BEST JUDGMENT ASSESSMENT UNDER SECTION 144 OF INCOME TAX ACT, 1961

Best judgment assessment is given statutory recognition in terms of provisions of section 144 of the Act. 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.

The Best Judgment Assessment is a procedure under the Income Tax Act to comply with the principles of natural justice. Vide Section 144 of the Act, the Assessing Officer is under an obligation to make an assessment of the total income or less to the best of his judgment in the following cases.

Reasons for Best Judgment Assessment

The assessing Officer, after considering all relevant material which he has gathered,, is under an obligation to make an assessment of the total income or loss to the best of his judgment in the following cases:

(a)    Failure to furnish a return under section 139 [Section 144(1)(a)]

As a result of the amendment of section 144(1)(a) by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1st April, 1989, the first default for attracting the provisions of section 144(1) is the failure of the assessee to furnish a return within the ‘due date’ prescribed in his case under section 139(1) and non furnishing of a return or a revised return under section 139(4) or section 139(5). Thus, a best judgment assessment can be made where no return has been filed under section 139(1) within the period prescribed therein.

(b)   Failure to comply with a notice under section 142(1) [Section 144(1)(b)]

The second default relates to non-compliance of notice issued under section 142(1) of the Act i.e. by not furnishing the information or total wealth statement thereby required or by not producing the documents or evidence thereby demanded. Non-compliance of such notice results in a best judgment assessment under section 144 of the Act.

                    

Further, for and from assessment year 1989-90, non-compliance with a notice under section 142(1) by not furnishing the return as required under clause (i) of section 142(1) of the Act also results in a best judgment assessment.

Thus, in cases where the Assessing Officer calls upon the assessee under section 142(1) to produce certain accounts and documents and the assessee does not produce the same, the Assessing Officer can arrive at his own conclusion and he can proceed under section 144.

But if in such a case, there is no material from which the Officer could reasonably infer existence of books/documents, the non-production of such imaginary books/documents would not be a default attracting section 144.

It was held that a combined reading of section 142(1) and 144 makes the position clear that the authorities would be justified in proceeding to make ex parte assessment when there was no response to the notice under section 142(1) of the Act.

[R. L. Narang v. CIT (2001) 249 ITR 68 (Del)]

Notices under section 142(1) and 143(2), compliance with one and non-compliance with the other, result of

Failure to comply with all the terms of a notice issued under section 142(1) is a default separate from, and independent of, the default in compliance with all the terms of a notice under section 143(2). Even if the assessee has fully complied with a notice under section 143(2) by producing all the evidence he relies on in support of his return, but still, if he has failed to produce the evidence specifically called for in a 142(1) notice, the latter default entails a 144 assessment to the best of the Officer’s judgment.

(c)    Failure to comply with the directions under section 142(2A) [Section 144(1)(b)]

The third default contemplates for non-compliance with the audit direction in terms of provision of section 142(2A) of the Act. Thus, where the Assessing Officer directs the assessee to get his accounts audited by an auditor nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and to submit within the stipulated time, the audit report to the Assessing Officer, a default therein will entail an ex-parte best judgment assessment under section 144(1)(b) of the Act.

(d)    Failure to comply with the notice under section 143(2) [Section 144(1)(c)]

The last clause in section 144(1) of the Act stipulates for best judgment assessment for failure to comply with all the terms of notice issued under section 143(2) of the Act. Failure to comply with all the terms of a notice under section 143(2) by personally attending the hearing or, as the requirement may be, by production of evidence, etc., in support of the return earlier filed. On happening of any one or more of the above defaults will entail an ex-parte best judgment assessment under section 144(1)(c) of the Act.

        

It was held that a 143(2) notice could require either the personal attendance of the assessee or mere production of evidence in support of the return. The choice and option was of the assessee and compliance was complete if either of the two requirements was fulfilled.

[Rajmani Devi v. CIT (1937) 5 ITR 631 (All)]

Mohini Debi Malpani v. ITO (1970) 77 ITR 674 (Cal) goes a step further and it says that the 143(2) notice may require both, the personal attendance as well as production of evidence. It leaves the choice with the Assessing Officer. Thus, the conclusion that could be drawn from the aforesaid two decisions is that where an Assessing Officer requires both – personal attendance as well as production of evidence – default in compliance with either of the requisitions would result in a exparte assessment in terms of section 144 of the Income Tax Act.

