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Best Judgment Assessment in Service Tax

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Best Judgment Assessment in Service Tax
By: Dr.Sanjiv Agarwal
July 11, 2008
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Prior to omission by Finance Act, 2004 (w.e.f. 10.9.2004) the provision relating to Best Judgment Assessment in section 72 read as under -


(a) [any person who fails to make the return under section 70, or]

(b) any person having made a return fails [to comply with the provisions of section 71], or

(c) the [Assistant Commissioner of Central Excise or, as the case may be, Deputy Commissioner of Central Excise] is not satisfied with the correctness or the completeness of the accounts of the assessee,

the [Assistant Commissioner of Central Excise or, as the case may be, Deputy Commissioner of Central Excise], after taking into account all the relevant material which he has gathered, shall, by an order in writing, make the assessment of the value of taxable service to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment."

On any one or more defaults, the Assistant or Deputy  Commissioner of Central Excise, after taking into account all relevant material which he might have gathered, shall make a best judgment assessment and determine the sum payable by or refundable to the assessee on the basis of such best judgment assessment. The Assessing Officer should act honestly and he does not have any absolute arbitrary authority. After amendment made by Finance Act, 2001, the assessment was required to  be done by Assistant/Deputy Commissioner of Central Excise and not the Central Excise Officer.

If a person failed to comply with section 70 for filing of return or did not complied with notices issued under section 71 or Assistant/Deputy Commissioner was not satisfied with the correctness of accounts of the assessee, the assessing officer could  proceed with making an assessment by a order in writing to the best of his judgment and on the basis of material available with him.

After the enactment of Finance Act, 2001, non-compliance with any of the provisions of section 71 relating to verification of tax assessment by assessee attracted the provisions of section 72. Section 72 was omitted by Finance Act, 2004 w.e.f. 10.9.2004 and has now been reintroduced after a gap of four years with modifications by Finance Act, 2008 w.e.f. 10.5.2008

What is meant by best judgment assessment.

Best judgment assessment is not by way of penalty for non-compliance and it cannot be made capriciously in utter disregard to the material on record -  Jotram Sher Singh v. CIT (1934) 2 ITR 129 (All).

In Sri Ghauker Khandsari Sugar Mills v. CIT (1992) 193 ITR 699 (Karnataka), it was held that best judgment assessment to be based on a fair and proper estimate of the income of the assessee and the inference to be drawn from the available material should be proper. It should be based on proper enquiry and data, though the enquiry may be summary. The assessment should also be on the basis of the material discovered by the assessing authority. In ITO v. Jitender Mehra(1995) 53 ITR 396 (Delhi ITAT), it was held that on expartie assessment under section 144 of the Income Tax Act must conform to the rules of justice, equity and good conscience and it can not be arbitrary and capricious.

This provision is akin to the similar provision of Income Tax Act (Section 144). There are no provisions for best judgment assessment under  Central Excise Act, 1944. It has been held that provisions of section 144 of Income Tax Act, 1961 are mandatory - CIT v. Segu Butchaiah Shetty (1970) 77 ITR 539 (SC). There can be no best judgment assessment where the mistakes are insignificant - CIT v. Padma Chand Ram Gopal (1970) 76 ITR 719 (SC). The order should not only speak about the total income of the assessee but also of the tax payable.

In a best judgment assessment the assessing officer should really make  the assessment on the basis of  his best judgment i.e. he must not act dishonestly or vindictively or capriciously. There are two types of judgment assessment:

- Compulsory best judgment assessment made by the assessing officer in cases of non-co-operation on the part of the assessee or when the assessee is in default as regards supplying informations.

- Discretionary best judgment assessment is doen even in cases where the assessing officer is not satisfied about the correctness or the completeness of the accounts of the assessee or where no method of accounting has been regularly and consistently employed by the assessee.

The word 'fails' should be interpreted to mean 'omit' or 'does not'. The scope of word 'fails' is large enough to include any act of inevitable necessity.

Following judicial pronouncements on best judgment assessment (income tax) are noteworthy -

- The assessments made on the basis of the assessee's accounts and those made on 'best judgment' basis are totally different types of assessments, The distinction between 'best judgment assessment' and assessment based on accounts submitted by an assessee must be borne in mind. Sometimes there may be innocent or trivial mistakes in the accounts maintained by assessee. There may be even certain unintended or unimportant omissions in those accounts; but yet the accounts may be accepted as genuine and substantially correct. In such case, assessments are made on basis of accounts maintained, even though the assessing officer may add back to the accounts price of items that might have been omitted to be included in the accounts. In such case, the assessment made is not a 'best judgment' assessment. It is primarily made on the basis of accounts to evade taxes, it is not possible for the Assessing Officer to find out precisely the turnover suppressed. He can only make an estimate of the suppressed turnover on the basis of the material before him. So long as the estimate made by him is not arbitrary and has nexus with facts discovered, the same cannot be questioned. In the very nature of things, the estimate made may be over-estimate or an under-estimate. But, that is no ground of interfering with his 'best judgment'. -.-.-.-.-.-.-..

