Naidu Hall & Sons v. The State of Tamil Nadu

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 31.08.2012CORAM:THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANandTHE HONOURABLE MR.JUSTICE K.RAVICHANDRA BAABUTax Case (Revision) No.1846 of 2008Naidu Hall & Sons No.96, Pondy Bazaar, T.Nagar Chennai-600 017...PetitionerversusThe State of Tamil Nadu represented by the Commercial Tax OfficerT.Nagar (North) Assessment CircleNo.46, Greenways RoadChennai-600 028...Respondent-----PRAYER: Tax Case Revision filed under Section 38 of the TamilNadu General Sales Tax Act, 1959 to revise the order of the SalesTax Appellate Tribunal (Additional Bench), Chennai-600 104 dated05.10.1999 in T.A.No.91/96 and T.M.P.No.260/96 arising out oforder of the Appellate Assistant Commissioner (CT) III,Madras inAppeal No. and Year 77/95 order dt.7.8.96 against the order ofthe Commercial Tax Officer T.Nagar (North), Assessment Circle inTNGST/117501/90-91 order dt. 8.6.92.-----For petitioner: Mr.N.InbarajanFor respondent: Mr.Manoharan Sundaram Government Advocate (Taxes)-----ORDER(Order of the Court was made by CHITRA VENKATARAMAN,J.)The assessee is on revision as against the order of the https://hcservices.ecourts.gov.in/hcservices/ Tribunal relating to the assessment year 1990-91, raising thefollowing substantial questions of law:(i)Whether the Sales Tax Appellate Tribunal has committed anerror of law by omitting to consider relevant evidence and byrendering findings based on no evidence?(ii)Whether the Sales Tax Appellate Tribunal has committed anerror of law in examining the order before it as a Court ofJudicial Review instead of a fact finding body?2. It is seen from the facts herein that on 09.10.1990,there was an inspection conducted at the business premises of theassessee. The assessee is engaged in the manufacture and tradingof readymade garments and it also sells clothes as such, bothintra-State and inter-State.3. At the time of inspection, the Inspecting Officials foundthe following defects:1. No manufacturing account in Form XXX or in any other Form forthe assessee's own manufacturer of blouse, bra and petty coat;2. No accounts such as Delivery Challans for inter-Branchtransfer of goods from Factory to Branches, Main Office andgodown vice versa;3. No separate stock accounts for the goods held at the godown,Head Office and Branch are maintained;4. Export sales against Form H were effected but no records tothat effect (for Rs.21,913.00 in May, 90) were produced forverification, even though the assessee had claimed exemptionson this in the monthly returns. 4. On verification of the actual stock taken with that ofopening stock, purchases and sales, the Inspecting Officialsnoted stock variation of Rs.1,84,140/-. Based on the results,the Assessing Officer initiated assessment proceedings and workedout the difference of stock as follows: https://hcservices.ecourts.gov.in/hcservices/ Opening stock of cloth...Rs. 2,64,170.00Add: Purchases from 01.04.90 upto the time of inspection fabric as per statement...Rs.93,80,115.00 -------------------TotalRs.96,44,285.00Less: Stock of raw materials clothsand works-in-progress...Rs. 6,80,118.00--------------------- Rs. 89,64,167.00Add: Opening stock of readymade goods (as on 01.04.90) (Trading account as per 31.03.90)...Rs.36,01,417.00---------------------Opening stock (manufactured) finished ...Rs.1,25,65,584.00Add: Purchases of readymade ...Rs. 8,49,086.00 ---------------------Total...Rs.1,34,14,670.00Add: G.P. 20%...Rs. 26,82,934.00 ---------------------Less: Sales turnover of taxable goods (as per reconciliation statement).Rs.1,60,97,604.00 ...Rs. 74,92,419.00---------------------Net ...Rs. 86,05,185.00Less: Profit at 20% ...Rs. 14,34,197.00---------------------Stock that should be...Rs. 71,70,988.00Less: Actual stock of finished goodsfound at the time of inspection...Rs. 25,36,344.00 ---------------------Difference noticed...Rs. 46,34,644.00 ---------------------The Officer proposed equal time addition as well as levy ofpenalty. The aggrieved assessee filed its reply and admitted thefact that it had not maintained the manufacturing account;nevertheless, it was contended that it was maintaininginventories and opening and closing stock, both on the materialspurchase locally as well as from inter-State purchase ofreadymade garments, sale of cloth as well as sale of readymadegarments. It contended that considering the manufacture of huge https://hcservices.ecourts.gov.in/hcservices/ volume of under-garments of different sizes, dimensions anddesigns, it was not possible for the assessee to maintain amanufacturing account of the stock account. 