At the same time, in order to commit the default under section 143(2), it is necessary that there must be a failure, on the part of the assessee, to produce books or documents or evidence on which the assessee relies in support of the return. If an assessee is not relying on any such books or document or evidence, it cannot be said that there was a failure, on the part of the assessee, to produce evidence in support of the return on which he relies. In such a case the best judgment assessment cannot be made and such an assessment, if made, is wrong and is in violation of the provisions of section 144.

[ITO v. Laxmi Prasad Goenka (1977) 110 ITR 674 (Cal)]

      The following broad guidelines must be followed in a best judgement assessment:

(a)    Assessments Not to be Over-Pitched

(b)   Assessment to be Fair, Based on Material on Record

(c)    Best Judgement Assessment

(d)   Not to be Arbitrary

(e)   Estimate of Income

(f)     Claim for Depreciation to be Separately Allowed

Following points also have a bearing on the best judgment assessment :

(i)    The assessee has a right to file an appeal under Section 246A or to make an application for revision under Section 264 to the Principal Commissioner or Commissioner;

(ii)    The best judgment assessment can only be made after giving the assessee an opportunity ofbeing heard. Such opportunity shall be given by issuing a notice to him to show cause why the assessment should not be completed to the best ofjudgment and opportunity for hearing will not be necessary where notice under Section 142(1) has already been issued;

       (iii)   A refund cannot be granted under Section 144.

On happening of any one or more of the above defaults the Assessing Officer, after taking into account all relevant material which he might have gathered, shall, after giving the assessee an opportunity of being heard, make a best judgment assessment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment. The provisions are mandatory.

[Prabhat Mills Stores Co. Ltd. v. CIT (1966) 59 ITR 197 (Cal); CIT v. Laxminarian Badridas (1937) 5 ITR 170 (PC)]

Best judgment assessment is mandatory for any one of the defaults under Section 144.

[CIT v. Segu Buchiah Setty (1970) 77 ITR 539 (SC)]

Assessing Officer to record finding of non-compliance
Where there is no finding by the Assessing Officer that there had been any non-compliance with any of the notices mentioned in the three sub-clause (a), (b) and (c) of section 144, the best judgment assessment is liable to be struck down.

It was held that a recording of finding is necessary because in the absence of the same, upon a challenge being made by the aggrieved-assessee, the superior authority or the Court would not be in a position to ascertain whether such a finding is correct or not and to give relief on that basis in an appropriate case.

[Smt. Mohini Debi Malpani v. ITO (1970) 77 ITR 674 (Cal)]

Best judgment assessment is different from regular assessment

The assessments made or the basis of the assessee’s accounts and those made on ‘best judgment’ basis are totally different types of assessments.

[CST v. H.M. Esufali H.M. Abdulai (1973) 90 ITR 271 (SC)]

Provision applies to reassessment proceedings also

There is no merit in the submission that the words ‘so far as may be’ in section 148 exclude the applicability of the provisions of section 144 to an assessment made under section 147.

[R.B. Seth Shreeram Durgaprasad and Fatehchand Narsingdas (Export) Firm v. CIT (1988) 170 ITR 23 (Bom)]

Assessment can be made even where return is not signed or verified

A best judgment assessment can be made when the return is not signed and verified.

[Behari Lal Chatterji v. CIT (1934) 2 ITR 377 (All)]

Assessment can be made when a blank return is filed

Where the assessee filed a return with all columns blank, the assessee must be treated as having failed to file a return, and a best judgment assessment could be made.

[Rattan Chand Dunichand of Guru Bazar  v. CIT 3 ITC 69 (Lahore)]

Where approximate figures are returned, assessment can be made to the best of judgment Where the assessee had furnished only approximate figures in his return of income without any further details, a best judgment assessment made by ignoring that return was valid

[A.R.A.N. Chettiar Firm v. CIT 2 ITC 477 (Rangoon)

Non-production of books not proved to exist is not a valid ground

Mere non-production of books, without proof of the existence of things not produced, would not fall within the mischief of section 144.

[J. M. Sheth v. CIT (1965) 56 ITR 293 (Mad)]

Best judgment to be judicial

In case where the provisions of Section 145(3) are attracted, although the assessment is made in the manner provided in Section 144, nevertheless the assessment is made under Section 143(3) of the Act. A clear cut distinction between best judgment assessment and in the manner provided under Section 144 is required to be understood while resorting to the provisions of Section 145(3). Under Section 145(3) the assessment is required to be in the manner under Section 144 of the Act only. However it is well known that in the case of best judgment where resort is taken to Section 144, the Assessing Officer exercising his jurisdiction cannot act arbitrarily or capriciously. The assessment must proceed on judicial considerations in the light of relevant material that may be brought on record.

