Best Judgement Assessment: Section 144 of the Income Tax Act
Updated: Oct 1
A crucial component of the Indian tax system is tax assessment, which guarantees that taxpayers pay their fair share of taxes and complete all requirements. Under Section 144 of the Income Tax Act, Assessing Officers are authorised to use the best judgement assessment procedure to determine the tax due of a taxpayer who has neglected to file his or her income tax return. This article will provide you with all the information you need to understand Section 144 and how the AO makes his evaluation using his best judgement given the circumstances.
Table of Contents
What is the Best Judgement Assessment under Income Tax?
Under the Income Tax Act, a "best judgment assessment" is an evaluation carried out by a tax officer based on their understanding of a taxpayer's financial situation. This can happen if a taxpayer fails to provide the required documents or doesn't file tax returns. In such cases, the authorities step in to assess the individual's tax liability.
Before making a best judgment assessment, the officer considers specific conditions to ensure the decision is fair, unbiased, and accurate. Some of these conditions include:
Documentation
Proper documents need to be maintained by the authorities. It includes the efforts made to collect the information, record reasons to start such assessments, examination criteria and final decision.
Lack of information
This process starts when the taxpayer fails to provide the correct, complete information. In the case of assessing tax, taxpayer fails to file the IT return, tax authorities might start a best judgment assessment based on the information available.
Objective criteria
This starts with the assessment rather than personal biases. The assessing officer needs to consider the relevant laws, principles, and rules during the assessment process.
Reasonable efforts
Before turning to a best judgment assessment, the authorities must make reasonable efforts to gather the necessary information. This includes sending notices to the taxpayer, allowing ample time to respond, and giving multiple chances to correct any discrepancies.
Types of best judge assessment
Compulsory best judgment assessment
This type of assessment is used when a taxpayer is uncooperative or withholds important information. It usually occurs when the taxpayer doesn't provide the necessary cooperation during the assessment process, making it difficult for the officer to determine the correct tax liability. In such situations, the assessing officer makes the judgment based on whatever information is available.
Discretionary best judgment assessment
A discretionary best judgment assessment is done when the assessing officer finds inconsistencies in the taxpayer's accounting methods or questions the accuracy of their financial records. In such cases, the officer has the authority to make an assessment based on their judgment of what seems appropriate.
Principles of Best Judgement Assessment
Before using the best judgement evaluation, the assessing officer takes a few factors into account. It contributes to the accuracy, fairness, and impartiality of the process. Among them are:
Lack of information: Any taxpayer who fails to give correct and comprehensive information triggers the start of this process. When assessing taxes, tax authorities may use their best judgement assessment based on the information at hand if a taxpayer neglects to submit an IT return or provide the necessary documentation.
Record-keeping: The authorities must keep accurate records for the evaluation of their best judgement. It includes all information gathering activities, documentation of the rationale for the assessment's inception, examination standards, and ultimate determination.
Objective standards: Rather than being influenced by one's prejudices or ideas, this approach is based on the assessment's objective standards. During the assessment process, the evaluating officer (AO) must take into account relevant laws, regulations, precedents, and principles.
Understanding Section 144 of the Income Tax Act in Detail
The assessment of a taxpayer, which is completed by the Assessing Officer (AO) using his best judgement and all pertinent facts gathered, is covered by Section 144 of the Income Tax Act of 1961. These assessments, which will be covered in depth, are typically made when a taxpayer disregards the obligations outlined in other act sections. The following are the ramifications of using best judgement in accordance with Section 144:
Resolution of disputes: The taxpayer may appeal the order for best judgement evaluation.
Interest and penalties: If the taxpayer ignores the tax-related notices, they may be required to pay interest and penalties.
Prosecution: If the taxpayer ignores tax-related notices, the assessing officer may bring legal action against them.
While the Income Tax Act's Section 144 is a crucial tool for the government to make sure that taxpayers are paying their fair share of taxes, people with good reasons to ignore tax-related warnings may find it concerning. For example, a taxpayer might have overlooked filing his tax return within the allotted time frame because of unanticipated events like illness or misplacing vital paperwork. In these situations, it is crucial that the taxpayer give the assessing officer an explanation of his circumstances and offer proof to back up his assertions.
Applicability of Section 144
According to Section 144 of the Income Tax Act, the assessing officer starts the best judgement assessment. AO will use an evaluation of best judgement for the following reasons:
If a taxpayer does not comply with all the terms of a notice issued under Section 142(1), is unable to file an IT return by the prescribed due date under Section 139(1), files a belated return as per Section 139(4), files a revised return as per Section 139(5), or files an updated return under Section 139(8A)
If a taxpayer disregards any of the instructions provided in Section 142(2A)
If an AO finds that a taxpayer's accounts are incomplete or inaccurate, or if the taxpayer has not followed a consistent accounting system
If, following the filing of an IT return, a taxpayer does not comply with all of the provisions of a notification—a notice of scrutiny assessment—issued in accordance with Section 143(2)
Exceptions to Best Judgement
It is not appropriate to use best judgement when assessing the following cases:
Insignificant mistakes
Merely the assessing officer's rejection of every piece of evidence
Sending out invalid notices
A best judgement determination is not justified if summons demanding the submission of books of account and other documents is disregarded
Ignoring the notice would not result in the assumption if the assessee had filed a loss of return
If the assessee fails to correct errors, appropriate action related to the error must be taken. Errors that are not corrected do not qualify for the best judgement.
