Best Judgment Assessment [Section 144]

Section 144 of the Income Tax Act, 1961, empowers the Assessing Officer (AO) to determine a taxpayer’s income and tax liability based on their “best judgment” when the taxpayer fails to comply with statutory requirements. This provision ensures tax collection even in cases of non-cooperation or incomplete information.

1. When is Section 144 Invoked?

A Best Judgment Assessment is triggered in the following scenarios:

1. Non-Filing of Returns:
   • Taxpayer fails to file ITR under Section 139(1)(original due date) or Section 139(4) (belated return).
2. Non-Compliance with Notices:
   • Ignores notices under Section 142(1)(submitting documents) or Section 143(2) (scrutiny assessment).
3. Incomplete/Inaccurate Accounts:
   • AO finds accounts unreliable, incomplete, or inconsistentwith accounting standards.
4. Special Audit Non-Compliance:
   • Fails to comply with a Section 142(2A)audit direction.

2. Key Features of Best Judgment Assessment

(A) AO’s Discretion

• The AO mustuse available information (e.g., past returns, bank statements, industry benchmarks) to estimate income fairly.
• Cannot act arbitrarily—must follow principles of natural justice.

(B) Notice & Hearing

• A show-cause noticeis issued, giving the taxpayer a chance to respond (typically 15–30 days).
• If no response, the AO proceeds with the assessment.

(C) Time Limits

• AY 2024-25 (FY 2023-24): Must be completed within 12 monthsfrom the end of the financial year.

3. Consequences of Best Judgment Assessment

1. Higher Tax Liability:
   • AO may disallow deductions/exemptionsand add undisclosed income.
2. Penalties:
   • Section 271(1)(b): ₹10,000 per default.
   • Section 270A: 50–200% penalty for underreporting income.
3. Legal Action:
   • Prosecutionunder Section 276C for willful evasion.

4. How to Challenge a Best Judgment Assessment?

1. File an Appeal:
   • Within 30 daysto CIT(A) under Section 246A.
2. Provide Evidence:
   • Submit missing documentsor revised returns (if within deadlines).
3. Writ Petition:
   • If the AO’s order is arbitrary or malafide

1.  Opportunity Must Be Given to The Assessee In Best Judgment Assessment [Section 144]

Section 144 of the Income Tax Act, 1961, empowers the Assessing Officer (AO) to conduct a best judgment assessment when a taxpayer fails to comply with statutory requirements. However, natural justice principles require the AO to grant the assessee a fair opportunity before finalizing the assessment.

1. Legal Requirement of Opportunity

• Section 144(1) Proviso:
  • The AO mustissue a show-cause notice before making a best judgment assessment.
  • The assessee must be given a reasonable time(usually 7–30 days) to respond .
• CBDT Circular No. 14/2015:
  • Emphasizes that failure to provide an opportunityrenders the assessment void .

2. When Must Opportunity Be Given?

The AO must allow the assessee to present their case in the following scenarios:

(A) Before Finalizing the Assessment

• If the taxpayer has not filed a return(Section 139).
• If the taxpayer ignores notices(e.g., under Section 142(1) or 143(2)).
• If the taxpayer’s books of accounts are rejected(Section 145(3)).

(B) During the Assessment Process

• If the AO proposes to make additions(e.g., undisclosed income, disallowed expenses).
• If the AO relies on third-party information(e.g., bank statements, Form 26AS).

3. How Should Opportunity Be Provided?

1. Written Notice:
   • Must specify the proposed adjustmentsand basis of estimation.
   • Example:
     *”You have not filed your ITR for AY 2024-25. The AO proposes to estimate your income at ₹X based on bank deposits. Submit objections within 15 days.”*
2. Hearing Opportunity:
   • The assessee can request a personal hearing(in-person or via video conferencing).
   • Must be granted unless the case is frivolous or delaying tacticsare suspected .
3. Right to Submit Evidence:
   • The assessee can provide:
     • Revised return(if within time limit).
     • Supporting documents(bank statements, invoices).
     • Legal arguments(case laws, CBDT circulars) .

4. Consequences of Denying Opportunity

• Assessment Order Becomes Void:
  • Can be quashedin appeal (CIT vs. S. Khader Khan Son (2013) – SC).
• Remedy Options:
  • Appeal to CIT(A): Within 30 daysof the order.
  • Writ Petition: If the AO acts arbitrarily (High Court jurisdiction).

5. Judicial Precedents

2.  Assessment on Rejection of Accounts in Best Judgment Assessment [Section 144]

When an Assessing Officer (AO) rejects an assessee’s books of accounts under Section 145(3) of the Income Tax Act, 1961, they may proceed to compute income using Best Judgment Assessment under Section 144. This process ensures tax compliance even when records are deemed unreliable. Below is a detailed breakdown of the legal framework, procedural safeguards, and judicial interpretations.

1. Legal Basis for Rejection of Books [Section 145(3)]

The AO can reject books of accounts if:

1. Incorrect/Incomplete Records: Accounts lack proper vouchers, ledgers, or fail to reflect true income.
2. Non-Compliance with Accounting Standards: The assessee does not follow mercantile/cash systemconsistently or violates Income Computation & Disclosure Standards (ICDS).
3. Unreliable Method: The accounting method leads to income suppression (e.g., unexplained low profits compared to industry standards).

Key Point: Mere suspicion is insufficient—the AO must provide specific defects.

2. Transition to Best Judgment Assessment [Section 144]

Once books are rejected, the AO:

1. Estimates Income: Uses industry benchmarks, past returns, bank statements, or third-party data.
2. Follows Due Process:
   • Issues a show-cause notice(opportunity to rebut defects).
   • Considers assessee’s submissionsbefore finalizing additions.
3. Avoids Arbitrariness:
   • Cannot pick selective entries—must reject entire booksif unreliable.
   • Must justify estimations (e.g., gross profit rate adjustments).

Judicial Safeguard:

• Gujarat HC Ruling (2025): AO must record reasonsfor rejecting voluminous submissions.
• Delhi HC (2024): Rejection requires independent evidence, not just lower profits.

3. Consequences of Rejection & Best Judgment

1. Higher Tax Liability:
   • Disallowed expenses, added income (e.g., estimated profits).
2. Penalties:
   • Section 271(1)(b): ₹10,000 per default.
   • Section 270A: 50–200% penalty for underreporting.
3. Appeal Options:
   • CIT(A): Challenge within 30 days.
   • Writ Petition: If natural justice is violated.

4. Key Defences for Taxpayers

1. Maintain Robust Records:
   • Stock registers, vouchers, and audit trails.
2. Consistent Accounting:
   • Avoid hybrid methods; follow ICDS.
3. Timely Responses:
   • Reply to notices under Sections 142(1)/143(2)