Power to be exercised judicially

The power to reject the books of accounts by the Assessing Officer is to be exercised judicially. The Assessing Officer is to bring on record material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of the assessee or the method of accounting employed by it.

It was held that in every case of best judgment, the element of guess work cannot be eliminated so long as best judgment has a nexus with material on record and discretion in that behalf has not been exercised arbitrarily and capriciously.

[CIT v. Surejeet Singh Maheskumar (1993) 11 TMI 22 (All)]

It was held that when the Assessing Officer does not accept the assessee’s method of accounting, then he has to resort to the provisions of Section 145(3) for computation of income by adopting such other basis as determined by him. The Assessing Officer’s powers under the Section are not arbitrary and he must exercise his discretion and judgment judicially.

[Karnataka State Forest Industries Corporation Limited v. CIT (1992) 10 TMI 65 (Kar)]

It was observed by the Supreme Court that the assessing authority while making the "best judgment" assessment, no doubt, should arrive at its conclusion without any bias and on rational basis and that the said authority should not be vindictive or capricious and that basis adopted in estimating the turnover should have a reasonable nexus with the estimate made.
[CST v. H.M. Esufali H.M. Abdulali (1970) 90 ITR 271 (SC)]

It was observed that limits of powers are implicit in the expression "best of his judgment". Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon arbitrary caprice of a judge, but on settled and invariable principles of justice and though there is an element of guesswork in a "best judgment" assessment, it shall not be a wild one but shall have a reasonable nexus to the available material and the circumstances of each case.
[State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC)]

The decision of Privy Council in CIT v. Laxminarayan Badridas (1937) 5 ITR 170 (PC) rendered on the provisions in the 1922 Act is a classic one in which it was observed that the officer making best judgment assessment should not act dishonestly, vindicatively or capriciously because he must exercise "judgment" in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose, he must take into account local knowledge and repute in regard to the assessee's circumstances and all other matters which he thinks will assist him in arriving at a fair and proper estimate and though there must necessary be a guesswork in the matter it must be a honest guesswork.

Action must not be dishonest, vindictive or capricious

The officer making a best judgment assessment must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for the purpose 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/assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork.

[CIT v. Laxminarain Badridas (1937) 5 ITR 170 (SC)]

Best judgment assessment must have reasonable nexus to the available material

The Assessing Officer is conferred with the power to make the best judgment assessment. However, the limits of the power are implicit in the expression “best of his judgment”. Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary ca-price of a judge, but on settled and invariable principles of justice. Though there is an element of guess-work in a ‘best judgment assessment’, it shall not be a wild one, but shall have reasonable nexus to the available material and the circumstances of each case.

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

Quantum must be based on adequate and relevant material:

In State of Orissa v. Maharaja Shri B.P. Singh Deo [(1970) 76 ITR 690, 691], the Supreme Court has observed: “Apart from coming to the conclusion that the material placed before him by the assessee were not reliable, the Assistant Collector has given no reasons for enhancing the assessment. His order does not disclose the basis on which he has enhanced the assessment. The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary power, it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities. The scope of that power has been explained over and over again by this court.”

Thus, the quantification part of the ex-parte assessment must be based upon the material relevant for making an assessment and the basis thereof must be stated in the ex-parte assessment order.

It was held that it is undoubtedly true that if the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, he can proceed to make best judgment assessment. However, even while doing so, the Assessing Officer is bound to take into account all relevant material on the record.

[CIT v. Chopra Bros. India (P) Ltd. (2001) 252 ITR 412 (P&H)]

Where Assessing Officer, on finding that assessee had not maintained and kept any quantitative details/stock register for goods traded in by it; that there was no evidence on record or document to verify basis of valuation of closing stock shown by assessee; and that GP rate declared by assessee during assessment year did not match result declared by assessee itself in previous assessment years, rejected assessee’s books of account and resorted to best judgment assessment under section 144, it was held that since cogent reasons had been given by Assessing Officer for doing so, there was no reason to take a different view.