If the estimate made by assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima Facie, the assessing authority is the best judge of the situation. The 'best judgment' is of  the Assessing Officer and of nobody else.-.-.-.-.-. High Court cannot substitute its best judgment for that of Assessing Officer -.-.-.-.-Court will have to first see whether accounts maintained by assessee were rightly rejected as unreliable - CST v. H.M. Esufali H.M. Abdulai [1973] 90 ITR 271 (SC).

- In making a best judgment assessment, the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes. Although he is not bound by strict judicial principles, he should be guided by rules of justice, equity and good conscience - CIT v. Ranicherra Tea Co. Ltd. [1994] 207 ITR 979 (Calcutta HC).

- The mere fact that the material placed by the assessee before the assessing officer is unreliable does not empower the officer to make an arbitrary order. The power to make a best judgment assessment is not an arbitrary power - State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC).

- The assessee will have to be given an opportunity of being heard and a right to question the correctness or the relevancy of the materials on the basis of which the ITO proposes to make the best judgment assessment - Dhanalakshmi Pictures v. CIT [1983] 144 ITR 452 (Mad.); T.C.N. Menon v. ITO [1974] 96 ITR 148 (Kerala H C).

- While making a best judgment assessment on the basis of comparable cases, the assessee must be apprised of those cases and given an opportunity to have his say in the matter - K. Baliah v. CIT [1965] 56 ITR 182 (Mysore H C).

- The authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such an estimate, the same must not be capricious but should have a reasonable

-  nexus to the available material and the circumstances of the case - Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC).

- The officer making a best judgment assessment must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for the purpose he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and his own knowledge of previous returns/assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork - CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC).

- Though best judgment assessment is an estimate and involves guess work, the estimate must relate to some evidence or material and must be something more than mere suspicion - Raghubar Mandal v. State of Bihar - (1957) 8 STC 770 (SC) = AIR 1957 SC 810. Even a best judgment assessment must be made reasonably and not suiormises - Kathyaini Hotels v. ACCT (2004) 135 STC 77 (SC)  

- There is no doubt that authorities should try to make an honest and fair estimate of the income even in best judgment assessment and should not act arbitrarily, there is always a certain degree of guess work in best judgment assessment. If assessee did not maintain proper books of account, he himself has to be blamed for such an assessment - Kachwala Gems v. JCIT (2007) 158 Taxman 71 (SC). 

- Where there was no finding by the ITO that there had been any non-compliance with any of the notices mentioned in sub-clauses (a), (b) and (c) of section 144, the order of best judgment assessment should be struck down, even if there was valid service of notice under section 131 and there had been non-compliance with the terms of such notice - Mohini Debi Malpani v. ITO [1970] 77 ITR 674 (Calcutta H C).

- Mere non-production of books, without proof of the existence of things not produced, would not fall within the mischief of section 144 - J.M. Sheth v. CIT [1965] 56 ITR 293 (Madras H C).

- Though there is an element of guesswork in a 'best judgment assessment', it should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case. Though the section provides for a summary method because of the default of the assessee, it does not enable the assessing authority to function capriciously without regard to the available material - State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC).

- Where the accounts were not audited by the chartered accountant for frivolous reasons, appellant could not be held responsible. There is neither  default nor failure to comply with the directions issued so as to attract the provisions of best judgment assessment u/s 144 of Income Tax Act, 1961 - Swadeshi Polytex Ltd. v. ITO (1983) 144 ITR 171 (SC),

These judgments bring about the following inferences -  

-  Power to do best judgment assessment should not be used arbitrarily.

-  Best judgment assessment is different from a regular assessment.

-  Opportunity of being heard must be given to the assessee.

-  Principles of justice, equity and good conscience must be followed by the assessing officer.

-  Assessing Officer doing best judgment assessment should make honest and fair estimates.

-  Non production of books or non audit by CA are not valid grounds for best judgment assessment.

Best judgment assessment done on comparable basis should be discussed with assessee.


By: Dr.Sanjiv Agarwal - July 11, 2008



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