Best Judgment Assessment – A Critical Analysis

INTRODUCTION:

The term ‘assessment’ in field of taxation law has a definite meaning. This term is comprehensive and may include varied ranges of activities and procedures2. 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 has only one meaning which is synonymous with the expression ‘tax’. A business turnover can be under-taxation or can escape taxation. The definition of assessment has not been provided with the IT Act4, 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 payer5. 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 Assessee6.

The expression of assessment has a wide scope within the purposes of the Act whether the said assessment made are correct or not.7 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 8. 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. It is generally of the following types9.

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.

Regular Assessment: On the basis of the return of income chargeable to tax furnished by the Assessee an 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-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.

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.

The Best Judgment Assessment is a procedure under the IT Act to comply with the principles of natural justice10. Vide Section 141 of the Income Tax Act, 2003 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/s. 142 or fails to comply with the directions requiring him to get his accounts audited in terms of section 142(2A).

3. 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.

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 assessment11. 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 conditions12 into account13. The question of rebate is one related to the assessment process. A rebate is allowed on the basis of the return submitted to the dealer and if not so allowed, it is open to challenge an appeal. Taxing officers have the jurisdiction to make the assessment under the Central Act even though the same turnover had already been assessed under the local act14. An order of assessment relying on the computations previously made during the course if certain investigations will not render the best of judgments15.

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 Commissioner16. 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 showcase 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 issued17.

An assessment order made relying on the computations made on the previous years records during the course of certain investigations will not render a best judgment assessment void where the Assessee was absent inspite of notice issued against him. Further, if the Assessee does not render assistance when sought for by the assessing officer, the officer has the right to make an assessment based on the reasonable presumption of documents available to him for computation of the tax payable. However, in an instance where the Assessee is present on the date fixed he should be informed of the materials upon which the officer intends to rely18.

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 judgment19. 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 conscience20. In common parlance the words ‘best judgment’ carry the connotation that what is being done is in order to make an estimate.

In instances where certain unlisted items not included in the turnover was returned by the dealer are discovered from the dealer’s turnover, the assessment cannot be regarded as based on best judgment and where account books are accepted along with other records there are no requirements for conducting best judgment assessments21. Thus when the issue is with respect to acceptance of the account books as a record so long it is reliable the Sales Tax Officer has no option but to make an assessment on the basis of the returns submitted by the Assessee and supported by his account books. The question arises only in instances where the Assessee books are rejected as unreliable22.

In case of one or more ways are available for determining the estimated turnover then alternative methods should be complied with for a best judgment assessment. The judgment so made has to be rational and fair which should be germane and have nexus to relevant facts23. However, if the account books are rejected for admission by the assessing authority, then the said authority has the jurisdiction to take into consideration past history of the Assessee as relevant considerations for framing a turnover24.

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. If the estimate is adopted and if it is held to be a relevant basis and the Courts might not think it to be relevant the estimate made by the assessing officer cannot be questioned in the court of law25. It is not the duty of the assessing officer to adduce proof in support of its estimate26.

THE BASIS FOR BEST JUDGMENT ASSESSMENT:

A best judgment assessment as discussed earlier is made based on non-compliance of the provisions of the IT Act. Therefore in the absence of furnished proof for assessment of the income the assessing officer is free to choose any basis which is substantial and material to the case. An element of guess work is bound to be there in the best assessment and the assessing officer for that purposes is the best person to deal with it27.

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 assessment28.

The research in this section will attempt to discuss the various instances in which a Best Assessment Judgment might take place. 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 AO29 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 return30. 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 years31. When the assessment was made on the basis of not invoking best assessment penalty for belated submission is not authorized32.

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 record33.

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 required34. 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. Some material which one may justify35.

BEST JUDGMENT ASSESSMENT VIS- A-VIS ASSESSMENT ON ACCOUNTS.

