Some guesswork inevitable in best judgement assessments: SC

Updated: Jan 21 2007, 09:03am hrs
Section 144 of the Income Tax Act, 1961 provides for ex-parte assessment to the best of the judgement of the assessing officer (AO) after considering all relevant matters, which he has gathered in certain circumstances.

Circumstances when best judgement assessments can be made: If the person fails to make the return required u/s 139(1) and has not made a return or revised return under sub-section (4) or (5) of that section.

If any person fails to comply with all the terms of a notice u/s 142(1) or fails to comply with the direction requiring him to get his accounts audited in terms of section 142(2A).

If any person, after having filed a return, fails to comply with the terms of a notice u/s 143(2), requiring his presence or production of evidence and documents.

If the AO is not satisfied about the correctness or the completeness of the accounts of the assessee or if no method of accounting has been regularly employed by the assessee.

Past decisions

Obviously, because of non-compliance from the assessee's side or because of unsatisfactory nature of accounts, the AO has to make the assessment without the assistance of the taxpayer. There have been challenges to the estimates made by the AO before the courts.

Some decisions in this regard are, briefly, mentioned below:

Estimate must be honest and fair [see Brij Bhushan Lal Parduman Kumar v CIT (1978) 115 ITR 524 (SC)].

Best judgement assessment must have reasonable nexus to the available material [see State of Kerala v C Velukutty (1966) 60 ITR 239 (SC)].

However, in best judgement assessment guesswork is necessary and it is not required that the figures have to be proved of the exact amount determined by taxing authorities [see Lake Palace Hotels & Motels (P) Ltd v CIT (1995) 213 ITR 735 (Raj)].

Recent decision

Recently, the Supreme Court has again mentioned about the guesswork in best judgement assessment in the case of Kachwala Gems v JCIT, Jaipur (2007) 158 Taxman 71 (SC). The assessee in the case before the SC was dealing in precious and semi-precious stones. The AO noticed certain defects in books of account of the assessee, viz, that it had not maintained any quantitative details/stock register for the goods traded in by it; that there was no evidence/document on record to verify the basis of the closing stock valuation shown by it; that GP rate declared by the assessee at 13.49% during the assessment year did not match the result declared by the assessee itself in the previous assessment years; and that the gross profit declared by it was much below the rate declared voluntarily by another assessees engaged in similar business. Thereafter, the AO rejected the books of account of the assessee and resorted to best judgement assessment u/s 144 and estimated the gross profit rate at 40%. The AO further held that the assessee had shown bogus purchases for reducing the gross profits.

The assessee took the matter up to SC. The court decided the appeal in favour of the tax department.

The important observations of the court in its decision are: Whether there were bogus purchases or not was a finding of fact and there was no need to interfere with the same in the instant appeal.

As regards the rejection of the books of account, cogent reasons were given by the income-tax authorities for doing so, and there was no reason to take a different view.

It is well settled that in a best judgement assessment, there is always a certain degree of guesswork. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgement assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgement assessment, and it is the assessee himself, who is to blame as he did not submit proper accounts. There was no arbitrariness in the instant case on the part of the authorities.

Hence, the assessee's appeal was dismissed.

Summing up

The view expressed by the Rajasthan High Court in the case of Lake Palace Hotels (supra) stands confirmed by the Apex Court. By the very nature of proceeding, some amount of guesswork is inevitable in best judgement orders.

The author is former chairman, Central Board of Direct Taxes