# STATE OF KERALA v. K. T. SHADULI YUSUFF ETC

- **Citation:** [1977] 3 S.C.R. 233
- **Court:** Supreme Court of India
- **Decided:** 1977-03-15
- **Case number:** Civil Appeal Nos. 572-574 and 575 of 1972
- **Bench:** P. N. Bhagwati, R. S. Sarkaria, S. MURTAZA FAZAL Au
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-kerala-v-k-t-shaduli-yusuff-etc-7202
- **Pages:** 16

## Headnote

B
Kera/a General Safes Tax Act, 1963-S. 17(3)-Scope of-Best judgment
.assessn1ent 1nade relying 011 entries in account books of other dealers-Assessee
-If e11titlcd to cross-exan1ine the dealers.
Natural iustice-Scope in tax matters-Best
Judgment assessnient
made
relyuig on en/lies in account books of other
dealers-Cross-examination
of
dealers-If par/ of pruiciples of 11atr11al Justice.
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
oroviso to the sub-section enacts that before taking action under the sub-~cc
iion, the dealer shall be given a reasonable
opportuniry of being heard aud,
Yihere a return has been submitted, to prove the correctness of completeness of
~uch return.
Relying on the evidence furnished by entries in the books of acc9unt
of
5ome olher dealers, the Sales Tax Officer disbelieved the assessee's
a~(..OUnts
and came to the conclusion that the return field by hin:1 was incorrect and incomplete and made a
best judgment
assessment
under
s. 17(3).
fhe
asses~ee's request to cross-examine the dealers in regard to the correctne:-.s of
their accounts was rejected by the Sales Tax Officer. Jn 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 thi.:
second part of the proviso to s. 17(3).
The Sales Tax Officer's
refi.,_~al to
summon the dealers for cross-examination by the· assessee constituted infraction
c
D
E
of ti1e right conferred on the assessee by the second part of the prov1su
and
F
that vitiated the order of assessment made against him. [239 F]
(I) The rule which requires an opportunity to be heard to be given ro a
person likely to be affected by a decision is not an inflexible rule having a fixed
connotation.
It has a variable co:i;iten_t ~epending on the. na.ture of the .inquiry,
the framework of the law under which 1t rs held, the const1tutton of the at~thority
hoiciing the inquiry, the nature and character of the right affected and tne coHsequences :flo\ving from the decision.
The rule of audi alterem partc1n does not
require in every case a specified procedure to be followed.
In a given case,
G
the rule of audi alterem parte1n may import a requirement that witnesses, wilo5e
statemenls are sought to be relied upon by the authority holding the inquiry,
should be permitted to be cross-examined by the party affected while in s0me
other cases it mav not. The procedure required to be adopted for giving an
opiJortunity to a person to be heard must necessarily depend on the facts and
circumstances of each case. rz37 B-Dl
(2) (a) It is only on the existence of one of two conditions, namely, that
H
n.J return is submitted by the assessee or the return submitted appears to be
incorrect ·or incomplete that the Sales Tax Officer gets the jurisdiction to make
a be'St judgn1ent assessment. [237 H]
A
B
c
D
E
.F
G
.II
234
SUPREME COURT REPORTS
(1977]3 S.C.R.
----
(b) The second. part of the proviso lays down that ~·here a return has been
. submitted, the assessee should be given a reasonable opportunity to pro,•e, the
correctness or completeness of such return. ..To prove"' means to establish the
correctness or. completeness of the return by any mode permissible under taw.
The Oppor_tun1ty to prove would, !herefore, necessarily carry with it the right to
CxaDllne w1~esses and that would include equally the right to cross-exarniae w~t
nesses examined by the Sales Tax Officer. [238 G-HJ
Jn the instant case, the assessee could prove the correctness and completnes~
of his return only by showing that the entries in the books of account of the
dealers on ·which the Sales ·Tax O_fficer relied, were false, bogus or manipulated
and that bis return should not be disbelieved on the basis of· such entries. 'I his

## Text

_Characters 0–39,745 of 47,965. This is a partial read: ask again with offset=39745 for what follows._

233
STATE OF KERALA
A
v.
K. T. SHADULI YUSUFF ETC.
March 15, 1977
[P. N. BHAGWATI, R. S. SARKARIA AND S. MURTAZA FAZAL Au, JJ.,]
B
Kera/a General Safes Tax Act, 1963-S. 17(3)-Scope of-Best judgment
.assessn1ent 1nade relying 011 entries in account books of other dealers-Assessee
-If e11titlcd to cross-exan1ine the dealers.
