Balchand Udairam and Another, Ramchandra Verma, Saroj Agarwal, Rameshwarlal Kandoi and Others, Narpat Singhi and Another, Jiwan Ram Agarwal, Ishwarchandra Singhal and Another, Chothmull Joshi, Asha Devi Singhi, Durga Prasad Bhawanipuri and Another, Jagat Singh Singhi, Amar Singh Singhi and Anand Kumar Singhal and Another vs State of Sikkim and Others

R. Dayal, Actg. C.J.

All these writ petitions involve, with minor differences, common questions of law and facts and concern the validity and interpretation of the law of Income Tax, transfer fees and recovery proceedings in the State of Sikkim.

Sikkim became a component State of the Indian Union by and under the Constitution (36th Amendment) Act, 1975, which inserted Article 371-F in the Constitution. Clause (k) of that article provides that all laws in force immediately before the appointed day (i.e., 26th day of April, 1975) in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority. Clause (n) provides that the President may, by public notification, extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India on the date of the notification. The Income Tax Act, 1961, was not extended to Sikkim under the aforesaid Clause (n) of Article 371-F at the relevant time, and so the law of Income Tax which was in force on the appointed day was applicable in the State of Sikkim during the relevant period. That law is contained in the Sikkim State Income Tax Manual, 1948. The petitioners are engaged in business and, therefore, only those provisions which relate to assessment of Income Tax on business are relevant for the purpose of these petitions. Clause 4 of the Manual provides in Sub-clause (i) that Income Tax shall be charged on the gross sale proceeds of the previous year of all persons engaged in business at the rate prescribed. Sub-clause (ii) provides that "every person doing business is expected to keep proper accounts and produce it on demand before the Income Tax Officer who, in default or in case of unsatisfactory account, will assess tax according to his discretion". Sub-clause (iii) states that for assessment of tax, all persons doing business shall complete their accounts of the previous year before the end of June, every year. "Previous year" has been defined in Clause 2(viii) as meaning, in respect of an assessment, the financial year from April 1, to March 31, preceding the year in which tax assessed is to be collected. Clause 18 provides that "any amount specified as payable in a notice of demand, shall be paid into the State Bank within the time given thereunder, and any assessee failing so to pay shall be deemed to be in default provided that, when an assessee has presented an appeal the appellate authority may, in his discretion, pass a stay order when the assessee will not be treated as in default in respect of such tax so long as the stay order remains in force." Clause 20 states that if a person makes a statement or a verification in an Income Tax return which is false, and which he either knows or believes to be false or does not believe to be true, he shall be liable, on conviction, to a fine which may extend to Rs. 1,000. Clause 22 makes provision for appeal and states that "Appeal from the assessment of Income Tax or penalty imposed under any of the foregoing Clauses will lie to His Highness the Maharaja of Sikkim through the Department concerned." Notification No. 1220-200/IT and ST dated December 20, 1973, provides for the period required to be specified in the demand notice and also for payment of interest in case the payment is not made in time by providing that any amount specified as payable in the notice of demand shall be paid within 45 days from the date of the issue of the notice. If the said amount, as specified in the notice of demand, is not paid within the aforesaid period, simple interest at twelve per cent. per annum shall be charged from the date of the notice of demand. In paragraph 2, provision is made for payment of penal interest at the rate of 20% on the defaulted amount in case the payment has not been made within three months from the date of the notice of demand. Paragraph 3 provides as under :

"3. An assessee may present an appeal for the revision of assessment made against him after payment of fifty per cent. of the amount assessed in which case he shall not be treated as in default in respect of the amount in dispute. He will not, however, be treated as such if the appeal, on determination, has been found to be frivolous and preferred only to gain time for payment."

As regards transfer fees, Notification No. 2053-200/IT and ST dated August 26, 1966, postulated that any person or firm, intending to transfer out of Sikkim, profits, capital gains and other such allied gains or income, accrued within the territories of Sikkim and arising from trade, business, contract or other transactions carried on therein, will be required to obtain a transfer certificate from the office of the Income Tax and Sales Tax Department. The notification stated in paragraph 2 that the Income Tax and Sales Tax Department will issue the necessary certificate after making full verification from the relevant account books or documents that the amount sought to be transferred had been lawfully earned and was otherwise unencumbered. By paragraph 3, the applicant was required to deposit as fee 1% of the amount to be transferred. Transfer or attempt to transfer without a valid certificate was made a cognizable offence and all police check-posts were empowered to search and seize, on reasonable suspicion, any money, bullion, hundies or other valuable securities, intended to be taken out of Sikkim without a valid transfer certificate. However, it was brought to the notice of the Sikkim Darbar by the Merchants'' Association in Gangtok that the aforesaid notification dated August 26, 1966, was likely to adversely affect their day-to-day trade. It was stated in Circular No. 2468-12/IT dated September 21, 1966, that the "intention of the Sikkim Darbar in the issue of the Notification was essentially to ensure that such transfer certificates which are normally issued after proper verification of their income would serve as a proof of income earned in Sikkim whereby they would not be subject to double taxation." By this circular, the aforesaid notification was kept in abeyance for the time being. Subsequently, another Notification No. 7692-500/IT and ST dated May 1, 1967, was issued in the following terms :

"GOVERNMENT OF SIKKIM Income and Sales Tax Department Notification No. 7692-500/IT and ST.

In modification of this office Notification No. 2053-200/IT and ST dated the 26th August, 1966, it is notified for the information of all concerned that any person or firm may apply for a transfer certificate from the office of the Income Tax and Sales Tax Department, when seeking to transfer out of Sikkim profits, capital gains as other such allied gains or income, accrued within the territories of Sikkim and arising from any trade, business, contract or other transactions carried on therein.

The applicant will have to deposit as fee one per cent. of the amount to be transferred.

Application for such transfer will be made on a Darbar Paper of the value of Re. 1.

(Sd.) T. S. Gyaltsen, Chief Secretary, Government of Sikkim."

Procedure for recovery of public dues was provided for in Order No. 405/50, dated November 21, 1950, which reads as under :

"SIKKIM STATE Order No; 405/50

In supersession of all previous orders on the subject, the following rules shall govern the realisation of all public dues :--

Whenever any moneys due to the Government become payable, the Officer-in-charge concerned shall issue a preliminary writ of demand notifying the amount and the date by which the defaulter should pay the sum due into the bank treasury.

Any objections preferred will be disposed of by the Officer-in-charge. A final writ of demand will then be served on the defaulter in the prescribed form. If the objector is present during objection proceedings, the notice may be served to him during these proceedings.

(a) If the legality of the demand is challenged (wholly or in part), the party demurring to pay may, within a period of three months, move the court for adjudication.

(b) If the court finds the objection frivolous or without proper cause, special costs may be awarded to the Department.

If no case is filed in court within the limitation period prescribed under Clause (3), it shall be presumed that the legality of the demand is accepted by the defaulter ; and the Officer-in-charge shall proceed to realise the amount as laid down in these rules.

Any suit, filed after the expiry of the limitation period of three months calculated from the date of the final writ of demand, shall be summarily dismissed.

If there is no response to the final writ of demand issued under Clause (2), the Officer-in-charge is hereby invested with civil court''s power to realise the amount due, by distraint of movable and landed property of the defaulter in that order, up to the extent of the demand.

Gangtok

21st November, 1950.

J. S. Lall, I. C. S. Dewan, Sikkim State."

A new procedure for collection of taxes was provided by the enactment of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, which came into force with effect from August 13, 1987. Section 5 of the Act provides that every tax due to the Government of Sikkim shall be collected by the Inspector by distraint and sale of movable and immovable properties. "Tax" has been defined u/s 3(d) to mean tax payable under the taxation laws in force in the State of Sikkim. Section 6(1) provides that the Inspector shall serve a demand directing the payment of tax due on the person who is liable to pay, within seven days. Section 7(1) provides that the Inspector shall attach the movable and immovable properties upon failure to pay the tax demanded within the stipulated time. Section 8(1) provides that the Inspector shall, after due publication, sell the properties attached u/s 7 by public auction. Section 10 provides for offences and penalties as under :

"10. Any person who-

(a) commits default in payment of tax as determined ;

(b) fails or refuses to submit any return of his annual gross income ;

(c) obstructs the Inspector or other officials authorised by the Government in the discharge of his or their duties under this Act and other taxation laws in force in the State of Sikkim ;

(d) is guilty of contravention of or non-compliance with any of the requirements of the taxation laws in force in this State or orders, notifications or directions made thereunder for which no special penalty is provided ;

(e) wilfully furnishes incorrect or false return of his annual income, shall be punishable with fine which may extend to five thousand rupees or imprisonment for a period of three years or with both.

u/s 11, all the offences under the Act are cognizable and non-bailable. Section 12 provides that no prosecution under the Act shall be instituted except with the previous sanction of the Government or such other officer as may be authorised by the Government in this behalf.

For proper appreciation of the various points raised for decision in these cases, it would be enough to mention in detail the facts of Writ Petition No. 33 of 1987. In that case, petitioner No. 1 is a joint Hindu family and petitioner No. 2 is the karta thereof. Petitioner No. 1 got income from business of various types and also from several Government contracts. On March 13, 1987, the Income Tax Officer issued a notice to petitioner No. 2 stating that gifts for an amount of Rs. 27,21,500 were made by him during the years 1985-86 and 1986-87 which were quite disproportionate to his income. By this notice, he was required to submit within 5 days proof to show his source of income for making the gifts. He was also required to produce documents and books of account for the relevant period "in support". Further, he was required to deposit the fee at the rate of 1% on the amount transferred as per Notification No. 7692-500/IT and ST along with interest. It was also stated that, in case of failure to comply with the notice, the assessment already made would be reviewed and determined as per Clause (4)(ii) of the Income Tax Manual. By another notice bearing No. 117/IT dated March 24, 1987, petitioner No. 2 was asked whether he had obtained a transfer certificate from the office of the Income Tax and Sales Tax Department before the transfer and whether he had deposited the fee of 1% of the amount thus transferred. On the same date, another letter bearing No. 118/IT and ST was sent to petitioner No. 2 by the Income Tax Department stating that in his reply dated March 3, 1987, he had vaguely stated that he had received "certain amounts from other sources of income". He was required by this letter to appear before the Joint Secretary, Income Tax and Sales Tax Department, on March 26, 1987, and produce the necessary records or books of account. A reply to both these letters dated March 24, 1987, was sent by respondent No. 2 on March 26, 1987, stating therein that his was a joint Hindu family and whatever income was earned by the firm, Balchand Udairam, was joint family income. He further said that the firm had been dealing with the Government of Sikkim as "Cardamom Khazana Collectors" besides holding contracts for cigarette, bidi, tea, supari, chewing tobacco, etc., and also for collection of toll tax for Rangpo, Singtam and Gangtok Bazaar. Further, it was stated that the family had entered the industrial field by setting up Kanchenjunga Proprietors Pvt. Ltd. for manufacturing of a popular brand cigarettes in collaboration with I. T. C. Ltd., in which the family had 51% share. It was stated that the family had good sources of income from various trading activities and -Whatever gifts had been made were very much within their means. Further, it, is stated that no separate books of account were maintained for the purpose of the gifts as it was not considered necessary to reflect the same in the accounts of the firm since the gifts were made in their personal capacity. On May 14, 1987, the Joint Secretary-cum-income tax Officer passed a best judgment assessment. After referring to the reply dated March 26, 1987, it was stated that petitioner No. 2 had admitted that the amount of Rs. 27,21,500 had been transferred outside the State without obtaining a transfer certificate and depositing the transfer fee and thus the provisions of Notification No. 2053-200/IT and ST dated August 26, 1966, had been contravened. Further, it was stated that a loan for Rs. 29,53,400 had also been advanced by him to Supreme Roadways Ltd., Delhi, in 1983. The best judgment assessment was passed under Clause 4(ii) of the Sikkim Income Tax Manual, 1948, taking the turnover of the business as ten times the amount transferred. Income Tax was assessed at Rs. 20,63,568. Besides, the transfer fee was assessed on the amount of loan and gifts at Rs. 21,20,317 and after deducting the transfer fee of Rs. 27,215 already paid, the net amount payable was shown as Rs. 20,93,102. Both these amounts were directed to be deposited within seven days from the date of the receipt of the order. This assessment order was followed by a preliminary writ of demand dated August 5, 1987, issued by the Tax Recovery Officer calling upon petitioner No. 2 to deposit the amount of Rs. 20,63,568 as Income Tax payable by him on or before August 18, 1987, failing which the final writ of demand would be issued and the amount would be recovered by distraint and sale of his movable and immovable properties. A reply was sent by petitioner No. 2 on August 10, 1987, wherein he disputed the validity of the best judgment assessment. Thereafter, he preferred an appeal before the appellate authority but the appeal was dismissed because payment of 50% of the tax assessed by the Income Tax Officer was not paid. Thereafter, petitioner No. 2 received a demand notice dated September 26, 1987, from the Tax Recovery Officer-cum-Inspector requiring him to pay the amount of Rs. 20,93,102 within seven days from the date of the receipt of the notice. It was stated in the notice that in case of his failure to pay the amount, the amount would be recovered as per the provisions of Sections 7 and 8 of the Act No. 7 of 1987 by attachment and sale of both movable and immovable properties belonging to him. This was followed by attachment of the movable properties of petitioner No. 2, vide order dated November 3, 1987. The petitioners have challenged the best judgment assessment order dated May 14, 1987, the order of the appellate authority rejecting the appeal for not having deposited 50% of the assessed amount and the proceedings taken for recovery of the amount. They have pleaded that petitioner No. 1 received substantial revenue from the various sources referred to in paragraphs 2 and 3 of the petition and that returns had been filed by petitioner No. 1 in respect of the accounting years 1982-83 to 1985-86 truly and correctly stating therein the turnover of their trading business and that tax had been properly assessed as per the returns. According to the petitioners, gifts had been made out of joint family funds or savings resulting from funds provided by petitioner No. 1 to its members. Regarding the alleged loan amount, it is denied that any loan was advanced and it is alleged that this was a business transaction. It is stated that petitioner No. 1 was originally a dealer in Tata Diesel vehicles and spare parts and, subsequently, the dealership was taken by Denzong Automobiles Pvt. Ltd., whose shares are held by petitioner No. 1 and its members. It is stated that this private limited company informed the manufacturers with regard to the requirement of 20 Tata Diesel vehicles by Supreme Roadways Ltd., Delhi, who took delivery from the Silvas Regional Sales Office of the manufacturers but they could not immediately make the payment and, therefore, the price of Rs. 29,53,400 was paid by petitioner No. 1 and the company to the manufacturers. The case of the petitioners thus is that Rs. 29,53,400 was provided to Supreme Roadways Ltd., as credit in the normal and usual course of business and not as loan.