[Kachwala Gems v. Jt. CIT (2007) 158 Taxman 71 (SC)]

Power is not arbitrary

The mere fact that the material placed by the assessee before the assessing officer is unreliable does not empower the officer to make an arbitrary order. The power to make a best judgment assessment is not an arbitrary power.

[State of Orissa v. Maharaja Shri B.P. Singh Deo (1970) 76 ITR 690 (SC)]

Assessing Officer should be guided by rules of justice equity and good conscience

In making a best judgment assessment, the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes. Although he is not bound by strict judicial principles, he should be guided by rules of justice, equity and good conscience.

[CIT v. Ranicherra Tea Co. Ltd. (1994) 207 ITR 979 (Cal)]

Specific finding is necessary

Where there was no finding by the ITO that there had been any non-compliance with any of the notices mentioned in sub-clauses (a), (b) and (c) of section 144, the order of best judgment assessment should be struck down, even if there was valid service of notice under section 131 and there had been non-compliance with the terms of such notice.

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

Opportunity to the assessee

The assessment that has to be made after rejection of books of account under Section 145(3), of the evidence or books produced is not an assessment under Section144, but is only an assessment under Section 143 (3) which is to be made ‘in the manner provided in Section 144’. In such cases, the Assessing Officer has to give an opportunity to the assessee to contradict the materials upon which the Assessing Officer wants to base his estimate.

Opportunity must be real and effective

By virtue of the first proviso to section 144(1) of the Act, opportunity is to be given to the assessee so as to explain as to why ex-parte assessment should not be framed. But this opportunity to be given must be real and effective and not mere notional.

Opportunity must be given to assessee

The assessee will have to be given an opportunity of being heard and a right to question the correctness or the relevancy of the materials on the basis of which the ITO proposes to make the best judgment assessment.

[Dhanalakshmi Pictures v. CIT (1983) 144 ITR 452 (Mad); T.C.N. Menon v. ITO  (1974) 96 ITR 148 (Ker)]

It was held that if any quasi-judicial authority does, as enjoined in the statute, give an opportunity to explain himself, it would be futile to fix a particular hour of a day as the outer limit for making submissions. The opportunity must be realistic and not notional. If any time is given, the normal presumption is that the assessee may file his objections or comply with the requisition before the expiry of the working hours of that date. Such outer limit may be fixed for administrative convenience; but, if it comes to the question of appreciation of rights and obligations of parties, equity and justice interfere and compel courts to afford a reasonable and effective opportunity to persons aggrieved and affected to state their objections by the end of the working day notwithstanding the fact that an hour, a minute or a second of the day was noted in an order.

[S. Velu Palandar v. Dy. CTO (1972) 83 ITR 683 (Mad)]

Where a notice is issued to an assessee giving him seven days, for compliance, from the date of receipt of the notice, the Assessing Officer can have no jurisdiction to pass a best judgment assessment order before the expiry of such period. The fact that the assessee has complied with such notice after the expiry of seven days would be an irrelevant factor

[Cf. Abdulla v. Ag ITO (1989) 180 ITR 391 (Ker)]

Requirement of giving an opportunity – when may be dispensed with [Second proviso to section 144(1)]

The second proviso to section 144(1) dispenses with the requirement of giving an opportunity of being heard in a case where a notice under section 142(1) has been issued prior to the making of the assessment under section 144(1).

Resorting to Best Judgment – when?

Section 145 (3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under Section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee.

It was held that the Tribunal has rightly held that when the books of account of the assessee had not been rejected and assessment having not been framed under Section 144 of the Act the said authorities were in error in resorting to an estimation of income and such exercise undertaken by them was not sustainable. In the instant case the Assessing Officer has not made out a case that conditions laid down in Section145 (3) of the Act are satisfied for rejection of books of account. As such the Tribunal has rightly rejected or set aside the partial addition made by the Assessing Officer for arriving at gross profit and sustained by Commissioner (Appeals). The High Court dismissed the appeal filed by the Revenue.

[CIT and another v. Anil Kumar & Co (2016) 3 TMI 184 (Kar)]

Show-cause notice must be served [First proviso to section 144(1)]

The first proviso to section 144(1) provides that before passing the ex-parte order, the Assessing Officer is required to give opportunity of hearing to the assessee and for this purpose, the Assessing Officer is required to serve a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment.

