Best judgment assessment

Introduction

Assessment means appraisal, evaluation, estimation, measurement, judgment etc. In the context income tax law it means then evaluation, estimation, or measurement of income. The term ‘assessment' in field of taxation law has a definite meaning. This term is comprehensive and may include varied ranges of activities and procedures. The definition of assessment has not been provided with the IT 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

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. The expression of assessment has a wide scope within the purposes of the Act whether the said assessment made are correct or not. 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. 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.

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 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.

An analysis of The Procedure of Best Judgment Assessment

The expression of assessment has a wide scope within the purposes of the Act whether the said assessment made are correct or not. 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. 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.

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-co-operation 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.

The Best Judgment Assessment is a procedure under the IT Act to comply with the principles of natural justice. Vide Section 144 of the Income Tax Act, 1961 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.

  1. If the person fails to make a return or required under s. 139(1) and he has not made a return or a revised return under ss. (4) or (5) of that section.
  2. If any person fails to comply with all the terms and conditions stipulated under a notice u/ss. 142 or fails to comply with the directions requiring him to get his accounts audited in terms of section 142(2A).

  3. If any person, after having filed a return fails to comply with the with all the terms of a notice under section 143(2) requiring his presence or production of evidence and documents; or
  4. If the Assessing officer is not satisfied about the correctness and the completion of the accounts of the assessee if no method of accounting has been regularly employed by the assessee.

In case of best judgment assessment 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. The best judgment assessment can only be made after giving the assessee an opportunity of being heard.

Such opportunities shall be given by issuance of notice by way of a show cause as to why the assessment should not be completed to the best of the judgment and that opportunity for hearing will not be necessary where notice u/s 142(1) has been issued.

Under this provision where the assessee fails to file a return or submit the documents or fails to comply with any of the above-mentioned conditions the assessing officer is empowered u/s 144 to assess the total income according to the best of his judgment with a reasonable opportunity provided to the tax payer of being heard. This is however to the exclusion of the provision as provided U/s 142(1) of the IT Act where the assessee has been given prior notice to the assessment. The assessing officer u/s 144 is under a duty to make assessment of the total income or the loss to the best of his judgment and the tax payable after taking all externalities and conditions into account.

Judicial Rulings on Scope of Sec. 144

The term ‘best judgment assessment' is not a term of art. When the statute prescribes resort to the best judgment assessment in either of the two contingencies, the Court will not be justified in interpreting the expression with reference to the general principle bearing on the question as to when assessment can be made on the basis of best judgment. In making best judgment assessment the officer does not possess arbitrary powers to assess any figure as he like. Though quasi judicial in nature these assessments are to be based on the principles of justice, equity and good conscience. In common parlance the words ‘best judgment' carry the connotation that what is being done is in order to make an estimate.

When Best Judgment Assessment can be made:

  • Ex-parte proceedings - An assessment made under S. 144 can by no means be equated to ex-parte proceedings in a civil court.
  • Mandatory action for defaults - Best judgment assessment is mandatory for any one of the defaults under S. 144.

  • Approximations - Where the assessee had furnished only approximate figure in his return of income without any further details, it was held that the best judgment assessment made by ignoring such a return was invalid.
  • Signing of returns - A best judgment assessment can be made when the return is not signed and verified.

  • Production of accounts - Where, in response to a combined notice for personal appearance as well as production of account books, the assessee appeared in person but did not produce any account books; it was held that the Income-tax Officer would be justified in making a best judgment assessment.

Often instances may arise where the assessee maintains false accounts to evade the payment of tax and in such instances it becomes difficult on the assessing authority to precisely find the amount of turnover concealed. In such cases the judgment is made by the assessing officer to the best of his judgment and so long it is made in a non-arbitrary way and the nexus seems apparent the decision is final and there is no scope for interfering with the best judgment. Thus, in a way there remains no scope for challenging a best judgment assessment. This is because an assessee cannot be allowed to take advantage of his own illegal act.

Chapter Two- Object and Basis 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. 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.

Basis of Best Judgment Assessment

Where the quantum of turnovers was based on the assessee's account books which are accepted along with other records there can be no ground for making a best judgment assessment, it being well-known that the best judgment assessment has to be on an estimate. In other words, an element of guess-work is bound to be present in best judgment assessment although it must have a reasonable nexus to the available material and the circumstance of each case.

At this juncture it is pertinent to mention that correctness of accounts is not the sole criteria for accepting returned figures of best assessment judgment. Other externalities such as volume of business, conduct of the dealer, past records and similar facts are conditions which are the basis for a best judgment assessment.

It is pertinent to be advised in this respect that when a return is filed though belatedly the assessing officer is not at liberty to ignore it and still applies his best judgment. Thus, where the Assessing Officer feels that it is incomplete and incorrect and he has to follow the procedure and give an opportunity to the assessee to prove the completeness or correctness of the return. Similarly, where the assessee was not a registered dealer and did not file his returns voluntarily notice for best judgment has to be issued in a prescribed form within the 3 years time to which the assessment proceedings could be completed even after the expiry of three years. When the assessment was made on the basis of not invoking best assessment penalty for belated submission is not authorized. Where the assessing authority fixed the turnover which recorded with the turnover recorded by the assessee in his books of accounts it could not be said that the assessment made by the assessing authority. It is enough if such assessment had a reasonable nexus to the available material on record.