The best judgment assessment has been challenged by the petitioners on several grounds. One is that the assessment had already been completed up to the accounting year 1985-86 and under the provisions of the Income Tax Manual, the Income Tax Officer had no power or jurisdiction to review any assessment already made. The other ground is that, under the provisions of the Manual, assessment of tax can be made only during the financial year immediately following the previous year and, therefore, assessment up to the accounting year 1985-86 could not be made in the year 1987-88. Assessment for the year 1986-87 is challenged on the ground that it is premature for the reason that the accounts for the previous year could be completed only by the end of June, 1987, but the assessment was made before the end of June, on May 14, 1987. It is further contended that, in fact, the proceedings started in the previous year itself since the notice requiring the production of books was dated March 13, 1987. Then, the Income Tax Officer, it is said, failed to appreciate that petitioner No. 1 and its members had sufficient funds at their disposal to make the gifts aggregating to Rs. 27,21,500 and provide the credit for Rs. 29,53,400 and violated the principles of natural justice in respect of the latter amount since he never called upon petitioner No. 2 to explain the credit provided to Supreme Roadways Ltd., and for this, no show cause notice was issued. Another ground of challenge is that the amount of the gifts and the credit given was included not only in the turnover of the relevant accounting years but also in the turnover of the other accounting years. Assessment of transfer fee is said to be bad for the reason that the gifts were made at Gangtok and that respondent No. 3 wrongly recorded in the order that the petitioners had admitted that the amount of the gifts had been transferred outside the State. A number of legal pleas have been taken in these petitions which are as under :

The Income Tax Manual and other notifications were neither signed nor approved by the Maharaja of Sikkim and the originals have not been produced. The Maharaja of Sikkim did not have any rules of business or any rules of allocation of business and so it was necessary that all the orders and notifications should have been issued under his signature. Though a Law Commission has been functioning in this State since 1976, the Income Tax Manual and the notifications have not been published by the Commission for the reason that the Commission was not sure about the correctness and the authenticity of the Manual and the notifications. The State has not published the laws made by the former Rulers even after the expiry of a decade from the merger and has acted on typed or cyclostyled copies. There cannot be a worse form of tyranny than to subject people to operation of laws that or so as to affect their rights and liabilities without publishing them in some reasonable manner and recognisable method to enable the people to know them. Thus, according to the petitioners, the Income Tax Manual and the notifications are not laws.

Income Tax was collected in Sikkim since 1910 or even before that without any law and the people of Sikkim used to pay such taxes voluntarily as and when demanded by the Officials of the then Maharaja. The State Income Tax Manual, 1948, is a compilation of guidelines prepared by the officers who used to collect taxes. The Manual is not jurisprudentially legislative.

Parliament has the exclusive power to make laws with respect to any of the matters enumerated in the Union List and Income Tax falling in that list could be legislated upon only by Parliament and, therefore, the State Income Tax Manual is not a valid law.

Income Tax falls within the Union List and so appointment of Income Tax Officers and appellate authority after April 26, 1975, must have been by the Central Government and neither the State Legislature nor the State Government has any jurisdiction to make any order or issue any notifications relating to Income Tax. Therefore, since the appointments of the Income Tax Officers and appellate authority were made by the State Government, the appointments were without jurisdiction and, consequently, the actions taken by them are also withoutjurisdiction.

Under Clause 22 of the Manual, appeal lies to His Highness the Maharaja of Sikkim which expression under the Adaptation of Sikkim Laws (No. 1) Order, 1975, means the "State Government". According to the petitioners, the "State Government" means the Governor as advised by the council of Ministers, and so the appointment of the appellate authority by the State Government is without the jurisdiction or competence of the State Government and so the appeal would have to be heard either by the Governor or the council of Ministers.

The rejection of appeal by the appellate authority for failure of the petitioners to deposit 50% of the tax assessed was unjustified, since there was no such pre-condition stipulated in the notification bearing No. 1220-200/IT and ST dated December 20, 1973, for admission of appeal. In the alternative, there is no such precondition stipulated in the Manual and no such condition could be imposed by the notification dated December 20, 1973 which is merely an administrative order.

There is no other adequate and efficacious alternative remedy available to the petitioners.

Under the Income Tax Manual, there is no provision either for filing any return or for issuing any notice or for making reassessment or review and assessment of tax can be made only during the financial year immediately following the previous year. Therefore, the assessment subsequent to the financial year immediately following the previous year was without jurisdiction. For the same reason, the action initiated for reopening of the assessment in the previous year itself was without jurisdiction.

Assessment of turnover at ten times the amount of gifts or loans was arbitrary, there being no basis for such assessment

There has been hostile discrimination against the petitioners inasmuch as they were singled out for imposition of tax on gifts or loans whereas others similarly situated were not proceeded against and, therefore, the impugned orders are invalid. Further, there is no justification for assessing tax in respect of the amounts of gifts or loans where certificates had been issued by the Income Tax Officer that gifts or loans had been advanced out of capital account.

Notification bearing No. 2053-200/IT and ST dated August 26, 1966, as modified by notification bearing No. 7692-500/IT and ST dated May 1, 1967, is bad because, after the merger of Sikkim with India, the levy of transfer fee is beyond the legislative competence of the State Legislature.

Notification No. 2053-200/IT and ST dated August 26, 1966, was modified by Notification No. 7692-500/IT and ST dated May 1, 1967, which merely prescribes that any person or firm may apply for transfer certificate from the office of the Income Tax and Sales Tax Department and, therefore, no transfer fee is liable to be paid on any transfer where a transfer certificate is not applied for.

The Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, is beyond the legislative competence of the State Legislature, since the State Legislature has no power or competence to legislate in respect of any matter relating to levy of Income Tax.

No Inspector was appointed as per the requirement of Section 3(a) of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, and so every action taken under that Act is invalid.

Action cannot be taken under the Sikkim Income Tax (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987, once proceedings have been initiated under the Notification bearing No. 405/50, since the Act does not provide that any proceedings taken under the Notification may be continued under the provisions of the Act.

In the counter filed by the respondents, they have defended the assessment order and other orders and have alleged that since there is a provision for filing an appeal, the petitioners should not have filed the writ petitions without exhausting the statutory remedy. The validity of the Income Tax Manual and the notifications which were in force on the date of the merger of Sikkim with India is defended on the strength of Article 371F and it is stated that the enactment of the Sikkim Income Tax (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987 (hereinafter referred to as Act No. 7 of 1987), was within the legislative competence of the State Legislature because it is an incidental legislation for levy and collection of taxes which were within the legislative competence of the State of Sikkim. It is also stated that Act No. 7 of 1987 supersedes the notification bearing No. 405/50 dated November 21, 1950, in so far as the collection of taxes is concerned. Appointment of the Finance Secretary as the appellate authority is defended by pleading that under the business rules framed by the Governor of Sikkim, the business of the Government is distributed departmentwise and the Secretary of the Department is made the head of the Department and since collection of taxes and other financial matters have been allotted to the Finance Department, the Government notified the Secretary, Finance Department, as the appellate authority. The best judgment assessment is defended on the ground that after the Department came to know of the gift and the loan, the assessment orders for the years 1983-84, 1984-85 and 1985-86 were checked and the petitioners were given notice for production of books of account for the accounting years 1982-83 to 1985-86 informing them that the gift and the loan amounts had not been included in any of the returns, but they failed to produce the books of account and so the respondents had to resort to a best judgment assessment.

As regards the contention of the petitioners that the Income Tax Manual and other notifications were neither signed nor approved by the Maharaja of Sikkim, copies of the Manual and the relevant notifications do not purport to show that the originals bore the signatures of the Maharaja. The copy of the Manual does not purport to show that the originals bore the signature of any person and the copy of Notification No. 2053-200/IT and ST dated August 26, 1966, regarding transfer fee shows that the original bore the signature of the Chief Secretary. The words "By Order of Chogyal" purport to show that the notification was issued under the authority of the Chogyal. Circular No. 2468-12/IT dated September 21, 1966, shows that the original bore the signature of Sri R. N. Haldipur, Principal Administrative Officer, Government of Sikkim. The copy of Notification No. 7692-500/IT and ST dated May 1, 1967, shows that the original bore the signature of the Chief Secretary. The copy of Notification No. 1220-200/IT and ST dated December 20, 1973, shows that the original bore the signature of the Finance Secretary, Income Tax and Sales Tax Department. The words "By Order" are also written showing that the notification was issued under the Order of the Chogyal. It is true that none of the copies shows that the originals bore the signature of the Chogyal. It is also true that the original of none of them was produced by the State Government. But merely on these facts, it cannot be said that these did not have the approval of the Chogyal. Whether the Maharaja of Sikkim had any rules of business or any rules of allocation of business is not of any relevance, because, to consider the validity of the pre-merger laws, such questions have not to be gone into. The only relevant factor which has to be considered is as to whether the pre-existing laws were in force immediately before the date of the merger. The fact that the Law Commission has not been able to publish the Manual and the notifications do not lead to the inference that the Commission was not sure of the correctness and authenticity of the Manual and the notifications. There can be no doubt about the factual position that the Income Tax Manual was in force in the State of Sikkim prior to the merger, since the Government employees and the businessmen were paying Income Tax under no other law than the Manual of 1948. Transfer fee was also collected under the notifications referred to above. Since these were in force immediately before the appointed day, they are laws as per the provisions of Clause (k) of Article 371F. It is true that the Income Tax Manual and the relevant notifications have not been published till now so as to bring them within the easy reach of the people and even the courts have to act on typed or cyclostyled copies. The need for publication of laws can never be over-emphasised since, without publication, it is difficult to get access to them and if access is difficult, compliance cannot be easy. The cult of the occult is not the rule of law. So, the State, in order to ensure proper compliance, ought to have published the laws. However, only for such reason, the laws to which access could have been had if search had been made for them, though with difficulty, did not become inoperative, particularly, when they are primarily concerned with levy and collection of taxes and not with punishment for offences for non-compliance.