Steps for Best Judgement Assessment
Under Section 144, the assessing officer is required to follow the following process when conducting an evaluation using best judgement:
Notice: Under Section 144, the assessing officer is required to notify the taxpayer of the proposed best judgement assessment.
Chance to be heard: Prior to making the best judgement determination, the taxpayer must be granted a chance to be heard.
Evidence: The evaluating officer must use the information and proof at their disposal to support their best judgement evaluation. Reasons for making the best judgement evaluation must be documented by the assessing officer.
Serve order: The taxpayer must receive the order for the best judgement assessment from the assessing officer.
Notice under Section 144
Best judgement assessment is applied in situations where a taxpayer fails to submit an IT return or refuses to assist in providing an explanation or supporting documentation for their tax assessment. Before carrying out such a decision, the assessing officer must notify the taxpayer.
If the taxpayer still hasn't submitted an income tax return, the AO may, in accordance with Section 142(1), send notices requesting that he do so.
Additionally, the officer may request that the taxpayer provide any necessary accounts or documents in writing and verify in the manner specified on any necessary points or matters. Regardless of whether they are included in the accounts, this can also include a statement of assets and liabilities.
Opportunity to the Assessee
The assessee needs to be given a chance to be heard before any processes are started, just like in the majority of important matters. Furthermore, the assessee's request for an extension of time to submit pertinent papers or for an explanation of any other difficulties should be given careful consideration by the court rather than being turned down out of hand. Prejudice, bias, and other such things must be eliminated in the taxation domain. A fair trial on the assessee's returns is required. The assessing officer is responsible for making sure he follows the rules and adheres to the maxim that someone in his position should follow. Any tax authority must adhere strictly to the rules of honesty and compliance.
It's also critical to remember that an evaluation conducted in accordance with Section 144's best judgement is not the last word. The taxpayer has the option to challenge the best judgement assessment order and argue his case in front of higher authorities. Before making a final decision, the appeal authority will take into account the evidence that was submitted by the assessing officer as well as the taxpayer.
Conclusion
If you fail to file your returns or provide the necessary evidence, Section 144 deals with the provisions of an assessing officer using their best judgement in analysing your situation. The taxpayer is supposed to receive a notice about this from an AO. Furthermore, depending on the assessment year, there are different deadlines for starting these kinds of evaluations. As a result, to prevent the applicability of the best judgement assessment requirements, you must file your returns carefully and provide all relevant information about your income.
FAQ
Q1. What are the different types of assessments under Income Tax law?
There are four major assessment types under income tax law. They are as follows:
Section 143(3)- Summary assessment
Section 143(3)- Scrutiny assessment
Section 144- Best judgement assessment
Section 147- Income escaping assessment
Q2. What is the best Judgement assessment under Section 144?
As per Section 144, if you neglect to file income tax returns, omit any necessary information, or withhold information, the assessing officer may utilise his best judgement to penalise you.
Q3. What is the time limit for Section 144?
The Income Tax Act's Section 153 establishes the deadline for finishing an assessment made according to Section 144. The period is nine, twelve, or twenty-one months from the end of the fiscal year in which your income was first determined. The deadline is set at twelve months from the end of the fiscal year in which the income was first assessed, effective from FY 22–23.
Q4. What are the consequences of a best judgment assessment?
If the taxpayer ignores the tax-related notices, they could be subject to interest charges and penalties. When a taxpayer ignores tax-related notices, the assessing officer may in certain circumstances additionally file charges against them.
Q5. Can a taxpayer challenge a best judgment assessment?
It is possible for a taxpayer to challenge a Section 144 best judgement determination through an appeal and make their case before higher authorities.
Q6. What evidence can a taxpayer provide to support their case?
A taxpayer may substantiate his or her claim with any pertinent documentation, including medical certifications and evidence of the loss of significant records.
Q7. Can a taxpayer seek an extension to comply with the tax-related notices?
Yes, if a taxpayer has a good reason for not complying within the allotted time frame, he or she may request an extension of time to comply with the tax-related notices.
Q8. What happens if the assessing officer fails to give a proper notice under Section 144?
The higher authorities have the authority to annul the best judgement assessment if the assessing officer disregards due process and does not provide a proper notification in accordance with Section 144.
Q9. What happens if a taxpayer does not respond to the notice within 30 days?
You may be subject to a number of repercussions if you get a notice from an Assessing Officer and choose not to reply within the allotted period. The assessment is the result of the Income Tax department's examination, which comes next.
Q10. How do tax authorities determine the income in a Best Judgement Assessment?
Tax authorities use various methods such as industry averages, past tax returns, available financial records, and other relevant data to estimate the taxpayer's income and determine the tax liability.
Q11. What steps can a taxpayer take if they disagree with a Best Judgement Assessment?
Taxpayers can challenge a Best Judgement Assessment by submitting accurate financial records, filing an objection, and presenting their case to the tax authorities or through an appeal process.
Q12. What are the implications of a Best Judgement Assessment on a business?
A Best Judgement Assessment can result in higher tax liabilities, penalties, and interest charges. It may also increase the likelihood of future audits and scrutiny from tax authorities.
Q13. How can businesses prevent a Best Judgement Assessment?
Businesses can prevent a Best Judgement Assessment by maintaining precise and complete financial records, filing timely and accurate tax returns, and ensuring compliance with all tax regulations and requirements.
Q14. What are the different types of assessment that come under income tax law?
Four major types of assessment come under income tax law-
Summary assessment- Section 143(3)
Scrutiny assessment- Section 143(3)
Best judgement assessment- Section 144
Income escaping assessment- Section 147
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