The first proviso therefore entails that the service of the show-cause notice giving opportunity to the assessee is mandatory and the non-issuance of such notice was held to vitiate the best judgment assessment. Where the assessing authority proposes to proceed to make an order of assessment to the best of his judgment, the basis for the proposed assessment should be put to the assessee and an opportunity should be given to the assessee to show cause as to why assessment should not be made on the basis proposed

[Prabhakar Mallappa Panadare v. Ag. ITO (1970) 77 ITR 349 (Mys)]

At the same time, the first proviso merely requires that the assessee be given an opportunity of hearing before passing the ex-parte assessment order. This however, does not lead to the conclusion that if the opportunity is not given, the assessment is to be annulled. In such cases, assessment need not be annulled but set aside so as to give the opportunity to the assessee.

It was held that the Tribunal had committed error in annulling the assessment made by the Assessing Officer. If statutory requirement had not been complied with, direction could be given to make a fresh assessment after complying with section 144 before framing the fresh assessment.

[CIT v. Agro Engineers (2004) 266 ITR 637 (Raj)]

Proper and valid service of notice to be proved by the department

It is for the department to prove the service of the notice once the assessee contends that no notice is served upon him. Thus, where a best judgment assessment has been made under section 144 because of default in complying with any of the notices referred to in that section, and the assessee contends that no such notice was received by him, the department has to prove that such notice was properly and validly served on the assessee. A mere statement that the service was effected by affixation is not enough

[A. A. Kochandi v. Ag. ITO (1977) 110 ITR 406 (Ker); Lakshmi Narayan Prasad Bhagat v. State of W.B. (1979) 118 ITR 454 (Cal)]

Best judgment assessment – how to be made?

The assessing officer is given power to proceed to make an exparte assessment if there is any of the default contemplated in the provision of Section 144(1) of the Act. However, the power so conferred has to be exercised judicially and not arbitrarily and therefore the assessing officer cannot make assessment at whatever figure as he like, but the same has to be made upon proper appreciation of the entire facts and circumstances of the case and based upon the records.

The best judgment assessment ought to be based on a fair and proper estimate of the assessee’s income and the inferences to be drawn from the available material should be properly inferable inference. The assessment has to proceed upon definite basis or data as in the case of an assessment after enquiry, but the enquiry is summary unlike the case of a normal assessment. The assessment is to be based on materials to the extent to which the materials are discovered

[Sri Shankar Khandasari Sugar Mills v. CIT (1992) 193 ITR 669 (Karn)]

In other words, the Assessing Officer, while making a best judgment assessment, should make an intelligent well-grounded estimate. Such estimate must be based on adequate relevant materials

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

It was held that in making a best judgment assessment the Assessing Officer must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose 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 and assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guess-work.

[CIT v. Laxminarian Badridas (1937) 5 ITR 170 (PC)]

In making a best judgment assessment the Assessing Officer does not possess absolutely arbitrary authority to assess at any figure he likes and that although he is not bound by strict judicial principles he should be guided by rules of justice, equity and good conscience

[Abdul Qayum & Co. v. CIT (1933) 1 ITR 375 (Oudh)]

Best judgment estimates

It was held that even while making best judgment assessment Assessing Officer has to make rational estimate and some amount of guess-work notwithstanding, there is no scope for fixing an abnormally high and unreasonable figure.

[ITO v. Vijaya Authomobiles (2001) 243 ITR 874 (Ker)]

Basis of computation must be disclosed by the Assessing Officer

[Ganga Prasad Sharma v. CIT (1981) 132 ITR 87 (MP)]

Estimate must be honest and fair

The authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such an estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case.

[Brij Bhushan Lal Parduman Kumar v. CIT(1978) 115 ITR 524 (SC)]

While making a bestjudgment assessment under Section 144, the determination of tax in the assessment order is as much mandatory as the determination ofincome.

[S. Mubarik Shah Naqshabandi v. CIT (1977) 110 ITR 217 (J&K)]

Basis must be discussed

It is implicit in the section that the Assessing Officer should give his reasons for arriving at a particular figure of income so that the assessee may be enabled to appreciate the mental process leading to the assessment and the figure assessed. Such order being subject to appeal need also be a speaking order

[CIT v. Ranicherra Tea Co. Ltd. (1994) 207 ITR 979 (Cal)]

Estimation of income/ profit

Once the books of account of assessee are rejected, profit has to be estimated on the basis of proper material available. An Assessing Officer is not flattered by technical rules of evidence and pleadings and he is entitled to act on material on which may not be accepted as evidence in Court of Law. Nevertheless the Assessing Officer is not entitled to make a pure guess and make an assessment with reference to any evidence or any material at all. There must be something more than mere suspicion to support an assessment under Section 143(3) of the Act. The estimate of turnover and fixation of gross profit rate are two import parameters which affect the assessment. If these are fixed or calculated in such a way that they adversely affect the assessee’s case, then he is entitled to know the basis and to be given an opportunity to rebut the same.