As for the contention of the petitioners that the Income Tax Manual is not jurisprudentially legislative, it being a mere compilation of guidelines prepared by the officers who used to collect taxes, there is absolutely no basis for this contention. There is no warrant for the view that the guidelines were prepared by the officers who used to collect taxes and that they had no sanction of the Maharaja. It is unthinkable that the tax would have been collected without the sanction of the Maharaja. It is difficult to believe that Income Tax was collected since 1910 or even before that, without any law or that the people used to pay tax voluntarily. Voluntary compliance of law is different from saying that the payments were made without any sanction. The very word "tax" carries the implication of compulsion. Whether the rules by which tax was collected had the form of a legislative enactment or of rules or guidelines or orders did not make any difference inasmuch as every one of them had to be complied with, and no person could say that the law was not in the form of a legislative enactment. As observed by the Supreme Court in Madhaorao Phalke Vs. The State of Madhya Bharat, , the distinction between executive orders and legislative commands is likely to be merely academic where the Ruler is the source of all power. There was no constitutional limitation upon the authority of the Ruler to act in any capacity he liked ; he would be the supreme Legislature, the supreme Judiciary and the supreme head of the Executive, and all his orders, however issued, would have the force of law and would govern and regulate the affairs of the State including the rights of its citizens. Thus, this contention has no merit.

The next contention of the petitioners is that since Parliament has the exclusive power to make laws with respect to Income Tax, the subject of Income Tax falling in the Union List, the State Income Tax Manual is not a valid law. However, this contention is contrary to the law contained in Clause (k) of Article 371F which provides that notwithstanding anything in the Constitution, all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority. There is nothing in the provision to suggest that in order to be valid, the subject with which the pre-existing law dealt, must be within the legislative competence of the State Legislature. On the other hand, the non obstante clause makes it clear beyond any doubt that pre-existing laws are valid even if they are contrary to any other provision in the Constitution.

The next contention of the petitioners that, since the subject of Income Tax falls within the Union List, the appointment of the Income Tax Officers and the appellate authority must have been made by the Central Government, is also not valid. Since the implementation of law contained in the State Income Tax Manual is the responsibility of the State Government, it is that Government that has the jurisdiction to appoint officers to perform the duties thereunder. Further, Clause 2(x) of the Manual defines "income tax Officer" as meaning a person appointed by the Government entrusted with the conduct or management of the levy or assessment of Income Tax coming within the purview of the Manual. Sub-clause (vi) of that clause defines "Government" as "The Government of Sikkim". Both these provisions make it abundantly clear that an Income Tax Officer has to be appointed by the State Government. The fact that the subject of Income Tax falls within the Union List has no bearing on this matter.

As regards the question as to the authority competent to hear an appeal against the assessment of Income Tax, Clause 22 of the Manual provides that an "appeal from the assessment of Income Tax or penalty imposed under any of the foregoing clauses will lie to His Highness the Maharaja of Sikkim through the Department concerned". By the Adaptation of Sikkim Laws (No. 1) Order, 1975, issued in exercise of powers conferred by Clause (1) of Article 371F of the Constitution by the President, the expression "His Highness the Maharaja of Sikkim" means the "State Government". The expression "State Government" has to be given a reasonable interpretation as per the constitutional scheme. Merely because an appeal was to be heard before the merger by the Maharaja in person does not mean that the appeal will have to be heard after the merger by all the Ministers sitting together. Under Clause (1) of Article 166, all executive action of the Government of a State shall be expressed to be taken in the name of the Governor. This will have to be so even when the concerned file is not to be put up before the Governor. Under Clause (3) of that article, the Governor shall make rules for the more convenient transaction of the business of the Government of the State, and for the allocation among Ministers of the said business in so far as it is not business with respect to which the Governor is by or under the Constitution required to act in his discretion. Now, if, under the allocation of business rules made by the Governor under Clause (3) of Article 166, the Finance Secretary is appointed as the appellate authority, that would meet the requirement of the State Government being the appellate authority. There is also no merit in the argument that since Clause 22 requires the appeal to be filed through the Department concerned, it would not be logical that the appeal should lie to the Secretary, Finance, through the Department which is headed by him. No practical significance can be attached to the requirement of the appeal being filed through the Department concerned under the changed constitutional set up. Under the rule of the Maharaja, it could have been to the convenience of the Maharaja, if the appeal came to him through the Department concerned, but under the present system, appeal has to lie to the authority concerned direct without there being any necessity of its being routed through any Department. Therefore, there is no merit in the contention that the appeal would have to be heard either by the Governor or the Council of Ministers.

As regards the contention about the condition of deposit of 50% of the assessed amount as a precondition for preferring an appeal, paragraph 3 of the Notification bearing No. 1220-200/IT and ST dated December 20, 1973, provides that an "assessee may present an appeal for the revision of assessment made against him after payment of fifty per cent. of the amount assessed in which case he shall not be treated as in default in respect of the amount in dispute. He will not be, however, treated as such if the appeal, on determination, has been found to be frivolous and preferred only to gain time for payment". The requirement that an appeal may be filed after payment of 50% of the amount assessed, necessarily implies that an appeal cannot be filed without payment of that much amount. Whether a person is to be treated as a defaulter or not is not germane to the question as to whether an appeal can or cannot be preferred without depositing the amount. However, it has been made clear that if the appeal is preferred after depositing the amount, the assessee would not ordinarily be treated as a defaulter, though he will be treated as a defaulter if the appeal, on determination, is found to be frivolous and preferred only to gain time for payment. The argument that the condition of deposit could not be imposed by an administrative order such as the notification concerned, there being no such provision in Clause 22 of the Manual which provides for an appeal, is without any substance, firstly, for the reason that the Manual is also in the nature of an administrative order and, secondly, because, as observed earlier, the distinction between executive orders and legislative command is merely academic where the Ruler is the source of all power.

As regards the question whether the petitioners had an adequate and efficacious alternative remedy available to them in the form of an appeal and the petitions should not be entertained, reference may be made to Ram and Shyam Company Vs. State of Haryana and Others, , where the Supreme Court observed (at p. 1151) "that the court has imposed a restraint in its own wisdom on its exercise of jurisdiction under Article 226 where the party invoking the jurisdiction has an effective, adequate alternative remedy. More often, it has been expressly stated that the rule which requires the exhaustion of alternative remedies is a rule of convenience and discretion rather than rule of law. At any rate, it does not oust the jurisdiction of the court." Further, it was pointed out that "it should be made specifically clear that where the order complained against is alleged to be illegal or invalid as being contrary to law, a petition, at the instance of a person adversely affected by it, would lie to the High Court under Article 226 and such a petition cannot be rejected on the ground that an appeal lies to a higher officer or the State Government. An appeal, in all cases, cannot be said to provide, in all situations, an alternative effective remedy keeping aside the nice distinction between jurisdiction and merits." In the present petitions, the impugned orders have been challenged on various grounds of alleged illegalities having been committed. Further, the requirement contained in Notification No. 1220-200/IT and ST, dated December 20, 1973, for the deposit of 50% of the amount assessed as. a condition precedent for an appeal makes the remedy of appeal illusory in many of the cases because of the assessments having been made at''quite a heavy amount which the petitioners say they cannot pay. Besides, there is no provision for an appeal regarding the transfer fee and as such no other remedy was available to the petitioners on that grievance. It would thus appear that no adequate and efficacious alternative remedy was available to the petitioners and the petitions are not liable to be rejected on that count.

As regards the next contention of the petitioners, it is true that there is no specific provision in the Income Tax Manual enjoining upon persons liable to pay tax to file the Income Tax returns, yet the fact that returns could even then be filed is evident from Clause 20 which makes a reference to an Income Tax return by making a provision for imposition of a fine on a person who makes a false statement or a false verification in an Income Tax return. At the same time, it is common ground between the parties that in actual practice Income Tax Officers visit the business establishments of the people and make assessments by getting relevant, information from them and after looking into their relevant records. It is correct that there is no specific provision in the Manual for reassessment or review and under Clause 4(i), Income Tax is to be charged on the gross sale proceeds of the previous year of all persons engaged in business ; but the question is : Does this mean that assessment cannot be made subsequent to the financial year which follows the previous year, if, for any reason, a particular income escaped from being assessed to tax in any particular financial year ? In other words, is the requirement of assessment in the financial year following the previous year mandatory or directory ? The fundamental rule of interpretation is that the court will have to find out the expressed intention from the words of the enactment. But, if, however, two constructions are possible, then the court must adopt that which will ensure a smooth and harmonious working of the enactment and eschew the other which will lead to absurdity or give rise to practical inconvenience or make well established provisions of established law nugatory. As pointed out in Utkal Contractors and Joinery Pvt. Ltd. and Others Vs. State of Orissa and Others, , "a statute is best understood if we know the reason for it. The reason for a statute is the safest guide to its interpretation. The words of a statute take their colour from the reason for it.... No provision in the statute and no word of the statute may be construed in isolation. Every provision and every word must be looked at generally before any provision or word is attempted to be construed. The setting and the pattern are important". Certain broad propositions about the difference between a mandatory and directory rule were summarised by E. S. Venkataramiah J. (as he then was) in Sharif-ud-din Vs. Abdul Gani Lone, , as under (at page 305) :--

"The difference between a mandatory rule and a directory rule is that while the former must be strictly observed, in the case of the latter, substantial compliance may be sufficient to achieve the object regarding which the rule is enacted. Certain broad propositions which can be deduced from several decisions of courts regarding the rules of construction that should be followed in determining whether a provision of law is directory or mandatory may be summarised thus : The fact that the statute uses the word ''shall'' while laying down a duty is not conclusive on the question whether it is a mandatory or directory provision. In order to find out the true character of the legislation, the court has to ascertain the object which the provision of law in question is to subserve and its design and the context in which it is enacted. If the object of a law is to be defeated by non-compliance with it, it has to be regarded as mandatory. But when a provision of law relates to the performance of any public duty and the invalidation of any act done in disregard of that provision causes serious prejudice to those for whose benefit it is enacted and at the same time who have no control over the performance of the duty, such provision should be treated as a directory one. Where however, a provision of law prescribes that a certain act has to be done in a particular manner by a person in order to acquire a right and it is coupled with another provision which confers an immunity on another when such act is not done in that manner, the former has to be regarded as a mandatory one. A procedural rule ordinarily should not be construed as mandatory if the defect in the act done in pursuance of it can be cured by permitting appropriate rectification to be carried out at a subsequent stage unless by according such permission to rectify the error later on, another rule would be contravened. Whenever a statute prescribes that a particular act is to be done in a particular manner and also lays down that a failure to comply with the said requirement leads to a specific consequence, it would be difficult to hold that the requirement is not mandatory and the specified consequence should not follow."

