Taxman

BEST JUDGMENT ASSESSMENT

RAJIV GANDHI NATIONAL UNIVERSITY OF LAW

PATIALA, PUNJAB

TAXATION LAWS

PROJECT ON:


SUBMITTED IN PARTIAL FULFILMENT OF B.A. LL.B.

(HONS.)

SIXTH SEMESTER

Submitted to: Submitted by: (Group 18)

MR. K.C. GARG HIMANSHU MEENA (374)

Professor of Law PRIYANKA BARUPAL (375)

TANAY HAZARI (378)

DALBIR SINGH (381)

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TABLE OF CONTENTS

CHAPTER 1 INTRODUCTORY...........................................................................................03

1.1 Role of Tax.......................................................................................................03

1.2 Income Tax Act, 1961......................................................................................03

1.3 Assessment.......................................................................................................03

1.4 Procedure of Assessment in IT Act,1961.........................................................03

1.5 Importance........................................................................................................05

1.6 Objective...........................................................................................................05

1.7 Methodology and Scope...................................................................................05

1.8 Chapterization ..................................................................................................06

1.9 Table of

cases....................................................................................................06

CHAPTER 2 CONCEPT OF BEST JUDGMENT ASSESSMENT IN IT ACT, 1961.........08

2.1 Best Judgment Assessment: Meaning..............................................................08

2.2 Defaults for which best judgment assessment is

permissible...........................09

2.2.1 Non-filing of Return.................................................................................09

2.2.2 Non-Compliance with notice under Section 142(1) ...............................12

2.2.3 Non-Compliance with direction for auditing of accounts.......................14

2.2.4 Failure to comply with notice under Section 143(2)...............................14

2.3 Analysis of Statutory Provisions relating to Best Judgment Assessment.......16

CHAPTER 3 PRINCIPLES UNDERLYING BEST JUDGMENT ASSESSMENT...........19

CHAPTER 4 DISCRETIONARY BEST JUDGMENT ASSESSMENT.............................22

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CHAPTER 5 CONSEQUENCES AND REMEDIES...........................................................23

CHAPTER 6 DIRECT TAX CODE AND BEST JUDGMENT ASSESSMENT.................25

CHAPTER 7 CONCLUSION AND SUGGESTIVE MEASURES.....................................26

CHAPTER 1

INTRODUCTORY

1.1 Role of Tax in India

For the development and progress of any country the contribution of its citizens is of

paramount importance. In India, like in many other countries, such contribution is made

by the citizens through the paying of tax. Therefore, in India the main source of income

of the government is tax collected from people. The significance of Income Tax becomes

many folds more for a developing country like India as it provides the government with

much needed financial leverage to plan and carry out the development schemes at a larger

level.

1.2 Income Tax Act, 1961

It is the charging statute of income tax in India. It provides for levy,administration,

collection and recovery of Income Tax in India. The Act is criticized for the excessive

amendments brought in it, which have seemingly changed the basic structure or the original

form of the Act

1.3 Meaning of the term ‘Assessment’

The term ‘assessment’ has been derived from a Latin word assidere which means to “sit

beside”. It implies the process by which people get together to evaluate the educational

experience and the ways to make it more meaningful. The term literally means the act of

determining or evaluation. The word ‘assessment’ is used in various contexts like the

assessment of damages or of taxes or the assessment of valuation of a property.

1.4 Procedure of Assessment in Income Tax Act, 1961

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In field of taxation law assessment has a definite meaning. This term is inclusive of varied

ranges of activities and procedures.1 Therefore it would be erroneous to consider it with the

dictionary meaning of ‘determination’ respectively. It is to be strictly construed in the taxing

context and has only one meaning which is synonymous with the expression ‘tax’. The

definition of assessment has not been provided with the Income Tax Act, but a perusal of the

term within the scope of the Act makes it obvious that it implies an investigation and

ascertainment of the correctness of the returns and accounts filed by the assessee. Essentially

the assessment would evidently mean determination of the quantum of taxable turnover and

also the quantum of taxable amount payable by the tax payer.2 This assessment is made on

the basis of returns and accounts furnished by an assessee in support thereof but on an

estimate made by the assessing authority which may, of course, be based inter alia on the

accounts and documents furnished by the assessee.3

The expression of assessment has a wide scope within the purposes of the Act whether the

said assessment made are correct or not.4 Therefore any assessment made would not

essentially mean an assessment correctly or properly but would signify all assessment made

or purported to have been made under the said Act.5 Basically assessment is estimation for an

amount assessed while paying Income Tax. It is a compulsory contribution that is required

for the support of a government.

Assessment is generally of the following types.

Self Assessment (under Section 140A): It means that the person is calculating his own tax

liability and thereafter filing income tax return after payment of self calculated tax. It is

called self-assessment as the assessee himself calculates the tax and the income returned. It

comprises paying of tax and filing of returns by the assessee. The assessee can file income

tax return as self assessment under Section 139 or with response to notice under Section

142(1) of the Income Tax Act, 1961.

