MANU/KE/0013/1966

Equivalent Citation: AIR1966Ker55, 1965()KLT803, [1966]17STC 380(Ker)

IN THE HIGH COURT OF KERALA

O.P. No. 1675 of 1963
Decided On: 23.12.1964
Appellants: M. Appukutty Vs. Respondent: Sales Tax Officer, Spl. Circle I, Kozhikode
Hon'ble Judges/Coram:
P. Govindan Nair, J.
Counsels:
For Appellant/Petitioner/Plaintiff: K.V. Suryanarayana Iyer and K.N. Karunakaran,
Advs.
For Respondents/Defendant: Government Pleader
Case Note:
Sales Tax - return - Articles 19, 226 and 265 of Constitution of India and
Section 17 (3) of Kerala General Sales Tax Act, 1963 - sales tax officer
rejected returns and accounts produced in support of them - additional
amount added to total turnover of assessee-petitioner - petition against
such Order - rejection of account books does not give taxing authority right
to make any assessment in any arbitrary manner without any reference to
materials before him - evidence on record proved that there was no
material before authority which would justify addition to turnover -
addition made found to be arbitrary, capricious and mala fide -
constitutional provision that no tax shall be levied or collected except by
authority of law also violated - petition allowed.

JUDGMENT
P. Govindan Nair, J.
1 . The writ applicant is an assessee to sales-tax. For the year 1961-1962, monthly
returns were submitted and tax was also paid by the petitioner in accordance with
those returns. A consolidated return for the entire year showing the turnover
correctly, it is claimed by the petitioner, was also sent. The respondent, the Sales-tax
Officer then issued a notice dated 20-2-1963 in which it is stated.
"It is therefore proposed to reject your returns and the accounts produced in
support of them and to complete the assessment to the best of my
judgment."
The above communication is Ext. P1 and the objections of the petitioner to Ext. P1 is
Ext. P2 dated 27-2-1963. On 5-7-1963, another communication, Ext. P4, was sent by
the respondent stating that he proposes to complete the assessment for the year
according to the best of his judgment by adding "10 per cent of the net taxable
turnover as per the books of account as probable suppressions." This too was
objected to by the petitioner by Ext. P5. But overruling his objections, the

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assessment order in question has been passed adding 10 per cent to the net turnover
as computed by the assessing authority from the books of account of the assessee.
The 10 per cent comes to Rs. 27,60,883.60. A copy of the assessment order is Ext.
P6. It is this order, Ext. P6, that has been challenged in this writ application.
2 . According to counsel for the petitioner, Ext. P6 evidences a capricious and
arbitrary assessment without any material to support the conclusion and is the pure
result of surmises and conjectures. He, therefore, prays that a writ he issued
quashing the order, Ext. P6.
3 . A preliminary objection has been raised that the petitioner has adequate
alternative remedies under the statute and, therefore, this writ application should not
he entertained. This, in fact, was the only argument that has been advanced by
counsel on behalf of the Revenue. This question has, therefore, to be examined. I
shall refer to the facts relating to the assessment which, I consider necessary, for the
determination of this issue.
4 . Certain reasons have been given in Ext. P1 for rejecting the accounts and
notwithstanding the explanation, Ext. P2, the accounts have been rejected. I will
assume for the purpose of this proceeding under Article 220 of the Constitution (in
fact it is not for me to assess the adequacy of the grounds for rejecting the accounts)
that the accounts have been rightly rejected. The further question is as to whether
the addition of 10 per cent of the net taxable turnover as per the books of account
towards probable suppressions is arbitrary and capricious as contended by counsel
for the petitioner. It is stated in Ext. P4 that such an addition is proposed because of
the defects enumerated in Ext. P1. The defect mentioned in paragraph 3 of Ext. P1
has been given up in Ext. P4. The remaining defects are:
(1) The turnover 'as per the returns and accounts' do not agree.
(2) The cash balance on certain dates mentioned in Ext. P1 does not justify
the loans taken by the petitioner from the persons mentioned in Ext. P1 on
the dates specified in Ext. P1.
(3) The secret account recovered from Messrs. Vasu and Janardhanan
indicates purchases having been made on twelve occasions from the
assessee. These do not find a place in the books of account of the assessee.
5 . The petitioner contended that there is no discrepancy between the turnover as
returned and as seen from his books of account. He gave detailed reasons for the
loans taken on the various dates mentioned in Ext. P1. He further said that all his
transactions are entered in his account books and that he had no dealings whatever
with Messrs. Vasu and Janardhanan. There were he contended, no sales effected by
him on the several dates mentioned in Ext. P1 to Messrs. Vasu and Janardhanan. He
however pointed out that on ten out of the twelve dates mentioned in Ext. P1 he had
effected sales on a cash basis to different parties for the identical amounts mentioned
in Ext. P1 and that these sales are seen from his own account books. He further
stated that, his representative had already shown the concerned cash bills to the
Sales-lax Officer. He therefore, asserted that out of a turnover of Rs. 14,834.27
which is the total of the twelve items mentioned in Ext. P1 all but a turnover of Rs.
3,531.21 are seen entered in his account books.
In the above circumstances he pleaded that there was no justification for making any
addition to the turnover disclosed by his book's and that in any event there was no
justification for adding 10 per cent to the net turnover as disclosed by the books. The
answers to these objections, if any, are in the order, Ext. P6, and are the following:

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 "The turnover as per books and that as disclosed by the returns does not
agree. ..... The explanations regarding the alleged borrowing are
unacceptable ..... The contention that only actuals can be added on towards
suppression cannot he accepted. . . . ."
The reason for doubting whether there has been borrowing is stated thus:
"It is common knowledge that usurers charge exorbitantly high rate of
interest and none would go in for a loan unless one is so hard pressed."
And, regarding the contentions of the petitioner relating to the entries in the "secret
books" of Messrs. Vasu and Janardhanan, what is stated is:
"Collusion and collaboration are the key note of evasion as without which the
delinquent will be found out by the normal routine cross verification of
transactions at the time of final assessment. So apart from the regular books
of accounts which are kept for inspection and production before Income Tax
and Sales-tax authorities, another set of accounts showing real volume of
business done is kept by the evaders. These books of accounts may not
conform to the standard of books of accounts that are expected to be
maintained in a commercial house as it is only intended to understand for
ourselves the veal volume of business transacted. These books are styled by
the department either as duplicate books or secret books. It is only by the
element of surprise involved in an inspection that such books are
occasionally detected by the departmental officers. When such books are
seized it is quite usual for the dealers to disown the books, even though they
may know that ultimately it may not be of any avail to them. For the
continued prosperity of the business they must have the help and co-
operation of the suppliers as well as their customers and so they will go to
any extent to help them. They will therefore figure only as hostile witnesses
to the department.
In the instant case the books have been seized by the Intelligence Officer
from the shop of Vasu & Janardhanan and the receipt for the same has been
acknowledged by Shri Vasu. On a comparison of the entries in the book
marked "A" with their regular book of account it has been found that
transactions which are specially noted as 'credit' have been entered in them.
So apart from the normal presumption that the books found in the business
place of a dealer relate to him, it has been established that the books relate
to them. It is true that Sri Vasu was at pains to assert that no books have
been detected and they do not relate to him. On the face of the above facts,
he can only be deemed as a witness who has sworn to speak the untruth and
nothing but the untruth. I discard his evidence as fabrication".
And finally, regarding the proposal to add 10 per cent, the respondent says:
"The contention that only actuals can be added on towards suppression
cannot be accepted. The only dictum laid down is that the estimation must he
related to the material relied on. In the circumstances of the case I do not
think that 10 per cent towards omission, is in any way high."
6 . The discrepancy as seen from the order, Ext. P6, relating to the gross turnover
returned and the gross turnover as computed from the hooks of the assessee is Rs.
1,51,404,17. The turnover shown in the return of the assessee was in excess by the
above amount of the turnover computed by the respondent from the books of
account. How this will help in coming to the conclusion that there should be an

