Whether the value of stock-in-difference based on the notional trading method is legally sustainable?

The appellant is a registered dealer under CGST, Act, 2017, engaged in manufacturing of hosiery Garments at Tiruppur, Tamilnadu. The business premises of the appellant were inspected by the Enforcement Wing of the Commercial Tax Department on 26.11.2015. The inspection brought out facts such as the purchase of cotton yarn not accounted and Stock Register in Form-H not being maintained. The stock verification conducted by the Enforcement Wing revealed stock-in-difference.

Assessment made deriving Rs.1,96,085/- as suppressed turnover. For probable omission, an equal sum of Rs.1,96,085/- added and tax at the rate of 5% with 150% penalty levied. For the stock-in-difference on stock verification, based on trading account analysis, the value of the stock suppressed was determined to be Rs.20,42,659/-. Adding 20% towards deemed profit and adding one time equal addition, for the total sum tax @ 5% and penalty @ 150% levied. For the above proposed assessment, the appellant was served with notice dated 31.08.2016. The appellant did not object to the assessment. The Final Assessment Order was passed on 22.05.2017, with tax effect of Rs.2,64,728/- and penalty of Rs.1,98,545/-. Page Nos.2/26

Aggrieved by the order of assessment, the trader/appellant had preferred appeal before the Appellate Deputy Commissioner. The appeal, VAT A.P.No.43 of 2017 (2015-16), was partly allowed on 20.10.2021 with the following terms:-

As against the above order of the Appellate Authority, the department filed appeal before the Appellate Tribunal in CTSA.No. 7 of 2022. The Tribunal, based on the grounds of appeal, formulated the following points for consideration:- i. Whether the order of the Assessing Authority making equal addition of Rs.24,51,190.00 towards probable omission which was subsequently deleted by the first appellate authority is sustainable or not? ii. Whether the order of the Assessing Authority levying penalty u/s.27(3)(c) of' TNVAT Act, 2006 Rs.1,83,839.00 for stock difference which was subsequently deleted by the first appellate authority is sustainable or not?

The Tribunal concluded that the dealer (appellant herein) has systematically evaded tax through deliberate suppression of turnover, non- Page Nos.4/26 maintenance of statutory records and false declarations. Hence allowed the department appeal by restoring the equal addition and the penalty levied by the assessing authority.

The Tribunal order restoring the levy of equal addition and penalty, is under challenge by the trader/appellant raising the following question of law:- 1. Whether the Appellate Tribunal erred in law in sustaining the equal addition of Rs.24,51,190.00 towards probable omission on the ground that stock register was not maintained and response was not given to assessment notice? 2. Whether the Appellate Tribunal is wrong in overlooking the fact that the actual stock variation itself was arrived at based on notional trading method and not based on any stock variation found at the time of inspection ? 3. Whether the Appellate Tribunal is correct in sustaining the equal time estimation/addition in the absence of regular pattern of suppression in the form of stock variation for the earlier period or the subsequent period ? 4. Whether the Appellate Tribunal being a final fact finding authority has committed judicial impropriety in not following numerous orders by the Hon’ble Division Page Nos.5/26 Bench of the Madras High Court which held that equal time estimation cannot be sustained in the absence of stock variation made on notional trading method ? 5. Whether the Appellate Tribunal was wrong in sustaining the levy of penalty u/s.27(3)(c) of TNVAT Act, 2006 of Rs.1,83,839.00 for estimated stock difference found based on trading account method without proper physical verification of stock? 6. Whether the Appellate Tribunal was wrong in overlooking the settled proposition of law penalty cannot be levied under section 27(3)(c) of the TNVAT Act, 2006 in the absence of a specific finding that there was wilful non-disclosure of assessable turnover ?

Whether the Appellate Tribunal was equally wrong in ignoring the fact that the entire tax was paid by the petitioner even before the revision of assessment was made and in such circumstances, can there be a penalty levied under section 27(3)(c) of the TNVAT Act,2017 as held by the Division Bench of the Hon’ble Madras High Court in the case of Sri Vignesh Jewellers and followed by numerous decisions?