The provision in Sub-clause (i) in Clause 4 of the Manual that Income Tax shall be charged on the gross sale proceeds of the previous year is a rule of procedure which has to be followed in the normal course. It is plain that Income Tax is to be charged in respect of the income of a particular year in the next year. It is the normal rule which has been stated in Sub-clause (i). The real intention of the sub-clause was to make a provision for tax liability. It is with (hat objective in view that Sub-clause (ii) enjoins upon every person to keep proper accounts and produce the same on demand before the Income Tax Officer who, in default or in case of unsatisfactory account, will assess the tax according to his discretion. It is clear from Sub-clause (ii) that it is primarily on the basis of the proper books of account that tax is expected to be assessed but if accounts are not maintained or are misleading and the Income Tax Officer does not come to know of a particular business in respect of which there is no mention in the accounts produced before him, can it be said that the intention was that if the Income Tax Officer comes to know of the escaped income subsequent to the close of the financial year, that income would get immunity from tax liability. In this connection, reference may be made to Clause 20 of the Manual which says that if a person makes a statement or a verification in an Income Tax return which is false or which he either knows or believes to be false or does not believe to be true, he shall be liable on conviction to a fine which may extend to Rs. 1,000. When evasion of Income Tax liability on the basis of a false statement or verification in an Income Tax return has been made punishable, it would amount to doing great violence to the scheme of the Manual to say that once income has escaped from being assessed in any relevant financial year, it cannot be assessed in any subsequent year. The requirement that assessment of the income of the previous year shall be made in the financial year is procedural and the defect which occurs in not making assessment of the escaped income in the relevant financial year can be cured by appropriate rectification which may be carried out by making assessment in a subsequent year, and if this is done, this will only advance the reason of the Income Tax law of getting revenue according to law without causing prejudice to anyone and so the requirement has to be held as mere directory and not mandatory.

Furthermore, no assessment in any of the cases was done in respect of any previous year in the previous year itself. What happened was that on receiving information about certain gifts or loans, inquiry was initiated in the previous year itself. Since the inquiry was made shortly after the making of the gift or giving of the loan, facts as to the source of money from which gifts or loans were given would be very much within the memory of the persons concerned and thus, this would only be beneficial to the persons concerned and could not cause any prejudice to any one. However, if there was to be any difficulty, the difficulty could be brought to the notice of the Income Tax Officer. Nothing could be pointed out to show that any prejudice was caused to any of the petitioners by making the inquiry before the end of the previous year itself.

Further, if the Income Tax Officer seeks to assess Income Tax on the income that escaped tax earlier, it does not involve any review. A distinction has to be made between a review of the assessment and an assessment of escaped income. Where Income Tax has already been assessed on a particular income and is sought to be reassessed by the Income Tax Officer, a review would be involved but, where a particular income was not assessed at all and is sought to be assessed for the first time, no review is involved. An assessment of escaped income cannot be challenged on the ground that there is no provision for review contained in the Manual.

As regards the next question, it was pointed out by the Privy Council in CIT v. Laxminarain Badridas [1937] 5 ITR 170 that the officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, 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. The Supreme Court pointed out in Brij Bhushan Lal Parduman Kumar Vs. Commissioner of Income Tax , Haryana Himachal Pradesh and New Delhi III, , that though arbitrariness cannot be avoided in such estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case. In the present cases, the petitioners did not produce account books from which turnover of the amounts of gifts or loans could be ascertained. The Income Tax Officer had, therefore, to make an estimate on the basis of the experience gained from the assessments of earlier years. It cannot be said that the assessment of turnover at 10 times the amount of gifts or loans was without any basis.

Several petitioners have taken the plea that gifts were given from capital or wealth or inheritance, but they did not produce any documents to prove their allegation. The Income Tax Officer could reasonably presume that huge amounts running into lakhs or millions of rupees would not have been kept in cash by the petitioners in their homes, and, therefore, if they did not constitute income that had escaped tax, they ought to have proved from where the amounts had been withdrawn for making the gifts ; and it was not enough to say that they had sufficient wealth or income to enable them to make gifts. When the Income Tax Officer assessed tax in this manner, it was not a tax on gifts but on escaped income which was evidenced by gifts.

As regards the contention of the petitioners about hostile discrimination against them, there is an allegation in paragraph 22 of Petition No. 44 of 1987 that out of 185 cases of transfer of money from Sikkim, only 41 persons were served with notices. Allegations of discrimination have been made in several other petitions also. There can be no doubt that every one is entitled to equality of treatment. It has to be borne in mind that it is the duty of the State to levy tax on every person who is liable to pay tax. There is no discretion whether to impose or not to impose a tax on a person who is liable to pay tax. So, when some persons have unjustifiably been left out of the tax net, others who have been proceeded against, cannot claim to be left out, though as citizens, having substantial interest in that the State gets its due revenue for the betterment and well-being of the people at large including themselves, they may claim that others who are also liable to pay tax must not be left out. The concerned authorities should, therefore, see that those who have been left out be also proceeded against.

As regards transfer certificates, it is strange that a number of certificates were issued to the effect that the amounts of the gifts mentioned therein had been withdrawn by the donor out of his capital from his business and the gifts were genuine. 16 such certificates are on the file of Writ Petition No. 42 of 1987. One such certificate is reproduced below :--

"TO WHOM IT MAY CONCERN

Certified that Shri Rameshwarlal Kandoi, son of late Shri Bajrangdass Kandoi resident of M. G. Marg, Gangtok (Sikkim) who is an Income Tax assessee with the Income Tax Department of the Government of Sikkim has made a gift of Rs. 2,50,000 (Rupees two lakhs fifty thousand) only to Master Parveen Kumar s/o. late Shri Om Prakash r/o 39, Gadiapur, Tehsil Mahrauli, New Delhi, vide bank draft No. TL/A/3/892177 dated 24-12-1986 of the State Bank of India, Zero Point Branch, Gangtok (Sikkim), payable at New Delhi. The amount of the gift has been withdrawn by the donor Shri Rameshwarlal Kandoi from his capital in his business being carried on in Sikkim under the name and style of Sanjay Enterprises, M. G. Marg, Gangtok (Sikkim). The genuineness of this gift has been verified by the undersigned and the same has been found to be correct and in order.

(Sd.) Illegible, (Sd.) Illegible, 24-12-1986 24-12-1986 income tax Officer Income Tax Officer Income Tax and Sales Tax Depart, Income Tax and Sales Tax Depart, Government of Sikkim, Government of Sikkim, Gangtok. Gangtok."

On the other hand, a transfer certificate as contemplated under Notification No. 2053-200/IT and ST dated August 26, 1966 is also on the same file and is reproduced as under :

"GOVERNMENT OF SIKKIM INCOME TAX AND SALES TAX DEPARTMENT

MONEY TRANSFER CERTIFICATE NO. 3/IT

This is to certify that Rameshor Lall Kandoi of Dikchu Bazaar, East Sikkim is hereby allowed to transfer a sum of Rs. 2,00,000 (Rupees two lakhs) only from Sikkim to Rajasthan out of the income accrued to him from his business in Sikkim,

Gangtok, (Sd.) Illegible, The 2nd April, 1981 Senior Income Tax and Sales Tax Officer, Income Tax and Sales Tax Department, Government of Sikkim, Gangtok."

Certificates of the former category are not exactly transfer certificates as contemplated under the notification and were issued without charging a transfer fee, yet obviously, they were intended to serve the same purpose as the transfer certificates produced before the Income Tax Officer concerned by the donees as proof of the genuineness of the gifts so as to avoid inquiry by the Officer. The fact that there was something sinister about them is clear from the fact that subsequently, the amounts mentioned in them were treated as income that had escaped tax and were assessed to Income Tax treating them as of no consequence. This matter requires detailed investigation by the concerned authorities.

The question now is what is the effect of such certificates on the assessments which have been impugned in the writ petitions. There is a presumption that official acts have been regularly performed. There would be such a presumption in respect of a transfer certificate issued under the provisions of Notification No. 2053-200/IT and ST dated August 26, 1966, because such certificates are required to be issued only after making full verification from relevant account books or documents that the amounts sought to be transferred had been lawfully earned and were otherwise unencumbered. But there is no such presumption in respect of the certificates which are not transfer certificates and which were issued without the payment of transfer fee, notwithstanding what is contained therein because, instead of having been issued in the regular course of official acts, they were issued against the official procedure prescribed in the aforesaid notification.

As regards the next contention, there is no merit in the argument that Notification bearing No. 2053-200/IT and ST dated August 26, 1966, as modified by Notification No. 7692-500/IT and ST dated May 1, 1967, relating to transfer fee is bad for want of legislative competence, in view of Clause (k) of article 371F of the Constitution which provides that notwithstanding anything contained in the Constitution, all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority. The laws which were in force immediately prior to the date of the merger continue to be valid law until amended or repealed by a competent Legislature or a competent authority and for their validity they have not to depend upon the legislative competence of the State Legislature.

The question as to whether no transfer fee is liable to be paid on any money transfer, where a transfer certificate has not been applied for, is of great importance. In view of the importance of the matter, Notification No. 2053-200/IT and ST dated August 26, 1966, is reproduced as under :

"GOVERNMENT OF SIKKIM INCOME TAX AND SALES TAX DEPARTMENT Notification No. 2053-200/IT and ST

It is hereby notified for the information of all concerned that any person or firm, intending to transfer out of Sikkim, profits, capital gains and other such allied gains or income, accrued within the territories of Sikkim and arising from any trade, business, contract or other transactions carried on therein will be required to obtain a transfer certificate from the office of the Income Tax and Sales Tax Department.

The Income Tax and Sales Tax Department will issue the necessary certificate after making full verification from the relevant account books and documents that the amount sought to be transferred has been lawfully earned and is otherwise unencumbered.

The applicant will have to deposit as fee one per cent. of the amount to be transferred.

Application for such transfer will be made on a Darbar Paper of the value of Re. 1.

All police checkposts shall have the power to search and seize, on reasonable suspicion, any money, buljion, hundies or other valuable securities, intended to be taken out of Sikkim without a valid transfer certificate.

Transfer or an attempt to transfer without a valid transfer certificate as required under Clause 1 above, shall be a cognizable offence. Any Police Officer not below the rank of Sub-Inspector will be competent to grant bail to a person arrested for violation of this order upon his furnishing satisfactory security.

Any person found guilty of violating this order, upon trial by a Magistrate of the First Class, shall be liable to pay a fine to the extent of the amount seized, besides confiscation thereof.

BY ORdER OF CHOGYAL.

Gangtok, (Sd.) D. Dahdul, The 26th August, 1966. Chief Secretary, Government of Sikkim"

