Rajiv Gandhi National University of Law BEST JUDGMENT ASSESSMENT

PROJECT SUBMISSION ON

BEST JUDGEMENT ASSESSMENT

A PROJECT REPORT SUBMITTED IN THE PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE SUBJECT OF TAXATION OF LAW, VI SEMESTER, B.A.LL.B (HONS.) COURSE

SUBJECT: TAXATION LAW

SUBMITTED TO:
PROF. K. C. GARG

SUBMITTED BY:
HIMANSHU MEENA.................................374 PRIYANKA BARUPAL...........375 TANAY HAZARI...378 DALBIR PAUL SINGH381 SUPERVISORS CERTIFICATE

1|P age SUBMITTED IN THE PARTIAL FULFILLMENT OF VI SEMESTER OF THE B.A.LL.B (HONS.)

BEST JUDGMENT ASSESSMENT

SUPERVISORS CERTIFICATE
This is to certify that the project on the topic Best Judgment Assessment is purely based on bona-fide research work carried under my guidance and supervision and the same has not been submitted anywhere for any purpose whatsoever.

(Signature) Prof. K.C. Garg

2|Page

BEST JUDGMENT ASSESSMENT

CANDIDATES CERTIFICATE
This is to certify that the project on the topic Best Judgment Assessment is purely based on bona fide research work carried by me under the guidance and supervision of Prof. K. C. Garg and the same has not been submitted anywhere for any purpose whatsoever.

3|Page

BEST JUDGMENT ASSESSMENT

ACKNOWLEDGEMENT
God gives us life to decorate it with knowledge. Life without knowledge is like river without water. Its our privilege to acknowledge with profound gratitude and indebtedness towards my respected and learned supervisor for her inspiration, constructive criticism and valuable suggestions. Her precious guidance and time matched with unrelenting support kept me on track throughout during the completion of the project. We are grateful to Prof. K.C.Garg for his timely guidance and motivation which helped us in giving the final shape to this project. He was instrumental in conceptualization of this study. We are really thankful to our classmates, who helped in preparing research base for this project work. We are grateful to Maam Updesh Kaur, our librarian for her cooperation and support. Also our library staff which was always there to help us in anyway whatsoever may. Last but not least, we want to thanks my friends and peoples who appreciated our work and motivated us. With Loving regards and thanks to all, including those contributors whose names have not been mentioned here.

4|Page

BEST JUDGMENT ASSESSMENT

PREFACE

Anti-conversion legislations, euphemistically called Freedom of Religion laws, adopted by several Indian states have been the subject of much scrutiny. An analysis of the legislations reveals that the language used is often extraordinarily broad and vague, posing serious challenges to religious freedom as guaranteed by the Indian Constitution and enshrined in international human rights instruments. It is clear that the anti-conversion legislations, as they stand, pose serious challenges to both the intrinsic structure of Indian society and the international perception of the countrys legal system. it is difficult to escape the conclusion that these legislations are primarily motivated by a religious ideology and will detrimentally impact religious minorities. should the courts acquiesce in this emasculation of tolerance and secularism amid an increasing number of such laws passed by different state

governments, Indian democracy and its founding principles of equality and tolerance will be seriously weakened.

5|Page

BEST JUDGMENT ASSESSMENT

TABLE OF CONTENTS
SUPERVISORS CERTIFICATE ........................................................................................................................... 02 CANDIDATES CERTIFICATE ............................................................................................................................ 33 ACKNOWLEDGEMENT .................................................................................................................................... 44 PREFACE ........................................................................................................................................................ 05 TABLE OF CONTENTS........................................................................................................................................ 6 CHAPTER I : INTRODUCTORY......................................................................ERROR! BOOKMARK NOT DEFINED.7 ASSESSMENT: .................................................................................................... ERROR! BOOKMARK NOT DEFINED.7 CONCEPT OF ASSESSMENT IN IT ACT, 1960: ..................................................... ERROR! BOOKMARK NOT DEFINED.07 IMPORTANCE: ...................................................................................................... ERROR! BOOKMARK NOT DEFINED. OBJECTIVE: ........................................................................................................... ERROR! BOOKMARK NOT DEFINED. METHODOLOGY AND SCOPE OF THE PROJECT: .................................................. ERROR! BOOKMARK NOT DEFINED.9 CHAPTERIZATION: ............................................................................................................................................ 09 TABLE OF CASES AND BIBLIOGRAPHY: ................................................................ ERROR! BOOKMARK NOT DEFINED.0 CHAPTER II :CONCEPT OF BEST JUDGMENT ASSESSMENT IN IT ACT, 1960 .. ERROR! BOOKMARK NOT DEFINED. BEST JUDGMENT ASSESSMENT: MEANING : ...................................................... ERROR! BOOKMARK NOT DEFINED.1 DEFAULTS FOR WHICH BEST JUDGMENT IS PERMISSIBLE: ................................. ERROR! BOOKMARK NOT DEFINED.2 NON FILING OF RETURN:................................................................................ Error! Bookmark not defined.2 NON-COMPLIANCE WITH NOTICE UNDER SECTION 142(1): .......................... Error! Bookmark not defined.4 NON-COMPLIANCE WITH DIRECTION FOR AUDITING OF ACCOUNT: ............ Error! Bookmark not defined.5 FAILURE TO COMPLY WITH NOTICE UNDER SECTION 143(2): ....................... Error! Bookmark not defined.5 PRINCIPLE UNDERLYING BEST JUDGMENT ASSESSMENT: .................................. ERROR! BOOKMARK NOT DEFINED.7 CHAPTER III : CONSEQUENCE AND REMEDIES ............................................. ERROR! BOOKMARK NOT DEFINED. CHAPTER IV :DISCRETIONARY BEST JUDGMENT ASSESSMENT ...................ERROR! BOOKMARK NOT DEFINED.1 CHAPTER V : DIRECT TAX CODE AND BEST JUDGMENT ASSESSMENT .........ERROR! BOOKMARK NOT DEFINED.2 CHAPTER VI : ANALYSIS OF BEST JUDGMENT ASSESSMENT .......................ERROR! BOOKMARK NOT DEFINED.3 CHAPTER VII : CONCLUSION AND SUGGESTIVE MEASURES ........................ERROR! BOOKMARK NOT DEFINED.6

