Assessment based on best judgement

Arun, a taxpayer, regularly files his return of income. One day, he received a notice from the income-tax department requesting him to furnish additional information on his returns.

However, Arun failed to respond to the notice. After a few days, Arun was shocked to receive an order asking him to shell out a huge amount of additional tax.

How could he be asked to pay such a huge amount of tax even when he had not furnished additional information? The reason could be Best Judgement Assessment of income by the income-tax officer or the assessing officer.

Officers' call

Best judgement assessment is the process of determination of the income of the assessee by the I-T officer, to the best of his judgement and based on the information available with him. Such assessments normally involve use of estimates, assumptions and exercise of judgement by the assessing officer.

These assessments are carried out under Section 144 of the Income-tax Act-1961 if a person fails to make a return required as per the provisions of the Act; or fails to comply with terms of a notice issued for submitting the return of income or calling for additional information pertaining to the return already submitted; or fails to carry out a special audit as directed by the income-tax officer.

These assessments are carried out when one fails to respond to notices issued by income-tax department.

This may be deliberate, may arise out of ignorance or circumstances beyond his control.

Although the law has conferred the powers to unilaterally assess the income of the assessee, it is necessary that the principles of natural justice are followed by the assessing officers before carrying out such assessment. An opportunity of being heard must be provided to the assessee.

However, this opportunity of ‘being heard' may not be provided, if the officer has issued the notice requesting the assessee to submit the return. Hence, it is advisable that every notice or direction received from the income-tax department is responded to by the taxpayer.

Several courts have laid down the principles an assessing officer must follow in framing a best judgement assessment.

Courts have accepted that though the assessment under Section 144 is an estimate, it should be true and fair and should have a reasonable nexus with the material available with the officer. However, these principles are rarely followed by the assessing officers, and arbitrary and ad-hoc assessments are often made.

Additional scenarios

The new Direct Taxes Code, which is likely to be effective from April 1, 2012, covers two additional scenarios where the assessing officer may carry out the best judgement assessment. They are if a person fails to regularly follow the method of accounting or accounting standards as notified; or if, the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee.

As it is rightly said, “Ignorance of law is not an excuse”. Taxpayers should promptly respond to all the notices or directions issued by assessing officers.

(The author is with >PricewaterhouseCoopers Pvt Ltd)

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