Thus, Notification dated August 26, 1966, prohibited any transfer of money of the nature specified therein, out of Sikkim without a transfer certificate which could only be obtained on deposit of 1% as fee. Even before the expiry of one month from the date of the issue of this notification, it was brought to the notice of the Sikkim Darbar by the Sikkim Merchants'' Association in Gangtok that the notification requiring traders to obtain transfer certificates was likely to adversely affect their day-to-day trade. By the circular bearing No. 2468-12/IT dated September 21, 1966, it was made clear that the "intention of the Sikkim Darbar in the issue of the notification was essentially to ensure that such transfer certificates which are normally issued after proper verification of their income would serve as a proof of income earned in Sikkim whereby they would not be subject to double taxation." This meant that the requirement as to transfer certificate was not with a view to earning revenue for the State but was merely to charge a fee for the service of verification required for the issue of certificates and the idea was to avoid harassment to the traders by being required to pay tax again. By this circular it was made known that Notification dated August 26, 1966 was kept in abeyance for the time being. After some time, on May 1, 1967, another notification bearing No. 7692-500/IT and ST was issued in modification of Notification dated August 26, 1966, and it was notified for the information of all concerned that "any person or firm may apply for a transfer certificate from the office of the Income Tax and Sales Tax Department, when seeking to transfer out of Sikkim profits, capital gains or other such allied gains or income, accrued within the territories of Sikkim and arising from any trade, business, contract or other transactions carried therein." Paragraph 2 stated that "the applicant will have to deposit as fee one per cent, of the amount to be transferred". Paragraph 3 required such an application to be made on a Darbar Paper of the value of Re. 1. Now the question whether the requirement of deposit as fee 1% of the amount to be transferred is to apply even to a case where no transfer certificate is needed has to be answered by ascertaining the real intention of issuing the notification dated May 1, 1967. It would appear from the context that if one were required to deposit the fee even when no certificate was applied for, it would follow that no purpose was intended to be achieved by Notification dated May 1, 1967. If the fee was to be paid in eithet event, whether or not the certificate was needed, there would hardly be any person who would not like to get a certificate. It cannot be assumed that Notification dated May 1, 1967 was issued without any purpose, only for the sake of issuing it. As stated earlier, the reason for a statute is the safest guide to its interpretation. To find out the meaning of a law, recourse may legitimately be had to the prior state of law, the evil sought to be removed and the process by which the law was evolved. Justice Oliver Wendell Holmes said in his book, The Common Law that the "law embodies the story of a nation''s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. In order to know what it is, we must know what it has been and what it tends to become." The reason for the issue of Notification dated May 1, 1967, was to give relief to traders by making it discretionary to them whether to apply for the certificate or not and paragraph 3 of the notification made it clear that an application for such transfer was to be made on a Darbar paper of the value of Re. 1. No application was needed if no certificate was needed and as such paragraph 3 was to apply only if a certificate was needed. The use of the word "applicant" in paragraph 2 also made it clear that fee was to be deposited only by the applicant. One who did not need the certificate and so did not need to make an application, could not be said to be an applicant. As such, the requirement by notification dated May 1, 1967, which was issued in modification of the earlier notification meant that the fee was to be paid only by the applicant who needed a certificate and by no other person. The difference between the earlier Notification dated August 26, 1966, and the subsequent Notification dated May 1, 1967, is that whereas earlier, money could not be transferred without a certificate, by the subsequent notification, it was made discretionary whether to have or not to have the certificate, with the result that money was permitted to be transferred even without a transfer certificate. And this was the interpretation put by the officials of the Income Tax Department when certificates, which were not exactly transfer certificates contemplated under the notification dated August 26, 1966, were issued without charging a transfer fee. Furthermore, as brought to the notice of the court by some of the petitioners, Shri K. C. Pradhan, then Secretary, Department of Finance, stated in his objection filed on May 30, 1983, in Writ Petition No. 10 of 1983, Ashok Tshering Bhutia v. State of Sikkim, that the department was of the view that Notification dated August 26, 1966, has not been in force in Sikkim after Sikkim became a part of India. Relevant portion is produced as under :

"8. That the Notification No. 2053-200/IT and ST dated 26-8-1966 was a measure which was in force when Sikkim was not part of India. After Sikkim has become a part of India, the Government has not been enforcing the said notification and no such cases have been brought to law courts after Sikkim has become a part of the country ..."

Furthermore, in Writ Petition No. 15 of 1988, it was pleaded in paragraph 30 that, during the early period of May, 1987, the Finance Department issued instructions to the nationalised banks in Sikkim not to issue bank drafts without the permission of the Finance Department or the State Government but, subsequently, the instructions were withdrawn. These allegations have not been controverted in the counter filed by the respondents. The withdrawal of the instructions also implied that the State Government was of the view that money could be transferred without a transfer certificate.

The next contention raised on behalf of the petitioners is that the Sikkim Income Tax (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987 (hereinafter referred to as "Act No. 7 of 1987"), is beyond the competence of the State Legislature, since the State Legislature has no power or competence to legislate on any matters relating to levy of Income Tax. u/s 4 of this Act, the Government was enjoined with the duty to appoint one or more Inspectors for the purposes of the Act. "Tax" has been defined u/s 3(d) to mean a tax payable under the taxation laws in force in the State of Sikkim. Thus, this Act has been enacted for collection of taxes which are payable under the taxation laws in force in the State of Sikkim. Since Income Tax which is payable under the Sikkim State Income Tax Manual has to be collected by the State Government, the argument of the petitioners that since Income Tax is a subject falling under the Union List, the State Legislature has no competence to pass an enactment for the collection of that tax is without merit. The State of Sikkim is entitled to recover Income Tax not on account of the power given under any entry in the Seventh Schedule but because the Sikkim State Income Tax Manual was a law in force in Sikkim immediately before the appointed day. It is a consequence of the doctrine of pith and substance that once a law in pith and substance falls within a legislative entry, the incidental encroachment on an entry in another list does not affect its validity. The machinery devised for the effective collection of tax is incidental or supplemental to the levy of tax and so when the State has the competence to levy tax under any of the provisions of the Constitution, the State Legislature has the competence to devise an effective machinery for its collection.

The next contention of the petitioners is that the appointment of Inspectors was not notified in the Official Gazette and, therefore, no proceeding under Act No. 7 of 1987, could be lawfully taken. Section 3(a) defines "Inspector" as meaning any officer of the Government appointed as Inspector, by notification u/s 4 of the Act. "Notification" has been defined u/s 3(b) as meaning a notification published in the Official Gazette. Section 4 says that the Government "shall appoint one or more Inspectors for the purpose of this Act for such areas as may be specified in the notification. Section 5 states that every tax due to the Government of Sikkim shall be collected by the Inspector by distraint and sale of movable and immovable properties. The Inspector has been given, wide powers under Sections 7, 8 and 9 of the Act inasmuch as he has the power to attach movable and immovable properties, to sell properties by public auction, to enter upon the premises of any person for inspection of books of account and any other relevant records connected with business, trade occupation or profession and seize such books or records. It is on account of the wide powers having been given to an Inspector that a provision has been made in Section 3 that "Inspector" means any officer appointed as an Inspector by publication in the Official Gazette. Respondents were given several opportunities to produce the Gazette Notification to show that the appointment of Inspectors was made by publication in the Official Gazette but no such notification could be produced. It, therefore, follows that the "Inspector" was not appointed by publication in the Official Gazette as per the statutory requirement. Therefore, whatever proceedings have been taken under the Act are invalid, not having been taken by a person authorised to do so and so they are liable to be quashed.

As regards the next contention of the petitioners, Notification bearing No. 405/50 regarding realisation of public dues has already been produced earlier. Relevant provisions of Act No. 7 of 1987 have also been referred to. There is no doubt that the provisions of Act No. 7 of 1987 are more severe than the provisions of Notification No. 405/50. But there is no warrant for saying that once the process for recovery was initiated under Notification No. 405/50, subsequently, the procedure provided under Act No. 7 of 1987 cannot be taken after the Act came into force. Act No. 7 of 1987 is a procedural law providing a procedure for collection of taxes due to the State Government. No tax payer has a vested right of being proceeded against according to a particular procedure in the matter of collection of tax. In fact, after the enactment of the Act No. 7 of 1987, Notification bearing No. 405/50 has become inoperative in respect of matters which are covered by the Act. There is no merit in the argument that once proceedings had been initiated under Notification No. 405/50, recovery proceedings cannot be continued under the provisions of Act No. 7 of 1987.

Now the ground is clear for considering the individual cases on merit.

Writ Petition No. 33 of 1987 :

In Writ Petition No. 33 of 1987, a notice dated March 13, 1987, was issued to petitioner No. 2, Shri Udai Ram Agarwal, by Shri Pema Wangyal, Income Tax Officer, stating that during the years 1985-86 and 1986-87, a sum of Rs, 27,21,500 was transferred by him as gift/loan. That notice was vague inasmuch as it did not clearly specify whether the amount was by way of gift or loan, yet it was clear to respondent No. 2 that it was a gift. By this notice, respondent No. 2 was directed to submit within five days proof to show his source of income for making the gift which was, according to the Income Tax Officer, quite disproportionate to his income as per the volume of his business as per the returns filed/assessment made. Documents and books of account maintained for those years were also required to be submitted. Petitioner No. 2 was also asked to pay the transfer fee at the rate of 1% as per notification No. 7692-500/ IT and ST. Another letter bearing No. 118/IT dated March 24, 1987 was sent to petitioner No. 2 by the Joint Secretary, Income Tax and Sales Tax Department, stating that he had vaguely stated''in his reply that he had certain amounts from other sources of income. By this notice, petitioner No. 2 was required to appear before the sender on March 26, 1987, and produce the necessary records or books of account showing the receipt of the amounts and also to answer the necessary queries. On the same date, another letter was also sent to petitioner No. 2 enquiring from him whether he had obtained a transfer certificate from the office of the Income Tax and Sales Tax Department and whether transfer fee at the rate of 1% had been deposited. In reply to both these letters, a letter dated March 26, 1987 was sent by petitioner No. 2 to the Joint Secretary, Income Tax and Sales Tax Department, wherein, he gave details of several businesses carried on by the Hindu undivided family which is petitioner No. 1 and of which he himself is a member and said that the family had good sou/Tees of income from various trading activities "and whatever gifts have been made by us to our relatives are very much within our means . . . However, no separate books of account were maintained for this purpose as it was not considered necessary to reflect the same in the accounts of our firm since the gifts were made in our personal capacity". It would appear from the documents referred to above and also from the allegations made in the writ petition that the case of the petitioners has been that the gifts had been given out of joint family funds and savings resulting from funds provided by petitioner No. 1, the Hindu undivided family to its members. This plea, however, does not answer the query of the Income Tax Department. When the Income Tax Department came to know that certain gifts had been made by petitioner No. 2, it was natural for the Department to enquire as to the source from which the money was advanced. The purpose was not to know about the businesses from which petitioner No. 2 could get money so as to be able to make gifts, but to know exactly the business or the bank accounts or the other place from which the money had been withdrawn to make the gifts so that it could be ascertained as to whether the money advanced was liable to be taxed and if so whether the tax had already been paid. The reply that petitioner No. 2 was a member of the Hindu undivided family which had several businesses yielding substantial income and that income was sufficient to provide the means to give gifts obviously did not meet the requirement. What was required of petitioner No. 2 was to say from which business or businesses or from which bank account portion of the total gift amount had been withdrawn to make a total of the gifts given. Since no proper reply was given by petitioner No. 2 and no books of account were produced to satisfy the Income Tax Officer that tax had already been paid on the amount of gifts advanced, the best judgment assessment made regarding the gift amounts cannot be said to be beyond or in excess of jurisdiction or otherwise contrary to law.

The impugned best judgment assessment, however, went beyond making an assessment on the gift amounts. It further stated that a loan of Rs. 29,53,400 had been advanced by petitioner No. 2 to Supreme Roadways Ltd., New Delhi, in 1983. As already stated, the case of the petitioners in this regard is that the amount had been paid to the manufacturers of Tata Diesel vehicles as the price of 20 vehicles on behalf of Supreme Roadways Ltd., who had placed an order with them and, therefore, this was on account of credit advanced in the normal course of business and not as a loan. The petitioners have alleged, in paragraph 32 of the petition, that he was never called upon to explain about this amount advanced as credit to Supreme Roadways Ltd., and thus, the principles of natural justice were violated. This allegation was not controverted by the respondents in their counter, and during arguments also, it was not challenged that the petitioners were not given any notice or any opportunity to explain about this amount. Therefore, an assessment regarding this amount was in violation of the principles of natural justice and, therefore, the impugned best judgment assessment is to be quashed regarding this amount, though the matter shall be again considered regarding this amount by the Income Tax Department.

Petitioner No. 2 was also directed to pay transfer fee by the impugned order. There is no doubt that he had not applied for any transfer certificates. It has already been held above that no transfer fee is liable to be paid, if transfer certificate is not applied for. Therefore, the impugned assessment relating to transfer fee is also liable to be quashed and whatever amount has been paid by petitioner No. 2 regarding transfer fee is to be refunded.

In the result, Petition No. 33 of 1987 is allowed in part and the impugned best judgment assessment dated May 14, 1987, is quashed as regards the loan amount of Rs. 29,53,400 and transfer fee. Petitioner No. 2 shall be liable to pay Income Tax on the amount of gifts amounting to Rs. 27,21,500 after getting adjustment for the Income Tax and transfer fee already paid. The impugned order is also quashed in respect of the transfer fee. The matter regarding the loan amount of Rs. 29,53,400 shall be again considered by the Income Tax Officer, following the principles of natural justice. Therefore, the recovery proceedings started on the basis of the impugned order are also quashed. Another assessment order shall be issued in the light of the observations made above.