The Assessing Officer made an application of ₹ 30.26 lakhs on account of trading addition by applying the gross profit rate of 52% instead of 51.27% shown by assessee after rejecting the book results in the MDF division. The Commissioner (Appeals) deleted the addition and confirmed by the Tribunal. The High Court held that in deleting the addition by rejecting the accounts, the Commissioner (Appeals) and the Tribunal had followed the earlier decision in the case of the assessee for the financial year 1993-94 which was not shown to have been upset by any higher court. The deletion of the addition was justified.

[CIT v. Nuchem Limited (2015) 5 TMI 259 (P&H)]

Best judgment assessment - Unaccounted receipts–loose papers – Search –Only net profit to be added as income and not gross receipts

Dismissing the appeal of the revenue the Tribunal held that ;though the books of account is rejected entire gross receipts cannot be assessed as income, only net profit embedded in unaccounted receipts to be taxable as income. (Related Assessment year 2014-15)

[DCIT v. Mehul T. Desai (2019) 174 ITD 584 (ITAT Surat)]

Best judgment assessment – When income is estimated other additions cannot be made on the basis of entries in the books of account

Allowing the appeal of the assesseee the Court held that; – When income is estimated other additions cannot be made on the basis of entries in the books of account.

[Malpani House of Stones v. CIT (2017) 395 ITR 385 (Raj)]

Best judgment – - Liquor trade - General principles - Rejection of books of account - Percentage of 40% could not be adopted

The Assessing Officer rejected the book results and estimated the gross profit at 40% of purchases. This was confirmed by CIT(A). The Tribunal held that the estimation of turnover at eight times the purchase price and 1% there on as profit would be reasonable. The Court held the estimating the net profit at 2% of the estimated sales or 16% of the purchase price would be reasonable. The Court laid down the following general principles

(1)  The power to levy assessment on the basis of best assessment is not an arbitrary power; it is an assessment on the basis of best judgment of the officer;

(2)  When best judgment assessment is undertaken it cannot be as per the whims and fancies of the Assessing Officer but should be based on some material either produced by the assessee or gathered by the taxing officer. If for any reason material like books of account produced by the assessee is rejected as unreliable or unsatisfactory, there should be valid reasons for doing so; and

(3) whenever best judgment assessment is made, the Court would not call for proof from the officer if there is some nexus between the amount arrived at after some guess work and the facts of the case. (Related Assessment years 1993-94 and 1995-96).

[CIT v. R. Narayana Rao and Others (2011) 338 ITR 625 (AP)]

It was held that once the books are properly rejected, the income has to be estimated and in making the estimate of such income, the best record along with other things will become the relevant material.

[Vrailal Manilal & Company v. CIT (1972) 11 TMI 9 (MP)]

Peak credit

It was held that where assessee’s business income is estimated after rejecting the books of account produced by the assessee, it is not reasonable on the part of the Income Tax Officer to work out the Peak credit on the basis of such books of accounts.

[CIT v. KMN Naidu (1995) 10 TMI 16 (Mad)]

Best judgment assessment - Principle of telescoping-Assessee unable to show that particular amount from particular bank account used for purchase of specific property--No question of telescoping being permitted

Dismissing the appeal the Court held that; the source of income was being generated continuously by the assessee and his other co-accused and further the assessee had been unable to show before the authorities of the Department that a particular amount from a particular bank account had been used for the purchase of specific property, movable and immovable, and in the said circumstances, there could be no question of any telescoping being permitted. Liability to tax remains so long as it is income of particular assessment year whether derived from legal or illegal source .Attachment of properties under Criminal Law Amendment Ordinance, 1944 and liability of forfeiture to State Government not material.