Natural iustice-Scope in tax matters-Best
Judgment assessnient
made
relyuig on en/lies in account books of other
dealers-Cross-examination
of
dealers-If par/ of pruiciples of 11atr11al Justice.
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
oroviso to the sub-section enacts that before taking action under the sub-~cc
iion, the dealer shall be given a reasonable
opportuniry of being heard aud,
Yihere a return has been submitted, to prove the correctness of completeness of
~uch return.
Relying on the evidence furnished by entries in the books of acc9unt
of
5ome olher dealers, the Sales Tax Officer disbelieved the assessee's
a~(..OUnts
and came to the conclusion that the return field by hin:1 was incorrect and incomplete and made a
best judgment
assessment
under
s. 17(3).
fhe
asses~ee's request to cross-examine the dealers in regard to the correctne:-.s of
their accounts was rejected by the Sales Tax Officer. Jn 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 thi.:
second part of the proviso to s. 17(3).
The Sales Tax Officer's
refi.,_~al to
summon the dealers for cross-examination by the· assessee constituted infraction
c
D
E
of ti1e right conferred on the assessee by the second part of the prov1su
and
F
that vitiated the order of assessment made against him. [239 F]
(I) The rule which requires an opportunity to be heard to be given ro a
person likely to be affected by a decision is not an inflexible rule having a fixed
connotation.
It has a variable co:i;iten_t ~epending on the. na.ture of the .inquiry,
the framework of the law under which 1t rs held, the const1tutton of the at~thority
hoiciing the inquiry, the nature and character of the right affected and tne coHsequences :flo\ving from the decision.
The rule of audi alterem partc1n does not
require in every case a specified procedure to be followed.
In a given case,
G
the rule of audi alterem parte1n may import a requirement that witnesses, wilo5e
statemenls are sought to be relied upon by the authority holding the inquiry,
should be permitted to be cross-examined by the party affected while in s0me
other cases it mav not. The procedure required to be adopted for giving an
opiJortunity to a person to be heard must necessarily depend on the facts and
circumstances of each case. rz37 B-Dl
(2) (a) It is only on the existence of one of two conditions, namely, that
H
n.J return is submitted by the assessee or the return submitted appears to be
incorrect ·or incomplete that the Sales Tax Officer gets the jurisdiction to make
a be'St judgn1ent assessment. [237 H]
A
B
c
D
E
.F
G
.II
234
SUPREME COURT REPORTS
(1977]3 S.C.R.
----
(b) The second. part of the proviso lays down that ~·here a return has been
. submitted, the assessee should be given a reasonable opportunity to pro,•e, the
correctness or completeness of such return. ..To prove"' means to establish the
correctness or. completeness of the return by any mode permissible under taw.
The Oppor_tun1ty to prove would, !herefore, necessarily carry with it the right to
CxaDllne w1~esses and that would include equally the right to cross-exarniae w~t
nesses examined by the Sales Tax Officer. [238 G-HJ
Jn the instant case, the assessee could prove the correctness and completnes~
of his return only by showing that the entries in the books of account of the
dealers on ·which the Sales ·Tax O_fficer relied, were false, bogus or manipulated
and that bis return should not be disbelieved on the basis of· such entries. 'I his
could not be done unless an "opportunity to: cross exan1ine the dealers was given.
[239 BJ
· ·
,
.-.I
.i.-turlimohan Prabhudayal v. State of Orissa~ 2~ S.T.C. 22 and 1.1. Appukutry
v. Stt:t_e of Kera/a~ 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 tl1e assc,,~e to prove the correctness of his return and the asses~ee \\'~J fntitled
to cross..examine the wholesale dealers, relying· on whose accounts the
Sales
Tax Officer 1nade a best judgment assessment. [247 E]
(1) Th: ,,_.ell-settled rules in regard to best judgment assessment
are (i)
The taxing authority must not act dishonestly 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 EJ
·
·
'ii) Although tax proceedings are quasi-judicial and tt..e-Salcs Tax Officer is_
noL bound strictly by rules of evidence, yet he must base his order on materials
known to the asse~see and after he has been given a chance to rebut the same.
[244 E)
.