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addition of 10 per cent., I am unable to follow:
7 . The only other material was the entries-in the secret account books of Messrs.
Vasu and Janardhanan. It has to be mentioned here that these books are not of the
assessee and have not been recovered from the assessee. Out of the amounts seen in
these books all but-Rs. 3,531.21 is seen entered in the books of account maintained
by the assessee. Apart from those two items of material relied on there is of course
the opinion of the Sales-tax Officer that "none would go in for a loan unless one is so
hard pressed." He has not found that the assessee has not actually borrowed the
money. No attempt has been made to find out the truth or otherwise of the
transactions of borrowing relied on by the assessee.
8 . Whether a business-man dealing in goods to the tune of nearly a lakh of rupees
each day should or should not maintain cash reserves of a particular amount by
borrowing certain amounts--the maximum of such borrowings in this case being Rs.
75,000, is a matter which must be left to the business man, and solely to his
discretion. The petitioner has given reasons for these borrowings and also pointed
out that the cash balances along with the borrowed amounts had to be utilised within
the next few days to meet the demands of the business. These aspects have not even
been adverted to and all that is said in the order. Ext. P6, is that:
"The explanations regarding the alleged borrowings are unacceptable".
9. It is, therefore, clear that the addition of Rs. 27,60,383.00 has been made on the
basis of the entries in the secret books of Messrs. Vasu and Janardhanan which
indicated transactions of dealings with the petitioner on two occasions amounting to
a total of Rs. 3531.21." Such an addition is clearly arbitrary and seems to me to he
perverse and capricious. This Court had occasion to consider similar estimates. When
the rate of the purchase and" sale of copra from October 1, 1957 to March, 31, 1958
was taken to be the prevailing rate for the purchase of copra right from 1st April
1957 to 13th January 1958 for the purpose of estimating suppressions this Court said
in Alikoya & Co. v. State of Kerala, (1961) 12 STC 567 (Ker) that the assessment is
arbitrary.
10. Notwithstanding the fact that the assessment is thus quite arbitrary and even
perverse it is contended that this Court should not interfere under Article 226 but
should leave this matter to be dealt with by the taxing authorities. I am unable to
accept this contention.
11. It is well settled that the existence of an alternate remedy is not an absolute bar
to the issue of a writ of certiorari when there has been violation of the principles of
natural justice and when a fundamental right is infringed. I need refer only to one or
two decisions of the Supreme Court in support of this proposition. In State of U. P. v.
Mohammad Noon, AIR 1958 SC 86 it was said:
"The superior court will readily issue a certiorari in a case where there has
been a denial of natural justice before a court of summary jurisdiction."
And the Supreme Court has also ruled that the infringement of a fundamental right is
a ground on which a writ of certiorari would issue notwithstanding the existence of
other remedies under the statute, adequate or otherwise (See the decisions of the
Supreme Court in State of Bombay v. United Motors (India) Ltd.,
MANU/SC/0095/1953 : 1953 SCR 1069: (AIR 1953 SC 252 and in Himmatlal Harilal
Mehta v. State of Madhya Pradesh, MANU/SC/0021/1954 : 1954 SCR 1122: (AIR
1954 SC 403) ).

