R. 317.
(3) [1949] 1 All. England Reports 108.
237
no man should be: condemned unheard. It is indeed a re-
quirement of the duty to act fairly which lies on all quasi
judicial authorities and this duty has been extended also to
the authorities holding administrative enquiries involving
civil consequences or affecting rights of parties because,
as pointed out by this Court in A.K. Kraipak and Ors. v.
Union of India,(1) "the aim of the rules of natural justice
is to secure justice or to put it negatively to prevent
miscarriage of justice" and justice, in a society which has
accepted socialism _as its article of faith in the Constitu-
tion, is dispensed not only by judicial or quasi judicial
authorities but also by authorities discharging administra-
tive functions. This rule which requires an opportunity to
be heard to be given to a person likely to be affected by a
decision is also, like the genus of which it is a species,
not an inflexible rule having a fixed connotation. It has a
variable content depending on the nature of the inquiry, the
framework of the law under which it is held, the constitu-
tion of the authority holding the inquiry, the nature and
character of the rights affected and the consequences flow-
ing from the decision. It iS, therefore, not possible to say
that in every case the rule of audi alterem partem requires
[that] a particular specified procedure to be followed. It
may be that in a given case the rule of audi alterem partem
may import a requirement that witnesses whose statements are
sought to be relied upon by the authority holding the in-
quiry should be permitted to be cross-examined by the
party affected while in some other case it may not. The
procedure required to be adopted for giving an opportunity
to a person to be heard must necessarily depend on the facts
and circumstances of each case.
Now, in the present case, we are not concerned with a
situation where the rule of audi alterem partem has to be
read _into the statutory provision empowering the taxing
authorities to assess the tax. Section 17, sub-section (3),
under which the assessment to sales tax ha’s been made on
the assessee provides as follows:
"If no return is submitted by the
dealer under subsection (1) within the pre-
scribed period, or if the return submitted by
him appears to the assessing authority to be
incorrect or incomplete, the assessing author-
ity shall, after making such enquiry as it may
consider necessary and after taking into
account all relevant materials gathered by it,
assess the dealer to the best of its judgment:
Provided that before taking action
under this sub-section the dealer shall be
given a reasonable opportunity of being heard
and, where a return has been submitted, to
prove the correctness or completeness of such
return."
It is clear on a plain natural construction of the language
of this provision that it empowers the Sales Tax Officer to
make a best judgment assessment only where one of two condi-
tions is satisfied:
(1) [1970] 1 S.C.R. 457.
238
either no return is submitted by the assessee or the return
submitted by him appears to the Sales Tax Officer to be
incorrect or incomplete. It is only on the existence of one
of these two conditions that the Sales Tax Officer gets the
jurisdiction to make a best judgment assessment. The ful-
filment of one of these two pre-requisites is, therefore, a
condition precedent to the assumption of jurisdiction by the
Sales Tax Officer to make assessment to the best of his
judgment. Now, where no return has been submitted by the
assessee, one of the two conditions necessary for the
applicability of section 17, subsection (3) being satisfied,
the Sales Tax Officer can, after making such inquiry as he
may consider necessary and after taking into account all
relevant materials gathered by him, proceed to make the best
judgment assessment and in such a case, he would be bound
under the proviso to give a reasonable opportunity of being
heard to the assessee. But in the other case, where a
return has been submitted by the assessee, the Sales Tax
Officer would first have to satisfy himself that the return
is incorrect or incomplete before he can proceed to make the
best judgment assessment. The decision making process in
such a case would really be in two stages, though the in-
quiry may be continuous and uninterrupted: the first stage
would be the reaching of satisfaction by the Sales Tax
Officer that the return is incorrect or incomplete and the
second stage would be. the making of the best judgment
assessment. The first part of the proviso which requires
that before taking action under sub-section (3) of section
17, the assessee should be given a reasonable opportunity of
being heard would obviously apply not only at the second
stage but also at the first stage of the inquiry, because
the best judgment assessment, which is the action under
section 17, sub-section (3), follows upon the inquiry
and the "reasonable opportunity of being heard" must extend
to the whole of the inquiry, including both stages. The
requirement of the first part of the proviso that the asses-
see should be given a "reasonable opportunity of being
heard" before making best judgment assessment merely em-
bodies the audi alterem partem rule and what is the content
of this opportunity would depend, as pointed out above, to a
great extent on the facts and circumstances of each case.
