Section 144 lets the Assessing Officer assess to the best of his judgment where the assessee fails to file a return or to comply with notices, but only after taking into account all relevant material he has gathered and after giving a show cause opportunity. The estimate must be an honest and fair one with a nexus to the material; it cannot be dishonest, vindictive, capricious or a punishment for non-cooperation.
Section 144(1) is triggered by specified failures: failure to make the return required under section 139 (and no revised return under the relevant sub-sections); failure to comply with all the terms of a notice under section 142(1) or a direction under section 142(2A); or, having made a return, failure to comply with all the terms of a notice under section 143(2). On any of those, the Assessing Officer shall make the assessment of the total income or loss to the best of his judgment, after taking into account all relevant material he has gathered, and determine the sum payable or refundable.
Two safeguards sit in the section itself. The officer must give the assessee an opportunity of being heard by serving a notice calling upon him to show cause, on a date and time specified, why the assessment should not be completed to the best of his judgment. The exception is that such an opportunity is not necessary where a notice under section 142(1) has already been issued — that is, where the assessee has already been called on and has not responded.
The phrase "best of his judgment" has been read consistently across direct and indirect tax. The officer must make what he honestly believes to be a fair estimate of the proper figure of assessment; there must necessarily be guess work, but it must be honest guess work. He must not act dishonestly, vindictively or capriciously. The estimate must be related to some evidence or material and must be something more than mere suspicion, with a reasonable nexus to the material available and to the circumstances of the case. That line runs from Raghubar Mandal Harihar Mandal and Seth Gurumukh Singh through State of Kerala v. C. Velukutty and into the income-tax cases including Brij Bhushan Lal Parduman Kumar and Kachwala Gems.
What best judgment is not is equally important. It is not a penalty. Non-filing or non-compliance triggers the power; it does not license inflation of the figure as a sanction. It is not a licence to discard material the officer has, including the assessee's own books and bank records if they are on file. It is not an escape from giving reasons — the order must show the basis of the estimate, the comparable adopted, the rate applied and why. And it is not final: a best judgment assessment is appealable to the Commissioner (Appeals) and thereafter to the Tribunal, and is also open to revision under section 264 and to writ jurisdiction where the estimate is wholly arbitrary.
Where the estimate follows a rejection of books, there is a further requirement. Books cannot be rejected without identifying specific defects in them, and an estimate made after rejection still has to be anchored to something — the assessee's own past history, a comparable case, an accepted gross profit rate — rather than plucked out of the air.
In practice the reply and the appeal work at two levels. First, was the section 144 power available at all: was there a genuine failure, and was a show cause notice served? Second, if it was available, is the number defensible: what material did the officer take into account, what basis did he state, and how does the rate or comparable relate to your own history?
Attacking a best judgment assessment as "excessive" alone rarely succeeds; attacking it as unreasoned, unrelated to material, or punitive does. That means the appeal has to identify what the officer had on file and did not use, and what basis he stated and could not support. If the show cause opportunity was not given where it was required, the assessment itself is vulnerable before you reach the figure.
Is a notice under s.143(2) a jurisdictional precondition, or merely a procedural step the Assessing Officer can skip?
My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
I am an MES contractor and the department supplies me cement and steel at fixed rates. The Income-tax Officer added the value of that material to my cash receipts before applying a flat rate. Can he?
The Income-tax Officer examined witnesses behind my back and used their statements against me. Is that material evidence at all?
I sell developed plots and book the whole sale price on the mercantile basis, but I still have to build the roads and drains I promised the buyers. Can I deduct the estimated cost of that work now?
My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
The AO wants to substitute my method of accounting for one that suits him better. What does he have to establish first?
Can I go straight to the High Court against an income-tax order instead of filing the statutory appeal?
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