Whether the Appellate Tribunal was wrong in deciding the appeal filed by the State Government without granting reasonable opportunity to the petitioner herein and the respondent therein? Page Nos.6/26 7. The Learned Counsel for the Revision petitioner at the time of admission submitted that along with the actual tax payable, the equal addition and the penalty levied also paid under protest and thereafter the taxpayer filed appeal and succeeded. Though the alleged suppression of stock is not based on physical verification but on trading account method based on value, which is incorrect, the appellant has not challenged the levy of tax on the alleged suppression of sale hypothetically estimated based on difference in stock, but seriously aggrieved on levy of equal addition and penalty for the probable omission since, no substantive reason assigned by the assessing authority for levy of equal addition. Likewise when there is no willful suppression made out, penalty under Section 27(3) cannot be levied. The law been settled by this Court and Hon’ble Supreme Court in catena of judgments, therefore prayed for disposal of the main case itself. 8. In support of his arguments, the Learned Counsel referred the following judgments:-

In response, the Learned Government Advocate appearing for Taxes, contended that, Section 22 of the Act empowers authority to make best assessment in respect of suppressed turnover and impose one time equal addition. Section 27 provides for imposing penalty for the willful suppression. Hence in the case in hand, the trader who failed to maintain invoices of cotton yarn which is the raw material for the end product (hosiery garments) and failed to maintain stock register for the end product during the inspection by the inspection wing, based on stock verification following trading account method. The judgments cited not applicable to the cases arising from best judgment assessment. The power to impose equal addition and penalty is in-build in the statute. The willful suppression of turnover and stock is expressly found from not maintaining stock register and over stocking found during the inspection. The method of estimating the stock been upheld even by the appellate authority and the levy of tax on the stock in difference accepted and paid by the trader. He Page Nos.9/26 did not challenge the levy of tax on the estimated value of excess stock found during the inspection. While so, the equal addition though discretion of the assessing officer, same cannot be deleted by holding the suppression of stock is only hypothetical and no tangible evidence available. Likewise, penalty u/s 27(3) being mandatory in case of willful suppression, after admitting suppression of stock and paying the tax levied, penalty imposed being consequential, same cannot be assailed. The Appellate authority erred in deleting the equal addition and penalty. The Tribunal rightly reversed the erroneous order of the appellate authority.

In support of his arguments, the Learned Government Advocate for the respondent referred the following judgments:-

Heard both sides. Records perused. The judgments cited were considered. Based on the submissions, the following substantial questions of law framed: a) Whether in the facts and circumstances of the case value of the stock-in-difference based on notional trading method is legally sustainable? b) Whether the Appellate Tribunal is correct in sustaining the equal time estimation/addition in the absence of regular pattern of suppression in the form of stock variation for the earlier period or the subsequent period ? c) Whether the Appellate Tribunal was wrong in sustaining the levy of penalty u/s.27(3)(c) of TNVAT Act, 2006 of Rs.1,83,839.00 for estimated stock difference found based on trading account method without proper physical verification of stock? Page Nos.11/26 Discussion on substantial questions of law

In the final order of assessment dated 22.05.2017, the Assessing Authority had mentioned two defects found in his best judgment assessment, based on the Inspection Wing report. The two defects and the tax assessed are as follows:- Defect No.1 They have purchased cotton yarn from local registered dealers, manufacture hosiery goods and effect sales. The verification of the purchase bills with reference to the monthly returns filed found that they have not accounted for the following purchase of cotton yarn and availed the tax due on the tax value as follows. Name of Tin Purchase Bill Purchase Add Add GP 20% the Seller No/Date amount Fright AS Textiles 33492404743 204/31.08.15 Rs.160200 3204/- 32681/- Total Value Add Total Tax at 5% Penalty Total Due 150% 196085/- 196085/- 392170/- 19608/- 14706/- 34315/- They have to pay the amount. Page Nos.12/26 Defect No.2. They have not maintained stock register in form “H” prescribed under TNVAT Act 2006. The physical stock as on 28.03.2016 available in the place verified which results that there is stock in difference

After tabulating the opening stock and closing stock, it was determined by the Assessing Officer that while the value of the physical stock was Rs.24,95,413/- whereas the book stock shows Rs.4,52,755/-. Table of the opening stock as on 01.04.2014 and the closing stock as on 01.03.2015, along with the break-up details, is mentioned in the assessment order. The same is not extracted here for the sake of brevity.

