IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE THE CHIEF JUSTICE MR.H.L.DATTU & THE HONOURABLE MR. JUSTICE A.K.BASHEER THURSDAY, THE 17TH JULY 2008 / 26TH ASHADHA 1930 S.T.Rev..No. 262 of 2004 --------------- ------------------------- ORDER DATED 7.10.2002 IN TA.248/2001 OF THE KERALA SALES TAX APPELLATE TRIBUNAL, THIRUVANANTHAPURAM .................... PETITIONER/APPELLANT/ASSESSEE ---------------------------------------------------- A.NANTHI, PROPRIETOR, MARBLE ROCKS, ENCHAKKAL, THIRUVANANTHAPURAM. BY ADV. SRI.JOSE JOSEPH RESPONDENT/RESPONDENT/REVENUE: ---------------------------------------------------------- STATE OF KERALA. BY SR.GOVERNMENT PLEADER SRI.MUHAMMED RAFIQ THIS SALES TAX REVISION HAVING COME UP FOR ADMISSION ON 17/07/2008, THE COURT ON THE SAME DAY PASSED THE FOLLOWING: H.L.DATTU, C.J. & A.K.BASHEER, J. ------------------------------------------ S.T.Rev.No.262 of 2004 ------------------------------------------ Dated, this the 17th day of July, 2008 ORDER H.L.Dattu, C.J. This Sales Tax Revision pertains to the assessment year 1993-94. 2. The assessee is a dealer registered both under the provisions of the Kerala General Sales Tax Act, 1963 ('the KGST Act' for short) and the Central Sales Tax Act, 1956 ('the CST Act' for short). The assessee is doing business in marbles, granites, etc. 3. The assessee's business premises was inspected by the Intelligence Officer of the Department on 3.12.1993. He had noticed certain defects in the books of accounts maintained by the dealer. He had prepared a mahazar. After receipt of the copy of the mahazar, the assessee had filed his reply dated 4.12.1993. In the said reply it is stated as under: “On further verification of the SIR it is seen that you have recorded the stock of items measuring less than One Square Foot. We never include such items in stock. When large slabs are cut to sizes small pieces result from such cutting and we record these items as breakages and deduct this from stock. These small pieces are cut to tiles of smaller sizes measuring 12 x 6 inches or 9 x 6 inches, etc. These items do not have much demand. At times we get enquiries and we sell it at reduced rates. S.T.Rev.No.262 of 2004 2 At the time of inspection you have recorded these items as forming part of regular stock. But in our records these are counted as wastage and hence there could arise difference in stock. It is requested that items measuring less than One Square Foot may be deleted from the stock recorded by you and these may be considered as broken items.” 4. The Sales Tax Intelligence Officer had issued a notice under Section 45A of the KGST Act, inter alia, directing the petitioner to show cause, why penalty proceedings should not be initiated and completed based on the shop inspection said to have been done by the Intelligence Officer on 3.12.1993. After receipt of the said notice, the assessee had filed his detailed reply, by his reply letter dated 27.12.1995. After receipt of the said reply, we are informed by Sri. Jose Joseph, the learned counsel appearing for the assessee, that no penalty order has been passed by the Sales Tax Intelligence Officer. 5. The assessee had filed his annual returns before the assessing authority for the assessment year 1993-94. In view of the shop inspection report dated 3.12.1993, the assessing authority had issued a pre-assessment notice dated 27.2.1998, proposing to reject the books of accounts and the returns filed by the assessee and to complete the best S.T.Rev.No.262 of 2004 3 judgment assessment. After receipt of the said notice the assessee had filed his detailed reply dated 28.3.1998 and in that, the assessee has stated as under: “The proposals contained in the above notice are against the law and facts of the case and hence are objected. The rejection of accounts and estimated addition of 50% of taxable turnover is based on an inspection conducted at my business premises on 3.12.1993. The Intelligence Officer has issued me notice No.169/3-1-1994 for which I gave a detailed reply pointing out in detail the flaws those crept in in ascertaining the stock. For about two years there was no response from the Intelligence Officer. Another notice u/s 45A No.169/3-11-95 was sent to me for which also I gave a detailed reply. There was no response from the Intelligence Officer to this reply which could be taken only as an acceptance of the mistakes on the part of the department in conducting the stock verification at the time of inspection. As an assessing authority you are now relying on records which were not sufficient enough to arrive at a conclusion as to suppression of sales on my part. I am not reiterating points again in this letter regarding the defects in stock verification, but am enclosing copies of my earlier two replies to the Intelligence Officer, S.T.Rev.No.262 of 2004 4 for your ready reference. The replies to the notices of the Intelligence Officer may be read as part of my reply to your notice u/s.17(3). You may go through the explanations in those letters and make an independent decision in this regard.” 