V.K. Balakrishnan vs State of Kerala and Others

Chettur Sankaran Nair, J.—Petitioner, once an abkari contractor, seeks to quash Exts. P-13 and 14 orders assessing contribution under the Toddy Workers Welfare Fund Act, for the period 18th April 1986 to 14th October 1986 and directing him to pay the same. These orders were affirmed in appeal by Ext. P-16.

Petitioner was the highest bidder for toddy shops in the Karunagappally Range for the year 1986-87. He submits that he could run the shops only for the period 18th April 1986 to 14th September 1986, as he had to close the shops thereafter due to problems created by the workmen. Despite this he submits he was directed to pay contribution for the period 18th April 1986 to 14th October 1986. His further grievance is that the demand is not based on any material, and that assessment is arbitrary. He would also submit that the 2nd Respondent did not furnish him particulars relating to the employees, attached to the shops, in spite of his requests in this behalf and that an assessment was made in respect to all the shops, while contribution had to be assessed in respect of each shop. Petitioner referred to Ext. P-13 to show that the basis of assessment was statements made by one Sadanandan, Joint Secretary of C.I.T.U., Purushothaman, Joint Secretary of A.I.T.UC. and Gopinatha Kurup, Secretary of I.N.T.U.C. Ext. P-13 also shows that "other reports" were taken into account. Counsel submitted that even a best judgment assessment, must rest on acceptable material, and that material upon which assessment is proposed, must be put to the Assessee, before making a determination. Counsel for Respondents did not dispute these propositions, but he would submit that a reasonable opportunity was afforded to Petitioner and he was put on notice, of the material, on which the assessment was made.

Shri S.A. Nagendran appearing as amicus curiae, referred to paragraphs 28, 33 and 37 of the Scheme framed under the Act which according to him are relevant in the matter of making a best judgment assessment. Paragraph 28 states that every employee who at the beginning of a calendar month has put in three months continuous service, is entitled to be a member of the fund. Paragraph 33 provides for registration of beneficiaries and for maintaining registers. These registers should contain details regarding employees and contribution. Paragraph 37 requires the Chief Welfare Inspector to make entries in the registers and allot registration numbers to employees. These are statutory registers on the basis of which an assessment could be made.

In Welfare Fund Inspector v. Krishnan Nair and Ors. ILR 1976 Ker 302 a case arising under the same statute, Govindan Nair, C.J. speaking for the Court observed:

There must be something more than a mere suspicion to support the assessment.

The Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal AIR 1955 S.C. 65 outlined the requirements, preceding best judgment assessments. The Court held that bare suspicions cannot support an assessment. In Varghese v. State of Kerala 1970 KLT 979 (F.B.) this Court surveyed the law governing best judgment assessments and observed that the assessing officer may make an estimate if he reject the return filed. But estimate must be based on evidence or other acceptable material. The assessing officer must make what he honestly believe to be a fair estimate of the proper figures of assessment, and for this purpose he may take into consideration such material as he has before him, including the Assessee''s circumstances, knowledge of previous returns and other matters which he thinks, will assist him in arriving at a fair and proper estimate. The material on which he proposes to rely must be put to the Assessee to enable him to show cause, why such material should not be accepted. To the same effect is a decision of this Court in T.C.N. Menon Vs. Income Tax Officer, B-Ward, The Court of appeal in Board of Education v. Rice and Ors. 1911 A.C. 179. Indicated the basic principle, and it is that an authority must act in good faith and fairly listen to both sides, for, that is a duty lying upon every one who decides anything. In State of Kerala v. C. Velukutty 60 S.T.C. 239 Subba Rao J. (as His Lordship then was) observed:

Judgment is a faculty to decide matters with wisdom truely and legally. Judgment does not depend upon the arbitrary caprice of a Judge, but on settled and invariable principles of justice. Though there is an element of guess-work in a best judgment assessment, it shall not be a wild one, but shall have a reasonable nexus to the available material and circumstances of each case...it does not enable the assessing authority to function capriciously without regard for the available material.

In State of Kerala Vs. K.T. Shaduli Yusuff etc., the Supreme Court stressed the need to adhere to principles of natural justice, in making a best judgment assessment, as the proceedings are quasi-judicial in nature. The Court stated:

It is indeed a requirement of the duty to act fairly which lies on all quasi-judicial authorities and this duty has been extended also to the authorities holding administrative enquiries involving civil consequences or affecting rights of parties.... It may be that in a given case the rule of audi alteram partem may import a requirement that witnesses whose statements are sought to be relied upon by the authority holding the enquiry, should be permitted to be cross-examined by the party affected, while in some other cases it may not. The procedure required to be adopted for giving an opportunity to a person to be heard must necessarily depend on the facts and circumstances of each case.