5. As regards the allegation as noted in the inspectionreport in respect of the stock variation at Rs.1,84,140/-, theassessee submitted that the Department had not allowed theassessee to verify the accounts before they could make anystatement and the proposal now made as though there was a hugestock variation at Rs.46,34,644/- was also not based on anymaterials. Pointing out to the flaw in the analysis of theOfficer, the assessee submitted that both the Officer as well asthe Inspecting Officials had not considered the accounts in theproper perspective and that as per the accounts, the differencewould work out only to a sum of Rs.3,29,116/-. Even for that,the assessee stated that the profit margin adopted uniformly forcloth as well as readymade sale was not correct and that therewas no inventory taken on the consumables and that the sales ofreadymade garments made on 09.10.1990 were not taken intoconsideration. In the circumstances, the assessee contended thatthere was no stock variation at all. The Assessing Officer,however, rejected the contention of the assessee and arrived atthe total turnover at Rs.2,94,16,960/- for making equal additionfor probable omission at Rs.46,34,644/- on the stock noticed asper the working furnished. The assessee went on appeal beforethe First Appellate Authority. 6. On a perusal of the accounts, the First AppellateAuthority pointed out that the Inspecting Officials had notcorrectly adopted the sales figure and had not taken intoconsideration the sale of cloth upto the time of inspection,though the relative pages were duly signed by the InspectingOfficer. Hence, the stock variation arrived at Rs.1,84,140/- wasnot correct. Thus, on going through the books of accounts, theFirst Appellate Authority pointed out to the actual sales at thetime of inspection of cloth and readymade garments atRs.1,06,55,646/- (Rs.31,63,227/- + Rs.74,92,419/-) which wasposted subsequently pending the stock purchase and sales and thebalance of stock was worked out as under:ClothReadymadeConsumablesOpening stockRs. 2,64,170.00Rs.36,01,417.00Rs.2,24,250.00PurchasesRs.72,52,553.00Rs. 9,59,954.00-Rs.75,16,723.00Rs.45,61,371.00Rs.2,24,250.00 https://hcservices.ecourts.gov.in/hcservices/ Grand total of the above...Rs.1,23,02,344.00Sales upto the time ofinspection now arrived: Rs.1,06,55,646.00Less: 20% Gross Profit as per book : Rs. 17,75,941.00 ---------------------..Rs. 88,79,705.00 ---------------------Stock that should be ...Rs. 34,22,539.00Actual stock available ...Rs. 32,16,462.00 ---------------------Stock difference now arrived...Rs. 2,06,177.00 ---------------------7. The First Appellate Authority further pointed out thataccording to the accounts, the assessee had given the purchase ofcloth and readymade garments at Rs.82,12,507/- before theinspecting officials (Cloth – Rs.72,52,553/- and Readymade –Rs.9,59,954/-), as against the figure given before theEnforcement Wing Officers at Rs.93,80,116/-. Thus, there is adifference of Rs.11,67,609/-. Since the assessee could notreconcile this figure, taking the ratio of purchase of cloth andreadymade garments at 88:12, the difference was thus accordinglyapportioned to the turnover and thereby stock variation wasarrived at Rs.3,46,290/-. The First Appellate Authorityconfirmed the equal time addition and the suppression wasestimated at Rs.6,92,580/-. 8. As regards the disallowance of second sales exemption atRs.4,49,511.87, on verification of the sales register, the FirstAppellate Authority set aside the assessment. Considering therelief granted, penalty levied was also pro-rata reduced. 