The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He 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, their lordships think, 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 any assessments of the assessee, and all other matters which he think will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess work in the matter, it must be honest guess work. In that sense, too, the assessment must be, to some extent, arbitrary.
Raghubar Mandal, Harihar Mandal vs. State of Bihar (1957) 8 STC 770 at page 778; AIR 1957 SC 810 at page 614.
No doubt it is true that 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.
State of Kerala vs C. Velukutty (1966) 17 STC 465 (SC); (1966) 60 ITR 239 (SC) Justice J Subba Rao, observed at page 244 of the report (at page 470 of STC) thus;
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, but on settled on invariable principles of justice. Though there is an element of guess work in a best judgment assessment, it shall be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case.
Though arbitrariness cannot be avoided in such estimate the same must be capricious but should have a reasonable nexus to the available material and the circumstances of the case.The AO has to make estimate but a fair estimate . AO has to make guess work but honest guess work . AO has to make assessment not one sided but neutral . AO has to gather the material which he can at best possible . Without going through the material , without gathering the material , with reading the material , without giving an opportunity to the assessee , without issuing the show cause notice to the assessee the assessment done is bad in law and spirits and at best is made null and void in the court of law .
Best Judgement Assessment (Section 144)
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 some cases. Such cases are narrated as under .
(1) if any person fails to submit his return;
(2) if any person fails to comply with all the terms of a notice under section 142(1);
(3) if a person fails to comply with the direction to get his accounts audited;
(4) if a person fails to respond to a scrutiny notice under section 143(2) or
(5) if the Assessing Officer is not satisfied about the correctness or the completeness of the accounts.
A Mandatory requirement is that best judgment assessment can only be made after giving the assessee an opportunity of being heard.
Opportunity must be given to the assessee before making Best Judgement Assessment :
The best judgment assessment can only be made after giving the assessee an opportunity of being heard by giving notice to the assessee to show cause why the assessment should not be completed under section 144. However, it will not be necessary to give such notice where a notice under section 142(1) has already been issued prior to making assessment under this section.
Best Judgement Assessment on Rejection of Accounts:
Section 145(3) empowers the Assessing Officer to reject the account books which are unreliable, false or incorrect or incomplete and not in accordance with accounting principles . The Assessing Officer can reject the books of account on the following grounds and may make the assessment in the manner provided in section 144:
1. He is not satisfied about the correctness or completeness of the accounts of the assessee,
2. Although the accounts of the assessee are correct and complete to the satisfaction of the Assessing Officer but the method of accounting employed is such that, in the opinion of the Assessing Officer, profits cannot be correctly arrived therefrom,
3. Where the method of accounting adopted by the assessee has not been regularly followed by him and changed every year , or
4. Where income has not been computed in accordance with the standards notified under section 145(2)”
Reasonable opportunity is a must – Best judgment principles
In state of Kerala vs. K.T. Shaduli Jusuff (1977) 39 STC 479 (SC), the Hon’ble Supreme court followed principles laid down by the Lahore High Court in Seth Gurumukh Singh vs. CIT. (1944) 12 ITR 393 (Lahore) for making best judgment assessment under income tax as under:-
(i) If he proposed under sub section 3 of section 23 of the Income Tax Act, the Income Tax Officer is not bound to rely on such evidence produced by the assessee as he considered to be false.
(ii) If he proposed to make an estimate in disregard of the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to bound that estimate.
(iii) He is not however debarred from relying on private sources of information, which source he may not disclosed to the assessee at all and,
(iv) In case he proposes to use against the assessee the result of any private enquires made by him, he must communicate to the assessee the substance of the information so propsed to be utilized to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it, if possible circumstances for estimation.
Seizure of secret account books or documents:-
Gupta Ornamental House vs. Com. of ST (1970) UPST 151 past history of the dealer but non-taxability Com. of ST vs. Bhola Prasad (1952) 50 STC 371411. Turnover of the previous years midland cycle & motor industries Ref.8 – DSTC 159.
Subsequent history is also taken into account, if there is no past history – Amrit Beverages Pvt. Ltd. vs. Com. of STI 1995 (vol.30) Delhi Tri.82 see also chaudhary chemicals works vs. Com of ST (1992) 84 STC 156 (Delhi).
See also following authorities for best judgment assessment.
1. S. Valsala vs. ST. of Kerala (1994) 95 ITC 450 (Ker.)
2. Azad Group Hotels109 STC 1998 (P&H)
only on the basis of consumption of electricity production cannot be presumed
Evidence regarding consumption of electricity was taken as a factor in calculating the turnovers on the best judgment basis, after the accounts were rejected on the basis of the information disclosed from the seized documents.
When substratum build by the Ld. AO is weak superstructure cannot stand on it.