The question debated before us was whether this opportunity
of being heard granted under the first part of the proviso
included an opportunity to cross-examine Haji Usmankutty and
other wholesale dealers on the basis of whose books of
accounts the Sales Tax Officer disbelieved the account of
the assessee and came to the finding that the return submit-
ted by the assessee were incorrect and incomplete. But it
is not necessary for the purpose of the present appeals to
decide this question since we find that in any event the
assessee was entitled to this opportunity under the ’second
part of the proviso.
The second part of the proviso lays down that where a return
has been submitted, the assessee should be given a reasona-
ble opportunity to prove the correctness or completeness of
such return. This requirement obviously applies at the
first stage of the enquiry before the Sales Tax Officer
comes to the conclusion that the return submitted by the
assessee is incorrect or incomplete so as to warrant the
making of a best judgment assessment. The question is what
is the content
239
of this provision which imposes an obligation on the Sales
Tax Officer to give and confers a corresponding right on
the assessee to be afforded, a reasonable opportunity "to
prove the correctness or completeness of such return".
Now, obviously "to prove" means to establish the correctness
,or completeness of the return by any mode permissible under
law. The usual mode recognised by law for proving a fact is
by production of evidence and evidence includes oral evi-
dence of witnesses. The opportunity to prove the correct-
ness or completeness of the return would, therefore, neces-
sarily carry with it the right to examine witnesses and that
would include equally the right to Cross-examine witnesses
examined by the Sales Tax Officer. Here, in the present
case, the return filed by the assessee appeared to the Sales
Tax Officer to be incorrect or incomplete because certain
sales appearing in the books of Hazi Usmankutty and other
wholesale dealers were not shown in the book’s of account
of the assessee. The Sales Tax Officer relied on the evi-
dence furnished by the entries in the books of account of
Hazi Usmankutty and other wholesale dealers for the purpose
of coming to the conclusion that the return filed by the
assessee was incorrect or incomplete. Placed in these
circumstances, the assessee could prove the correctness and
completeness of his return only by showing that the entries
in the books of account of Hazi Usmankutty and other whole-
sale dealers were false, bogus or manipulated and that the
return submitted by the assessee should not be disbelieved
on the basis of such entries, and this obviously, the
assessee could not do, unless he was given an opportunity of
cross-examining Hazi Usmankutty and other wholesale dealers
with reference to their accounts. Since the evidentiary
material procured from or produced by Hazi Usmankutty and
other wholesale dealers was sought to be relied upon for
showing that the return submitted by the assessee was incor-
rect and incomplete, the assessee was entitled to have Hazi
Usmankutty and other wholesale dealers summoned as witnesses
for cross-examination. It can hardly be disputed that
cross-examination is one of the most efficacious methods of
establishing truth and exposing falsehood. Here, it was not
disputed on behalf of the Revenue that the assessee in both
cases applied to the Sales Tax Officer for summoning Hazi
Usmankutty and other wholesale dealers for cross-examina-
tion, but his application was turned down by the Sales Tax
Officer. This act of the Sales Tax Officer in refusing to
summon Hazi Usmankutty and other wholesale dealers for
cross-examination by the assessee clearly constituted in-
fraction of the right conferred on the assessee by the
second part of the proviso and that vitiated the orders of
assessment made against the assessee.
We do not wish to refer to the decisions of various High
Courts on this point Since our learned brother has dis-
cussed them in his judgment-. We are of the opinion that
the view taken by the Orissa High Court in Muralimohan
Prabhudayal v. State of Orissa(1) and the Kerala High Court
in M. Appukutty v. State of Kerala(2) and the present cases
represents the correct law on the subject. We accordingly
dismiss the appeals with no order as to costs.
(1) 26 S.T,C, 22. (2) 14 S.T.C, 489.