(iii) Admissibilitv of a document or material in evidence is quite different
from the value \vhiCh the authority ·would attach to such materia1. 1'he tax
auttrority can even. base its conclusion on private .opi!1ion or asSessmcttt provided
the same is fu11y disclosed to the assessee and he ts given an opportunity to rebut
the same. [242 E]
lnconie-t.a:t ClJmmissioller v." Badridfis Ra111rai Shop, Al..ofa ! 1
1)37; 64 I.A.
102 114 115 and Dhakeswari Cotton !.-fills Ltd. v. Com1nissio11er of 111cometax,' Wesi Bengal, [1955] 1 S.C.R. 941 followed.
Uar;T1ubar 11.fandal Harihar Mandal v. State of Bihar 8 S.T.C. 770 and C~
Vasaniilal & Co. v. C.l.T. Bombay City 45 LT.R. 206 referred to.
Seth Gurmukh Singli v.
Com~issioner of Income-tax Punjab,
(1944] 12
J.T.R. 393 approved •
.,flJ The \\l"'rds "opportunity of being heard" ills. lil3) ace Of very wide
amPli~de.
A~i that the court has to see is whether the asses~ee had been gi".en ,
a fair hearing. \Vhether the hearing would extend to ttie r1gnt of demandLng
cross·examination oL witnesses or not, 'Y?uld depend upo!1 the. nature of the
matetials r\!lled uron by the tax autbonuc,,. the manner tn wh1cl\ the a<;Sessee
cars rebut those materials and the facts and circumstances of each case. [234
F-G]
KERALA v. K. T. SHADULI YUSUFF (Bhagwati, J.)
235
(b) The second part of the proviso confers benefit on the assessee 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
retu1n 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 DJ
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. 1244 Hl
Jayalllilal Thakordas v. State of Gujarat 23 S.T.C. 11 distinguished.
M. Appukutty v. State of Kerala, 14 S.T.C. 489 and Muralimohan Prabhudayal v. State of Orissa, 26 S.T.C. 22 approved.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 572-574 and
575 of 1972.
A
B
c
(Appeals by Special Leave from the Judgment and Order dated
D
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.
Pudissery for the appellant in all the appeals.
T. A. RamachRndran, 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 ri'se 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 572-57 4 of 1972 are concerned, it would be
sufficient to state briefly lhe following facfs as these are the only facts
necessary for appreciating the question of Jaw 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 opportunity to cross-examine Haji
Usmankutty in regard to the correctness of his accounts, but this
opportuntry wa:~ denied to him and the Sales Tax Officer proceeded
to make a best jud!lffient assessment under section 17, sub-section (3)
of the Kerala _General Sales Tax, 1963. The assessee appealed but
without success and this was followed by a revision application . to
E
F
G
H
A
B
c
D
E
F
G
H
236
SUPREME COURT REPORTS
[1977] 3 S.C.R.
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 l:o
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 assessmen\s according to
law after giving an opportunity to the assess·~e to cros_s-examine Haji
Usmankutty. The facts in Civil Appeal No. 575 of 1972 are almost
identical, save that instead of Haji Usmankl1tty, 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 Dhakes1\'ari Cotton Mills Ltd. v.
Commissioner of Income Tax,
West
Bengal(') that a taxing officer "is not fettered 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 rule's of natural justice are not a constant :
they are not absolute and rigid rules having uni versa! application. lt
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 Ru;sel 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 whh, and so forth.
Accordingly.
1 do not derive much assistance from the definitions of
natural justice which have been from time io time used, but.
whatever 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 principles
of
natural justice is the rule of audi alterem partem which requires that
(!) [1955] 1 S.C.R. 941.
(2) [1969] I S.C.R. 317.
(3) [1949] 1 AU. England Reports 108.
KERALA v. K. T. SHADULI YUSU).'F (Bhagwati, l.)
237
no man should be condemned unheard. It is indeed a requirement
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 poinied out by this Court in A. K. Kraz'pak and
Ors. v. Union of India,(') "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 Constitution, is dispensed not only by judicial or quasi
judicial authorities but also by authorities discharging administrative
functions.
This rule which requites an opportunity to be heard to
be given to a person likely to be affected by a decision is also, like
the g,,;ms 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 constitution of the authority holding the inquiry, the nature and character
of the rights affected and the consequences flowing 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 inquiry 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 has been
made on the assessee provides as follows :
"If no return is
submitted by the dealer
under subsection ( 1) within the prescribed period, or if th~ return
submitted by him appears to the assessing authority to· be
inco;rect or incoll!plete, . the assessing authority shall, after
makmg such enqmry as 1t 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 conditions is
satisfied :
(l) [19701 I S.C.R. 457.