In case of failure of filing or non-filing of returns the issuance of a notice to the assessee is optional. Thus in case of non-filing of returns the assessing authority may visit the premises of the dealer and inspect the books of accounts at his premises in the presence of the dealer where the issuance of a notice for the said purpose is not required. There cannot be a real basis of basis of rejection of the books of accounts if it seems that the assessing officer rejected the returns on the basis of unreasonable suspicion and in the absence of any finding regarding sale and purchase omission.

Chapter Three -Appraisal of The Procedure

When the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion. 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 consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate.

In cases which clearly fall beyond the line of permissible guess work or arbitrariness, the assessment must be set aside. In estimating any turnover, it is inevitable that there is some guess- work. The assessing authority while making the best judgment assessment should arrive at its conclusion without any bias and on rational made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his best judgment and not of any one else.

Nexus for Guess-Work

In the estimation, there may be some overestimate and underestimate. That would not be sufficient for questioning the determination of the amount of tax payable by the dealer as determined to the best judgment. The term ‘to the best of judgment' of the assessing officer would envisage his judgment. Where the estimate is on account of arbitrariness, vindictiveness or capriciousness of the assessing officer, it cannot be said to be his judgment. The estimate based on the reputation of the dealer in the locality, the length of the period of his business to enhance the return turnover by 5% only cannot be said to be without any nexus when that aspect of the matter is not challenged. Reputation and the length of period of business would be sufficient nexus in the peculiar circumstance of a case, although the assessing authority can take turnovers of the previous years for the purpose of estimation.

Penalties

In best judgment assessment, where the return has not been filed, the moment it is found that the dealer has transacted business and his turnover is taxable then penalty can be imposed. The mere fact there is best judgment, particularly when the assessment based on the inference flowing from the inability of the assessee to establish the case pleaded by him, will not be sufficient for the purpose of imposition of penalty, for the degree of proof required for the imposition of penalty is quite different from and is of a much higher order than that required for the purpose of making a best judgment assessment. Though an estimate made on best judgment basis may be legal, for the purpose of imposing penalty something more concrete is required which would enable the judicial mind to reach the conclusion that the dealer actually had the turnover which was fixed by best judgment. The order imposing penalty cannot sustain if there is no material available to conclude that there was any willful suppression of the taxable turnover warranting a penalty.

Conclusion

A general 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 difficult 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 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.

Bibliography

Primary Sources

  • The Income Tax Act, 1961

Cases

  • Kamala Mills Ltd. V. Bombay State, (1965) 16 STC 613 (SC)
  • Illuri Subbaya Chetty v. State of AP, (1963) 14 STC (SC)

  • Surya Fertilizers & Chemicals v. State of Tamil Nadu, (1977) 40 STC 538 (Mad)
  • Gem & Co v. State of West Bengal, (1959) 10 STC 537 (Cal)

  • Bengal Behar Construction Co. Pvt Ltd. V. State of Tamil Nadu, (1983) 54 STC 176 (Mad)
  • State of Orissa v. Maharaja B.P. Singh Deo, (1970)77 ITR 674 (Cal).

  • State of Madras v. Jayaraj Nadar & Sons, (1971) 28 STC 700 (SC)
  • Nemi Chand Vimal Chand v. CST, (1974) 34 STC 562 (All)

  • Bata Shoe Co. Pvt Ltd v. Joint CTO, (1968) 21 STC 135 (Mad)
  • Motor House v. State of Orissa, (1990) 79 STC 385 (Ori)

  • Ravi v. State of TN, (1981) 48 STC 274 (Mad).
  • Babulal Agarwal v. CST, (1987) 66 STC 164 (MP)

  • Bhaskar Rao v. State of AP, (1986) 63 STC 297 (AP)

Secondary Sources

Books

  • MRV. Rao et al', Concepts in Taxation, The Law Publishers, Madras.
  • N. A. Palkhivala and B.A. Palkhivala, Kanga and Palkhivala's The Law and Practice of Income Tax, N.M.Tripathi Pvt. Ltd., Bombay, 7th Ed. 1977, Vol.1.

  • Narayan Jain & Deepak Loyalka, How to Handle Income Tax Problems? Book Corporation Publishers, 1997-1998.
  • Rakesh Bhargava(ed), Taxmann's Master Guide to Income Tax Act, Taxmann Publication, New Delhi, 2003.

  • Dr. Vinod K. Singhania and Monica Singhania; Students' Guide to Income Tax; Taxmann Publications Pvt. Ltd.; latest edition.
  • Mahesh Chandra & D.C. Shukla; Income-tax Law and Practice; Pragati Publications

  • H.C. Mehrotra; Income-tax Law and Accounts; Sahitya Bhawanedition.
  • Girish Ahuja and Ravi Gupta; An Elementary Approach to Income Tax & Sales Tax; Bharat Publications;

  • Dinkar Pagare; Law and Practice of Income Tax; Sultan Chand & Sons;

Electronic Sources

  • Taxation Admin. & Procedures, as adapted from the site: http://finance.indiamart.com/taxation/typesof_assessment.html



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