The Statute empowers the Assessing Authority to levy equal additions and penalties in cases of probable omission and willful suppression. Section 22 is the Procedure to be followed by Assessing Authority. Best Judgment assessment is dealt in sub- Section (4) of Section 22 which reads as, If no return is submitted by the dealer for that year, the assessing authority shall, after making such enquiry as it may consider necessary, assess the dealer to Page Nos.13/26 the best of its judgment, subject to such conditions as may be prescribed: Provided that before taking action under this sub-section, the dealer shall be given a reasonable opportunity of being heard. Section 27 deals with Assessment of escaped turnover and wrong availment of input tax credit. Sub Section (3) speaks on levy of penalty as below: In making an assessment under clause (a) of sub-section (1), the assessing authority may, if it is satisfied that the escape from the assessment is due to wilful non-disclosure of assessable turnover by the dealer, direct the dealer, to pay, in addition to the tax assessed under clause (a) of sub-section (1), by way of penalty a sum which shall be - (a)fifty per cent of the tax due on the turnover that was wilfully not disclosed if the tax due on such turnover is not more than ten per cent of the tax paid as per the return; (b)one hundred per cent of the tax due on the turnover that was wilfully not disclosed if the tax due on such turnover is more than ten per cent but not more than fifty per cent of the tax paid as per the return. (c)one hundred and fifty per cent of the tax due on the assessable turnover that was wilfully not disclosed, Page Nos.14/26 if the tax due on such turnover is more than fifty per cent of the tax paid as per the return;

In this case the genesis of the assessment is the inspection held on 26.11.2005 and its report regarding suppression of purchase and failure to maintain Form H regarding stock, leading to disclosure of difference in physical stock and book stock. Both the defects are interrelated. Suppression of the purchase of cotton yarn, being the raw material and the omission to maintain the mandatory Form-H, being the end product. The Assessing Authority had placed on record, in detail, about the quantum of suppression of purchases and the excess of stock in hand.

Regarding non-accounting of purchases, the trader had contended before the Appellate Authority that, even though the purchases has not been reported in the returns, it has been duly accounted for in the books of accounts and reflected in the balance sheet which proves the fact that the yarn has been utilized for the manufacture of hosiery garments. The Appellant further argued that by not reporting in the returns, there is no loss of revenue to the Government but there is a loss to the appellant as the Input Tax Credit could not be claimed. Therefore, treating the non-reporting of purchases as sales Page Nos.15/26 suppression is not fair and reasonable. When such being the position, the equal addition made thereon for probable omission is also not correct and liable for cancellation. The Taxpayer had produced records in support of the above contention. Hence, the Appellate Authority has remanded the matter back for fresh assessment based on the records relied by the appellant.

Regarding stock difference turn over, the appellant has contended that the stock variation arrived at by the Enforcement Wing and followed by the Assessing Officer is only on notional basis and not on exact methods by taking the purchase and sales figures for two years, i.e., 2014-15 and 2015-16. There is no proper physical verification of stock was made at the time of hearing. Had there been exact verification, there would not be difference at all.

Considering the said plea of the appellant and the reasoning given by the Department, the Appellate Authority, in answer to the Issue No:(iii)- “Whether the order of the Assessing Authority levying tax on the estimated sale value of Rs.24,51,190/- based on stock difference is correct or not?” held that the Enforcement Wing Officers have arrived at the stock difference based on the trading account method in terms of money value. The stock variation arrived Page Nos.16/26 out of trading account method would result in only notional variation. Stock difference arrived by adopting Trading Account method is not scientific one. However, the argument of the appellant cannot be accepted, since the dealer/appellant had accepted the defect before the Enforcement Wing Officers. Thus, some difference in stock proved beyond doubt, for which no proper explanation given by the dealer/appellant. As a consequence, the appeal of the trader/appellant in respect of this issue was dismissed. The dealer/appellant had not challenged this part of the Appellate Authority order and, therefore, it has reached finality.