240
FAZAL ALl, J.--These appeals by special leave involve an
interesting question of law as to the interpretation of s.
17(3) of the Kerala General Sales Tax, 1963--hereinafter
referred to as ’the Act’--and the proviso thereof read with
r. 15 framed under the Act. The assessment years in question
are 1965-66, 1966-67 and 1967-68. in the case of the re-
spondent K.T. Shaduli in Civil Appeals Nos. 572-574 of 1972
and 1967-68 in the case of Nallakandy Yusuff in Civil
Appeal No. 575 of 1972. But both the cases involve an
identical question of law. In this view of the matter, we
propose to deal with all these appeals by one common judg-
ment.
The assessee in Civil Appeals Nos. 572-574 of 1972 filed
his sales-tax returns before the Sales Tax Officer who on an
examination of .the accounts found that the returns submit-
ted by the assessee were both incorrect and incomplete
inasmuch as certain entries in the books of account of Haji
P.K. Usmankutty revealed Certain transactions which were not
accounted for in the assessee’s book’s of account. The Sales
Tax Officer, after hearing the assessee, made an assessment
to the best of his judgment under s. 17(3) of the Act read
with r. 15 made under the Act. The Sales Tax Officer thus
rejected the accounts of the assessee as they did not re-
flect the goods said to have been purchased by Haji P.K.
Usmankutty. The assessee sought an opportunity to cross-
examine Haji Usmankutty with respect to the correctness of
his accounts which were relied upon by the Sales Tax Offi-
cer, but this opportunity was refused to him by the Sales
Tax Officer as also the other appellate authorities. Simi-
larly in the case of the respondent Nallakandy Yusuff, in
Civil Appeal No. 575 of 1972, the return filed by the asses-
see was rejected by the Sales Tax Officer on the ground that
certain transactions shown in the accounts of some wholesale
dealers were not reflected in his books of account and the
opportunity asked for by the assessee for cross-examining
the said wholesale dealers was refused to him. The order of
the Sales Tax Officer was confirmed by the Appellate Author-
ities under the Act. Both the assessees then filed a revi-
sion application before the High Court which allowed the
application of the assessees, quashed the orders of the
Sales Tax Authorities and remanded the cases to the Sales
Tax Officer for giving an opportunity to the respondents
for cross-examining the wholesale dealers concerned and
then making assessments in accordance with the law. The
State having obtained special leave from this Court hence
these appeals before us.
The short question that fell for determination before
the High Court was, whether under the provisions of the Act
the opportunity of being heard which was to be given to the
assessees, would include within its sweep the right of
cross-examination of a third party whose accounts were the
basis of the best judgment assessments made by the Sales Tax
Officer and the examination of which later on showed that
the returns filed by the assessees were incorrect and incom-
plete. The High Court, on a consideration of s. 17(3) and
the Rules made under the Act came to the conclusion that the
assessees were entitled to a fair hearing and the opportuni-
ty of being heard could not be said to be complete unless
in the circumstances of these cases the as-
241
sessees were allowed to cross-examine Haji P.K. Usmankutty
and other wholesale dealers on whose accounts reliance was
placed by the Sales Tax Authorities.
A provision of law authorising the Taxing Authorities to
make a best judgment assessment in default of the assessee
complying with the legal requirements is not a new one, but
existed in s. 23(4) of the Income-tax Act, 1922 as amended
by the Indian Income-tax (Amendment) Act, 1939, the relevant
part of which runs thus:
If any person fails to make the return
required by any notice given under sub-section
(2) of section 22 and has not made a return or
a revised return under sub-section (3 ) of
the same section or fails t6 comply with all
the terms of a notice issued under sub-section
(4) of the same section or, having made a
return, fails to comply with all the terms of
a notice issued under sub-section (2) of this
section, the Income-tax Officer shall make.
the assessment to the best of his judgment and
determine the sum payable by the assessee on
the basis of such assessment and, in the case
of a firm, may refuse to register it or may
cancel its registration if it is already
registered:
Provided x x x x"
Describing the nature and character of a best judgment
assessment, Lord RuSsell of Killowen in delivering the
judgment of the Privy Council in Income-tax Commissioner
v. Badridas Ramrai Shop, Akola,(1) observed as follows:
"The Officer is to make an assessment to
the best of his judgment against a person who
is in default as regards supplying informa-
tion. He must not act dishonestly or _vindic-
tively or capriciously, because he must exer-
cise 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 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 guess-work."