9. Aggrieved by this, the Department went on appeal beforethe Sales Tax Appellate Tribunal by way of Cross Appeal and theassessee went on appeal before the Tribunal as against theconfirmation of the assessment on the alleged stock differenceand the equal addition made. The Tribunal considered thecontention of the assessee as well as the Revenue in therespective appeals and ultimately dismissed the assessee's appealand partly allowed the enhancement portion. 10. A perusal of the order of the Tribunal shows that whiledisagreeing with the reasoning of the Appellate AssistantCommissioner, it pointed out that the Appellate AssistantCommissioner's stock tally proceeded on the premise that both theInspecting Officer and the Assessing Authority failed to take https://hcservices.ecourts.gov.in/hcservices/ into consideration the sale of cloth at the time of inspectionand arrived at the sale of cloth for the value of Rs.25,05,549/-.The Tribunal viewed that the assessee had not maintainedproduction-cum-stock account. The cloth required for the purposeof stitching of articles alone were taken into account for thepurpose of computing the stock of finished goods. The Tribunalviewed that the First Appellate Authority committed an error inviewing that the Officer did not take into consideration the saleof cloth and thus proceeded to apportion the unreconciledpurchase turnover towards sale of cloth and sale of readymadegoods. Thus, the Tribunal held that the Appellate Authority'sview was not based on materials. It viewed that the AssessingOfficer's estimate was based on pure facts according to the booksof accounts. Thus, the Tribunal upheld the stock variation asstated in the assessment at Rs.46,34,644/- as well as furtheraddition of Rs.46,34,644/- towards probable omission. 11. As regards the disallowance on the claim of second salesand estimate of first sale by the Assessing Officer, the Tribunalpointed out that the assessee had not maintained separate stockaccount for taxable and non-taxable goods. In the circumstances,the formula adopted by the Assessing Officer was well within thelaw declared by this Court. Accordingly, it confirmed the orderof the Assessing Officer.12. However, as regards the levy of penalty, the Tribunalheld that restoration of penalty at 50% would meet the ends ofjustice. Thus, while setting aside the order of the FirstAppellate Authority and restoring the order of the AssessingOfficer, the Tribunal allowed the enhancement petition; buthowever, the penalty was reduced to 50%. Aggrieved by this, theassessee is on appeal before this Court as against the order ofthe Tribunal. 13. Learned counsel appearing for the assessee placed beforeus the sales details of readymade garments as well as cloth uptothe date of inspection as well as the purchase of readymadegarments and cloth, locally and inter-State, upto the date ofinspection as well as to the close of the financial year. Hesubmitted that while the Inspecting Officials arrived at thestock variation at Rs.1,84,140/-, which, according to theassessee itself, is not based on the correct figures, theassessment done by the Officer, treating the stock variation atRs.46,34,644/-, is also against the account entries; as such, thefinding on both were incorrectly arrived at by the AppellateAuthorities. The assessee contended that there was no stockvariation at all for the purpose of any assessment in this case.He submitted that when the account books were all there beforethe Inspecting Officials and they were seized and the sales and https://hcservices.ecourts.gov.in/hcservices/ purchase were noted, the difference found in the stock by theInspecting Officials was only on account of the improper stocktaking as well as the failure to get into the accounts relatingto purchase and sales. The assessee submitted that it purchasedstock both locally and from outside the State and it alsopurchased readymade garments. The purchased cloth materials weresold as such, as well as used for the manufacture of readymadegarments. Given the nature of different manufactured items, hesubmitted that there was always a difficulty in maintaining themanufacturing account, but then, it did not mean that there wereno accounts at all, reflecting the true state of affairs. 