While the Trading Account Method of stock verification is also recognized as one of the modes of stock verification and the departmental officials having found that other methods of stock verification were not feasible in the given circumstances, the trader/appellant’s reasoning for questioning the method of stock verification is not tenable. In this aspect, the judgments cited before us by the appellant wherein that courts have observed that stock variation arrived at by adopting various formula method in terms of monetary value is an unscientific method. Page Nos.17/26

In our considered view, the Trading Account Method for stock verification, though may not be accurate, when no other method of stock verification is possible, in such circumstances, Trading Account Method can be adopted. Variations arrived based on purchases, sales and stock reflected in the books of account and the actual physical stock found during the inspection, will certainly disclose suppression of stock, if any. The suppression so estimated if found to be willful that is sufficient to levy tax by adopting best judgment assessment. Consequently, penalty is also leviable under Section 27(3) if the suppression is willful. Insofar as equal additions towards probable omission are concerned, Courts in catena of judgments have held that there must be material available on record for warranting said additions. The authority should also assign reasons for levy of equal additions.

In Nokia India (P) Ltd vs. Deputy Commissioner (CT)-IV, Large Tax Payers Union, Egmore, Chennai and others reported in 2014 SCC Online Mad 8988, the Division Bench of this Court, after a deep analysis of the Expression “Best of judgment assessment” and the power under Section 22(4) to levy equal addition and under Section 27(3) to impose penalty, observed as below:- Page Nos.18/26 “36. Undoubtedly the power under section 27(1)(a) of the Act, is a wider power with a limitation of six years dealing with assessment of escaped turnover and wrong availment of credit. Even while exercising such power, the authority may determine to the best of its judgment, the turnover which has escaped assessment and assess the tax payable on such turnover. The question is while exercising such power, what is best of judgment assessment ? Though the expression is used in all the provisions which gives power to the authority to exercise its best of judgment, the underlying principles to be addressed is as to what could be considered as a best of judgment and under what circumstances it could be treated as best of judgment. Therefore the decision of the honourable Supreme Court would have a definite bearing on the cases on hand regardless of the provision which was the subject-matter of interpretation of those decisions. The honourable Supreme Court pointed out that the best of judgment assessment on an estimate, which the assessing authority has to make not capriciously, but, on settled and recognised principles of justice; an element of guess work is bound to be present in best judgment assessment, but it must have a reasonable nexus to the available material and the circumstances of each case. It was further pointed out where accounts books are available along with other records, there can be no ground for making best judgment assessment. If the quantum of turnover was based on the assessee's books, it cannot be treated as a best judgment Page Nos.19/26 assessment. …... 44. In Jayalakshmi Oil Mills [2013] 58 VST 535 (Mad), the Division Bench of this court pointed out that when there is no basis for equal addition for probable omission, the same is unwarranted as it is only based on estimate that too probable suppression, it is only a guess work and no material for making equal amount for probable suppression and accordingly, deleted the equal addition for probable omission. Similar view was taken in the case of Sri Ramu Furniture Company [2013] 57 VST 383 (Mad), wherein, the Division Bench pointed out the fact that in the subsequent year there was an inspection, which revealed suppression, by itself would not be a good ground to sustain the equal addition for the earlier assessment year. In S. V. Cycle Stores [2011] 46 VST 565 (Mad), the Division Bench pointed out that addition under the head "equal addition" for probable omission, does not follow as an automatic, concomitant assessment on actual suppression ; merely because the assessee's explanation as regards the subsequent accounting of the unaccounted purchase had been rejected by the officer, that by itself, would not justify the equal time addition towards probable suppression. The honourable Division Bench in the case of S. M. Baba Sahib [1979] 44 STC 299 (Mad), while considering the correctness of the penalty imposed under section 16(2) of the TNGST Act, pointed out that a wilful non disclosure of assessable turnover is a necessary Page Nos.20/26 ingredient to make out a case of invoking sub-section (2) of section 16 of the TNGST Act, viz., a deliberate intention to suppress an assessable turnover which should, in fact, have existed. It was further held that it is not possible to say, merely from the fact that there has been a reassessment of escaped turnover on the basis of best judgment, that there has been a wilful non- disclosure of assessable turnover and there must be something to indicate that the turnover did in fact exist and the assessee had wilfully not disclosed that assessable turnover. ……. 45. Thus, the legal principle that could be culled out from the above decisions is that equal addition being a guess work, based on an estimate, unless there is material, equal addition is not warranted; Stocks not supported by purchase bills cannot be a ground for equal addition. Rejection of assessee's explanation as regards unaccounted purchases which were subsequently accounted for would not justify equal time addition. The assessing officer did not deal with the effect of the three decisions referred above except for quoting the dealer's objection, which referred to these three decisions. Undoubtedly, the decisions were binding on the assessing officer as they are decisions of this court, which is the jurisdictional court over the respondent. The assessing officer did not make any endeavour to deal with or distinguish those decisions considering the fact. The only ground for equal addition is by stating that the dealer Page Nos.21/26 failed to disclose the sale of scrap in their returns and it came to light and it was and at the time of inspection only they have disclosed. Applying the legal principles enunciated in the above referred decision to the facts before us, this court is of the considered view that the reason assigned by the assessing officer does not warrant equal addition. ……. 72. Section 27(3) of the Act states that in making an assessment under clause (a) of sub-section (3) of section 27 of the TNVAT Act (as in the present case) the assessing authority may, if it is satisfied that the escape from assessment is due to wilful non-disclosure of assessable turnover by the dealer, direct the dealer, to pay, in addition to the tax assessed under clause (a) of section 27(1) by way of penalty, which shall be either 50 per cent. or 100 per cent. or 150 per cent., depending upon the parameters set down in clauses (a) to (c) in section 27(3). In terms of the above provision, to levy penalty, the assessing officer should record its satisfaction that the escape from assessment is due to wilful non-disclosure. The honourable Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1970] 25 STC 211 (SC) ; AIR 1970 SC 253, while considering imposition of penalty on the assessee under the provisions of the Orissa Sales tax Act, 1947, pointed out, an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty will not Page Nos.22/26 be ordinarily imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of its obligation and penalty will not be imposed unless it is lawful to do so. Where penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. In the instant case, except for observing that there was wilful non-disclosure on the part of the petitioner, and but for the audit, the matter would not have come to light, the assessing authority did not examine as to whether the conduct of the petitioner/dealer was wilful. Further, the assessing officer has not assigned independent reasons as to the imposition of penalty on the entire demand, which essentially should have been done by the assessing officer.” In cases where the Assessing Officer had not brought out the “willfulness” in the manner it has to be established, in those cases levy of equal addition and imposing penalty is not sustainable. Contrarily, the materials placed if sufficient to probablise suppression of turnover willfully, the levy of equal addition and penalty is sustainable. Page Nos.23/26