These observations were quoted with approval by this Court
in Raghbar Mandal Harihar Mandal v. State of Bihar(2).
Mr. Gupte learned counsel for the appellant submitted that
the main object of the best judgment assessment was to pena-
lise the
(1) (1937) 64 IA. 102, 114-115.
(2) 8 S.T.C.770.
242
assessee for either not filing a return or for filing a
return which was defective and if at this stage he is given
a full-fledged ’hearing including the right to summon and
cross-examine witnesses, then this would amount to condoning
the default committed by the assessee. It was also argued
that as the Income-tax authorities are not bound by the
technical rules of evidence, the assessee cannot claim
cross-examination of witnesses as a matter of right. In
support of his submission he relied upon a decision of this
Court in Dhakeswari Cotton Mills Ltd v. Commissioner of
Income Tax, West Bengal(1), where agreeing with a similar
argument put forward by the Solicitor-General in that
case this Court observed thus:
"As regards the second contention, we are
in entire agreement with the learned Solici-
tor-General when he say’s that the Income-
tax Officer is not lettered by technical rules
of evidence and pleadings, and that he is
entitled to action material which may not be
accepted as evidence in a Court of law, but
there the agreement ends, because it is equal-
ly clear that in making the assessment under
sub-section (3) of section 23 of the Act,
the Income-tax Officer is not entitled to make
a pure guess and make an assessment without
reference to any evidence or any material at
all. There must be something more than bare
suspicion to support the assessment under
section 23 (3)."
There can be no doubt that the principle that as the tax
proceedings are of quasi-judicial nature, the Sales Tax
authorities are not strictly bound by the rules of evidence
which means that what the authorities have to consider is
merely the probative value of the materials produced before
them. This is quite different from saying that even the
rules of natural justice do not apply to such proceedings so
as to deny the right of cross-examination to the assessee
where the circumstances clearly justify such a course and
form one of the integral parts of the materials on the basis
of which the order by the Taxing Authorities can be passed.
The admissibility of a document or a material in evidence is
quite different from the value which the authority would
attach to such material. The Privy Council has held that
the Taxing Authorities can even base their conclusion on
their private opinion or assessment provided the same is
fully disclosed to the assessee and he is given an opportu-
nity to rebut the same. In these circumstances, therefore,
we do not agree with Mr. Gupte that merely because the
technical rules of evidence do not strictly apply, the right
of crossexamination cannot be demanded by the assessee in a
proper case governed by a particular statute.
This Court further fully approved of the four proposi-
tions laid down by the Lahore High Court in Seth Gurmukh
Singh v. Commissioner of Income-tax, Punjab(2). This Court
was of the opinion that the Taxing Authorities had violated
certain fundamental rules of
(1) [1955] 1 S.C.R. 941.
(2) (1944) 12 I.T.R. 393.
243
natural justice in that they did not disclose to the asses-
see the information supplied to it by the departmental
representatives. This case was relied upon by this Court in
a later decision in Raghubar Mandal Harihar Mandal’s case
(supra) where it reiterated the decision of this Court in
Dhakeswari Cotton Mills Ltd.’s case (supra), and while
further endorsing the decision of the Lahore High Court in
Seth Gurmukh Singh’s case(") pointed out the rules laid
down by the Lahore High Court for proceeding under sub-s.
