Some amount of guess work is always involved in a best judgement assessment- SC
Once a taxpayer files the income returns, the Income Tax Department will process it. There are occasions where, based on set parameters by the Central Board of Direct Taxes (CBDT), the return of an assessee gets picked for an assessment. Assessment also includes re-assessment and best judgment assessment under section 144.
According to Section 144, the Assessing Officer, after taking into account all relevant material which he has gathered, is under an obligation to make an assessment of the total income or loss to the best of his judgement and determines the tax payable by the assessee in the following cases:
- where any person fails to make return under Section 139(1) and has not made a return or revised return under Section 139(4) or Belated Return under Section 139(5);
- where any person;
- fails to comply, with all of the terms of a notice issued under Section 142(1); or
- fails to comply with directions issued under Section 142(2A) for getting the account audited.
- Where any person, having made a return, fails to comply with all terms and conditions of a notice issued under Section 143(2).
The best judgement assessment can be made only after giving the assessee an opportunity of being heard giving notice to the assessee to show cause, why the assessment should not be completed under Section 144 of the Income Tax Act, 1961. Assessing Officer cannot assess income under Section 144 for an assessment below the returned income or cannot assesses the loss higher than returned loss. If an assessment under Section 144 is made without giving show cause notice under Section 144 [except where a notice has been issued under Section 142(1)], then the assessment is void-ab-initio.
Let us refer to the case of Kachwala Gems v. Jt. CIT (2006), where the issue under consideration was whether there was necessarily some estimation involved in a best judgment assessment?
Facts of the Case:
- The appellant assessee dealt in precious and semi-precious stones.
- In the course of assessment, the Assessing Officer (AO) noticed the following defects in the books of accounts of the assessee:
- The assessee had not maintained and kept any quantitative details/stock register for the goods traded in by the assessee.
- There was no evidence on record or document to verify the basis of the valuation of the closing stock shown by the assessee.
- The assessee was not able to prepare such details even with the help of books of accounts maintained, purchase bills & Sale Invoices.
- The genuineness of purchases to the extent of Rs.42 lakhs (approx.) was not proved without any doubt.
- The GP rate declared by the assessee at 13.49% during the assessment year is not a match to the result declared by the itself in the previous assessment years.
- M/s. Gem Plaza, engaged in local sales of similar goods declared voluntarily rate of 35% in its assessment.
- M/s. Dhadda Exports, another assessee dealing in same items, but doing export business declared GP rate of 43.8% (even without considering the value of export incentives) in assessment year 1997-98.
- Thereafter the books of accounts of the assessee were rejected by the AO and he resorted to best judgment assessment under Section 144 of the Income Tax Act.
- The AO in the assessment order mentioned some comparable cases and was of the view that the case of the assessee is more or less having similar facts as that of M/s. Gem Plaza where the Gross Profit has been taken as 35.48%.
- The AO estimated the Gross Profit of the assessee as 40%.
- The AO further held that the assessee had shown bogus purchases in order to reduce the Gross Profits.
Proceedings of Appellate Authorities
- In appeal, the Commissioner of Income Tax (Appeals) upheld most of the findings of the Assessing Officer, but reduced the Gross Profit from 40% to 35%.
- In further appeal, the Tribunal had given further relief to the assessee and reduced the Gross Profit rate to 30%.
Observations before Supreme Court (SC)
- In SC’s opinion, whether there were bogus purchases or not, was a finding of fact, and SC could not interfere with the same in this appeal.
- As regards the rejection of the books of accounts, cogent reasons were given by the Income Tax Authorities for doing so, and SC saw no reason to take a different view.
- It was a well settled that in a best judgment assessment there was always a certain degree of guess work.
- No doubt the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily, but there was necessarily some amount of guess work involved in a best judgment assessment, and it was the assessee himself who was to blame as he did not submit proper accounts.
In SC’s opinion there was no arbitrariness in the present case on the part of the Income Tax Authorities and therefore the appeal was dismissed accordingly.