14. Taking us through the accounts reconciliation statementas was considered by the Appellate Authority, learned counselpointed out to the mistake in the reconciliation statement madeat the time of inspection that when the total sales of readymadegarments as well as cloth upto 09.10.1990 i.e., the date ofinspection, was only Rs.1,06,55,645.99, the inspection notedsales turnover of readymade garments upto 9th September, 1990. Healso pointed out that the total purchase of readymade garments aswell as cloth upto 08.10.1990 was to the tune of Rs.82,12,236.53.In the circumstances, the contention of the Revenue that thepurchase upto the date of inspection of fabric of Rs.93,80,115/-is not borne out by the accounts. Thus, the difference arrivedat by the Assessing Officer to a sum of Rs.46,34,644/- was notcorrect; the total sales made by the assessee in respect offabric as well as readymade garments was Rs.74,92,419/-. So toothe purchase of fabric taken was Rs.93,80,115/-. 15. He further pointed out to the failure to take note ofthe other materials available on the use in the manufacture ofreadymade garments. Consequently, he submitted that the Tribunalcommitted a serious error in ignoring the account entries touphold the order of assessment. 16. Countering the said statement, learned Standing Counselappearing for the Revenue defended the assessment order made andin turn, the Tribunal's order upholding the assessment.17. Heard learned counsel appearing for the assessee as wellas the learned Standing Counsel appearing for the Revenue andperused the materials placed on record. 18. A perusal of the inspection report reveals that as amanufacturer, the assessee had not maintained the manufacturingaccount, nor had it shown the purchase of materials made locallyas well as from other States which are sold in the State eitheras fabric or as readymade garments. Given the fact that theassessee is not just a trader alone, but a manufacturer too, the https://hcservices.ecourts.gov.in/hcservices/ basic document that one has to maintain, however difficult itmight have been, is the manufacturing account, since theverification as to the correctness of the claim starts only fromthereon. Thus, the admitted case that the assessee had notmaintained the manufacturing account, clearly pointed out to thedifficulty in arriving at the stock variation. 19. It is a matter of record that the inspection resulted inthe books of accounts being taken by the Revenue. It is also amatter of record that the assessee had maintained the books ofaccounts indicating purchase of materials as well as readymadegarments, apart from other materials, which are required inmaking readymade garments. Going by the details available,particularly as regards the purchase of cloth and readymadegarments and the sales thereon, a fact which is not denied by theRevenue too, it is evident that in the case of sale of readymadegarments upto 09.10.1990, the turnover itself is to the tune ofRs.81,50,097.34. As far as cloth is concerned, the turnover onsales is Rs.25,05,548.65, totaling to a sum of Rs.1,06,55,645.99.On a reading of the details given, it is evident that what hadbeen taken at the time of inspection was only with reference tothe sale of readymade garments, that too, upto the sales made ason 30th September 1990. When we look at the purchase turnover oncloth and readymade material upto the date of inspection, thetotal turnover comes to Rs.82,12,236.53. The AssessingAuthority as well as the Inspecting Officials noted it asRs.93,80,115/-. Taking the difference between the stock of clothand readymade garments at Rs.11,67,609/-, the First AppellateAuthority pointed out that the assessee could not reconcile this.Consequently, taking note of the ratio of purchase of cloth andreadymade garments, a sum of Rs.11,67,609/- was the stockdifference arrived at. Thus, taking the stock of cloth andreadymade garments along with the consumables atRs.1,23,02,344/-, the First Appellate Authority took note of thesales of readymade garments as well as cloth as found in thebooks of accounts at Rs.1,06,55,646/- and reduced book profit at20% and arrived at the stock difference at Rs.34,22,639/-. TheInspecting Officials noted