Case: State Of Kerala Vs. K.T. Shaduli Yusuff Etc

8. The assessee in Civil Appeals Nos. 572-574 of 1972 filed his sales-tax returns before the STO who on an examination of the accounts found that the returns submitted by the assessee were both incorrect and incomplete inasmuch as certain entries in the books of account of Haji P. K. Usmankutty revealed certain transaction which were not accepted for in the assessees books of account. The STO, after hearing the assessee, made in assessment to the best of his judgment under s. 17(3) of the Act read with r. 15 made under the Act. The STO thus rejected the accounts of the assessee as they did not reflect 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 lied upon by the STO, but this opportunity was refused to him by the STO as also the other appellate authorities. Similarly in the case of the respondent Nallakandy Yusuff, in Civil Appeal No. 575 of 1972, the return filed by the assessee was rejected by the STO on the ground that certain transaction 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 STO was confirmed by the Appellate Authorities under the Act. Both the assessee then filed a revision application before the High Court which allowed the application of the assessee, quashed the order of the ST Authorities and remanded the cases to the STO for giving an opportunity to the respondents for cross-examining the wholesale dealers concerned and then making assessment in accordance with the law. The State having obtained special leave from this Court-hence these appeals before us.

Court's reasoning:
There can be no doubt that the principle that as the tax proceedings are of quasi-judicial nature, the ST 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 opportunity 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 cross-examination cannot apply, the right of cross-examination cannot be demanded by the assessee in a proper case governed by a particular statute13. We, however, find that so far as the present appeals are concerned, they are governed by the provisions of the Kerala General ST Act, the provisions of which are not quite identical with the provisions of the IT Act and the Kerala Act appears to have fully incorporated al the essential principles of natural justice in s. 17(3) of the Act. In these circumstances, therefore, the answer to the question 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 of the sales-tax proceedings which are quasi judicial proceedings all that the Court has to se 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 the sales-tax 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 lard 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 intendmentFinally 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 representatives of the circumstances, therefore, Jayantilal Thakordas vs. State of Gujarat 23 STC 11   (Guj) case does not appear to be of any assistance to the appellant. We might, however, state that we are not peppered to go to the extent to which the Gujarat High Court has gone even in interpretation 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 caseThe High Court in the present appeals has relied on its earlier decision in M. Appukutty vs. State of Kerala 14 (STC) 489 (Ker) where in single Judge of the Kerala High Court pointed out that the fact that a third party maintaining some secret account 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 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 theretoThe rules 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 that a reasonable opportunity of being heard should be given to the assessee to prove the correctness or completeness 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 assessment. 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 a statutory 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 express prayer for cross-examining the wholesale dealers whose accounts formed the sheet-anchor of the notice issued to the assessee, he is undoubtedly 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 assessee are incorrect and incomplete, whereas the assessees contend that their returns are correct and that the accounts of the wholesale dealers which formed the basis of the information of the ST Authorities were wrong and incorrect. Such an issue can only he determined after examination of the accounts of both the parties and after affording the assessees the right to cross-examine the wholesale dealers concerned, particularly when the assessee makes a specific prayer to this effectIt is clear on plain natural construction of the language of this provision that it empowers the STO to make a best judgment assessment only where one of the two conditions is satisfied, either no return is submitted by the assessee or the return submitted by him appears to the STO to being correct or incomplete. It is only on the existence of one of these two conditions that the STO gets the jurisdiction to make a best judgment assessment. The fulfilment of one of these twos is, therefore, a condition precedent to the assumption of jurisdiction by the STO to make assessment to the best of his judgment. Now where no return has been submitted by the assessee, one of the conditions necessary for the applicability of s. 17,. (3) being satisfied, the STO 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 STO 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 inquiry may be continuous and uninterrupted : the firs stage would be the reaching of satisfaction by the STO 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. (3) of s. 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 s. 17,. (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 assessee should be given a "reasonable opportunity of being heard" before making best judgment assessment merely embodies the audi alteram 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 toe Haji Usmankutty and other wholesale dealers on the basis of whose books of accounts the STO disbelieved the account of the assessee and came to the finding that the return submitted by the assessee were incorrect an complete. 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 proviso5. The second part of the proviso to s. 17(3) of the Act lays down that where a return has been submitted, the assessee should be given a reasonable opportunity to prove the correctness or completeness of such return. This requirement obviously applies at the first stage of the enquiry before the TO 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 of this provision which imposes an obligation on the STO to give and confer 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 facts is by production of evidence and evidence includes oral evidence of witnesses. The opportunity to prove the correctness or completeness of the return would therefore, necessarily carrying with it the right to examine witnesses and that would include equally the right toe witnesses examined by the STO. Here in the present case, the return filed by the assessee appeared to the STO to the incorrect or incomplete because certain sales appearing in the books of Hazi Usmankutty and other wholesale dealers were not shown in the books of account of the assessee. The STO relied on the evidence 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 complete. 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 wholesale 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 ofg Hazi Usmankutty and other wholesale dealers with reference to their accounts. Since the evidentially 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 incorrect and incomplete, the assessee was entitled to an opportunity to have Hazi Usmankutty and other wholesale dealers summoned as witnesses forn 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 STO for summing Hazi Usmankutty and other wholesale dealer for, but his application was turned down by the STO. This act of the STO in refusing to summon Hazi Usmankutty and other wholesale dealers forn by the assessee clearly constituted infraction of the right conferred on the assessee by the second part of the proviso and that vitiated the orders of assessment made against the assessee6. We do not wish to refer to the decisions of various High Court on this point since our learned brother has discussed them in his judgment. We are of the opinion that the view taken by the Orissa High Court in Murlimohan Prabhudayal vs. State of Orissa 26 STC 22   (Ori) and the present cases represents the correct law on the subject