It is useful to refer to Kanga and Palkhivala, ''The Law and Practice of Income Tax'' Volume I (8th Edition) Pages 1134 and 1135:

The AO must act arbitrarily but must obtain materials and base his decision on the materials befor him. Though the Income Tax Officer has very wide powers and is not fettered by technical rules of evidence and pleadings, there is one overriding restriction on his judgment and that is that he must act honestly on the material, however inadequate, before him, and not vindictively, capriciously or arbitrarily. When making an assessment under this Sub-section the AO is not entitled to make a pure guess without any evidence or any material at all. A criminal practice, like that of selling by short measure, or at prices in excess of the controlled rates, or selling smuggled goods, cannot be attributed to the Assessee in the absence of any evidence to show that the Assessee followed such practice. There must be something more than bare suspicion to support an assessment. In Dhirajlal Girdharilal v. C.I.T., C.I.T. v. Daulatram Rawatrull, Dhakeswari Cotton Mills Ltd., v. C.I.T., Omar Salay Mohammed C.I.T. and Lalchand Bhagat Ambica Ram v. C.I.T: the Supreme Court set aside the assessment on the ground that it was based on bare suspicion, conjectures and surmises and further held in the first two case that a finding of fact would be vitiated if it is based partly on conjectures or on material which is partly inadmissible or irrelevant, even though there may be some other relevant and admissible material to support the finding. However, the order must be read as a whole to see whether the findings are so vitiated. (See further post under ''Benami transactions'', and u/s 256, ''Decision based on conjectures, suspicions or irrelevant material,- or ignoring relevant evidence'').

No hard and fast rule can be laid down by the Court to define the sort of material on which the AO''s estimate of income should be based. The material need not be direct evidence; it may be circumstantial evidence. The word ''material'' is here used advisedly, because the AO is not confined to what would be evidence in a Court of law. He may use his local knowledge. ''Past history'' may be legitimate material, but that is not sufficient by itself without more, to justify assessment in a particular year, for there must be some material related to the accounting year to justify a finding of concealed income. From one proved or admitted incident of suppression of income the Department may be entitled to infer that there were other similar incidents. Documents recovered during a search illegally conducted can be utilized for the purposes of assessment.

The AO may disbelieve the oral testimony of the Assessee and other witnesses and hold that certain items in the accounts represent profits from undisclosed sources. He may reject account books which he believes to be false and unreliable, although there may be no direct and definite evidence to prove them incorrect. ''There is no rule of law compelling a Judge to accept evidence, even though it is uncontradicted, which he believes to be a pack of lies. But if the AO proposes to make an estimate in disregard of the evidence, oral or documentary, led by the Assessee, he should in fairness disclose to the assessed the material on which he is going to found that estimate.

An authority making a best judgment assessment, exercises a quasi-judicial function and such exercise could affect rights of parties. It is therefore beholden, to strict observance of rules of natural justice. It must decide legally, guided by well settled and invariable principles of justice, and not capriciously. An element of guess is inevitable in making an estimate, but the guess cannot be a wild guess. The authority must make an estimate which it honestly believes to be fair. Honest belief is not merely a belief held in good faith. It must be a belief, a reasonable mind informed of facts, would entertain. Determination must be preceded by a full and fair disclosure of the material on which the authority proposes to rely. The authority must act in good faith and listen fairly, and base its conclusions on available material. Unlimited discretion, or uncanalised powers are not available to the authority. Nor, can it act, as it might, in exercising a quasi criminal jurisdiction. It is a power of adjudication, like any other. The authority cannot consider itself as an agency charged with the duty to raise revenue, but must act an agency, in whom inheres the duty to adjudicate. Making a best judgment, assessment is far from imposing a penalty, and elements of caprice, or vindictiveness cannot enter judgment.

Viewed in this profile. Exts. P-13 and 14 cannot be sustained. Determination of contribution, was not based on the registers, kept in accordance with the scheme. Contribution was not assessed with reference to each shop. It was an omnibus assessment. Statements recorded from persons, with no first hand knowledge, formed the basis of assessment. The statements were not put to Petitioner, nor were his objections elicited. There is no endorsement that Petitioner was present when the statements were recorded, while there are endorsements regarding the presence of certain functionaries of trade unions. I do not say that presence of Petitioner is essential, but I refer to this to say that Petitioner did not even know what statements were made. His repeated requests for particulars of employees were not heeded to. A contractor does not appoint workers, but employees attached to shops, become his employees. He had a right to know the particulars, he requested for.

In short, the assessing authority made an apology of its duty to make a fair determination, reckoning himself as no more than a collecting agency. Such exercises cannot be assented to.

In the result, Exts. P-13, 14 and 16 are quashed and the writ petition is allowed. Parties will bear their costs. I express appreciation of the help rendered by Shri S.A. Nagendran who argued, the matter ably as amicus curiae.