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12. It appears to me that in cases of this nature this Court should interfere, for, I
consider that the remedy available by way of appeal to the Appellate Authority and
then by way of second appeal to the Tribunal and then a Revision to this Court is not
adequate where as. assessee like the petitioner before me is compelled in the
meantime to pay the tax imposed on him by an arbitrary assessment which has been
solely guided by the whim and/or fancy of the assessing authority. It is very seldom,
if ever, that the Appellate Authorities in this state grant a stay of the payment of the
lax imposed on an assessee by an assessment order whether it be arbitrary or
otherwise. In fact, not a single case has come up before me where the Appellate
Authority or the Tribunal had granted a stay of the collection of the lax imposed on
an assessee. And it would take years before an assessee is able to reach this Court in
Revision to have a final adjudication. In these circumstances, the remedies under the
statute, I feel, are not even adequate and in the case of arbitrary assessments such
as the one evidenced by Ext. P6, this Court must protect the citizen from the
whimsicalities of officials, who, it seems to me, allow enthusiasm to overrun judicial
discretion and a sense of fair play. These authorises have to be kept on the "leading
strings" of fair play as this Court said in Musali Guptan v. State of Kerala, 1963 Ker
LT 1051.
13. Principles of natural justice demand that there should be a fair determination of a
question by quasi-judicial authorities. Arbitrariness will certainly not ensure fairness.
Black's Law Dictionary defines the word "Arbitrary" as
"Done capriciously or at pleasure without adequate determining principle;
non-rational; not done or acting according to reason or judgment."
14. For over a century, Courts have been at pains to lay down principles to guide
authorities who have to determine questions in a quasi-judicial manner and the
insistence has always been on adherence to the principles of natural justice. This, of
course, requires a fair opportunity being afforded to a person charged or a person to
be taxed, to show cause against the proposal and state his case. It appears to me
that it does not end there. By merely telling a person of the proposal and giving him
a chance to explain the principles of natural justice are not satisfied. If giving a mere
opportunity to show cause and to explain would satisfy the principles of natural
justice the notice to show cause becomes an empty formality signifying nothing for,
after issuing the notice to show cause the authority can decide according to his whim
and fancy. The judicial process does not end by making known to a person the
proposal against him and giving him a chance to explain but extends further to a
judicial consideration of his representations and the materials and a fair
determination of the question involved. In this connection I may refer to two
decisions of the House of Lords. Lord Loreburn in dealing with the powers of the
Board of Education in Board of Education v. Rice, 1911 AC 179 observed:
"In such cases the Board of Education will have to ascertain' the law and also
to ascertain the facts. I need not add that in doing either they must act in
good faith and fairly listen to both sides, for that is a duty lying upon every
one who decides anything."
And later on, the same learned Judge observed:
"But if the Court is satisfied either that the Board have not acted judicially in
the way I have described, or have not determined the question, which they
are required by the Act to determine, then there is a remedy by mandamus
and certiorari."
The same principle was reiterated by the House of Lords in the decision in Local

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Govt. Board v. Arlidge, 1915 AC 120. Viscount Haldane, Lord Chancellor quoted with
approval the decision of Lord Loreburn and said:
"I agree with the view expressed in an analogous case by my noble and
learned friend Lord Loreburn. In 1911 AC 179 he laid down that, in disposing
of a question which was the subject of an appeal to it, the Board of
Education was under a duty to act in good faith, and to listen fairly to both
sides, inasmuch as that was a duty which lay on everyone who decided
anything."
1 5 . If the materials available are disregarded or if the 'quasi judicial authority
refuses to apply its mind to the question and if he reaches a conclusion which bears
no relation to the facts before him, I think, to allow those decisions to stand would
be violative of the principles of natural justice. Arbitrary decisions can also,
therefore, result in violation of the principles of natural justice which is a
fundamental concept of our jurisprudence. Nay, in certain cases, where an authority
refuses to apply its mind to the question and makes a decision as it likes, it may
amount to even a mala fide decision. That is what the Calcutta High Court decided in
Ram Chandra Chaudhuri v. Secy. to Govt. of West Bengal, MANU/WB/0051/1964 :
AIR 1964 Cal 265. "
1 6 . Counsel on behalf of the Revenue has relied on a number of decisions. It is
however, not necessary to refer to all of them, for, the principle relied on by counsel
is clearly stated, if I may say so, in two recent pronouncements of the Supreme Court
in Bhopal Sugar Industries Ltd. v. D. P. Dube, MANU/SC/0349/1962 and Thansingh
Nathmal v. Supdt. of Taxes, Dhubri, (MANU/SC/0255/1964 : (1964) 15 STC 468 :
AIR 1964 SC 1419). In (MANU/SC/0255/1964 : AIR 1964 SC 1419) : (1964) 15 STC
468 the Supreme Court observed:
"The High Court does not therefore act as a court of appeal against the
decision of a court or tribunal, to correct errors of fact, and does not by
assuming jurisdiction under Article 226 trench upon an alternative remedy
provided by statute for obtaining relief. Where it is open to the aggrieved
petitioner to move another tribunal, or even itself in another jurisdiction for
obtaining redress in the manner provided by a statute, the High Court
normally will not permit by entertaining a petition under Article 226 of the
Constitution the machinery created under the statute to he by-passed, and
will leave the party applying to it to seek resort to the machinery so set up."
17. These observations were made with reference to the facts which were so stated
by their Lordships.
"Against the order of the Commissioner an order for reference could have
been claimed if the appellants satisfied the Commissioner or the High Court
that a question of law arose out of the order. But the procedure provided by
the Act to invoke the jurisdiction of the High Court was by-passed; the
appellants moved the High Court challenging the competence of the
Provincial Legislature to extend the concept of sale, and invoked the
extraordinary jurisdiction of the High Court under Article 226 and sought to
re-open the decision of the taxing authorities on a question of fact......"
1 8 . The circumstances under which the remarks contained in the Judgment in
MANU/SC/0349/1962 have been made are seen from page 415 of the report:
"In the present case the company invoked the jurisdiction of the High Court
on question of fact as well as on the constitutionality of the taxing statute