1 Harlalka v. CIT, (1967) 3 SCR 833

2 MRV. Rao et al’, Concepts in Taxation, The Law Publishers, Madras

3 Bharat Wood Products Co. v. CST, (1987) 64 STC 107 (Del).

4 Illuri Subbaya Chetty v. State of AP, (1963) 14 STC (SC)

5 Kamala Mills Ltd. v. Bombay State, (1965) 16 STC 613 (SC)

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Regular Assessment also known as Scrutiny Assessment (under Section 143(3): On the basis

of the return of income chargeable to tax furnished by the assessee intimation shall be sent to

the assessee informing him about the tax or interest payable or refundable to him.

Best Judgment Assessment (Under Section 144): In a best judgment assessment the assessing

officer should really base the assessment on his best judgment i.e. he must not act dishonestly

or vindictively or capriciously. There are two types of judgment assessment:

1. Compulsory best judgment assessment made by the assessing officer in cases of non-

co-operation on the part of the assessee or when the assessee is in default as regards

supplying informations.

2. Discretionary best judgment assessment is done even in cases where the assessing

officer is not satisfied about the correctness or the completeness of the accounts of the

Assessee or where no method of accounting has been regularly and consistently

employed by the Assessee.

Income escaping assessment or re-assessment: If the assessing officer has reason to believe

that any income chargeable to tax has escaped assessment for any assessment year assess or

reassess such income and also nay other income chargeable to tax which has escaped

assessment and which comes to his notice in course of the proceedings or any other

allowance, as the case may be.

Precautionary assessment: Where it is not clear as to who has received the income, the

assessing officer can commence proceedings against the persons to determine the question as

to who is responsible to pay the tax.

1.5 Importance

The project is analytical as well as descriptive in nature. However, majority of the part of the

project is analytical and suggestive in nature. The aim of the project is to explore and analyse

various kinds of assessment primarily focusing on best judgment assessment and finding

lacunae in it. The object of the project is to analyse and provide suggestive measures so as to

overcome the various flaws in it.

1.6 Objective

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The object of the project is to analyse and provide suggestive measures so as to overcome

various flaws in it. The aim of the project is to explore and analyse various kinds of

assessment primarily best judgment assessment and finding lacunae, if any, in it.

1.7 Research Methodology and Scope

The sources used for research herein are secondary sources of data collection such as books

and various journals have been used with the help of the access to the library and the

software. Moreover, the latest information was also taken from various newspapers and

journals.

The scope of this project is limited to analyzing the flaws in the Best Judgment Assessment

provision in the Income Tax Law, 1961 and providing for suggestive measures relating to it

1.8 Chapterization

The project has been divided into the following chapters:

(1) Introductory consisting of meaning of the role of tax in India , a brief introduction

about the Income Tax Act 1961, term assessment, its concept under the IT Act, 1961,

the scope, importance and object of the topic, the methodology used in the project, the

table of cases mentioned in the project.

(2) Concept of Best Judgment Assessment in IT Act, 1961 consisting of the meaning of

best judgment assessment, its concept under IT Act, the

(3) Principles underlying best judgment assessment.

(4) Discretionary type of Best Judgment Assessment

(5) Consequences and Remedies related to Best Judgment

(6) This Chapter deals with mainly with the Direct Tax Code and its comparative analysis

with the Income Tax Act, 1961 in context of best judgment assessment

(7) Analysis of best judgment assessment and conclusion

1.9 Table of Important Cases

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Mohini Debi Malpani v. ITO, (1970) 77 ITR 674 (Cal)

CIT v. Laxminarain Badridas, (1937) 5 ITR 170 (PC)

CIT v. Popular Electric Co. (P) Ltd., (1993) 203 ITR 630 (Cal)

State of Kerela v. C. Velukutty, (1966) 60 ITR 239 (SC)

CST v. H.M. Esufali, (1973) 90 ITR 271 (SC)

Mohanlal Mahribal v. CIT, (1982) 133 ITR 683 (MP)

Singh Engg. Works v. CIT, (1953) 24 ITR 93 (All)

T.C.N. Menon v. ITO, (1974) 96 ITR 148 (Ker)

Universal Book Stall v. CIT, (1993) 199 ITR 687

Pyarelal v. State of M.P., (1971) 28 STC 130 (MP)

K.P. Abraham v. ITO, (1987) 163 ITR 120 (Ker)

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CHAPTER 2

CONCEPT OF BEST JUDGMENT ASSESSMENT IN IT ACT, 1961

2.1 Best Judgment Assessment: Meaning (as per the Income Tax Act, 1961)

Best judgment assessment is the process by which the income of the assessee is determined

by the Income Tax officer, to the best of his judgment and based on the information available

with him. Such assessments generally involve the use of estimates, assumptions and exercise

of judgment by the assessing officer.

These assessments are carried out under Section 144 of the Income-tax Act-1961 if a person

fails to make a return required as per the provisions of the Act; or fails to comply with terms

of a notice issued for submitting the return of income or calling for additional information

pertaining to the return already submitted; or fails to carry out a special audit as directed by

the income-tax officer.6

These assessments take place when there is no respond to notices issued by the income-tax

department. This may be done deliberately or may arise out of ignorance or circumstances

beyond his control. Although the law has conferred the powers to unilaterally assess the

income of the assessee, it is necessary that the principles of natural justice are followed by

the assessing officers before carrying out such assessment. An opportunity of being heard

must be provided to the assessee. However, this opportunity of ‘being heard' may not be

provided, if the officer has issued the notice requesting the assessee to submit the return.

