Assessment refers to judgment or evaluation. According to the law relating to income tax, assessment means evaluation or measurement of income. The term ‘assessment’ includes many activities and formalities. Though the definition of assessment has nowhere been provided in the Income Tax Act, but the scope of the Act implies that assessment includes an investigation and ascertainment of the authenticity of a return filed by an assessee.
Assessment refers to the determination of the quantum of taxable amount that should be paid by an assessee. Normally an assessment is made based on the returns and accounts filed by an assessee.
What is best judgment?
Often it is found that an assessee maintains false accounts to evade tax and in such cases it becomes difficult for the authority to assess the amount of turnover that has been concealed. In such cases, the assessment is made by the AO to the best of his judgment and as long it is non-arbitrary the decision is final and there is no scope for altering the said judgment.
In a best judgment assessment, the assessing officer should make the assessment on his best judgment. He must not act dishonestly. Under the provisions of section 144 of the Act the assessing officer is under a duty to make assessment of the total income or the loss of an assessee to the best of his judgment and to assess the tax payable by such assessee after taking all conditions into account.
There are two kinds of best judgment assessment as the law relating to taxation suggests:
1. Compulsory best judgment assessment – It is made by the assessing officer when the assessee does not co-operate and is a defaulter in providing information.
2. Discretionary best judgment assessment – It is done even in cases where the AO is not satisfied regarding the authenticity of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee.
When best judgment assessment is applied:
The Best Judgment Assessment is a process laid down in the Income Tax Act, 1961 to comply with the principles of natural justice. Section 144 of the Act imposes an obligation upon the Assessing Officer to make an assessment of the total income of an assessee to the best of his judgment in the following cases.
1. If a person fails to file his return under section 139(1) of the Act and he has not filed a revised return under section 139(4) or section 139 (5) of the Act;
2. If any person fails to comply with all the conditions stipulated under a notice under section 142 or fails to comply with the requirements of getting his accounts audited as per section 142(2A);
3. If a person, upon filing a return fails to comply with the conditions of a notice under section 143(2) which requires his personal presence or production of documents; or
4. If the AO is not satisfied about the authenticity of the accounts furnished by the assessee.
A best judgment assessment can also be applied where a return is not signed and verified.
Object of Best Judgment Assessment:
The object of the Best Judgment is to arrive at a proper estimate of the turnover of an assesee. The best judgment does not refer to enhancement in turnover. The assessee is provided with sufficient opportunity to explain his case which is sought to make an assessment order. In cases where the AO receives information about individual who is being assessed, he must disclose the source of such information to the assessee. The assessee is entitled to summon such a witness for cross examining him for revealing falsehood.
The Procedure of Best Judgment Assessment:
When the returns and the books of account are rejected, the AO makes an estimate which is related to some evidence. However such estimate is not based on mere suspicion. The AO must make what he honestly believes to be a fair estimate taking into consideration all materials appearing before him, including the assessee’s circumstances which will assist him in arriving at a fair estimate.
In case such assessment is arbitrary, the assessment has to be set aside. In estimating any turnover, it should be made bonafide without any bias and there should be sound logic in support of that estimate. The assessing authority is the best judge of a best judgment.
Remedies available to an assessee against best judgment assessment:
Against a best judgment assessment, an assessee has a right to file an appeal under section 246A of the Act or to apply for revision under section 246 before the Income Tax Commissioner. The best judgment assessment is normally made after providing the assessee an opportunity of being heard.
Such opportunities are given by issuance of notice. However such opportunity for hearing is not necessary where notice under section 142(1) of the Act has already been issued.
Consequences of best judgment:
In a best judgment assessment, where no return has been filed if it is found that the turnover is taxable, penalty can be imposed. The mere fact there is best judgment is not be sufficient for imposition of penalty. The degree of proof required for penalty is different for the purpose of best judgment assessment. Though an estimate may be legal, for imposing penalty more concrete information is required which would enable a prudent mind to reach best judgment. The order imposing penalty cannot sustain if there is no sufficient material available to attract a penalty.