A
B
c
D
E
G
H
A
B
c
D
E
G
H
238
SUPREME COURT REPORTS
[1977] 3 S.C.R.
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 fulfilment 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 con'sider
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 inquiry may be continuous and uninterrupted : the first stage would
be the reaching of satisfaction by the Sale's 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 1 7,
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 assessee should be given a
"reasonable opportunity of being heard" before making best judgment
assessment merely embodies the audi alterem partem rule and what is
the content of this opportunity would depend, as pointed out above,
to a great exte_nt 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 opportuuity to cross-examine Haji Usmankutty and other wholesale dealer's
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 submitted by the as'sessee 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 shonld 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
Sales Tax Officer comes to the conclusion that the return submitted by
the assessee i·s incorrect or incomplete so as to warrant the making
of a best judgment assessment.
The question is what is the content
XERALA v. K. T. SHADULI YUSUFF (Bhagwati, ].)
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 comrleteness of the return by any mode permissible
"Under law.
The usl.lai mode recognised by Jaw for proving a fact 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 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 books of account of the assessee. The Sales Tax Officer
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 a'ssessee
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 as·sessee 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 cros's-examining Hazi Usmaukutty 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 incorrect
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-examination, 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 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 assessee.
We do not wish to refer to the decisions of various High Courts
on this point since our learned brother has discussed
them in his
iu.dgment. Y1e are ~f the opinion that the view taken by the Orissa
Htgh Court m Muralimohan Prabhudayal v. State of Orissa(I) and
A
B
c
D
E
F
G
the Kerala High Court in M. Appukulty v. State of Kerala(2) and the
present cases represents the correct Jaw on the subject.
We accordingly dismiss the appeals with no order as to costs.
H
(I) 26 S.T,C, 22.
(2) 14 S.T.C, 489.
A
B
240
SUPREME COURT REPORTS
(1977] 3 S.C.R.
FAZAL Au, J.-These appeals by special leave involve an interesting question of law as to the interpretation of s. 1 7 ( 3) of
the
Kerala Genera\ 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 respondent 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 judgment.
The assessee in Civil Appeals Nos. 572-574 of 1972 filed his
sales-tax returns before the Sales Tax Officer who on an examination
C
of the accounts found that the returns submitted py the a;sessee 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 assessce·s books of account.
The Sales Tax Officer, after hearing the ossessee, 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
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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 relied upon by the Sales Tax
Oflker, but this opportunity was refused to him by the Sa)es Tax
Ofticer as also the other appellate authorities.
Similarly in the case
of the respondent Nallakandy Yusuf!, in Civil Appeal No. 575 of 1972,
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the return filed by the assessee was rejected by the Sales Tax Officer
on the ground that certain transactions shown in the accounts of
41
some wholesale dealers were not reflected in his books of account and
i
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 co~nfirmed by the Appellate Authorities under the Act.
Both the assessees then filed a revision application before the Hi~b
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Court which allowed the application of the asscssees, quashed
the
orders of the Sales Tax Authorities and remanded ti.e 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.
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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 incomplete.
H
The High Court, on a coi:isideration 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 opportunity of being heard could not be
said to be complete unless in the circumstances of these cases the as-
KERALA v. K. T. SHADULI YUSUFF (Fazal Ali,!.)
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 ass~ssee .complymg with
the le•al requirements is not a new one, but existed m s. 23 ( 4)
of
the !;,come-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 sectin 22 and has
not made a return or a revised return under ;;uh-section
(3) ot the same section or fails to comply with aU 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 sec-
'.ion, the Income-tax Officer shall make the assessment to
the best of his judgment and determine the sum payable
bv the asscssee on the basis of ·such Qssessn1ent 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 iudgment assessment,
Lord RusseU of Killowen in delivering the judgment of. the Privy
Council in Income-tax Commissioner v.
Badridas Ramrai Shop,
A kola,(') observed as follows:
"The Officer is to make an assessment to the best of hiJ;
judgment aganst a person who is in default as regards supplying informatiQn.
He must not act dishonestly or vindictively or capriciously, because he must exercise 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 h.e must, their Lordships think,
b~ able to take into consideration local knowledge of previous returns by and as·sessments of the a&'l;essee, and all
other matters which he thinks will assist him in arriving at
a fair and proper es<imate; and though there must necessarily be guess-work in the matter, it must be honest guesswork."