Hence, it is advisable that every notice or direction received from the income-tax department

is responded to by the taxpayer. Several courts have laid down the principles an assessing

officer must follow in framing a best judgment assessment.

6 Akshay Desai, http://www.thehindubusinessline.com (last visited on March 21, 2011)

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http://www.thehindubusinessline.com/


Courts have accepted that though the assessment under Section 144 is an estimate, it should

be true and fair and should have a reasonable nexus with the material available with the

officer. However, these principles are rarely followed by the assessing officers, and arbitrary

and ad-hoc assessments are often made.

2.2 Defaults for which Best Judgment Assessment is permissible

An assessment to the best of the judgment of the assessing officer is permissible only if any

of the four defaults mentioned in Section 144 exists

Recording of finding of default, precondition for exercise of jurisdiction before the assessing

officer can assume jurisdiction under sec 144, he must record the finding in the first instance

that there has been a non-compliance with any of the various notices mentioned there in or

with direction for audit of accounts. If in a particular case, the assessing officer has a chosen

to assume jurisdiction under sec 144 and to make a best judgment assessment on a wrong

finding as to a jurisdictional fact, that is, non-compliance with any of the notices mentioned

in sec 144, the high court, in exercise of its jurisdiction under Art 226 of the constitution is

competent to inquire in to the correctness of such finding on a jurisdictional fact.7

2.2.1 Non-filing of return

Clause (a) of s. 144 provides that if any person fails to make a return required by a notice

given under s. 139(2) up to assessment year 1988-89 and from assessment year 1989-90, fails

to make a return under s. 139(1) and has not made a return under s 139(4) or a revised return

under s 139(5), the assessing officer shall make the assessment of the total income or loss to

the best of his judgment. It is, therefore, clear that the failure to file a return under s.139 (1)

was not to entail a best judgment assessment till assessment year 1988-89. However, in order

that this default may attract a best judgment assessment, two conditions must be fulfilled as

follows:

1. Failure to make a return under s. 139(1) from assessment year, and

2. Non filing of a return under s. 139(4) or 139(5)

(a) Valid notice calling for return, a pre-condition till 31.3.1989 - It may be observed

that cl. (a) of s.144 postulated a service of valid notice under s 139(2), as it existed till

7 Mohini Debi Malpani v. ITO, (1970) 77 ITR 674 (Cal)

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31.3.1989, calling for a return and such a notice was a necessary pre-condition for a

best judgment assessment. However, a wrong description of the assessee in the notice

calling for the return was not to render the consequential best judgment assessment

invalid.

(b) Return not be ignored – It has to be remembered that if, before an assessment is

completed, the assesse files a return, the assessing officer was not entitled to make an

assessment under s. 144 ignoring such return under s 139(2), as it existed till 31.3.

1989. However, a letter addressed to the assessing officer could not be treated as a

return for this purpose. If a return is offered by the assessee but is not accepted under

the instructions of the assessing officer who makes a best judgment assessment

thereafter even on the same day of refusal, the assessment would be illegal and liable

to be quashed.

The above principles are unquestionable even for and from the assessment year 1989-

90 so far as the filing of return is concerned.

An assessment made on account of non-submission of return in compliance with

notice under s. 139(2), as it existed till 31.3.1989, would be justified where the

assesseee simply filed several applications for extension of time on one ground or

other and even a notce under s 142(1) remained uncomplied with even if the assessee

denied receipt of any such notice. Similarly, a best judgment assessment would be

justified if the assessee had been ignoring notice under s 139(2) for many years and

adopting an unco-operative attitude.

(c) Return showing ‘nil income’ - a return duly signed and verified showing ‘nil’ in the

column meant for showing total income is a valid return. However, where the

assessee files a return in response to a notice but all the columns of the return are

blank, it would amount to failure to file a return attracting a best judgment

assessment.

(d) Non-filing of return of income of branches or principal place of business - Where the

assessee files a return of income from the head office only without including the

income of branches a s required by the assessing officer, the return cannot be treated

as the return of the total income and a best judgment assessment can be made.

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Similarly, where the assessee does not file a return to the assessing officer having

jurisdiction over his principal place of business but submits returns of branch income

to the assessing officer having jurisdiction over the places where the branches are

situated, a best judgment assessment can be made by the assessing officer having

jurisdiction over the principal place of business without getting any reports from the

assessing officer having jurisdiction over the places of branches.

(e) Return filed after signing of assessment order - where a return is filed after the

assessment order is signed by the assessing officer but before it is served on the

assessee, it could not be contended that the assessment made under s. 144 for non-

compliance with notice under s 139(2), as it existed till 31.3. 1989, was invalid.

(f) Return not signed and verified - a best judgment assessment can be made when the

return is not signed and verified by the assesse in the prescribed manner.

