Brilliant Match Works vs Deputy Commercial Tax Officer

Ramaprasada Rao, J.—The petitioner is a manufacturer of matches and carrying on under the name and style Brilliant Match Works,

Sivakasi, Ramanathapuram District. He was an assessee under the Madras General Sales Tax Act and he was assessed finally to tax under the

said Act on 31st January, 1963, for the assessment year 1961-62. The course of business of the petitioner appears to be to market the goods

through his exporting company known as Sivakasi Matches Exporting Company, Sivakasi. In allied proceedings under the Income Tax Act, the

question came up whether Sivakasi Matches Exporting Company, Sivakasi, were entitled to registration under the Income Tax Act and in that

action the Supreme Court perused the agreement between the Sivakasi Matches Exporting Company and the petitioner and other documents and

found that the exporting company was entitled to a commission on the entire production of the matches by the petitioner-factory, whether sales

were effected through that firm or not, and an extra commission of 1/2 anna per gross on the sales effected through the exporting firm. I have only

referred to this to show that the exporting company had recognition in the eye of law as an independent legal entity. For the assessment year 1961-

62, the Commercial Tax Officer, Ramanathapuram at Virudhunagar, after perusing the day-books, ledgers, purchase and sales bills, etc., came to

the conclusion that a turnover of Rs. 15,97,121.36 relatable to sales effected by the exporting company ought not to be included in the assessable

turnover under the Madras General Sales Tax Act. In fact, the said officer has also noted that for the very turnover, tax has been paid by the

petitioner under the Central Sales Tax Act. This observation of the first officer made in the order of assessment dated 31st January, 1963,

indicates that the exporting company as commission agent did sell the goods in the course of inter-State trade. The factual observation of the

Supreme Court in the other case referred to above and reported in Commissioner of Income Tax, Madras Vs. Sivakasi Match Export Company, ,

confirms the position that the exporting company was not only an independent legal entity in the eye of law, but was doing business for commission

and was dealing with the products manufactured by the petitioner-factory. On 9th February, 1967, the petitioner was called upon to produce the

books of account for a re-scrutiny by the assessing authority once over. On 16th February, 1967, the impugned notice purporting to be u/s 16 of

the Madras General Sales Tax Act was issued to the petitioner stating as follows:

On examination of the transactions of the alleged commission agent, it is found that the said company did not act as selling agent of the assessees

for the following reasons:

The conditions laid down in Rule 26(6)(a) of the Madras General Sale Tax Rules were not observed.

The alleged agents independently entered into contract with up-country buyers for the supply of safety-matches and looked to the manufacturers

for goods. The goods so produced were utilised to fulfil the forward contracts entered into.

There has been no written contract between the alleged principals and the alleged commission agents.

Sales were effected in the course of inter-State transactions by the Sivakasi Matches Exporting Company, and the tax due thereon has been

paid. The provisions of the Central Sales Tax Act or the Rules framed thereunder do not recognise any commission transactions in inter-State sales

and there is no provision to absolve from tax liability by one dealer based on the tax payment by another dealer. Hence, the exporting company is

deemed to have bought and sold goods for the purpose of taxation under the Commercial Taxes Acts.

For the above reasons, the assessing authority wanted to reopen the assessment in 1967 which was closed in 1963. The petitioner has come up

to this court for the issue of a prohibition restraining the revenue from proceeding with the proposals as contained in the challenged notice. The

objections are as follows: Firstly, it is stated that no reason is given in the impugned notice as to why the reopening is being effected; and secondly,

all the books of account having been examined for a second time on 9th February, 1967, prior to the issue of the notice under challenge, it is not

suggested in the impugned notice that a violation of the prescription in explanation (4) to Section 2(n) of the Act has been done which necessitated

reopening of a closed assessment and the issuance of the impugned notice. The revenue on the other hand would state that the petitioner is not

prejudiced in any event by submitting himself to the jurisdiction of the assessing authority who has a right to exercise his powers u/s 16 and reopen

assessments for any reason, He would, however, state that the said notice does not contain prima facie any material to indicate that the exporting

company did effect sales for a price at which the petitioner as manufacturer entrusted the goods to the marketing company as its commission agent;

but he would state that as the reopening is being sought on the foot that there was a deemed sale of the products by the manufacturing concern to

its commission agent that by itself is sufficient to indicate that the commission agent might not have acted strictly in accordance with the

prescriptions in explanation (4) to Section 2(n) of the Act.