Writ Petition No. 29 of 1987 :

By this writ petition, the best assessment judgment dated March 23, 1987, whereby, tax amounting to Rs. 17,72,920 was imposed for the years 1982-83 to 1985-86 on an amount of Rs. 15 lakhs advanced by the petitioner to Shri Satya Narayan and Sagarmal, partners of Bhutan Trading Co. of Delhi, has been challenged. The petitioner was served with a notice dated March 12, 1987 directing him to produce his books of account and other relevant documents so as to assess the correct and true gross income out of which he had advanced the loan of Rs. 15 lakhs on a single day. On the failure of the petitioner, the amount of Rs. 15 lakhs was considered as savings from his business and treating the turnover at ten times the loan amounts, Income Tax was assessed for the year 1982-83. The same turnover was fixed for the subsequent three years 1983-84, 1984-85, and 1985-86 and, accordingly, the assessment orders were passed. The petitioner challenges the assessment order primarily on the ground that the amount belonged to the son of his sister, Shri Chand Kumar Barma of Nepal, and that the money had been advanced by him to the two partners of Bhutan Trading Company at Delhi and he was only a benamidar with no profit accruing to him. Further, he has stated that the loan transaction was a single transaction and there could be no justification for treating the same figure as the turnover of other years also. The Income Tax Officer was very much within his jurisdiction in treating the amount of loan of Rs. 15 lakhs as the amount advanced by the petitioner and not as benamidar for Chand Kumar Barma and thus to assess tax according to his best judgment by treating the turnover at ten times the loan amounts for the year 1982-83. But there could certainly be no justification for treating the same turnover for the subsequent years also. The fact that a loan of Rs. 15 lakhs was advanced in one particular year does not necessarily mean that that much of the amount was earned in that very particular year. But since no accounts were produced to show when the amount was earned, the Income Tax Officer was within his jurisdiction to assess tax on that amount in one particular year. This would be so because there was no other basis to proceed, even if, in fact, the amount might have been earned in several previous years. Thus, the assessment of income for the year 1982-83 was within his jurisdiction but the assessments for the years 1983-84, 1984-85 and 1985-86 being based on no rational principle are liable to be quashed. In the result, the impugned assessment orders are quashed and it is directed that another assessment order shall be made for the year 1982-83 in the light of the observations made above. Recovery proceedings under Act No. 7 of 1987 are also quashed. Fresh recovery proceedings may, however, be taken on the basis of a new assessment order by the duly appointed Inspector.

Writ Petition No. 38 of 1987 :

In Writ Petition No. 38 of 1987, Pema Wangyal, Income Tax Officer, issued a notice dated March 13, 1987, to the petitioner, Smt. Saroj Agarwat, stating therein that she had made a gift of Rs. 4,20,000 during the year 1986-87 which was quite disproportionate to her income from the volume of her business. By this notice, she was required within five days to show her source of income for making the gift, and also to submit the documents and books of account maintained for the relevant period. Further, she was required to pay the transfer fee on the said amount of gift It was also stated that on her failure to comply with the notice, the assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. Another notice dated May 15, 1987 was issued by the Joint Secre-tary-cum-income tax Officer asking her to show cause as to why the turnover for the year 1986-87 should not be deemed to be ten times the amount transferred. The best judgment assessment was passed on June 15, 1987, which mentioned that her reply to the show cause notice that the gift had been made out of the income earned from the business earlier assessed by the Income and Sales Tax Department was not found satisfactory. Accordingly, a best judgment assessment was made taking the turnover at ten times the gift amount and a tax of Rs. 1,19,230 was levied.

The case of the petitioner is that the amount of gift had nothing to do with the annual turnover and that the gift had been made out of the past accumulated capital and wealth. She further stated that she deposited a sum of Rs. 4,200 as transfer fee on account of a misconception and she was entitled to get refund thereof. In view of the fact that the petitioner failed to prove before the Income Tax Officer that the gift had been made out of the past accumulated capital and wealth, the Income Tax Officer was within his jurisdiction in making the best judgment assessment taking the turnover at ten times the gift amount. During the arguments, however, it was pointed out that there was some error of calculation in the best judgment assessment. On behalf of the respondents also, it was conceded that there was some error.

It is, therefore, directed that a corrigendum shall be issued by the Income Tax Officer in order to correct the error in calculation in the best judgment assessment. In view of the fact that no transfer fee is liable to be paid where a transfer certificate is not applied for, the petitioner shall be entitled to refund of the transfer fee already deposited. Recovery proceedings are quashed. A fresh demand notice shall be issued, if necessary, after the correction is made in the best judgment assessment giving adjustment for the Income Tax already deposited and the transfer fee which is liable to be refunded.

Writ Petition No. 40 of 1987 :

In Writ Petition No. 40 of 1987, a notice dated March 13, 1987, was issued by Pema Wangyal, Income Tax Officer, to the effect that a sum of Rs. 35,75,000 was given in gift by petitioner No. 2 during the years 1985-86 and 1986-87, which was quite disproportionate to his income from the volume of business as per his annual return filed/assessment made. He was directed to submit within five days proof to show his source of income for making the gift and also to submit the documents and books of account for the relevant period. Further, he was asked to deposit the transfer fee at the rate of one per cent. on the amount transferred. It was made clear that on his failure to comply with the notice, assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. Another notice was issued by the Joint Secretary, Income Tax and Sales Tax Department, on March 24, 1987, wherein it was mentioned that in reply petitioner No. 2 had vaguely stated that he had certain amounts from other sources of income. He was asked to appear before the sender on March 26, and to produce necessary records or books of account and also to answer necessary queries. A reply to this notice was given on March 26, 1987, by petitioner No. 2 wherein he detailed the various businesses in which he had good sources of income and stated that whatever gifts had been made were within his means. It was further stated that whatever income is earned by way of various trading activities under the parent firm, Balchand Udairam, is the joint family income and whatever was gifted was done with the consent of the family as a whole. Further, it was stated that no separate books of account were maintained for the purpose of the gifts, as the gifts were made in personal capacity.

A best judgment assessment was made on May 14, 1987, wherein it was stated that petitioner No. 2 had admitted about the amount of the gifts made and that the reply that the gifts had been made out of his earnings from the business earlier assessed was not found justified. Income Tax was assessed at Rs. 10,58,960 taking the turnover at ten times the gift amounts. The case of the petitioners is that petitioner No. 1 is a joint Hindu family and the father of petitioner No. 2, Shri Udairam Agarwal, is the karta of that family and the family carries on several businesses. It is alleged that no show cause notice was issued before making the assessment. This allegation is not found to be correct in view of the fact that notices were issued on March 13, 1987, and March 24, 1987, and there is no reason for interfering with the assessment of Income Tax. Petitioner No. 2 has also claimed refund of the transfer fee deppsited by him to which he is entitled in view of the earlier discussion.

Demand notice issued under Act No. 7 of 1987 is quashed and a fresh notice may, if necessary, be issued after giving adjustment for the income- tax already deposited and for the transfer fee which is liable to be refunded.

Writ Petition No. 41 of 1987 :

In Writ Petition No. 41 of 1987, a notice dated March 13, 1987, was issued by Pema Wangyal, Income Tax Officer, to petitioner No. 2 stating that he had made gifts amounting to Rs. 12,75,000 during 1985-86 and 1986-87 which were quite disproportionate to his income from the volume of his business as per the annual returns filed/assessments made. He was directed to submit within five days proof to show his source of income for making the gifts and also to submit the documents and books of account maintained for the relevant period. He was also required to deposit transfer fee at the rate of one per cent, of the amount transferred. It was made clear that, in the event of his failure to comply with the notice by the due date, assessment of Income Tax already made would be reviewed and would be determined as per Clause 4(ii) of the Income Tax Manual. This was followed by another notice dated March 24, 1987, of the Joint Secretary, Income Tax and Sales Tax Department, wherein it was stated that in the reply filed by petitioner No. 2, he had vaguely stated that he had certain amounts from other sources of income. He was asked to appear before the sender on March 26, 1987, and to produce necessary records or books of account and also to answer necessary queries. It was made clear that should he fail to appear on the date fixed, the matter would be disposed of ex parte and assessment would be made as per discretion. On March 26, 1987, a reply was sent by petitioner No. 2, wherein he detailed the several sources of income of the Hindu undivided family of which he is a member. He stated that the family had good sources of income in various trading activities and whatever gifts were made by the family were within their means and were made as per the consent of the family as a whole and no separate books of account were maintained, since the gifts were made in a personal capacity. On May 15, 1987, the Joint Secretary-cum-income tax Officer sent another notice asking petitioner No. 2 to show cause why his turnover in business for the years 1985-86 and 1986-87 should not be deemed to be ten times the money transferred and assessment be made accordingly. A best judgment assessment was made on June 15, 1987, stating therein that petitioner No. 2 had admitted that a total amount of Rs. 13,75,000 had been transferred outside Sikkim and that his reply that the amount had been transferred out of the earnings from the business earlier assessed was not found justified. Taking the turnover at ten times the amounts of gifts, Income Tax was assessed at Rs. 4,25,960. Additional transfer fee was also imposed. The petitioners have alleged in their petition that the gifts had nothing to do with the annual turnover as the same had been made out of the past accumulated capital and wealth. Refund of transfer fee is also claimed. The Income Tax Officer was within his jurisdiction in treating the amount of gifts as income that had escaped Income Tax in the absence of specific details supported by documentary evidence to show as to from which bank account or from which business and when the amounts had been withdrawn by not agreeing with the claim of petitioner No. 2 that the gifts had been made out of accumulated capital and wealth. Therefore, the best judgment assessment is not liable to be interfered with as regards the amount of Income Tax, However, in view of the earlier discussion, the best judgment assessment is quashed as regards the transfer fees and petitioner No. 2 is entitled to all that he has paid on that account. Demand notice issued under Act No. 7 of 1987 is quashed. If necessary, fresh demand notice may be issued after giving adjustment for the amount of Income Tax already paid and the transfer fee which is liable to be refunded.

Writ Petition No. 42 of 1987 :

In Writ Petition No. 42 of 1987, a notice dated March 13, 1987 was issued by Shri Pema Wangyal, Income Tax Officer, to petitioner No. 1 stating therein that he had made a gift/loan of Rs. 22,99,000 during the year 1986-87 which was quite disproportionate to his income from the volume of his business, as per the annual returns filed/assessments made. He was directed to submit within five days proof to show his source of income for making the gift/loan and to submit documents and books of account maintained during the relevant period in support. Further, he was required to pay the transfer fee at the rate of one per cent, of the amount transferred. It was made clear that, in case of his failure to comply with the notice by the due date, assessment of Income Tax already made would be reviewed and would be determined as per Clause 4(ii) of the Income Tax Manual. On March 18, 1987, Shri Ashok Kumar Agarwal, son of petitioner No. 1, wrote a letter to the Income Tax Officer that his father was out of station and was expected to come back in the last week of the month, and made a request for granting at least three weeks'' time. A cyclostyled letter dated March 24, 1987 was sent by the Joint Secretary, Income Tax and Sales Tax Department to petitioner No. 1 stating therein that the latter had, in his reply dated March 18, 1987, stated vaguely that he had other sources of income. He was required to appear before the sender on April 1, 1987 and produce the necessary records or books of account showing the receipt of the amounts and to answer necessary queries. It is evident that this letter was issued without application of mind since in the letter dated March 18, 1987, the son of petitioner No. 1 had not written any such things as was attributed to him in this letter. On the other hand, he had only made a request for time. The statement of petitioner No. 1 was, however, recorded on April 1, 1987, wherein he admitted that he had made the gifts to his business friends and that he had received all the wealth from his father, after his death. He also stated that he did not have any accounts. A best judgment assessment was made on May 14, 1987, stating that the case of petitioner No. 1 that the transfer had been made out of his earnings from the business earlier assessed or from the capital inherited from his ancestors was not found justified. Taking the turnover at ten times the gift amounts, assessment was made. In the assessment, it was further stated that a loan of Rs. 2 lakhs had also been advanced to Sri Satnarain of Bhutan Trading Company on February 12, 1983, and other gifts had been made to three persons for a total amount of Rs. 5 lakhs on December 16, 1985. No notice whatsoever had been issued for these amounts of loan and gifts. Though the assessment order is in a cyclostyled form, yet, in view of the statement of petitioner No. 1 that he had not maintained any accounts and also because he did not disclose the source from which the money had been withdrawn for making the gift of Rs. 22,99,000, there is no reason to interfere with the assessment on that amount. Though petitioner No. 1 stated that he had received all the wealth from his father, after his death, yet no proof was submitted to prove this assertion. However, since no notice whatsoever had been issued for the amount of loan of Rs. 2 lakhs and of the other gifts of Rs. 5 lakhs, the best judgment assessment is liable to be quashed for these amounts on account of the violation of the principles of natural justice. Petitioner No. 1 is entitled to refund of the transfer fee already deposited.