(g) Effect of death of assessee - where the assessee died without furnishing a return as

required under s 139(2), his legal representative would not be competent to file a

return after the assesse’s death and the assessing officer could proceed to make a best

judgment assessment.

(h) Non-compliance with notice under s 148 - Section 148, as it existed till 31/3/1989,

required the assessing officer, before making an assessment or reassessment under s.

147, to “serve on the assessee a notice containing all or any of the requirements which

might be included in a notice under sub-s. (2) of s. 139 till 31.3.1989; and the

provisions of this act would, so far as might be, apply accordingly as if the notice

were a notice issued under that sub-section”. It will, therefore, be seen that s 144,

being a provision of the act, applied after a notice was served under s. 148, which

notice was a pre-condition of the making of an assessment or reassessment under s.

147. A best judgment assessment applying the provisions of s. 144 could, therefore,

be made when the provisions of s 147 had been invoked and the assessee had failed to

respond to a notice under s. 148. A best judgment assessment under s. 144 has to be

made upon such material as is available. Section 147 predicated the existence of some

material. Where an assessee does not respond to a notice under s. 148, the taxing

authority is obliged to determine the assessee’s income as best as he can base on that

material. There is no real difference between the manner in which the taxing authority

reaches it conclusion under the provision of s. 144 and s. 147. Both are assessments

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made to its best judgment. It is open to the assessee to argue that the material does not

support the assessment under s. 147 as under s. 144. There is, therefore, no merit in

the submission that the word “so far as may “ in s. 148 exclude the applicability of the

provision of s 144 to an assessment made under s. 147

It may be observed that the above principle will also apply in the context of substituted s.

148, w.e.f. 1.4.1989, because even under that section, a notice has to be issued, which has to

be treated as a notice requiring a return to be furnished under s. 139.

2.2.2 Non- compliance with notice under s. 142(1) - Second default- under cl. (b), first part,

of s. 144, if an assessee fails to comply with all the terms of a notice issued under s. 142 (1),

the assessing officer has to make an assessment of the total income or loss to the best of his

judgment.

(a) Partial default sufficient- failure to comply with all the terms of a notice under s.

142(1) attracts a best judgment assessment under s. 144 and a partial default involves

the same consequences as a total default.

(b) No default if account books, etc., not in possession or control of assessee- best

judgment assessment cannot be made for failure of the assessee to produce books of

account or documents over which the assesse has neither possession no control

however, a seizure of books of account, etc., under s. 132 would not make compliance

with notice under s. 142(1) impossible or difficult.

Where it is found by the assessing officer that the assessee is, in fact, in possession of

the books of account but they were not produced in terms of notice under s. 142(1),

the officer will be entitled to make an assessment to the best of his judgment under s.

144. However, where there are no materials from which the assessing officer could

reasonably infer existence of books, the non-production of imaginary books would

not be a default so as to attract. S. 144. If the assesee had a whole or predominating

interest in a business outside India and, despite being in control over the account book

of such business, refused to produce such books of account, the income-tax

authorities were entitled to make an assessment under s. 144.

(c) Notice where partly bad- though notice under s. 142(1), noncompliance with which

will lead to a best judgment assessment , should be a valid one, if the notice is partly

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bad and the illegal portion thereof is separable from the legal portion, non-compliance

with the legal portion could entail best judgment assessment

(d) Compliance with notice under s. 143 (2) immaterial- for failure to comply with a

notice under s. 142(1), an assessment under. 144 may follow, even where a notice

under. 143(2) has been issued. Assessment under s. 144 is permissible for non-

compliance with a notice under s. 142(1), even though the notice under s. 143(2) is

fully complied with. This is so because failure to comply with a notice under s. 142(1)

is a default different from, and independent of , the default of non-compliance with

the notice under s. 143 (2). If the assessee fails to comply with a notice under s.

142(1), notice being combined one under s. 142 (1) and 143(2), the best judgment

assessment can be made, though the assessee may have sufficient cause for not

complying with the notice under s. 143(2). However. The position will be different

where the assessee has stated his inability to produce books of account, etc., in

response to a notice under. 142(1) because they were destroyed in arson an riots. In

such a case, unless a notice is served under s. 143(2), an assessment under s. 144 will

not be valid and cannot be sustained.

(e) Similarly, where an notice under s. 142(1) is issued after submission of the return and

no notice under s. 143(1) is issued, default of notice under s. 142(1) cannot attract s.

144.

(f) Notice under s. 142 (1) issued after commencement of assessment under s. 143(3)- it

cannot be said that the assessing officer can exercise his power to call for accounts

and documents only prior to the submission of return, and not during the proceedings

under s. 142(1) even after the commencement of enquiry under s. 143 (3) and can

complete a best judgment assessment for failure to produce the books of account.

(g) Existence or relevance of account books –it is for the assessee to prove that the

account books called for by the department are not maintained by him. In the absence

of any such direct evidence by the assessee which is believable, the department could

rely upon circumstantial evidence to find that the accounts demanded were in

existence, and complete assessment under s. 144 for non-production of such accounts.

