Case: The Commissioner Of Sales Tax, U.P Vs. M/S. Bhagwan Industries (P) Ltd. Lucknow

2. The matter relates to the assessment year 1957-58. The respondent assessee, Bhagwan Industries (P) Ltd., carries on the business of selling atta, maida and sooji. Its business comprises various units including Venkateshwar Flour Mills, Lucknow. It was assessed on December 26, 1958 for the purpose of sales tax for the year 1957-58 under rule 41 (5) of the U. P. Sales Tax Rules. The estimated turnover was determined to be Rs. 46,00,000, out of which the net turnover of Venkateshwar Flour Mills for atta, maida and sooji was estimated at Rs. 43,00,000. The assessment was ex parte and the respondent did not produce the account books.3. On account of food shortage the Government banned the purchase of wheat by rolling flour mills from the open market in August 1958. The Government further fixed quota of wheat to be supplied by the Central Government for each such mill on the basis of average of grinding done in the past three years. The quota of Venkateshwar Flour Mills was fixed at 1,192 tons, i.e. 32,000 maunds per month. With that quota the respondent in the assessment year 1958-59 disclosed a turnover of Rs. 75,70,840. On September 13, 1961 the Sales Tax Officer issued the following notice to theitems of sales and purchases made by you during the year 57-58 and 58-59 have come to my notice which need verification. You are required to appear before me on 27-9-61 with all your account books of the year 57-58 and 58-59 for the above mentioned verification.2. Please note that in case you fail to appear it will be presumed that the Sales and Purchases under reference are not entered in your books and action under Section 21 of the U. P. Sales Tax Act may be taken againstabove notice was served upon the respondent on September 19, 1961. Appearance was put in on behalf of the respondent in pursuance of the notice, but the account books were not produced. On March 13, 1962 the Sales Tax Officer sent the following memorandum to theBhagwan Industries Private Ltd., Aishbagh Lucknow deal in attas, maida and sooji which are manufactured by them in their rolling flour mills Shree Venkateshwar Flour Mills. They have been finally assessed for the years 1956-57 and 1957-58 on estimated turnover of Rs. 42,75,000/- (tax assessed Rs. 98,046-94) and Rs. 45,00,000 (tax assessed Rs. 72,875.00) respectively. Both these assessment orders were passed ex parte. The case of the year 1956-57 was reopened under S. 21 on the basis of certain information and an escaped turnover of Rs. 35,532/- was again assessed under section 21 of the U.P. Sales Tax Act. At the time of this assessment also the account books were not produced.2. The above mentioned firm is on record for the last many years. The sale of atta, maida and sooji was exempt under Section 4 of the U. P. Sales Tax Act upto 31-3-56 but was declared taxable with effect from 1-4-56. According to the assessment order of the year 1955-56 their sales of atta, maida and sooji had amounted to Rs. 58,18,425-15-6. The assessment case of the firm for the year 1958-59 has also been completed and during that year according to the account books the turnover of atta, maida and sooji had amounted to Rs. 75,70,840/-. Keeping in view the turnover according to the account books during the year 1955-56 and 1958-59 it appeared that the turnover determined in the ex parte orders of the years 1956-57 and 1957-58 was estimated at a lesser amount and thus some turnover escaped assessment during each of these two years. It was, therefore, considered necessary that the actual position be ascertained from the assessee. Some information received from other Sales Tax Officers regarding the sales made by this firm during the year 1957-58 also needed verification as was done in the year 1956-57 resulting in the assessment of the firm under Section 21 during that year.3. A notice was, therefore, issued to the firm on 13-9-61 for the production of the account books of the year 1957-58 but the firm failed to produce the account books. Again summons were issued under rule 78 of the U. P. Sales Tax Rules to Shri Kesheo Pd. Vaid, Managing Director of the firm requiring him to appear in person and to produce the account books of the firm for the year 1956-57 and 1957-58 but again neither the account books were produced nor Shri Vaid appeared in person. One application dated 27-12-1961 was, however, received from one of the directors of the firm informing that Shri Kesheo Pd. Vaid was out of station and requesting that the summons be issued in the name of the concern M/s. Bhagwan Industries Private Ltd. rather than in the name of any individual. This application has been kept on record.4. The hesitation on the part of the firm to produce the account books and even to disclose their actual turnover during the years 1956-57 and 1957-58 as per their account books confirms the presumption that they have been under-assessed for these two years. They are, however, given an opportunity to produce their account books of these years on 19-3-62 and disclose their sales of the above mentioned two years as per their account books failing which their case of the year 1957-58 will be reopened under S. 21 of the U. P. Sales Tax Act and penalty or prosecution proceedings as permissible under the U. P. Sales Tax Act shall be started for the year 1956-57 the assessment of which has already become time barred.5. A copy of this order shall be kept in the file of the dealer pertaining to the year 1956-57 and another shall be kept in the file pertaining to the yearmemorandum was received by the respondent on March 16, 1962, but the account books were not produced by the respondent. On March 24, 1962 the following notice was issued under Section 21 of the Act to the respondent and the same was served on March 26, 1962I have come to know that a part of your sale proceeds relating to the assessment year 57-58, has been left over from being taxed, therefore, I order that you should furnish supplementary statement of the sale-proceeds in the form attached herewith in respect of the year ending 31-3-58 within 15 days.2. You are further informed that you should be present at the Sales Tax Office, Golaganj on 27-4-62 at 10.30 Oclock, along with all the account books