6|Page

BEST JUDGMENT ASSESSMENT

CHAPTER 1 INTRODUCTORY
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.

Concept in Income Tax Act,1961

In field of taxation law assessment has a definite meaning. This term is inclusive of varied ranges of activities and procedures1. 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 assessee3. 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 Act5. 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.

Kinds of Assessment
Assessment is generally of the following types6. Self Assessment: The Assessee is required to make a self assessment and pay the tax on the basis of the returns furnished. Any tax paid by the Assessee under self assessment is deemed to have been paid towards regular assessment.

Harlalka v. CIT, (1967)3 SCR 833 MRV. Rao et al, Concepts in Taxation, The Law Publishers, Madras

3 4

Bharat Wood Products Co v. CST, (1987) 64 STC 107 (Del). Illuri Subbaya Chetty v. State of AP, (1963) 14 STC (SC) 5 Kamala Mills Ltd. V. Bombay State, (1965) 16 STC 613 (SC)
6

7|Page

BEST JUDGMENT ASSESSMENT

Regular Assessment: 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: In a best judgment assessment the assessing officer should really base the assessment on his best judgement i.e. he must not act dishonestly or vindictively or capriciously. There are two types of judgement assessment: 1. Compulsory best judgement assessment made by the assessing officer in cases of non-cooperation on the part of the Assessee or when the Assessee is in default as regards supplying informations. 2. Discretionary best judgement 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.

Importance of the topic

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 judgement 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.

Objective of the Project

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 judgement assessment and finding lacunae, if any, in it.

8|Page

BEST JUDGMENT ASSESSMENT

Research Methodology
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. Scope and Limitation of the Project The scope of this project is limited to analyzing the flaws in the Best Judgement Assessment provision in the Income Tax Law, 1960 and providing for suggestive measures relating to it

Chapterization of the Project

The project has been divided into the following chapters: (1) Introductory consisting of meaning of the term assessment, its concept under the IT Act, 1960, the scope, importance and object of the topic, the methodology used in the project, the table of cases and the bibliography of the Project. (2) Concept of Best Judgment Assessment in IT Act, 1960 consisting of the meaning of best judgment assessment, its concept under IT Act, the Principles underlying best judgment assessment (3) The Remedies for Best Judgment Assessment (4) This Chapter deals with mainly with the Direct Tax Code and its comparative analysis with the Income Tax Act, 1960 in context of best judgment assessment (5) Analysis of best judgment assessment and conclusion

9|Page

BEST JUDGMENT ASSESSMENT

Table of Important Cases

Mohini debi malpani v. ITO, (1970) 77 ITR 674 (Cal) CIT Vs. 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 Mohini debi maplani v. ITO, (1970) 77ITR 674 (Cal) Pyarelal v. State of M.P., (1971) 28 STC 130 (MP) K.P. Abraham v. Agl. ITO, (1987) 163 ITR 120 (Ker)

Bibliography
Book sources: Lal and vashisht, Direct Taxes, Pearsons Education, 29 edition, delhi Mehrotra H.C., Direct Tax Laws, Sathiya Bhawan Publication, 47 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_Pro cedure. http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2005ITAct/casesec144 .html http://taxguru.in/income-tax/various-type-of-assessment-study-of-best-judgementassessment-2.html
10 | P a g e

BEST JUDGMENT ASSESSMENT

CHAPTER 2 CONCEPT OF BEST JUDGMENT ASSESSMENT

Best Judgement Assessment: Meaning (as per the Income Tax Act,1960)
Best judgement assessment is the process by which the income of the assessee is determined by the Income Tax officer, to the best of his judgement and based on the information available with him. Such assessments generally involve the use of estimates, assumptions and exercise of judgement 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 officer7. 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 judgement assessment. 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.