It is for the assessing officer to decide the necessity for the account book called for. A best

judgment assessment made for failure to produce account books and documents cannot be

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assailed by the assessee on the ground that, in his opinion, the documents were not relevant

for assessment purposes. The question whether the particulars, etc., called for are relevant or

not has to be decided on the facts and circumstances of each case. Where there are no proper

contract accounts what so ever and there is no way of knowing as to what are the receipts

and the spending on the part of the assessee, if the commissioner adopts the method of yearly

accounting in pursuance of his powers under s. 144, it is justified.

2.2.3 Non-compliance with direction for auditing for accounts - the third default mentioned

in cl. (b) of s 144 to attract a best judgment of assessment is the failure of the assessee to

comply with a direction issued under s. 142 (2A) for getting his accounts audited. It may,

however, be observed that the default contemplated under this provision is the default of the

assessee himself and not the default of the chartered accountant nominated by the

commissioner to audit the accounts that will entail a best judgment assessment. Therefore, as

pointed out by the supreme court in Swadeshi Polytex, if for a frivolous reason that a petition

under s. 397 of the companies act, 1956, was pending against the assessee-company, the

chartered accountant nominated by the commissioner declines to undertake the audit of the

company’s accounts and it is on record that there was no collusion between the chartered

accountant and the company, obviously the company could not be held responsible. There is

no default or failure to comply with the direction issued under s. 142(2A) on the part of the

company so as to attract the provisions of s. 144(b).

2.2.4 Failure to comply with notice under s. 143(2)- fourth default- clause (c) of s. 144 lays

down that if any person, having made a return, fails to comply with all the terms of a notice

issued under s. 143 (2), the assessing officer will have to make an assessment to the best of

his judgment. It may be observed that in order to commit a default under s. 143(2), it is

necessary that there must be a failure to produce books or documents or evidence on which

the assessee relies in support of the return. If an assessee does not rely on any evidence or

document in support of the return and as such fails to produce any such document or

evidence, it cannot be said that there was failure on the part of the assessee to produce

evidence, in such a case, the failure of the assessee to produce any document or evidence

upon which he does not seek to rely cannot entail a best judgment assessment.

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However, in a different situation, an assessment under s. 14 can be validly made where the

assesee merely denies to be not in possession of any further evidence and that too without

any affidavit because non-compliance with the notice would be complete. The position would

be different where, in response to notice under s 142(1). The assessee informed the assessing

officer that account books were not available on account of being burnt in arson and riots. In

such a case, the assessing officer must have issued a notice under s. 143(2) before making

best judgment assessment. The principle of audi alteram partem applies.

(a) Notice to be valid- the assessing officer is bound to issue a valid notice under s.

143(2) if he consider sit necessary or expedient to ensure that the assessee has not

understated the income, etc. if this is not done and the notice is illegal, such a notice

will be deemed to be a notice in the eye of law and the assessing officer cannot

proceed to make a best judgment assessment

(b) Second notice by successor assessing officer-where a notice under s. 143(2) is

complied with by the production of certain account books and thereafter the case is

transferred to another assessing officer, before the new assessing officer can issue

another notice under s. 143 (2). He has to be satisfied that, in spite of compliance with

the earlier notice, he cannot complete the assessment on the basis of the books of

account and documents produced but require further production by way of evidence

or the attendance of the assessee before completing the assessment. A mere letter

cannot be considered as a notice under s. 143 (2).

(c) No best judgment assessment for failure to comply with summons under s. 131- A best

judgment assessment under s. 144 can be made only for the defaults specified

therein . non-compliance with a summons issued under s. 131 for production of books

of account and other documents is not such a specified default so as to attract the

provision of s. 144

(d) Partner and firm-Till 31.3.1993, if the assessee, who had a share in the profits of a

firm, failed to comply with a notice under s. 143(2), in order to make an assessment to

the best of his judgment, the assessing officer was not bound to wait till the

assessment of the firm was completed. The estimate made by the assessing officer

under s. 144 did not become improper and arbitrary solely because it did not accord

with the profits determined in the final assessment of the firm made subsequently.

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2.3 Analysis of statutory provisions relating to Best Judgment Assessment

A common understanding of the procedure shows that the best judgment assessment

procedure has given wide discretionary powers to the assessing authority to assess in the

instances where there has been willful suppression and concealment of income and turnover

by the Assessee. The power so provided is wide to the extent that the AO has the authority to

assume from the documents so present as to provide an assessment with an increased or a

decreased turnover based on the documents so provided. Even though the assumption may be

guesswork it has a valid justification that all the turnover so recorded in order to correctly

assume the turnover and thereby the returns in case of an attempt to intentionally conceal the

tax payable by not displaying in the books of accounts and the other official documents.

Tax assessment being a complex area of work it is but imperative that the assessing authority

Should be provided with adequate powers for encountering tax evaders. The assessing

officers in this respect have been given wide powers in that regard. It also aids in honest tax

disclosures so as to avoid the rising concerns of tax evasion which had panicked the economy

of the country thereby giving rise to a parallel unaccounted economy.

