A key provision in the newly notified Income-tax Rules, 2026 — effective April 1 — has brought back focus on the powers of tax officers to estimate a taxpayer’s income in certain situations.
Under Rule 9 of the new rules, the Assessing Officer (AO) can step in and determine income where it cannot be “definitely ascertained”, particularly in cases involving non-residents with income linked to India.
This includes income arising from assets, property, or business connections in India, where clarity is missing or records are insufficient.
What exactly has changed?
While the concept is not entirely new, the latest rules give it a more structured and simplified framework.
As Mihir Tanna, Associate Director of Direct Tax at SK Patodia & Associate LLP, explains: “If a taxpayer fails to file a return, ignores statutory notices (like the notice for scrutiny), the AO can make best judgment assessment wherein estimation will be done.”
He adds that in cases involving non-residents: “If a non-resident’s income from Indian operations (business connections, property, or assets) cannot be ‘precisely calculated,’ in case adequate are not available or satisfactory reply is not provided, the AO can estimate income using a percentage basis of receipts, global profit ratios, or other reasonable methods.”
Importantly, he notes: “The same was applicable earlier as well. The new rules are just more structured, non-repititive and simpler.”
When can income be estimated?
Tax experts say the power is not blanket—it applies only in specific, defined situations.
Harsh Bhuta, Managing Partner, Bhuta Shah & Co LLP, explains: “Under the Income-tax Act, 2025 (New IT Act) and the Income-tax Rules, 2026 (New IT Rules), the power of the Assessing Officer (“AO”) to estimate income arises in limited and defined circumstances.”
He outlines two key triggers:
Non-resident cases
“Rule 9 of the New IT Rules empowers the AO to estimate the income of a non-resident where the actual income accruing or arising in India cannot be reasonably or definitively ascertained.”
Best judgment assessment
“Section 271 of the New IT Act… permits the AO to make a best judgment assessment where the taxpayer fails to comply with statutory obligations, including failure to file a return… or furnish information.”
Crucially, safeguards exist: “Before making such an assessment, the AO is required to issue a show cause notice and provide the taxpayer an opportunity of being heard.”
How will the AO estimate income?
As per the rules, the tax officer can adopt multiple approaches:
-A reasonable percentage of turnover
-Global profit ratio, linked to Indian receipts
-Any other reasonable method, depending on facts
Bhuta emphasises: “This is a residual and limited power. It can be exercised only where reliable determination of actual income is not possible, and the method adopted must be reasonable and justifiable.”
Compliance is the key safeguard
Experts stress that taxpayers can avoid such estimation by maintaining proper documentation and responding to notices.
Tanna advises: “Responding to notices received from income tax department with a plausible explanation (supported by third-party evidence) is the most effective way to stop the transition to a Best Judgment Assessment.”
He also points out: “Taxpayers can apply for an Advance Ruling… to gain certainty on tax liability and avoid future AO estimations.”
Bhuta adds that robust compliance is critical, especially for those with global operations: “The risk of income estimation arises primarily where there is lack of clarity, documentation, or compliance.”
Summing up…
The new rules do not expand powers dramatically but codify and streamline existing provisions, making them clearer and easier to apply.
However, for taxpayers, especially those with cross-border income, the message is clear: maintain documentation, respond to tax notices, and ensure transparency, or risk having your income estimated by the tax department.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.