Rejection of Books of Account under Section 145(3) and Assessment in the manner under Section 144 Connotation thereof

Method of Accounting

Section 145 of the Income Tax Act, 1961 (the Act) provides the method of accounting by the assessee. Section 145(1) of the Act provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

Rejection of books of account

However Section 145(3) of the Act states that where the Assessing Officer is not satisfied about

> the correctness or completeness of the accounts of the assessee; or

> where the method of accounting provided in has not been regularly followed by the assessee; or

> income has not been computed in accordance with the standards notified,

the Assessing Officer may make an assessment in the manner provided in section 144.

In simple words 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. And more importantly first and foremost the action of assessing officer in rejecting the books of accounts there shall be justification for the same.

Power to be Exercised Judicially

However while rejecting the books of accounts u/s 145(3) assessing officer(s) grossly errs by passing the assessment order u/s 144 of the Act; making the assessment invalid. Referring to the phraseology, syntax and language used / employed by the legislature in section 144 it makes it amply clear that the assessment order u/s 144 will be passed only if the assessee hits any of the below mentioned condition

> fails to make the return; or

> fails to comply with the terms of a notice issued u/s 142(1) or 142(2A); or

> fails to comply with the terms of a notice issued u/s 143(2) of the Act.

Nevertheless, even in the cases of no failure on the part of the assessee regarding the conditions specified u/s 144 of the Act the assessing officer(s) passes the assessment order u/s 144 of the Act. Wordings of the section 145(3), it is clearly discernible that it empowers the Assessing Officer only to take the reference of best judgement assessment and not to passing the order u/s 144 of the Act.

It may be noted that 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 has to be made under section 143(3) of the Act. A clear cut distinction between best judgement 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 judgement where resort is taken to Section 144, the Assessing Officer exercising his jurisdiction cannot act arbitrarily or capriciously.

Although the words “Best of the Judgement” are used in section 144 alone, the only difference between the assessment under section 143(3) where books are found to be unreliable and an assessment under section 144 is that the Act has contemplated a more summary method when the Assessing Officer is acting under section 144 and that on account of deliberate default of the assessee.

It may further be noted that the assessment that has to be made after rejection of books under section 145(3), of the evidence or books produced is not an assessment under section 144, but is only an assessment under section 143(3) which is to be made “in the manner provided in section 144”.

Conclusion

Based on the above it is clear that the action of assessing officer(s) passing the order u/s 144 is totally erroneous and is not tenable as per law. The Assessing Officer may resort to best assessment, the power of which shall be exercised judicially and not violating the principles of natural justice.

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