(3) of s. 23 of the Income-tax Act and observed as follows:
"The rules laid down in that decision were
these: (1 ) While proceeding under sub-section
(3) of section 23 of the Income-tax Act, the
Income-tax Officer is not bound to rely on
such evidence produced by the assessee as he
considers to be false; (2) if he proposes to
make an estimate in disregard of the evidence,
oral or documentary, led by the assessee, he
should in fairness disclose to the assessee
the material on which he is going to found
that estimate; (3) he is not however debarred
from relying on private sources of informa-
tion, which sources he may not disclose to the
assessee at all; and (4) in case he proposes
to use against the assessee the result of any
private inquiries made by him, he must commu-
nicate to the assessee the substance of the
information so proposed to be utilised to such
an extent as to put the assessee in possession
of full particulars of the case he is expected
to meet and should further give him ample
opportunity to meet it, if possible."
It will thus be noticed that this Court clearly laid down
that while the Income-tax Officer was not debarred from
relying on any material against the assessee, justice and
fair-play demanded that the sources of information relied
upon by the Income-tax Officer must be disclosed to the
assessee so that he is in a position to rebut the same and
an opportunity should be given to the assessee to meet the
effect the aforesaid information.
We, however, find that so far as the present appeals are
concerned, they are governed by the provisions of the Kerala
General Sales Tax Act, the provisions of which are not quite
identical with the provisions of the Income-tax Act and the
Kerala Act appears to have fully incorporated all the essen-
tial principles of natural justice in s. 17(3) of the Act.
In these circumstances, therefore, the answer to the ques-
tion posed in these appeals would have to turn upon the
scope, interpretation and content of s. 17(3) of the Act,
the proviso thereto and r. 15 framed under the Act. It is
true that the words "opportunity of being heard" are of
very wide amplitude but in the context the sales-tax pro-
ceedings which are quaSi-judicial proceedings all that the
Court has to see is whether the assessee has been given
a fair hearing. Whether the hearing would extend to the
right of demanding cross-examination of witnesses or not
would naturally depend upon the nature of the materials
relied upon by the sales-tax
244
authorities, the manner in which the assessee can rebut
those materials and the facts and circumstances of each
case. It is .difficult to lay down any hard and fast rule
of universal application. We would, therefore, first try to
interpret the ambit of s. 17(3) and the proviso thereof in
order to find out whether a right of cross-examination of
witnesses whose accounts formed the basis of best judgment
assessment is conferred on the assessee either expressly or
by necessary intendment. Section 17(3) of the Act runs
thus:
"If no return is submitted by the dealer
under subsection (1) Within the prescribed
period, or if the return submitted by him
appears to the assessing authority to be
incorrect or incomplete, the assessing author-
ity shall, after making such enquiry as it may
consider necessary and after taking into
account all relevant materials gathered by it,
assess the dealer to the best of its judgment:
Provided that before taking action under
this sub-section the dealer shall be given a
reasonable opportunity of being heard and,
where a return has been submitted, to prove
the correctness or completeness of such re-
turn."
An analysis of this provision would show that this sub-
section contemplates two contingencies--(1) where the asses-
see does not file his return at all; and (2) where the
assessee files his return which, however, is found to be
incorrect or incomplete by the assessing authority. The
sub-section further enjoins on the assessing authority a
duty to consider the necessary materials and make an enquiry
before coming to its conclusion. The proviso expressly
requires the assessing authority to give to the assessee a
reasonable opportunity of being heard even if the assessee
had committed default in not filing the return. Since the
statute itself contemplates that the assessee should be
given a reasonable opportunity of being heard, we are
not in a position to agree with the contention of the
learned counsel for the appellant that if such an opportuni-
ty is given, it will amount to condonation of default of the
assessee. The tax proceedings are no doubt quasi-judicial
proceedings and the Sales-tax authorities are not bound
strictly by the rules of evidence, nevertheless the authori-
ties must base their order on materials which are known to
the assessee and after he is given a chance to rebut the
same. This principle of natural justice which has been
reiterated by this Court in the decisions cited above has
been clearly incorporated in s. 17 (3) of the Act as men-
tioned above. The statute does not stop here, but the