It is relevant to mention that there is a difference between a best judgment assessment and an assessment made on the accounts submitted by an Assessee. Often it may happen where there are innocent, honest and trivial mistakes made by the Assessee in the books of accounts maintained by the Assessee. Though it might be negligible and unintended but still the accounts must be accepted as genuine and substantially correct.

Where however the dealer did not maintain appropriate books of accounts as contemplated U/s 12(2) of the UP Sales Tax Act the books of accounts were rejected and the turnover of the Assessee was estimated by the assessing officer to the best of his judgment36.

The question of best judgment will only arise in the instance that is in default of supplying relevant information. It is to be borne in mind that the assessing authority must not act dishonestly, vindictively or capriciously because he must exercise judgment in that matter. He must make an honest estimate of the proper figure of the assessment for which he may use may apply any lawful method applicable. Even though it may be guesswork in the matter it must be an honest guesswork37. However, where the order of assessment does not refer to any materials or relevant document whatsoever on which the estimate is based the assessment is purely guesswork and arbitrary and the order can be visciated on grounds error on the face of record38. Therefore a construction of the above mentioned ratio entails the research to believe that the jurisdiction of the assessing authority is in no way absolute and arbitrary. His action must be genuine and has to be made to the best of his ability where the Assessee has to be given reasonable opportunity for his hearing39.

Even when the assessment is made based on guesswork there has to be a certain mode of operation that needs to be followed in order to avoid the charges of arbitrariness and bias. When the returns of books of accounts are made or are rejected according to the assessing authority’s submission the AO has to make an estimate which might be an assumpsit and to what extent he should make the guess must be something more than mere suspicion. He must make an estimate that he believes to be honestly the actual figures which will assist him to arrive at a fair and proper estimate40.

In instances where the case clearly falls below the permissible limit of guesswork and arbitrariness the assessment must be set aside. In such cases the High Court will not interfere with, U/A 226 as an error on the face of record where it is difficult to ascertain whether the guesswork reached at is wild or honest41.

Assessment to the best of judgment is bound to have some estimate which would be guesswork. That would be inappropriate to deduce the tax payable by the dealer as determined to the best judgment. The term envisages the judgment of the AO. In this regard it is pertinent to point out that Reputation and the length and period of business would be sufficient nexus in the peculiar circumstances of a case, although the assessing authority can take turnovers of the previous years for the purpose of estimation42. In the actual assessment being unable to be carried out certain externalities might be assumed from the account books for the AO to reach a conclusion43.

Prima facie the assessing authority is best to adjudge the situation. In case of best judgment assessment the court will first have to see whether the accounts maintained by the Assessee were rightly rejected as unreliable44.

OBJECT 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 dealer45.

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 falsehood46.

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 imposed47.

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 penalty48. 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 judgment49.

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 legal50.

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 assessment51.

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 material52.

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 judgment53. However, a future action cannot be the nexus for best judgment assessment of the previous period as the items found in the slip related to the subsequent year to which assessment was made54. 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 Assessee55.

AN EVALUATION OF THE PROCEDURE:

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 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.

1 © SASWATA MITRA, 4th Year, NUJS, Kolkata.

2 It can comprehend the whole procedure for ascertaining and imposing liability upon the tax payer. Kalavati Devi

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

3 Kailash Oil Mills v. Tax Comm., (1982) 50 STC 157 (P&H)

4 Income Tax Act (hereinafter IT Act)

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

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

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

8 Kamala Mills Ltd. V. Bombay State, (1965) 16 STC 613 (SC)

9 See, Taxation Admin. & Procedures, as adapted from the site:

http://finance.indiamart.com/taxation/typesof_assessment.html As visited on 12/12/2006.

10 The principle of Audi Alteram Partem which signifies that ‘no one shall be condemned unheard.’

11 See, 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.

12 These include the Books of accounts, Bank Statements and Pass Books, Confirmation Certificates and Loans, Party

Details of Purchases and Sales, Names of Sundry debtors and Creditors of the Assessee. See, Narayan Jain & Deepak

Loyalka, How to Handle Income Tax Problems? Book Corporation Publishers, 1997-1998.

