It is for the assessing officer to determine what account books and documents are necessary to enable him to make an estimate of the income. An assessment under this section cannot be held to be invalid merely because some of the accounts, which were called for and not produced, were irrelevant in the opinion of the assessee (Tulsidas v CIT (6 ITR 385)). If the accounts of a branch office are not produced in response to a notice under section 142(1) issued by the assessing officer making an assessment at the principal place of the companys business, the assessing officer would be entitled to make a summary assessment under this section, regardless of the fact that such accounts were produced before and considered by the assessing officer exercising jurisdiction at the branch office (Lachhmandas v CIT (4 ITR 61)).
Mere denial by the assessee of the existence of the account books required to be produced, when it is found upon the evidence that the books are really in existence, cannot prevent or invalidate a best judgment assessment (Jangi v CIT (3 ITR 418); MKS Chettyar v CIT (5 ITR 95); Vir Bhan v CIT (4 ITR 111); Kanhaiyalal v CIT (9 ITR 225); Chaturbhuj v CIT (9 ITR 286); CIT v Sen (17 ITR 355); Mohanlal v CIT (4 ITR 90, 97); Ali Mohammad v CIT (8 ITR 243)).
However, if there are no materials from which the assessing officer could reasonably infer that undisclosed account books exist, the assessment under this section on the basis of non-production of account books would not be justified (Sheth v CIT (56 ITR 293) Re Ramdatta (15 ITR 61, 83-85) SPKAAM Chettyar v CIT (6 ITR 49) Kirtanlal v CIT (7 ITR 209)).
Where the assessing officer does not accept the return as correct and complete, he is bound to serve a notice on the assessee under section 143(2) giving the assessee a chance to justify his return by attending to the assessing officers office or producing evidence. If the assessing officer regards the return as incorrect or incomplete and yet does not serve any notice on the assessee under section 143(2), but only issues a notice to produce accounts under section 142(1) and proceeds to make a best judgment in case of non-compliance with the notice issued under section 142(1), such assessment cannot stand (Rajmani v CIT (5 ITR 631)). Under section 143(2), the assessee has to produce evidence on which he may rely in support of his return; therefore, a best judgment assessment cannot be made for non-compliance with a notice under section 143(2) when the assessee does not rely on any evidence in support of his return (ITO v Luxmiprasad (110 ITR 674)).
The assessing officer should not be influenced by a desire to punish the assessee for the default, however culpable such default might be (Jatram v CIT (2 ITR 129)). In other words, an assessment under this section must be made only upon inadequate materials.
However, that does not mean that the assessing officer can make the assessment capriciously or without regard to any available material (State of Orissa v Singh Deo (76 ITR 690 (S.C)); Gunda v CIT (159, 171); Abdul Qayum v CIT (1 ITR 375); CIT v Popular Electric (203 ITR 630)). The assessment must be to the best of his judgment, and the word judgment itself implies consideration of the facts relating to the income of the assessee.
The classic passage on the point is to be found in the judgment of the Privy Council in CIT v Laxminarain Badridas (5 ITR 170, 180), where it was held that 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; he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of income, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessees circumstances, and his own knowledge of previous returns and assessments of the assessee (Mohanlal v CIT (5 ITR 127, 133); Kishanlal v CIT (6 ITR 108); CIT v Sen (17 ITR 355); Rauf v CIT (33 ITR 843); Kodidasu v CIT (46 ITR 735); Muniratnam v CIT (51 ITR 644); Shankar v CIT (193 ITR 669).
This point has been considered by the Punjab and Haryana High Court in the case Brij Mohan Bansal v Income-tax Officer (311 ITR 317). The facts in this case were that the assessee was engaged in the business of purchase of timber and sale thereof in the form of batons, sleepers and crates. The gross profit rate declared by the assessee was 3.83% as against 8.59% for the preceding year.
The assessing officer rejected the books of account and made a best judgment applying a gross profit rate of 10% on sales and 6.5% on sale of wooden crates The Commissioner (Appeals) partly accepted the claim of the assessee reducing the gross profit rate from 10% to 8.53% for trading turnover and from 6.5% to 5.5% on sale of wooden crates.
The Tribunal upheld the order of the Commissioner (Appeals) on the grounds of failure to maintain record of purchases made by the assessee, absence of stock register, and low gross profit rate. On appeal, the High Court held that even after comparable data was shown to the assessee, he did not bring on record any contrary data to substantiate his plea. Hence, the assessment was upheld.
It needs to be pointed out that when a best judgment assessment is made on the ground of default in producing account books which according to the assessee do not exist, a question of law may arise whether there is any evidence to justify the presumption of the assessing officer that the account books do exist.
The author is advocate, Supreme Court