In the result, the best judgment assessment dated May 14, 1987, is quashed, both as regards the Income Tax as well as transfer fee. However, another assessment order shall be passed regarding the Income Tax liability on the gift amount of Rs. 22,99,000. The matter regarding the loan amount of Rs. 2 lakhs and the further gifts of Rs. 5 lakhs shall again be considered after giving reasonable opportunity. Petitioner No. 1 shall be given adjustments for the amount of Income Tax already deposited and the amount of transfer fee paid, except in respect of the amount of Rs. 2 lakhs for which a transfer certificate dated April 2, 1981 was issued. Recovery proceedings taken under Act No. 7 of 1987 are quashed. Proceedings may, if need be, be taken after the new assessment, in the light of the observations made.

Writ Petition No: 43 of 1987 :

In Writ Petition No. 43 of 1987, a notice dated March 13, 1987 was issued by the Income Tax Officer to petitioner No. 1 stating that the latter made a gift/loan of Rs. 6,50,000 during the year 1985-86, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. He was asked to produce proof within five days about the source of income for making the gift/loan and also to submit documents and books of account in support. A reply dated March 18, 1987, was sent by petitioner No. 1, wherein he stated that the gift had been made out of the capital and the wealth of himself and his ancestors and that he did not maintain any regular books of account. Thereafter, a letter dated March 24, 1987, was sent by the Joint Secretary, Income Tax and Sales Tax Department, to petitioner No. 1. It was stated therein that petitioner No. 1 had vaguely stated in his reply dated March 18, 1987, that he had got certain amounts from other sources of income. He was required to produce necessary records or books of account and to answer the necessary queries on March 26, 1987. Another show-cause notice was sent by the Joint Secretary-cum-income tax Officer to petitioner No. 1 on May 15, 1987, wherein it was stated that petitioner No. 1 had transferred Rs. 18,88,250 during the years 1984-85 and 1986-87 without obtaining permission of the Government and without paying transfer fee at the rate of one per cent., as per law and in view of the transfer, his annual return did not reflect the correct business turnover. Petitioner No. 1 was asked to show cause why his business turnover for the years 1984-85 and 1986-87 should not be deemed to be ten times the money transferred. A reply to this notice was sent on May 18, 1987, by petitioner No. 1 and he stated that he had made the gifts from capital and that had no connection with the annual turnover. A best judgment assessment was made on June 8, 1987, making an assessment of Rs. 10,000 as gifts made in 1985-86 and Rs. 18,78,250 during 1986-87. Turnover was taken at ten times the gift amount and tax was assessed accordingly. Petitioner No. 1 has pleaded that since the gifts had been made out of the wealth received from his ancestors, there was no question of reopening the assessment. However, there is no merit in the contention for the reason that petitioner No. 1 had failed to prove that the gifts had been made out of the wealth so received. He did not produce any evidence before the Income Tax Officer to show from where he had withdrawn the amounts. The Income Tax Officer was within his jurisdiction to treat the amounts of gift as escaped income and to assess tax according to his best judgment taking the turnover at ten times the gift amounts. Petitioner No. 1 deposited a certain amount as transfer fee, which, in view of the earlier discussion, is liable to be refunded to him. Demand notice u/s 6 of Act No. 7 of 1987 is bad, as no Inspector as contemplated u/s 3 (a) of the Act, was appointed.

In the result, the demand notice issued u/s 6 of Act No. 7 of 1987 is quashed. A fresh demand notice may be issued by a duly appointed Inspector giving adjustment for the amount of Income Tax already paid and the amount of transfer fee liable to be refunded to petitioner No. 1.

Writ Petition No. 44 of 1987 :

In Writ Petition No. 44 of 1987, a notice dated March 13, 1987, was issued by the Income Tax Officer to the petitioner to the effect that a sum of Rs. 7,66,000 was given as gift/loan during the years 1985-86 and 1986-87 which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. He was required by this notice to submit within five days proof to show his source of income for making gift/loan and also to produce documents and books of account maintained during the relevant period in support. He was also required to deposit the transfer fee. It was made clear that, in case of his failure to comply with the notice, assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. In reply, the petitioner stated that whatever amount had been gifted by him, was from his capital and wealth and that though he used to maintain rough books of account for his memory, the same were rotten and as such could not be produced and he did not maintain any regular books of account for his business. Thereafter, a notice dated March 23, 1987, was sent by the Joint Secretary, Income Tax and Sales Tax Department, requiring the petitioner to appear before the sender on March 25, 1987, to produce necessary records or books of account and also to answer necessary queries. Thereafter, another notice dated 15th/25th May, 1987, was sent to the petitioner by the Joint Secretary-cum-income tax Officer stating therein that the petitioner had, during the years 1985-86 and 1986-87, transferred Rs. 10,66,000 outside Sikkim without obtaining the permission of the Government and in view of the transfer, his return did not reflect the correct business turnover. The petitioner was required to show cause why his business turnover for the years 1985-86 and 1986-87 be not deemed to be ten times the money transferred and assessment be made accordingly under Clause 4(ii) of the Income Tax Manual. A best judgment assessment was made on June 15, 1987. It was stated therein that the petitioner had admitted that the amount transferred by him should be more than what was earlier shown and, according to the record of the Income Tax Department, an amount of Rs. 10,66,000 had been transferred by him. Taking the turnover at ten times the amount transferred, Income Tax was assessed. Besides, the petitioner was also directed to pay the transfer fee. The petitioner has challenged the impugned order of assessment on the legal pleas which have already been discussed. There is no reason to interfere with the best judgment assessment regarding Income Tax liability. In view of the earlier discussion, the best judgment assessment is quashed as regards the transfer fee and the petitioner is entitled to the refund of whatever transfer fee he has paid. Demand notice issued u/s 6 of Act No. 7 of 1987 is quashed. Fresh demand notices may be issued after giving adjustment for the Income Tax already paid and the transfer fee which is liable to be refunded to the petitioner by a duly appointed Inspector.

Writ Petition No. 45 of 1987 :

In Writ Petition No. 45 of 1987, a show-cause notice dated March 17, 1987, was issued by the Income Tax Officer to the petitioner to the effect that an amount of Rs. 5 lakhs was transferred by him in the year 1986-87 by way of gift/loan, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. The petitioner was required to submit within five days proof to show his source of income for making the gift/loan and also to produce documents and books of account maintained during the relevant period in support. He was also directed to deposit a transfer fee at the rate of one per cent. of the amount transferred. It was made clear that, in the event of his failure to comply with the notice, assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. In his reply dated March 18, 1987, the petitioner stated that he did not maintain any books of account and that the gift had been made from his income. On May 15, 1987, another show-cause notice was issued by the Joint Secretary-cum-income tax Officer requiring the petitioner to show cause why his turnover for the year 1986-87 be not treated as ten times the amount of gift, which was Rs. 5 lakhs and which had been transferred outside Sikkim without the permission of the Government. A best judgment assessment was made on June 15, 1987. Taking the turnover at ten times the amount of gift, assessment was made. Besides, the petitioner was directed to pay a sum of Rs. 5,000 as transfer fee. The petitioner has challenged the best judgment assessment on the ground that the Income Tax Officer did not take into account his plea that the gift had been made out of his capital or wealth and not from his income. In view of the fact that the petitioner did not disclose the bank account or the business from which the amount had been withdrawn to show that the amount had been withdrawn from his capital and did not produce any evidence in support of his claim, the Income Tax Officer was within his jurisdiction to treat the amount of gift as concealed income and to make an assessment according to his best judgment. There is no reason to interfere with the impugned order of assessment regarding Income Tax. However, in view of the earlier discussion, the impugned order is quashed as regards the transfer fee and the petitioner shall be refunded the transfer fee already deposited. Demand notice issued u/s 6 of Act No. 7 of 1987 is quashed and another notice may be issued by a duly appointed Inspector after giving adjustment for the amount of Income Tax already paid and the amount of transfer fee liable to be refunded.

Writ Petition No. 47 of 1987 :

In Writ Petition No. 47 of 1987, a notice dated March 13, 1987 was issued by the Income Tax Officer to the petitioner to the effect that an amount of Rs. 11,31,000 was transferred by him as gift/loan, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. He was asked to submit within five days proof to show his source of income for making the gift/loan and to produce documents and books of account in support. He was also required to deposit the transfer fee at the rate of one per cent. of the amount transferred. It was made clear that, in the event of his failure to comply with the notice, assessment of Income Tax would be reviewed and determined as per Clause 4(ii) of the Income Tax Manual. A reply dated March 17, 1987, was sent by the petitioner stating therein that the gift made by him to his relatives and friends did not have any bearing on his annual turnover, since he made the gift from his capital which he inherited from his ancestors. Thereafter, another notice dated March 23, 1987, was issued by the Joint Secretary, Income Tax and Sales Tax Department, to the petitioner. In this notice, it was stated that the petitioner had vaguely stated that he had got certain amounts from other sources of income and he was required to produce necessary books of account and to answer necessary queries to the sender on March 25, 1987. The petitioner has stated in his petition that he appeared before the Income Tax Officer and deposed that the gift had been made out of capital. A best judgment assessment was made by the Income Tax Officer on June 8, 1987. Taking the turnover at ten times the amounts of the gift transferred, Income Tax was assessed. Transfer fee at Rs. 11,310 was also assessed. The petitioner has challenged the impugned order of assessment on the ground that the gift had been made out of capital and the same had no concern with turnover. In view of the fact that the petitioner did not show from where the money had been withdrawn to make the gift and also did not produce any documentary evidence to prove that the gift had been made from capital, the Income Tax Officer was within his jurisdiction to make an assessment according to his best judgment. There is no reason to interfere with the impugned order of assessment regarding Income Tax. However, in view of the earlier discussion, the assessment regarding transfer fee is quashed and the petitioner shall be entitled to refund of the amount of transfer fee already paid. The demand notice issued u/s 6 of Act No. 7 of 1987 is quashed. A new notice may be issued by a duly appointed Inspector after making adjustment of the amount of Income Tax already paid and the amount of transfer fee liable to be refunded to the petitioner.