the available stock at Rs.32,16,462/-.The First Appellate Authority took the actual stock available atRs.32,16,462/- and arrived at the stock difference atRs.2,06,177/-. Adding the proportion at Rs.11,67,609/-, thesuppression was arrived at Rs.3,46,290/-. As far as the adoptionof the actual stock available taken at Rs.32,16,462/- isconcerned, we find from the inspection report submitted that thestock of finished goods found at the time of inspection wasRs.25,36,344/-. On a reading of the details furnished before us,we find difference between Rs.32,16,462/- and Rs.25,36,344/-representing the actual stock of finished goods which is onaccount of other materials in the form of consumables and that, https://hcservices.ecourts.gov.in/hcservices/ leaving that out for the purpose of arriving at the actual stockdifference, the Appellate Authority should have arrived at a sumof Rs.8,86,295/- as against Rs.3,46,290/-. In the light of thedetails thus available before us and which were very muchavailable before the Tribunal as well as before the otherAuthorities, we do not find any justifiable ground to accept thereasoning of the Tribunal, which fails to take note of theaccounts details. Even though the Tribunal pointed out that theAssessing Authority's assessment is based on facts according tothe books of accounts, we do not find any justifiable ground toaccept the working done by the Assessing Officer. The Books ofAccounts which were produced before the Assessing Officer as wellas before the Inspecting Officers were initiated by theauthorities concerned and it is not the allegation of the Revenuethat the entries were made subsequent to the date of inspection,for inference thereon to be drawn adversely against the assessee.Since account entries remain as they are, we do agree with theassessee's contention that the Assessing Authority committed anerror in arriving at the actual stock variation. As alreadynoted, variation was arrived at, taking note of the sale inreadymade garments upto September, 1990 whereas, theinvestigation was made on 09.10.1990. When the Revenue admitsthat the materials purchased could not be said as with referenceto sale of readymade garments alone, in fairness to the claim ofthe assessee, the Assessing Officer as well as the Tribunalshould have adverted to this fact while arriving at the stockvariation. In the circumstances, while confirming the reasoningof the Appellate Assistant Commissioner, we hold that in arrivingat the stock difference, instead of Rs.32,16,462/- as unaccountedstock available, the Officer should have taken note of the stockof finished goods at Rs.25,36,344/- to arrive at the stockdifference for the purpose of working out the liability. Exceptfor this modification, we confirm the order passed by theAppellate Assistant Commissioner. Thus, while disagreeing withthe view expressed by the Tribunal, we set aside the order of theTribunal and thereby remand the matter back to the AssessingOfficer to arrive at the stock difference, taking the actualstock at Rs.25,36,344/- and the stock difference atRs.34,22,639/- and assessment order passed thereon.20. In arriving at the penalty under Section 12(3)(b) at50%, the Assessing Officer shall, however, exclude the additionaltax portion, since the provision regarding the levy of penalty onadditional sales tax was introduced in the statute book in theyear 1997. Hence, the same was not available during the materialassessment year 1991. 21. As regards the equal time addition for probableomission, we uphold the order of the Tribunal to this extent of https://hcservices.ecourts.gov.in/hcservices/ the actual suppression. So too the penalty arrived at 50%. Withthe above observation, this Tax Case stands dismissed. Sd/ Deputy Registrar /true copy/ Sub Asst.RegistrarksvTo1. The Asst.Registrar,The Tamil Nadu Sales Tax Appellate Tribunal (Additional Bench) Chennai-104.2. The Appellate Assistant Commissioner (C.T) III, Madras-108.3. The Commercial Tax Officer, T.Nagar (North) Assessment CircleNo.46, Greenways Road, Chennai-28.+1cc to Spl. Govt. Pleader (T) Sr 53041+1cc to Mr.N.Inbarajan, Advocate Sr 52561MRD(CO)km/1.11.Tax Case (Revision) No.1846 of 2008