Best judgment assessment must rest on rational evidence, and penalty fails when based on arbitrary presumption.

In best judgment assessment, the estimate must rest on a bona fide and rational basis drawn from proved facts, not on imagination or arbitrary presumption. The Tribunal accepted that the enhanced purchases could be inferred as purchases from registered dealers because the surrounding facts supported that view, including the nature of the goods, the assessee's usual dealings with oil mills, and the absence of transactions with unregistered dealers in the books. On that reasoning, the Tribunal's conclusion was upheld, and the penalty could not survive where it was founded on an erroneous presumption.

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Issues: Whether the Tribunal was justified in holding that the enhanced purchases should be treated as purchases from registered dealers without requiring proof from the assessee, and in holding that penalty under section 36(2)(c) was not leviable.

Analysis: A best judgment assessment may involve some guesswork, but it must rest on a bona fide estimate made on a rational basis and not on imagination or a capricious presumption. The assessing authority had proceeded on a single proved circumstance, namely that one suppressed purchase was from a registered dealer, and had ignored the surrounding facts that the goods were oil, that the assessee's purchases were ordinarily from oil mills, and that the account books showed no transactions from unregistered dealers. The Tribunal, acting as the final fact-finding authority, drew the inference that the enhanced purchases were from registered dealers on a logical and rational basis from the proved facts. The levy of penalty could not stand on the erroneous presumption adopted by the assessing authority.

Conclusion: The Tribunal was justified in its conclusion, and the question was answered in the negative, in favour of the assessee.

Final Conclusion: The assessment could not be sustained on the basis adopted by the taxing authorities, and the penal levy also failed.

Ratio Decidendi: In a best judgment assessment, the estimate must have a reasonable nexus with the proved facts and cannot be founded on an arbitrary or imaginary presumption.

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