second part of the proviso confers express benefit on the
assessee for giving him an opportunity not only of being
heard but also of proving the correctness or completeness of
such return. In view of this provision it can hardly be
argued with any show of force that if the assessee desires
the wholesale dealers whose accounts are used against him to
be cross-examined in order to prove that his return is not
incorrect or incomplete he should not be conceded this
opportunity. Apart from anything else, the second part of
the proviso itself confers this specific right on the asses-
see. It is difficult to conceive as to how the
245
assessees would be able to disprove the correctness of the
accounts of Haji P.K. Usmankutty or the other wholesale
dealers, unless he is given a chance to cross-examine them
with respect to the credibility of the accounts maintained
by them. It is quite possible that the wholesale dealers
may have mentioned certain transactions in their books of
account either to embarrass the assessees or due to animus
or business rivalry or such other reasons which can only be
established when the persons who are responsible for keeping
the accounts are brought before the authorities and allowed
to be croSs-examined by the assessees. This does not mean
that the assessing authority is bound to examine the whole-
sale dealers as witnesses in presence of the assessees: it
is sufficient if such wholesale dealers are merely ten-
dered by the sales-tax authorities for cross-examination by
the assessees for whatever worth it is. In view of the
express provision of the second part of the proviso, we are
fully satisfied that the respondents had the undoubted right
to crosS-examine the wholesale dealers on the basis of whose
accounts the returns of the assessees were held to be incor-
rect and incomplete. We are fortified in our view by a
decision of this Court in C. Vasantilal and Co. v. Commis-
sioner of Income-tax, Bombay City(1), where this Court
observed as follows:
"The Income-tax Officer is not bound by any
technical rules of the law of evidence. It is
open to him to collect materials to facilitate
assessment even by private enquiry.But if he
desires to use the material so collected, the
assessee must be informed of the material and
must be given an adequate opportunity of
explaining it."
It will be noticed that if the Sales-tax authorities refused
the prayer of the assessees to cross-examine the wholesale
dealers, then such refusal would not amount to an adequate
opportunity of explaining the material collected by the
assessing authority.
Mr. Gupte learned counsel for the appellant relied on a
decision of the Gujarat High Court in Jayantilal Thakordas
v. Stale of Gujarat(2). In the first place the Gujarat High
Court in that case was concerned with the Bombay Sales Tax
Act which did not contain any .express provision like the
one which is to be found in the second part of the proviso
to s.17(3) of the Kerala General Sales Tax Act and, there-
fore, any decision given by the Gujarat High Court would
have no application to the facts of the present appeals. In
Jayantilal Thakordas’s case (supra) the Court was merely
called upon to interpret the import of the words "reasonable
opportunity of being heard" and the Judges held that as
ample opportunity was given to the assessee therefore
concerned to show cause why the sales said to have been
suppressed
(1) (1962) 45 I.T.R. 206, 209.
(2) 23 S.T.C. 11.
(3) 14 S.T.C. 489.
246
by him should not be included in his turnover, the rules of
natural justice were duly complied with. The Court further
pointed out that the sales-tax authorities were not strictly
bound by the rules of evidence nor did the Act require the
assessing authorities to do more than what they had done
in that case. The Gujarat High Court seems to have dissent-
ed from the view taken by a single Judge of the Kerala High
Court in M. Appukutty v. State of Kerala(3). Finally, it
does not appear from the facts mentioned in the judgment of
the Gujarat High Court that the assessee had at any time
made a specific prayer for cross-examining the representa-
tives of the firm of M/s A. Alibhai & Co. In these circum-
stances, therefore, Jayantilal Thakordas’s case (supra)
does not appear to be of any assistance to the appellant. We
might, however, state that we are not prepared to go to the
extent to which the Gujarat High Court has gone even in
interpreting the content and ambit of an opportunity given
to the assessee of being heard so as to completely exclude
the right of cross-examination. We have already held that
whether the reasonable opportunity would extend to such a
right would depend upon the facts and circumstances of each
case.
We feel that the correct law on the subject has been
laid down by a Division Bench of the Orissa High Court in
Muralimohan Prabhudayal v. State 07 Orissa(1) where the High
Court, while adumbrating the 4th proposition, namely, as to
how the assessee was to rebut the.., material used by the
Department against him, observed as follows:
"It is the amplitude and ambit of this
fourth proposition which needs examination.
