Best judgment assessment without notice in income tax procedure challenged for breach of natural justice, resulting in writ relief and quashing

Best judgment assessment made after rejection of accounts without affording the assessee opportunity to meet materials relied on engages the principle of audi alteram partem; consequence: assessment vulnerable for failure of natural justice where not framed under section 144. Knowledge obtained in an enquiry under section 142(2) about a prior year assessment is material to the officers determination and must be disclosed in the process of making a best judgment assessment; consequence: nondisclosure undermines fairness. Failure to urge breach of natural justice before departmental appellate or revisional authorities did not preclude exercise of High Court discretion under constitutional writ jurisdiction; consequence: writ relief granted and impugned action set aside.

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Issues: Whether, where an Income-tax Officer rejects the assessee's accounts and proceeds to make a best-judgment assessment by relying on materials gathered in enquiry (including prior-year returns and information from other dealers), the assessee must be given an opportunity of being heard under section 142(3) of the Income-tax Act, 1961; and whether the failure to raise that ground before departmental appellate or revisional authorities precludes relief by writ under Article 226.

Analysis: Section 142(2) permits the Income-tax Officer to make enquiries to obtain full information. Section 142(3) requires that the assessee be given an opportunity of being heard in respect of any material gathered on the basis of such enquiry and proposed to be used for assessment, except where the assessment is made under section 144. Section 145(2) contemplates that where accounts are rejected the officer may make an assessment in the manner provided in section 144, and section 144 contemplates a best-judgment assessment; however, the statutory exclusion in section 142(3) applies only to an assessment actually made under section 144. An assessment made under section 143(3), even if a best-judgment assessment, does not attract the section 144 exclusion. Where the officer relied on materials outside the records relevant to the year of assessment (including prior-year returns and information from other dealers), those materials constitute materials gathered on enquiry under section 142(2) and trigger the requirement of section 142(3) to afford the assessee an opportunity to be heard. Regarding writ jurisdiction, where departmental appellate and revisional remedies are available and are departmental in character, the failure to exhaust them is not an inflexible bar to exercise of discretion under Article 226; the superior court may still grant relief in appropriate cases where principles of natural justice were discarded.

Conclusion: The assessee was entitled to be given an opportunity of being heard under section 142(3) in respect of materials gathered by enquiry and used for a best-judgment assessment; the failure to afford that opportunity vitiated the assessment and justified issuance of writ relief under Article 226. The appeal is dismissed and the decision of the single judge confirming quashing of the assessment is upheld in favour of the assessee.

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