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

11 | P a g e

BEST JUDGMENT ASSESSMENT

Defaults for which best judgment assessment is permissible

An assessment to the best of the judgement 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 judgement 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 8 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: (i) Failure to furnish a return in response to a notice under s 139(2) and failure to make a return under s. 139(1) from assessment year, and (ii) 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 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

Mohini debi malpani v. ITO, (1970) 77 ITR 674 (Cal)

12 | P a g e

BEST JUDGMENT ASSESSMENT

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 bh the assessing officer, the return cannot be treated as the return of the total income and a best judgment assessment can be made. 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 assesses 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 assessees 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 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 13 | P a g e

BEST JUDGMENT ASSESSMENT

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.

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 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 noncompliance 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 14 | P a g e

BEST JUDGMENT ASSESSMENT

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 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 eac h 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. Non-compliance with direction for auditing for accounts-third default- 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 companys 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). 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. 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. 15 | P a g e

BEST JUDGMENT ASSESSMENT

(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.

16 | P a g e

BEST JUDGMENT ASSESSMENT 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 judgement 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 ones own case. The principles of natural justice are latently imbibed in the Best Judgement Assessment under the Act. They can be categorized in the following manner: ASSESSING OFFICER TO ACT FAIRLY AND HONESTLY

The assessment must be honest guess work The Income Tax officer must not act in a dishonest or vindictive manner and he must exercise judgement 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 assessees circumstances and his own knowledge of previous returns by the assessee . The guess work exercised in such matter must be honest guess work9 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 him10 Reasonable nexus with material available to him Though there is an element of guess-work in best judgement 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.11

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

CIT Vs. Laxminarain Badridas, (1937) 5 ITR 170 (PC) CIT v. Popular Electric Co. (P) Ltd., (1993) 203 ITR 630 (Cal) 11 State of Kerela v. C. Velukutty , (1966) 60 ITR 239 (SC)
10

17 | P a g e

BEST JUDGMENT ASSESSMENT

is the best judge of the situation . It is his best judgement and not anyone elses12. The assessment can be , to a certain extent, arbitrary but it must be honestly made and should not be vindictive13. 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 No assessment in the abscene 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 manner14

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 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 invalid15

12 13

CST v. H.M. Esufali , (1973) 90 ITR 271 (SC) Mohanlal Mahribal v. CIT, (1982) 133 ITR 683 (MP) 14 Singh Engg. Works v. CIT, (1953) 24 ITR 93 (All) 15 T.C.N. Menon V ITO, (1974) 96 ITR 148 (Ker)

18 | P a g e

BEST JUDGMENT ASSESSMENT

CHAPTER 3 CONSEQUENCES AND REMEDIES

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

1 Cancellation of assessment under sec 146 where made before 1.10.1984 16 2 Appeal to deputy commissioner or the commissioner under sec 246 till 30.9.1998 and w.e.f 1.10.1998, 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. 144.17 3 Revision by the commissioner under sec 264 4 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 fact18. 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. 19 However, the writ court cannot conduct an enquire with regard to the quantum and substitute its own estimate for that of the officer.20

Consequences
Alongwith the best judgment assessment, the assessee will also face the following consequences:

16 17

Setion 146 since omitted w.e.f. 1.4.1989 Universal book stall v. CIT, (1993) 199 ITR 687 18 Mohini debi maplani v. ITO, (1970) 77ITR 674 (Cal) 19 Pyarelal v. State of M.P., (1971) 28 STC 130 (MP) 20 K.P. Abraham v. Agl. ITO, (1987) 163 ITR 120 (Ker)

19 | P a g e

BEST JUDGMENT ASSESSMENT

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

20 | P a g e

BEST JUDGMENT ASSESSMENT

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.

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 mercantile 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.

Method of Accounting 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 receive 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

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

21 | P a g e

BEST JUDGMENT ASSESSMENT

CHAPTER 5 DIRECT TAX CODE AND BEST JUDGEMENT ASSESSMENT

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 judgement 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 ,1960 and the Direct Tax Code Bill .21 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.

21

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

22 | P a g e

BEST JUDGMENT ASSESSMENT

CHAPTER 6 ANALYSIS OF THE BEST JUDGEMENT 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 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.
23 | P a g e

BEST JUDGMENT ASSESSMENT

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 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
24 | P a g e

BEST JUDGMENT ASSESSMENT

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.

25 | P a g e

BEST JUDGMENT ASSESSMENT

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 willful 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 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.

26 | P a g e

BEST JUDGMENT ASSESSMENT

27 | P a g e