and your other business papers in respect of the year the sale proceeds whereof are mentioned by you in the above mentioned statement. If you fail to turn up on the fixed date tax shall be levied on you ex parte.On October 5, 1962 the accountant of the respondent made a statement before the Sales Tax Officer that the account books for the years 1956-57 and 1957-58 had been misplaced in the head office at Bombay and no books, registers or vouchers regarding the business of the years 1956-57 and 1957-58 were available. On March 19, 1963 the Sales Tax Officer made an assessment order under Section 21 of the Act for the assessment year 1957-58 estimating the total net turnover for that year at Rs. 84,50,000. The amount of escaped turnover was estimated to be Rs. 38,50,000.5. Appeal filed by the respondent against the above order was dismissed.6. The respondent then went up in revision and contended that there was no material on which the Sales Tax Officer could have reason to believe that turnover had escaped assessment. The proceedings initiated under Section 21 of the Act were said to be without jurisdiction. It was also urged on behalf of the respondent that notice issued on September 13, 1961 as also the memorandum dated March 13, 1962 constituted valid notices under S. 21 of the Act and as the assessment had not been completed within one year of the service of those notices, the assessments were barred by limitation. The Judge (Revisions) rejected these contentions. He was, however, of the opinion that the quantum of turnover needed redetermination. At the instance of the respondent, the Judge (Revisions) referred the questions reproduced at the commencement of this judgment to the High Court.7. The High Court while answering the first question in the negative, referred to the words "reason to believe" in Section 21 of the Act and observed that the reason must be that of an honest and reasonable person based upon reasonable grounds and that it was not sufficient that the Sales Tax Officer should have reason to suspect that the turnover had been under-assessed. In the opinion of the High Court, it could not be said that the Sales Tax Officer had reason to believe that the turnover had been under-assessed. As regards the second question, the High Court held that notice dated September 13, 1961 and the memorandum dated March 13, 1962 were of a preliminary nature and could not be considered to be notices under Section 21 of the Act.

Court's reasoning:
12. In the light of the view we have taken of the import of the words "reason to believe", we have no doubt that the assessing authority in the present case had valid grounds for initiating proceedings under Section 21 of the Act against the respondent. It would appear from the memorandum dated March 13, 1962 sent by the assessing authority that for the assessment year 1955-56 the sales of atta, maida and sooji of the respondent amounted to over rupees fiftyeight lakhs. Account books of the respondent also showed that during the year 1958-59 the turnover of the respondent for sale of atta, maida and sooji amounted to over rupees seventyfive lakhs. The assessing authority had also material with it to show that the quota of wheat for the respondent had been fixed in August 1958 on the basis of the average of grinding done in the past three years. There was also the additional fact that the respondent had in spite of repeated notices not produced its account books for the assessment year 1957-58. These facts, in our opinion, were germane to the formation of the belief of the assessing authority that part of the turnover of the respondent had escaped assessment to tax. It cannot be said that the above belief was not formed in good faith or was mere pretence for initiating action under Section 21 of the Act. The assessing authority in the circumstances, in our opinion, acted within the ambit of its powers in initiating proceedings under Section 21 of the Act.13. We are unable to accede to the contention of Mr. Karkhanis that as the assessment sought to be reopened was ex parte assessment under Rule 41 (5) of the Uttar Pradesh Sales Tax Rules, no proceedings in respect of that assessment can be initiated under Section 21 of the Act. There is nothing in that section to restrict its operation to assessments other than those which have been made ex parte under Rule 41 (5). The language of the section makes it plain that the assessing authority can take action if such authority has reason to believe that the whole or part of the turnover of a dealer has, for any reason, escaped assessment to tax for any year. To accede to the contention of Mr. Karkhanis would be tantamount to affording protection, so far as the operation of Section 21 is concerned, to dealers who avoid to put in appearance and produce their account books before the assessing authority. Such a construction is not only not warranted by the language of the section, it is manifestly unreasonable inasmuch as it puts a premium on contumacy.14.Mr. Karkhanis has also assailed the answer of the High Court to question No. (II) and has contended that the notice dated September 13, 1961 and the memorandum dated March 13, 1962 should be construed as notices under Section 21 of the Act.As the re-assessment was not completed within one year of the service of those notices, the re-assessment, according to the learned counsel, should be held to be barred by limitation. There is, in our opinion, no force in this contention. We agree with the High Court that the above notice and the memorandum were of a preliminary nature and did not constitute notices under Section 21 of the Act. All that was stated in the said notice and the memorandum was to call upon the respondent to produce account books. Threat was also held out that in case of non-compliance by the respondent proceedings would be taken under Section 21 of the Act. The above notice and the memorandum could not consequently be construed as notices under Section 21 of the Act.It was only on March 24, 1962 that notice under Section 21 of the Act was given to the respondent and the same was served on March 26, 1962. The assessment under Section 21 was made on March 19, 1963 which was admittedly within one year of the date of the service of the notice under Section 21 of the Act.