These observations were quoted with approval by this Court
in
Raghbar Mand al Harihar Manda/ v. State of Bihar(2).
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Mr. Gupte learned counsel for the appellant submitted that he
main object of the best judgment assessment was to penalise
the
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(1) (1937) 64 IA. 102, 114-115.
(2) 8 S.T.C.7i0.
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242
SUPREME COURT REPORTS
[1977] 3 S.C.R.
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 inclnding the right to summon and cro·ss-examine witnesses, then this would
amount to condoning the default committed by the assessee.
lt'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('), 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 Solicitor-General when he say·s
that the Income-tax Officer is not fettered bv technical rules
of evidence and pleadings, and that he is cl1titled to act on
material which may not be accepted as evidence ,in a Court
of law, bl!t there the agreement ends, because it is equally
clear that in JTiaking the assessment under sub-section (3)
of section 23 of the Act, the Income-tax Officer is not entitled to make a pure gues·s 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 uo 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 authoriiy 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 be demanded by the assessee in a proper case
governed by a particular statute.
This Court further fully approved of the four propositions 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 bad violated certain fundamental rules of
(I) [1955] l S.C.R. 941.
(2) (1944) 12 I.T.R. 393.
,
KER,\LA v. K. T. SHADULI YUSUFF (Fazal Ali, J.)
243
natural justice in that they did not disclose to the assessee the information supplied to it by the departmental representatives.
This case
was relied upon by this Court in a later decision in Raghubar Mandal
Har.ihar 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(2) 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 43 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)1 if he proposes to make an estimate
in disregard of the evidence, oral or documentary, kd 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 information, which sources he may not disclose
to the assessee at all; and ( 4) . in case he proposes to use
against the a~sessee the result of any private inquiries niade
by him, he must communicate 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 amp!~ opportunity to meet it, if possible."
It will .thus be noticed that this Court clearly laid down that while
the Income-taic 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
of the aforesaj_d 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 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 up.on the scope, inter··
pretation 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 proceedings which are qua'si-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
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244
SUPREME COURT REPORTS
[1977] 3 S.C.R.
authorities, the manner in which the asses·sce can rebut those malerials and the facts and circQmstances 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. 1 7 (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 intendmcnt.
Section 17 ( 3) of the Act runs thus :
"If no return is submitted by the dealer under sub-section ( 1) within the prescribed period, or if the return submitted by him
appears to the
assessing authority to be
incorrect or incomplete, the assessing authority shall, after
making such enquiry as it mzy 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."
An analysis of this provsion would 'show that this sub-section contemplates two contingencies-(!) where the assessee 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
as·sessing 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 arc
not in a position to agree with the contention of the learned counsel
for the appellant that if such an opportunity 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 arc
not bound strictly by the rules of evidence, nevertheless the authorities
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 ins. 17(3) of the Act
as mentioned above.
The statute does not stop here, but the second
part of the proviso confers express benefit on the a'ssessee 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 pro;·ision 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 assessee. It is difficult to conceive as to how the
'
KERALA v. K. T. SHADULI YUSUFF (Fazal Ali, l.)
245
assessees would be able to disprove the correctness of the accoun~s
of Haji P. K. Usmankutty or the other wholesale dealers, unless.he. is
given a chance to cros~-examine them with resp.eel to t~e cred1b1hty
A
,of the accounts maintamed by them.
It ts qmte possible .that t~e
wholesale dealers may have mentioned certain transacttons m
~heir
books of account either to embarrass the assessees or due to ammus
' or business rivalry or such other reasons which can only be established
'. B
when the persons who are responsible ior keeping the accounts are
brought before the authorities and allowed to be cross-examined by
the assessees.
This does not mean that the assessing anthority is
bound to examine the wholesale dealers as witnesses in presence of
the assessees : it is sufficient if such wholesale dealers are merely
tendered by the safos-tax authorities for cross-examination by
the
assessees for whatever worth it is.
In view of the express provision
of the second par\ 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 incorrect and incomplete.
We are fortified in our
view by a decision of this Court in C. Vasantilal and Co. v. Commissioner of Income-tax, Bombay City('), where this Court observed
as follows :
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"The Income-tax Officer is not bound bv anv technical
rules of tl!e law of evidence.