It is, no doubt, by now well-settled that the power to reopen a closed assessment under the Act can be undertaken by the prescribed authority

for any reason. The field for the exercise of such power is wide enough; but it is circumscribed by one important and singular fact, namely, that

there should be some reason to reopen. Such reason should not be drawn barely from the subjective satisfaction of the authority concerned but

should also satisfy the test of objectivity so as to provoke the courts exercising jurisdiction under Article 226 of the Constitution to accept the

exercise of such power under such circumstances.

It is not in dispute that in 1963 when the final order of assessment was made for the assessment year in question, the assessing officer had

occasion to peruse the day-books, ledgers, purchase and sales bills, etc., connected with Brilliant Match Works. Such an investigation undertaken

by the original authority should have made the position clear as to what was the legal or jural relationship between the petitioner-company and his

commission agent. As a matter of fact, the total turnover as per accounts was arrived at Rs. 21,28,757.29 whereas the sales effected through the

exporting company as commission agent of the petitioner amounted to Rs. 15,97,121.36. Thus, the major slice of the turnover returned by the

petitioner related to the sales effected by the exporting company and not by the petitioner by itself. In this sense, the original authority had occasion

to peruse the accounts and find out the reality of the situation and after assessing the material before it allowed the exemption asked for since the

turnover relatable to the commission agent of the petitioner was in connection with inter-State sales. It was because the original authority

recognised and accepted the character of such inter-State sales as if done by the corn-mission agent, exemption was granted under the Madras

General Sales Tax Act. When this order is sought to be upset on information or otherwise, the authority which assumed jurisdiction u/s 16 failed to

give any reason for reopening such a closed assessment based on scrutiny of all available material by the first original authority. Excepting for the

statement that the exporting company independently entered into contracts with up-country buyers, it is not even stated as to how and wherefrom

this information about the contracts were obtained or what was the price at which the commission agent sold these goods to the up-country

buyers. From the file produced, I am unable to share the suspicion entertained by the higher hierarchy such as the Board of Revenue that there was

some leakage in the payment of sales tax by the match manufacturing concern and, therefore, an all-round investigation was to be undertaken

suddenly; but, obviously such investigation cannot be without any basis. Though Section 16 is wide enough to vest jurisdiction in an authority to

reopen an earlier assessment made, yet such exercise of power should be reasonable or in any event based on reason. Excepting for a conjecture

or surmise entertained by a higher forum, which is the foundation for the challenged notice, I do not find anything in the notice to satisfy the

conscience of this court that the jurisdiction of the respondent was sought to be exercised on acceptable or cogent material. As a matter of fact, the

notice itself says that the exporting company was the commission agent of the petitioner-company. The respondent would state that as the

provisions of the Central Sales Tax Act or the Rules framed thereunder do not recognise any commission transactions in inter-State sales and there

is no provision to absolve from tax liability by one dealer based on the tax payment by another dealer, he was seeking to reopen the assessment. If

once it is conceded that the exporting company was a commission agent, then reopening is possible only if there is violation of prescriptions in

explanation (4) to Section 2(n) of the Act. Under explanation (4) which is a non obstante clause, a fiction is created whereby two independent

sales or purchases are assumed in cases where the goods are transferred from a principal to his selling agent provided the agent sold the goods at

one rate and passed the sale proceeds to his principal at another rate. It is not even suggested in the notice that such was the situation and that was

the reason for reopening the assessment in question. I am not satisfied that either on record which I have perused or in the text of the impugned

notice which is challenged, there is any material which could be characterised as a reason for the exercise of the power u/s 16 of the Act.

Whatever may be the wide range of such power, yet it must be exercised only if there is any reason to invoke such a power. In the absence of it

the petitioner is justified in his complaint, even at the threshold that an exercise of such power and the further proceeding of it has to be interdicted

by the issue of a writ of prohibition.

Learned Government Pleader however would state that the mention of the fact that there is a deemed sale is factually sufficient to project the

position that what was accounted for by the commission agent was different from what he realised by his activity as such commission agent of the

writ petitioner. This is a far-fetched conclusion which cannot be reasonably drawn from the text of the notice.

In this view, the rule nisi is made absolute and the writ petition is allowed. There will be no order as to costs.