A mandatory best judgment is done in the event of failure to furnish requisites books of

accounts by the Assessee and further the discretionary assessment made where the AO is

under the firm belief that the records are not true or the same are not admissible by him or

rejected of any of the grounds which the assessing officer deems fit for the case.

However this power is not absolute and there is an imperative understanding that the actions

of the assessing authority will be honestly and diligently performed. Further the Assessee is

given the power to furnish reasons for failure to provide adequate reasons for the non

disclosure or concealment of the material documents and as to why an assessment should not

be made according to the best understanding of the assessing authority. Moreover, an

Assessee has a right to file an appeal under S. 246A or to make an application for revision

under s. 246 to the Income Tax Commissioner if he is not pleased with the decision made

against him. However, it is to be kept in mind the courts cannot however assess or interfere 16 | P a g e


with the decision other than on instances on a material error on face or record or any mistake

of law.

It is pertinent to mention however, that the powers apparently are too wide and can be used to

the detriment of an Assessee and can be manipulated by a corrupt officer. Therefore there has

to be checks and balances to the ‘guess work’ done in case of a best assessment judgment.

The AO should be asked to provide and furnish proof for his actions as opposed to that of the

Assessee and only after a deduction of both sides of the documents provided should the

tribunal come to a decision. At present, the IT Act does not prescribe any strict method of

assessment but it is submitted their indeed is a need to narrow down and codify the

procedural law on this point so as to bring clarity and vigilance to the operations of the

Income Tax officers.

OBJECT AND NATURE OF BEST JUDGMENT ASSESSMENT

The object and the purpose of the Best Judgment are to arrive at a fair and proper estimate of

the turnover of the dealer. The best judgment does not mean enhancement in turnover of the

dealer.

It is to be borne in mind that the principles of natural justice are essential criteria while

invoking best judgment assessment. The Assessee should be provided with adequate

opportunity of meeting the case which is sought to make an assessment order. Even in cases

where in cases the AO receives information from outside the institution or business or

individual who is being assessed he must disclose the source of information to the Assessee

has to be revealed. Where evidentiary material produced by the third party was sought to be

relied upon for showing the return submitted by the Assessee was incomplete and dubious,

the Assessee was entitled to have such a person summoned as a witness for cross

examination for establishing truth and exposing falsehood.

Where the return has not been filed and it is found that the dealer had transacted business and

the turnover is taxable, then penalty can be imposed.

Where assessment is based on the fact that the Assessee has been unable to furnish

information or plead his case appropriately it would not be a sufficient purpose for

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imposition of penalty. The order of penalty cannot sustain if there is no material available to

conclude that there is a willful suppression of taxable turnover warranting a penalty. When

making the best judgment assessment the AO must provide reasonable chance to the dealer to

produce which will assist in making the judgment. If the dealer provides no such information,

it should assess based on the information available. Even though it is ‘guess work’ there

should less speculative element in the judgment.

Thus, where the sole proprietor of the applicant concern has died and the books of records

washed away in flood, the city was in a curfew and the appropriate authority was unable to

furnish information, the reduction of the turnover made through a best judgment was held to

be legal.

Similarly large remittance made in bank and not followed up in the bank with a filing of

returns coupled with non-production of stock and sales accounts will result in a valid best

judgment assessment.

If the original judgment is a best Judgment assessment in respect to a particular assessment,

no second best judgment assessment is permissible on the ground that the original estimate is

low. It is not possible for the department to substantiate one best judgment assessment by

another merely on a change of opinion in the absence of any fresh definite material.

In instances where the accounts showed unexplained transactions only for a specific period,

the manner of the conduct of the transaction might also show a continuation of the process

for the entire assessment year. In the latter contingency it was held that an estimate of the

turnover for the extended period or for the whole year had necessarily to be made and that

estimate can be made only to the best of judgment. However, a future action cannot be the

nexus for best judgment assessment of the previous period as the items found in the slip

related to the subsequent year to which assessment was made. Enhancement of gross turnover

however negligible it may be, disclosed cannot be sustained on grounds that there was a

likelihood of errors or omissions in the books of accounts produced by the Assessee.

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CHAPTER 3

PRINCIPLES UNDERLYING BEST JUDGMENT ASSESSMENT

The principles of natural justice can broadly be classified into the following two maxims:

Nemo iudex in causa sua - It means, “nobody shall be a judge in his own cause” , i.e.,

invalidating any judgment where there is a bias or conflict of interest

Audi Alteram Partem - It means, “hear the other side”, i.e., giving a fair opportunity to the

other party to be heard and present one’s own case.