Writ Petition No. 15 of 1988 :

In Writ Petition No. 15 of 1988, a notice dated March 13, 1987, was issued by the Income Tax Officer to petitioner No. 1 to the effect that a sum of Rs. 5,10,000 was given by her as gift/loan during the year 1985-86, which was quite disproportionate to her income from the volume of her business as per annual returns filed/assessments made. She was required by this notice to submit within five days proof to show her source of income for making the gift/loan and also to produce documents and books of account maintained during the relevant period in support She was also required to deposit the transfer fee. It was made clear that, in case of her failure to comply with the notice, assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. In her reply, petitioner No. 1 stated that the gift was made from her stridhana and the same had no connection with the annual turnover. Thereafter, the Joint Secretary, Income Tax and Sales Tax Department, issued another letter dated March 24, 1987, stating that in her reply, petitioner No. 1 had vaguely stated that she had certain amounts from other sources of income. By this letter, she was required to appear before the sender on March 26, 1987, and to produce necessary records or books of account showing the receipt of the amounts and also to answer necessary queries. The Joint Secretary-cum-income tax Officer again issued notice dated May 15, 1987, requiring petitioner No. 1 to show cause why her annua) turnover for the years 1984-85 and 1986-87 be not deemed to be ten times the money transferred and assessment of tax be made accordingly. In her reply, petitioner No. 1 stated that the gift had been made from her stridhana and had no connection with the annual turnover. A best judgment assessment was made on June 8, 1987, stating that her reply that the transfers had been made out of her earnings from the business earlier assessed was not justified. This is a case where the Income Tax Officer did not apply his mind inasmuch as in the reply sent in response to the notice dated May 15, 1987, as also in her earlier reply she never stated that the transfers had been made out of her earnings from the business earlier assessed. Further, in the show-cause notice dated May 15, 1987, the Joint Secretary-cum-income tax Officer had stated that the amount of Rs. 5,10,000 had been transferred during the years 1984-85 and 1986-87 but in the best judgment assessment, the whole amount was treated as transferred in one single year, that is, 1985-86, and no reason has been given for this change in stand. The petitioners have challenged that the whole amount of Rs. 5,10,000 was gifted in the year 1985-86.

Since the best judgment assessment was the result of non-application of mind, the same is quashed. However, the Income Tax Officer shall consider the matter again after giving one more opportunity to petitioner No. 1. Petitioner No. 1 shall be allowed refund of the transfer fee already deposited. Recovery proceedings are quashed. Fresh proceedings may be taken, if need be, after new assessment is made.

Writ Petition No. 17 of 1988 :

In Writ Petition No. 17 of 1988, a notice dated March (?), 1987, was issued by the Income Tax Officer to petitioner No. 1 to the effect that a sum of Rs. 4,00,000 was transferred by him as gift/loan during the year 1986-87, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. He was asked to submit within five days proof to show his income for making the gift/loan and also to produce documents and books of account maintained during the relevant period in support. He was also required to deposit a transfer fee at the rate of one per cent, of the amount transferred. It was made clear that, in the event of his failure to comply with the notice, assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. It is significant to note that this notice is a cyclostyled one and the space meant for noting the date was left blank. Shri Suresh Kumar, a staff member of the firm, which is petitioner No. 2, sent a letter on March 21, 1987, to the Income Tax Officer informing him that the owner of the shop was out of station since his mother''s clothes had caught fire and she had been hospitalised and making a request to extend the time by a period of twenty days. Thereafter, a notice dated March 24, 1987, was sent by the Joint Secretary, Income Tax and Sales Tax Department, stating therein that in the reply dated March 21, 1987, he had vaguely stated that he had certain amounts from other sources of income. He was required to appear before the sender on April 8, 1987, to produce necessary records or books of account showing the receipt of the amount and also to answer the necessary queries. On April 8, 1987, the statement of petitioner No. 1 was recorded wherein he admitted to having made the gift to his business friends. There is nothing in the statement to show the source from which the gift was made. Thereafter, a show-cause notice dated May 15, 1987, was sent by the Joint Secretary-cum-income tax Officer to petitioner No. 1 requiring him to show cause why his turnover should not be treated at ten times the transferred amount, during the year 1986-87. A best judgment assessment was made on June 15, 1987, stating that the statement of petitioner No. 1 that the gift was made from out of his earnings from the business earlier assessed by the Department was not found justified. The petitioners have stated in the writ petition that petitioner No. 1 had made the gifts out of money inherited from his ancestors and that he nowhere admitted that gifts had been made out of his earnings from the business earlier assessed by the Department. This plea of petitioner No. 1 has not been controverted by the respondents. This is a case where the best judgment assessment has been made without application of mind and it is, therefore, liable to be quashed. Petitioner No. 1 is also entitled to the refund of the transfer fee deposited by him in view of the discussion made earlier.

45.In the result, the petition is allowed. The best judgment assessment dated June 15, 1987, is quashed. However, the matter shall be considered again after giving an opportunity to petitioner No. 1. Petitioner No. 1 shall be given refund of the transfer fee already deposited by him. Recovery proceedings are also quashed.

Writ Petition No. 19 of 1988 :

In respect of Petition No. 19 of 1988, a notice dated March 13, 1987, was issued by the Income Tax Officer to the petitioner to the effect that an amount of Rs. 8,66,000 was given by him in the year 1986-87 by way of gift/loan which was quite disproportionate to his income as per the volume of his business as per Income Tax returns filed/assessments made. The petitioner was required to submit within five days proof to show his source of income for making the gift/loan and also to produce documents and books of account maintained during the relevant period in support. It was made clear that, in the event of his failure to comply with the notice, the assessment of Income Tax already made would be reviewed and determined as per Clause 4(ii) of the Income Tax Manual. Thereafter, another notice was issued on March 24, 1987, by the Joint Secretary, Income Tax and Sales Tax Department, to the effect that in his reply dated March 19, 1987, the petitioner had vaguely stated that he had certain amounts from other sources of income. The petitioner was required to appear before the sender on March 27, 1987, to produce necessary records and books of account showing the receipt of the amounts and to answer necessary queries. On March 27, 1987, the statement of the petitioner was recorded wherein he stated that the gifts had been made for an amount of Rs. 7,00,000 from his capital and wealth and that he did not maintain any books of account. Thereafter, another notice dated May 15, 1987, was sent by the Joint Secretary-cum-income tax Officer requiring the petitioner to show cause why his turnover of business for the year 1986-87 should not be deemed to be ten times the money transferred and assessment be made accordingly. Reply was sent by the petitioner on May 21, 1987, where again he stated that the gifts had been made from his capital and wealth to which Section 4(ii) of the Manual did not apply. Vide letter dated June 9, 1987, of the Joint Secretary, the petitioner was directed to appear before him and answer some questions. On June 16, 1987, a best judgment assessment was made by the Joint Secretary stating therein that in view of the admitted position that a sum of Rs. 7 lakhs had been transferred out of the State and also because his case that the transfers were made out of the earnings from the business earlier assessed was found not justified. A best judgment assessment was made taking the turnover at ten times the transfer amount. In view of the stand taken by the petitioner that gifts had been made from his capital and wealth and also because he did not produce any docu- mentary evidence to show from where the money was withdrawn for making the gifts, the Income Tax Officer was within his jurisdiction in concluding that the gifts had been made from income which had escaped tax. There is no reason to interfere with the best judgment assessment. However, the petitioner is entitled to refund of the transfer fee as per the discussion made earlier.

In the result, the petitioner shall be allowed refund of the transfer fee already deposited. The recovery proceedings under Act No. 7 of 1987 are quashed. However, fresh proceedings, if necessary, may be initiated, after giving adjustment of the transfer fee which is liable to be refunded to the petitioner, by a duly appointed Inspector.

Writ Petition No. 20 of 1988 :

In Writ Petition No. 20 of 1988, a show-cause notice dated March 17, 1987, was issued by the Income Tax Officer to the petitioner to the effect that an amount of Rs. 5,50,000 was transferred by him in the year 1986-87 by way of gift/loan, which was quite disproportionate to his income from the volume of his business as per annual returns filed/assessments made. The petitioner was required to submit within five days proof to show his source of income for making the gift/loan and also to produce documents and books of account maintained during the relevant period in support. It was made clear that, in the event of his failure to comply with the notice, assessment of Income Tax would be determined as per Clause 4(ii) of the Income Tax Manual. On March 26, 1987, the statement of the petitioner was recorded by the Income Tax Officer wherein the petitioner stated that gifts had been made from his wealth and that he does not maintain any books of account. Another notice was issued by the Joint Secretary-cum-income tax Officer on May 15, 1987. In that notice, it was stated that there was evidence that the petitioner had transferred Rs. 7,50,000 during the year 1986-87 outside Sikkim without obtaining the permission of the Government and that his annual return did not reflect the correct turnover. He was required to show cause why his turnover of business for the year 1986-87 should not be deemed to be ten times the money transferred. To this, a reply dated May 21, 1987, was sent by the petitioner wherein he stated that the gifts had been made from his capital and wealth and so Clause 4(ii) of the Manual could not be attracted. He also stated that, on oral orders, he had deposited Rs. 7,500 as transfer fee and he reserved his right to get back that money. A best judgment assessment was made on June 16, 1987, wherein it was stated that his case that the gifts had been made out of his earnings from the business earlier assessed was not found justified. From the case of the petitioner that the gifts had been made from capital and wealth, the Income Tax Officer could infer that the gifts had been, according to the petitioner, given from the earnings earlier assessed. Since the petitioner did not produce any books of account and did not prove from where the money was withdrawn for making the gifts, the Income Tax Officer was within his jurisdiction to treat the gift amount as income that escaped tax and to make the best judgment assessment as he did. There is no reason to interfere with the impugned judgment.

However, the petitioner shall get, in view of the earlier discussion, refund of the transfer fee deposited by him. The recovery proceedings under Act No. 7 of 1987 are quashed Fresh proceedings, if necessary, may be initiated by a duly appointed Inspector, after giving adjustment for the amount of transfer fee liable to be refunded,

Writ Petition No. 31 of 1987 :

This petition has been filed to quash the complaint bearing No. 339/IT dated August 7, 1987, filed by the Joint Secretary and Income Tax Officer before the Officer-in-Charge, Sadar Police Station, Gangtok, for violation of Notification No. 2053-200/IT and ST dated August 26, 1966, on the ground that the petitioner transferred out of Sikkim Rs. 5,00,000 as gift and loan without obtaining prior permission and making payment of transfer fees. As discussed earlier, this notification prohibited transfer of money of the nature specified therein without a transfer certificate from the Office of the Income Tax and Sales Tax Department, which could be obtained by making an application on Darbar Paper of the value of Re. 1 and by depositing one per cent. of the transferred amount as transfer fee. In paragraph 5 of this notification, any transfer or an attempt to transfer without a valid transfer certificate was made a cognizable offence. However, as discussed earlier, by a subsequent Notification bearing No. 7692/500/IT and ST dated May 1, 1967, obtaining of transfer certificate has been made discretionary and it has been made permissible to make a transfer without obtaining a transfer certificate and in that case no transfer fee is payable. It has also been observed that the result of making it discretionary whether to obtain or not to obtain a transfer certificate has made paragraphs 4, 5 and 6 of the earlier Notification dated August 26, 1966, automatically inoperative. As such, transfer of money without a transfer certificate is no longer an offence.

In the result, the petition is allowed and the complaint is quashed.

Writ Petition No. 32 of 1987 :

This petition has been filed to quash the complaint bearing No. 338/IT dated August 7, 1987, filed by the Joint Secretary and Income Tax Officer before the Officer-in-Charge, Sadar Police Station, Gangtok for violation of Notification No. 2053-200/IT and ST dated August 26, 1966, on the ground that the petitioner transferred out of Sikkim Rs. 76,72,200 as gift and loan without obtaining prior permission and making payment of transfer fees.

As discussed earlier, this notification prohibited transfer of money of the nature specified therein without a transfer certificate from the Office of the Income Tax and Sales Tax Department, which could be obtained by making an application on Darbar Paper of the value of Re. 1 and by depositing one per cent, of the transferred amount as transfer fee. In paragraph 5 of this notification, any transfer or an attempt to transfer without a valid transfer certificate was made a cognizable offence. However, as discussed earlier, by a subsequent notification bearing No. 7692-500/IT and ST dated May 1, 1967, obtaining of transfer certificate has been made discretionary and it has been made permissible to make a transfer without obtaining a transfer certificate and in that case no transfer fee is payable. It has been observed that the result of making it discretionary whether to obtain or not to obtain a transfer certificate has made paragraphs 4, 5 and 6 of the earlier notification dated August 26, 1966, automatically inoperative. As such, transfer of money without a transfer certificate is no longer, an offence.

In the result, the petition is allowed and the complaint is quashed.

52 The judgment be placed on the file of Writ Petition No. 33 of 1987 and a copy be placed on the file of every other case.