6. After receipt of the aforesaid reply, the Additional Sales Tax Officer III, 3rd Circle, Thiruvananthapuram has passed the best judgment assessment and while doing so, the assessing authority has merely relied on the shop inspection report dated 3.12.1993 and has quantified the tax liability by making an addition of 50% to the declared taxable turnover. 7. The order passed by the assessing authority is accepted by both the first appellate authority and the Tribunal. That is how the assessee is before us in this tax revision case. 8. The assessee has framed the following questions of law for our consideration and decision. They are as under: “i. Whether the 0rder of the Tribunal affirming the assessment made on best of judgment basis without any materials warranting rejection of accounts is legal and sustainable? S.T.Rev.No.262 of 2004 5 ii. Where it is settled position of law that penalty proceedings and assessment proceedings are distinct and different and even the findings in penalty proceeding are not conclusive in assessment proceedings, the Tribunal is right in accepting the findings of the Authorities below, solely on the basis of the SIR and notice proposing to impose penalty, to the effect that the stock variation pointed out actually exist? iii. Whether the Tribunal is correct in proceeding as if the SIR and mere issuance of a notice proposing imposition of penalty are conclusive materials sufficient for rejection of books of accounts and return?” 9. Sri.Jose Joseph, learned counsel appearing for the assessee, would submit that though the Sales Tax Intelligence Officer, Squad No.1, Kottayam and the Sales Tax Intelligence Officer, Squad No.1, Thiruvananthapuram had initiated proceedings against the petitioner under KGST Act pursuant to the shop inspection conducted on 3.12.1993, they have not passed any order after considering the reply filed by the assessee. That only means they have dropped all proceedings initiated against the assessee after accepting the explanation offered by the assessee. S.T.Rev.No.262 of 2004 6 10. Learned counsel would further submit that though the same was brought to the notice of the assessing authority, still, the assessing authority relying on the shop inspection report has proceeded to complete the best judgment assessment. Therefore, the best judgment assessment passed by the assessing authority is not only illegal but also irregular. 11. For rejecting the returns filed by the assessee, there must be a basis. It could be the shop inspection conducted or any other information received either from the Intelligence Officer or from the check post authorities or from any other authority under the Act or non-production of the books of accounts etc, maintained in the course of the business. In the instant case, the assessing authority has proceeded to reject the return filed by the assessee only on the ground that there was a shop inspection conducted by the Intelligence Officer, Squad No.1, Kottayam on 3.12.1993. Though proceedings were initiated after the shop inspection, for imposing penalty under Section 45A of the KGST Act, the Sales Tax Intelligence Officer, Thiruvananthapuram has not completed the proceedings, since he has accepted the explanation offered by the petitioner/assessee. If this is the factual matrix, in our opinion, the assessing authority could not have rejected the returns filed by the assessee S.T.Rev.No.262 of 2004 7 and thereafter could not have proceeded for best judgment assessment. The best judgment order so passed, in our considered opinion, is not only illegal but also improper. In view of the above, we cannot sustain the orders passed by the assessing authority for the assessment year in question and also the orders passed by the first appellate authority and the Tribunal. Therefore, all the orders passed by the authorities under the Act and the Tribunal are set aside and the matter is remanded back to the assessing authority to redo the matter in accordance with law, in the light of the observations made by us in the course of our order. Ordered accordingly. (H.L.DATTU) CHIEF JUSTICE (A.K.BASHEER) JUDGE vns/dk.