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 and breach of fundamental rights. The High Court instead of determining the
constitutional questions, on which alone the petition could normally be
entertained, proceeded to investigate the correctness of an assumption made
by the company, and thereby decided the case which was not expressly
raised by the other party. In doing so the High Court fell into an error and
assumed jurisdiction to decide the dispute which had to be decided by resort
to the machinery provided under the Act after ascertainment of the true
nature of the transaction in the light of the agreement and surrounding
circumstances. The order passed by the High Court cannot therefore be
upheld."
I8a. I am unable to discern anything in the above decision or in the decisions of my
learned brother Mr. Justice K. K. Mathew in O. P. Nos. 767 and 791 of 1963 (Kcr) on
which too reliance was placed which militate again what I have stated above.
19. It is too well established a principle to be sought to be supported by decisions
that the rejection of the account books does not give the Taxing Authority a right to
make any assessment in any way it likes without any reference to the materials
before him. Whether the assessment be one relating to Income Tax, agricultural
Income Tax or sales-lax, the process of best judgment assessment is a quasi-judicial
process, an honest and bona fide attempt in a judicial manner to determine the tax
liability of a person. And such determination must be related to the materials before
the authority.
20. I do not find even the slightest judicial approach to the question in this case.
There was no material before the authority which would in any manner justify the
addition of 27,60,000 and odd Rupees to the turnover. The addition made is arbitrary
and capricious and is even mala fide in the sense that there has been no application
of the mind to the question involved.
21. When tax is imposed illegally in such a fashion, I think, there is an infringement
of the fundamental right of a person like the petitioner before me to curry on his
trade or business. It was held by this Court in Aluminium Industries Ltd. v.
Agricultural Income Tax and Rural Sales-tax Officer, 1961 Ker L J 1336 that collecting
tax not legally due infringes the right to carry on business guaranteed by the
Constitution. No doubt quasi-judicial authorities have jurisdiction to decide rightly as
well as wrongly. But no judicial or quasi-judicial authority has the right to decide in
an arbitrary manner and if it so decides, I think, this Court is not helpless to
safeguard the interests of the victim of such decision by interfering under Article 226
of the Constitution. Further I am of the view that in such cases Article 265 of the
Constitution.
"No tax shall be levied or collected except by authority of law,"
is also violated. There is no collection of tax by the authority of law when
assessments are made in this arbitrary fashion.
22. I quash Ext. P6 in so far as it relates to the addition of Rs. 27,60,883.60. The
respondent will re-compute the turnover and the tax after deleting this turnover.
23. This writ application is allowed on the above terms and the respondent will pay
the costs of the petitioner including Advocates fee Rs. 300.
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