There cannot be any controversy that the
assessee can adduce independent evidence of
his own to disprove the particulars proposed
to be used against him ........ A third
party’s accounts are proposed to be used
against the assessee and if such accounts are
relied on, the assessee’s accounts are to be
discarded .......... If the assessee gets an
opportunity by cross-examination, he can
establish that the accounts of the third party
are wrong and manipulated to suit the interest
of the third party, or that they were intended
to be adversely used against the assessee
with whom the third party had inimical rela-
tionship. It is difficult to accept the
contention in such a case, that the ample and
reasonable opportunity to be given to the
assessee would not include within its sweep
the right of cross-examination."
The High Court in the present appeals has relied on its
earlier decision in Appukutty v. State of Kerala (supra)
where a single Judge of the Kerala High Court pointed out
that the fact that a third party maintaining some secret
accounts had made certain entries in his accounts which may
connect the assessee will not give jurisdiction to the
assessing authority to use that information unless the
assessee has been
(1) 26 S.T.C. 22.
247
given an opportunity to Cross-examine him effectively.. As
no such opportunity was given, the Court held that the
proceedings stood vitiated. In our opinion, the decision of
the Kerala High Court was substantially correct and in
consonance with the language of s. 17(3) and the proviso
thereto.
Other cases have also been cited before us which, howev-
er, are based on the peculiar language of the statutes which
the Courts were construing and which are different from the
language used in the Act.
Finally, apart from the provisions of s. 17(3.) and the
proviso thereto, the rules further reiterate what the provi-
so contemplates. Rule 15 which deals with provisional as-
sessment where a return is incorrect and incomplete runs
thus:
"If the return submitted by the dealer
appears to the assessing authority to be
incorrect or incomplete, the assessing author-
ity shall, after issuing a notice to the
dealer calling upon him to produce his ac-
counts to prove the correctness or complete-
ness of his return at time and place to be
specified in the notice and after scrutiny of
all the accounts if any, produced by the
dealer and after taking into account all
relevant materials gathered by it determine
the turnover of the dealer to the best of its
judgment, and fix provisionally the annual tax
or taxes payable at the rate or rates speci-
fied in Section or notified under Section 10.
Before determining the turnover under this
rule, the dealer shall be given a reasonable
opportunity of being heard and also to prove
the correctness or completeness of the return
submitted by him."
The Rule clearly shows that where the return of the assessee
is incorrect or incomplete he must be called upon to prove
the correctness or completeness of the same. It also en-
joins that a reasonable opportunity of being heard should be
given to the assessee to prove the correctness or complete-
ness of the return submitted by him. Thus the requirement
of the second part of the proviso to s. 17(3) is reiterated
in r. 15. We understand that such a provision in the Act is
peculiar to the Kerala Act and is not to be found in other
sales-tax statutes which provide for best judgment assess-
ment. Thus on a true interpretation of s. 17(3), the
proviso thereto and r. 15, the inescapable conclusion would
be that the assessee has been given stationary right to
prove the correctness of his return by showing that the
materials on the basis of which his return is found to be
incorrect or incomplete are wrong and if for this purpose
the assessee makes an expire prayer for cross-examining
the wholesale dealers whose accounts formed the sheet-
anchor of the notice issued to the assesee, he is undoubted-
ly entitled to cross-examine such wholesale dealers. In
view of the language in which the Rules are couched it seems
to us that a determinative issue arises in this case--the
Department taking the stand that the returns filed by
the assessees are incorrect and incomplete, whereas the
assessees contend that the
17--240SCI/77
248
returns are correct and that the accounts of the wholesale
dealers which formed the basis of the information of the
Sales-tax Authorities were wrong and incorrect. Such an
issue can only be determined after examination of’ the
accounts of both the parties and after affording the asses-
sees the right to cross-examine the wholesale dealers con-
cerned, particularly when the assessee makes a specific
prayer to this effect.
For these reasons, therefore, we are convinced that the
judgment passed by the High Court in all these appeals is
correct in law and the High Court has rightly decided the
issues involved. The appeals accordingly fail and are
dismissed with no order as to costs.
P.B.R. Appeals dismissed.
249