13 See, K. Chaturvedi and S. M. Pithisaria, Income Tax Law, Wadhwa Law Publishers, Nagpur, 5th Ed. 1998, Vol.2

14 Gem & Co v. State of West Bengal, (1959) 10 STC 537 (Cal)

15 Surya Fertilizers & Chemicals v. State of Tamil Nadu, (1977) 40 STC 538 (Mad)

16 Bengal Behar Construction Co. Pvt Ltd. V. State of Tamil Nadu, (1983) 54 STC 176 (Mad)

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

18 Gem & Co v. State of West Bengal, (1959) 10 STC 537 (Cal)

19 Bengal Behar Construction Co. Pvt Ltd. V. State of Tamil Nadu, (1983) 54 STC 176 (Mad)

20 State of Orissa v. Maharaja B.P. Singh Deo, (1970)77 ITR 674 (Cal).

21 State of Madras v. Jayaraj Nadar & Sons, (1971) 28 STC 700 (SC)

22 Nemi Chand Vimal Chand v. CST, (1974) 34 STC 562 (All)

23 DCST v. Archana Jewellery, (1993) 89 STC 27 (Ker).

24 CST v. Bhola Prasad, (1982) 50 STC 371 (All)

25 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

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

27 Ibid; CST v. HM Eusfali, (1987) 64 STC 107 (Del)

28 Motor House v. State of Orissa, (1990) 79 STC 385 (Ori)

29 Assessing Officer hereinafter AO

30 Bata Shoe Co. Pvt Ltd v. Joint CTO, (1968) 21 STC 135 (Mad)

31 Excise & Taxation Officer v. Visheswar Nath Kashmirlal, (1968) 22 STC 331 (SC).

32 National Insulated Cable Co v. State of Madras, (1968) 22 STC 445 (Mad)

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

34 Asst CTO v. Delight Steel Furniture, (1987) 65 STC 329 (Raj).

35 Ravi v. State of TN, (1981) 48 STC 274 (Mad).

36 CST v. Girija Shankar Avinash Kumar, (1997) 104 STC 130 (SC)

37 Kulmani Mohanty v. State of Orissa, (1987) 67 STC 418 (Ori)

38 Gadkari v. STO, (1985) 59 STC 362 (MP)

39 Padmavathy Paddy & Rice Co v. ACCCT, (1971) 27 STC 30 (AP).

40 Raghubar Mandal Harihar v. State of Bihar, (1957) 8 STC 770 (SC).

41 Pyarelal v. State of MP. (1971) 28 STC 130 (MP); Mandal v. State of Bihar, (1957) 8 STC 770 (SC)

42 State of Orissa v. Tormal Rameswardas, (1988) 68 STC 204 (Ori)

43 Basantlal & Co v. CST, (1963) 14 STC 395(All)

44 CST v. HM Eusfali, (1987) 64 STC 107 (Del)

45 CST v. Shyam Vastra Bhandar, (1997) 106 STC 326 (MP)

46 Dwijendra Kr Bhattarcharya v. Supdt of Income Taxes, (1990) 78 STC 393 (Gau)

47 Babulal Agarwal v. CST, (1987) 66 STC 164 (MP)

48 Ravi v. State of TN, (1981) 48 STC 274 (Mad).

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

50 Arvind Engineers v. CST, (1987) 67 STC 412 (All)

51 Raj Lakshmi Industries v. State of TN, (1992) 84 STC 505 (Mad)

52 Rakesh Bhargava(ed), Taxmann’s Master Guide to Income Tax Act, Taxmann Publication, New Delhi, 2003.

53 Sreenivasappa v. State of Madras, (1964) 15 STC 784 (Mad)

54 State of Orissa v. JP Sikiria & Co, (1987) 67 STC 101 (Ori)

55 Gopal Rao v. State of Orissa, (1993) 88 STC 488 (Ori)

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(Republished with Amendments by Team Taxguru)