On scrutiny of the records in the case in hand, we find from the assessment order that the trader has failed to maintain purchase account and also failed to maintain Form-H for truthful disclosure of stock. These two defects are the basis for the conclusion of willful suppression of turnover, the quantum of suppression not marginal but shockingly high. While the stock book show the value of stock only as Rs.4,52,755/-, the physical verification conducted on 28.03.2016 had revealed the actual stock in hand was of value Rs.24,95,413/-. A variation of nearly five times been found. When the trader given opportunity to explain the vast difference in stock available and the value of the stock shown, he had not produced any material to justify the variation. Hence, after recording these said reasons, the Assessing Authority had levied equal additions and penalty.

The Appellate Authority ought to have taken into consideration the failure to maintain Form-H and the omission to keep proper account for the purchase of cotton yarn before interfering with the assessment order. The Appellate Authority has erred in ignoring these two major omissions by the trader done with the intention to suppress the turn-over. The said error committed by the Appellate Authority been reversed by the Tribunal, by Page Nos.24/26 assigning cogent and probable reasons. Therefore, in the absence of any travesty of justice, the High Court need not interfere with the order of the Tribunal, which is the final court of fact.

For the aforesaid reasons, we hold the substantial questions of law in favour of the Department.

As a result, the Tax Case (Revision) filed by the trader/appellant stands dismissed. There shall be no order as to costs. Consequently, connected Miscellaneous Petition is closed. (Dr. G.JAYACHANDRAN, J.) & (N. MALA, J.) 06-07-2026