The principles of natural justice are latently imbibed in the Best Judgment Assessment under

the Act. They can be categorized in the following manner:

3.1 The assessment must be honest guess work

The Income Tax officer must not act in a dishonest or vindictive manner and he must

exercise judgment in the matter. The IT officer must make what he honestly believes to be a

fair estimate of the proper figure of assessment and also that he must be able to take into

consideration local knowledge and repute in regard to the assessee’s circumstances and his

own knowledge of previous returns by the assessee . The guess work exercised in such

matter must be ‘honest guess work’8

3.2 It should be an honest and fair estimate

The Assessing Officer must make an intelligent well-grounded estimate. Such estimate must

be based on relevant and adequate material The assessment should be honest and on the basis

of the materials available to him9

3.3 Reasonable nexus with material available to him

8 CIT v. Laxminarain Badridas, (1937) 5 ITR 170 (PC)

9 CIT v. Popular Electric Co. (P) Ltd., (1993) 203 ITR 630 (Cal)

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Though there is an element of guess-work in best judgment assessment, it should be

supplemented by the element of reasonability, i.e., the guess work should be reasonable and

should have a logical nexus with the material that is available to the assessment officer.10

3.4 Rationality and no biasness or vindictiveness

There should be no biasness or vindictiveness exercised by the assessing officer . The

assessment should be carried out in a rational basis. However, the assessing authority is the

best judge of the situation. It is his ‘best judgment’ and not anyone else’s11. The assessment

can be, to a certain extent, arbitrary but it must be honestly made and should not be

vindictive12.

3.5 Basis of computation to be disclosed

The disclosure has to be made of the basis of computation , by the Assessing Officer in the

order.Thus, where the assessee contractor , who was not maintaining , who was not

maintaining any books of account , estimated profits from contract works

3.6 No assessment in the absence of any material

There can be no assessment without the presence of any material . The exercise of the best

judgment depends upon application of the judicial decision by the Assessing Officer and

there should be no interference with his order unless it is shown to the satisfaction to the

satisfaction of the appellate court that the discretion has been exercised in a mala fide

manner13

3.7 Opportunity of being heard

A best judgment assessment is a quasi-judicial process, and it has to be based on materials

gathered. Such a process requires an opportunity of hearing being given to the assessee

before decision. Sec 142(3) deals with a stage before the assessing officer comes to a

tentative decision or proposal to determine the total income at a certain amount on the basis

10 State of Kerela v. C. Velukutty , (1966) 60 ITR 239 (SC)

11 CST v. H.M. Esufali , (1973) 90 ITR 271 (SC)

12 Mohanlal Mahribal v. CIT, (1982) 133 ITR 683 (MP)

13 Singh Engg. Works v. CIT, (1953) 24 ITR 93 (All)

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of the materials gathered by him. Those materials can be used against an assessee only after

giving him an opportunity of being heard. The assessee is entitled to have a second

opportunity to show cause why the total income should not be determined in the manner

proposed to be done by the assessing officer. It is only the first opportunity that is denied to a

defaulting assessee under sec 142(3) consequently, such an assessment, made without

providing an opportunity to the assessee, is invalid14

14 T.C.N. Menon v. ITO, (1974) 96 ITR 148 (Ker)

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CHAPTER 4

DISCRETIONARY BEST JUDGMENT ASSESSMENT

As the name suggests discretionary judgment assessment is the assessment by the Income

Tax assessing officer, based on his discretion. Discretionary best judgment assessment is

done even in cases where the assessing officer is not satisfied about the correctness or the

completeness of the accounts of the Assessee or where no method of accounting has been

regularly and consistently employed by the Assessee.

4.1 Method of Accounting (Section 145)

A. For Computing the income under the head profits and gains of business or profession

the assessee may adopt either cash or merchantile system of accounting.

B. The Central Government may modify the accounting standards to be following by

any class of assesses or in respect of any class of incomes.

4.2 Method of Acounting in certain cases (Section 145A)

A. The valuation of purchase and sale of goods and inventory for the purpose of

determining income under the head profits and gains of business or profession shall

be done in accordance with the method of accounting adopted by the assessee and it

shall be further adjusted by including any amount of tax, duty , cess or fee actually

paid by the assessee

B. Interest received by the assessee on compensation or enhanced compensation , as the

case may be, shall be deemed to be income of the year in which it is received

Section 154(3): By virtue of Section 154(3) the assessing officer can make a discretionary

type of best judgment assessment . This type of assessment can be made in the following two

types of cases :

A. Where the assessing officer is not satisfied about the completeness or correctness

of the accounts of the assessee, or

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B. Where no method of accounting has been regularly employed by the assessee

CHAPTER 5

REMEDIES & CONSEQUENCES

5.1 Remedies

The remedies open to the assessee against a best judgment assessment are as follows:

1 Appeal to commissioner under sec 246 (a). However, in an appeal against the assessment

under s. 144, it was not open to an assessee to raise grounds concerning the validity of

the making of the assessment ex parte under s.144 without availing of the remedy

provided by s. 146, as it existed till 31.3.1989. Where an assessment is made under s.