[Gauri Shankar Prasad (Dr.) v. ITAT (2017) 393 ITR 635 (Pat)]

Accounting of commission

The assessee was sole selling agent and power of attorney of film producer marketing, selling films to prospective distributors on behalf of principal. The assessee collected the amount on behalf of principal and remitted the same to the principal after deducting expenses and commission. The Assessing Officer has observed that the assessee only accounted for receipts of ₹ 22,04,265/- whereas according to the certificate of tax deduction at source the total receipts were ₹ 82,38,000/- and therefore he rejected the books of account and added the difference of ₹ 60,33,735/- to the total income. The Tribunal allowed the appeal holding that the assessee had rightly accounted for the commission on the gross value instead of accounting for payment from the parties on which tax was deducted. Since the assessee was working as the sole selling agent the provisions of Section 194J or 194C and Section 40(a)(ia) were not attracted. The Tribunal directed the Assessing Officer to delete the addition made of ₹ 60,33,736/-. Reference to Valuation Officer Section 142A (1) of the Act provides that the Assessing Officer may, for the purposes of assessment or reassessment, make a reference to a Valuation Officer to estimate the value, including fair market value, of any asset, property or investment and submit a copy of report to him.

[Sajid Iqbal Qureshi v. ACIT (2016) 7 TMI 106 (ITAT Mumbai)]

It was held that the Assessing Officer cannot refer the matter to the District Valuation Officer under Section 142A of the Act without rejecting the books of accounts under Section 145(3) of the Act.

[Sargam Cinema v. CIT (2009) 10 TMI 569 (SC)]

Comparing gross profit of earlier years

It was held that the rate of gross profit in a particular year depends on many factors such as general market conditions based on demand and supply position, the rise or fall in market rates, specially abrupt ones, the capital position and the turnover achieved etc., It is for the assessee to explain the fall, if so happens and to substantiate the reasons. Even if, thereafter, the Assessing Officer considers the material placed before him by the assessee to be unreliable keeping in view the comparative statement of accounts of the earlier years, he cannot proceeded to make an arbitrary addition and base his conclusion purely on guess work. He can do only if he relates to some evidence or material on the records. If the profit shown by the assessee in his return is not accepted, it is for the taxing authorities to prove that the assessee made more profits.

[International Forest Company v. CIT (1974) 12 TMI 33 (J & K)]

The rejection of books of accounts under Section 145(3) cannot be sustained merely on the fact that the gross profit of the assessee is low during the relevant period as compared to the book results of other years. Similarly the system of accounting adopted by the assessee cannot be rejected merely on the ground that the gross profits disclosed by his books were low as compared with those of others in the same line of business.

Comparison of earlier accounts

It is well settled position that while making the assessment, the account books for that year have alone to be considered, as each assessment year is independent.

It was held that there is no scope of presumption that merely because for some reason the account books in earlier years were rejected, these stood condemned for ever.

[Ram Avtar Ashokumar v. CIT (1979) 7 TMI 227 (All)

Assessee must be apprised of comparable cases

While making a best judgment assessment on the basis of comparable cases, the assessee must be apprised of those cases and given an opportunity to have his say in the matter.

[K. Baliah v. CIT(1965) 56 ITR 182 (MYS)]

Guesswork should not be wild but reasonably connected to available material

Though there is an element of guesswork in a ‘best judgment assessment’, it should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case. Though the section provides for a summary method because of the default of the assessee, it does not enable the assessing authority to function capriciously without regard to the available material.

[State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC)]

Refusal by chartered accountant under section 142(2A) cannot lead to best judgment assessment

If, for a frivolous reason, the chartered accountant declines to undertake the audit of a company’s accounts under a direction issued under section 142(2A), obviously the company could not be held responsible. There is neither default nor failure to comply with the direction issued under section 142(2A) on the part of the company so as to attract a best judgment assessment by invoking section 144(b).

[Swadeshi Polytex Ltd. v. ITO (1983) 144 ITR 171 (SC)] 

Failure to comply with summons under section 131 cannot bring about an assessment under section 144

An ex parte best judgment assessment under section 144 can only be made for defaults specified in that section. Non-compliance with a summons requiring production of books of account and other documents, etc., is not such a specified default and, therefore, it cannot result in an ex-parte best judgment assessment

[ITO v. Laxmi Prasad Goenka (1977) 110 ITR 674 (Cal)]

Power of First Appellate Authority

It is well settled position of law that the Commissioner of Income Tax (Appeals) during the appellate proceedings exercises all the powers vested with Assessing Officer to be exercised while framing the assessment order. Therefore, the Commissioner (Appeals) can reject the books of accounts of the assessee by invoking the provisions of Section 145(3) of the Act for the first time, while framing the appellate order provided with all other conditions exist warranting reject of such books of accounts.