Section 144 – Best Judgment Assessment

In the realm of income tax, taxpayers are primarily responsible for accurately declaring their income and computing their tax liability. However, there are instances where a taxpayer fails to comply with their obligations, leading the tax authorities to step in. One such measure is the Best Judgment Assessment, governed by Section 144 of the Income Tax Act, 1961.

This section empowers the Assessing Officer (AO) to make an assessment of the taxpayer's income to the best of their judgment, based on all relevant material gathered, when the taxpayer fails to cooperate or adhere to certain statutory requirements. Unlike a regular scrutiny assessment under Section 143(3), a Best Judgment Assessment is often made when there is a lack of information or cooperation from the taxpayer's side.

When is a Best Judgment Assessment Made?

An Assessing Officer can proceed with a Best Judgment Assessment under Section 144 in the following circumstances:

1. Failure to File Return (Section 139(1)): If a person fails to file their Income Tax Return by the due date prescribed under Section 139(1), or a belated return under Section 139(4), or a revised return under Section 139(5), and a notice under Section 142(1) requiring such filing is issued but not complied with.
2. Failure to Comply with Section 142(1) Notice: If a taxpayer receives a notice under Section 142(1) (requiring production of accounts, documents, or furnishing information) and fails to comply with all the terms of the notice.
3. Failure to Comply with Section 142(2A) Direction: If the accounts of the taxpayer are directed to be audited under Section 142(2A), and the taxpayer fails to comply with this direction.
4. Failure to Comply with Section 143(2) Notice: If a notice for scrutiny assessment under Section 143(2) is issued, and the taxpayer fails to comply with its terms (i.e., fails to respond or produce requested information/documents during scrutiny proceedings).
5. Defective Return (Section 139(9)): If a return is treated as defective under Section 139(9) and the taxpayer fails to rectify the defect within the specified time limit.

Process of Best Judgment Assessment

The process generally involves the following steps:

1. Triggering Event: One of the non-compliance events listed above occurs.
2. Show-Cause Notice: The AO issues a show-cause notice (often incorporated into a Section 142(1) notice or a specific Section 144 notice) asking the taxpayer to explain why a Best Judgment Assessment should not be made.
3. Opportunity of Being Heard: The taxpayer is given a reasonable opportunity to present their case, submit documents, or explain the reasons for non-compliance. This is a statutory requirement.
4. Consideration of Material: If the taxpayer fails to respond or provides unsatisfactory responses, the AO proceeds to make the assessment based on all available and relevant material. This includes:
   • Any information furnished by the taxpayer previously (e.g., past returns).
   • Information from third parties (e.g., TDS/TCS statements, annual information statements (AIS), bank statements obtained directly).
   • Results of any inquiries made by the AO.
   • Any other material available on record.
5. Passing of Order: The AO passes an order under Section 144, assessing the total income to the best of their judgment and computing the tax, interest, and penalties. This order is binding unless challenged.

Consequences of a Best Judgment Assessment

A Best Judgment Assessment often leads to adverse consequences for the taxpayer due to the absence of their input:

• Higher Tax Demand: The AO may make reasonable estimates that result in a higher assessed income and consequently, a higher tax liability, as they typically err on the side of caution or to safeguard revenue.
• Penalties: In addition to tax and interest, penalties can be levied. For instance, non-filing of return can attract a penalty under Section 271(1)(b), and under-reporting of income can attract a penalty under Section 270A.
• Loss of Deductions/Exemptions: Without the taxpayer's details, the AO may not be able to consider all eligible deductions (Chapter VI-A) or exemptions under Section 10, leading to a higher taxable income.
• Time and Effort for Appeals: Challenging a Best Judgment Assessment requires filing an appeal and providing all the necessary documentation and explanations that should have been provided during the assessment itself.

Time Limit for Best Judgment Assessment

Similar to other assessments, there are time limits for completing a Best Judgment Assessment. Generally, an order under Section 144 must be passed within 12 months from the end of the Assessment Year in which the income was first assessable.

For example, for Assessment Year 2025-26 (which corresponds to Financial Year 2024-25), the last date for passing a Best Judgment Assessment order would typically be March 31, 2027.

Remedies Against a Best Judgment Assessment Order

If you receive a Best Judgment Assessment order that you believe is unfair or incorrect, you have the following options:

• Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]: This is the most common recourse. An appeal can be filed with the CIT(A) within 30 days of receiving the demand notice (Section 156). In the appeal, you will have the opportunity to present the accounts and evidence that were not considered during the original assessment.
• Rectification of Mistake (Section 154): If the Best Judgment Assessment order contains mistakes apparent from the record (e.g., clerical errors, computational errors), you can file an application for rectification under Section 154 with the AO.

Conclusion

A Best Judgment Assessment under Section 144 serves as a deterrent against non-compliance with income tax laws. It empowers the tax authorities to ensure that income does not escape assessment due to a taxpayer's failure to furnish proper returns or cooperate with inquiries. While it can lead to a higher tax burden, taxpayers always have the right to appeal and present their case to higher authorities, provided they have valid reasons for their initial non-compliance.