147, appeal lies under s. 246/246A and is not restricted to quantum of income assessed or

tax determined as in the case of an appeal against assessment under s. 144.15

2 Revision by the commissioner under sec 264

3 Writ- when the assessing officer choses to assume jurisdiction under s. 144 and to make a

best judgment assessment on a wrong finding as to a jurisdictional fact, viz., non-

compliance with any of the notices mentioned in s. 144, the high court, in exercise of its

jurisdiction under art. 226 of the constitution, is competent to enquire in to the

correctness of such finding on a jurisdictional fat. If the high court finds that the

jurisdictional fact has been wrongly found by the assessing officer, it could set aside the

exercise of power by the assessing officer on such a wrong finding on a jurisdictional

fact16. Further, the high court has jurisdiction also to enquire whether the assessing

authority has acted legally or not in making an assessment under s. 144.17 However, the

writ court cannot conduct an enquire with regard to the quantum and substitute its own

estimate for that of the officer.18

15 Universal book stall v. CIT, (1993) 199 ITR 687

16 Mohini Debi Maplani v. ITO, (1970) 77ITR 674 (Cal)

17 Pyarelal v. State of M.P., (1971) 28 STC 130 (MP)

18 K.P. Abraham v. Agl. ITO, (1987) 163 ITR 120 (Ker)

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5.2 Consequences

Alongwith the best judgment assessment, the assessee will also face the following

consequences:

A. When the assessee files an application of appeal against the best judgment

assessment, he is prevented from bringing on record any new facts before the

appellate authorities

B. The assessee becomes liable for penalties and prosecutions under Sections 271,

276CC and 276D

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CHAPTER 6

COMPARISON BETWEEN BEST JUDGMENT ASSESSMENT IN DIRECT TAX

CODE AND INCOME TAX ACT,1961

The new Direct Taxes Code, which is likely to be effective from April 1, 2012, covers two

additional scenarios where the assessing officer may carry out the best judgment assessment.

They are if a person fails to regularly follow the method of accounting or accounting

standards as notified; or if, the assessing officer is not satisfied about the correctness or

completeness of the accounts of the assessee.

As it is rightly said, “Ignorance of law is not an excuse”. Taxpayers should promptly respond

to all the notices or directions issued by assessing officers.

There is some significant difference between Best Judgment Assessment in the IT Act ,1961

and the Direct Tax Code Bill .19 It is as follows:

Under Section 144 of the IT Act a best judgment assessment is allowed in cases where there

is a failure to file a return/failure to comply with the terms of certain notices etc.

Under clause 156, in addition to the existing requirements, a best-judgment assessment can

also be made if the fails to regularly follow the prescribed method of accounting, or if the AO

is not satisfied about the correctness or completeness of the accounts of the assessee.

In the new Direct Tax Code the concept of previous year and assessment year have been

substituted by financial year. Section 139 of the Income Tax Act, 1961 has been substituted

with Section 144 of the Direct Tax Code Bill. Section 146(1) of the Code states that the

assessing officer has to give a notice, if returns have not been filed by the assessee under

Section 144 within a period of 21 months from the end of financial year. The assesse has to

furnish the returns as per the notice within 14 days of the receipt of such notice.

19 CIT v. M.S.P. Exports (P.)

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CHAPTER 7

CONCLUSION AND SUGGESTIVE MEASURES

A common understanding of the procedure shows that the best judgment assessment

procedure has given wide discretionary powers to the assessing authority to assess in the

instances where there has been wilful suppression and concealment of income and turnover

by the Assessee. Even though the assumption may be guesswork it has a valid justification

that all the turnover so recorded in order to correctly assume the turnover and thereby the

returns in case of an attempt to intentionally conceal the tax payable by not displaying in the

books of accounts and the other official documents. Tax assessment being a complex area of

work it is but imperative that the assessing authority should be provided with adequate

powers for encountering tax evaders. The assessing officers in this respect have been given

wide powers in that regard. It also aids in honest tax disclosures so as to avoid the rising

concerns of tax evasion which had panicked the economy of the country thereby giving rise

to a parallel unaccounted economy.

The Assessing Officer should be asked to provide and furnish proof for his actions as

opposed to that of the Assessee and only after a deduction of both sides of the documents

provided should the tribunal come to a decision. At present, the IT Act does not prescribe any

strict method of assessment but it is submitted there indeed is a need to narrow down and

codify the procedural law on this point so as to bring clarity and vigilance to the operations of

the Income Tax officers.

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BIBLIOGRAPHY

Book sources:

Lal and Vashisht, Direct Taxes, Pearsons Education, 29th Edition, Delhi.

Mehrotra H.C., Direct Tax Laws, Sathiya Bhawan Publication, 47th Edition, Agra, 2010

Taxmann, Direct Taxes Law, Lexicon, Taxmann Publications, New Delhi, 2008

Acharya Shuklendra, Law of Income Tax, Vol. 4, Modern Law House Pvt. Ltd., 2008

Internet sources:

http:// commerce.nic.in/annual 2006-07/html

http://www.firs.gov.ng/CMSTemplates/FIRS_SITE/downloads/Tax_Assessment_Procedure.

http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2005ITAct/casesec144.html

http://taxguru.in/income-tax/various-type-of-assessment-study-of-best-judgment-assessment-

2.html

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http://taxguru.in/income-tax/various-type-of-assessment-study-of-best-judgement-assessment-2.html

http://taxguru.in/income-tax/various-type-of-assessment-study-of-best-judgement-assessment-2.html

http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2005ITAct/casesec144.html

http://www.firs.gov.ng/CMSTemplates/FIRS_SITE/downloads/Tax_Assessment_Procedure.


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Taxman

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Transcript of Taxman