Best judgment assessment must rest on evidence, and a guess-based reduction can be corrected on tax reference.

A best judgment assessment cannot be reduced on a pure guess or on material not properly part of the assessment record. The commentary explains that where the Income-tax Officer's estimate is supported by the assessee's false denial, bank and broker materials, and third-party account evidence, a Tribunal's lower figure without evidentiary basis is arbitrary and unsustainable. It also states that, on a reference under section 66 of the Income-tax Act, 1922, the High Court may correct a finding that is unsupported by any material and answer the reference so that the legally sustainable assessment is restored, even if that results in a higher assessed income.

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Issues: (i) Whether the Tribunal was justified in reducing the best judgment assessment from Rs. 4,60,000 to Rs. 1,00,000 and whether that reduction was arbitrary and unsupported by material; (ii) Whether, on a reference under section 66 of the Income-tax Act, 1922, the High Court could answer the questions so as to restore the higher assessment found by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner.

Issue (i): Whether the Tribunal was justified in reducing the best judgment assessment from Rs. 4,60,000 to Rs. 1,00,000 and whether that reduction was arbitrary and unsupported by material.

Analysis: The assessment made by the Income-tax Officer and affirmed by the Appellate Assistant Commissioner was supported by the record, including the assessee's false denial of connection with Hanuman & Co., the bank and broker materials, and the speculative dealings proved through third-party accounts. The Tribunal rejected the application under section 27, yet relied upon material introduced only through that rejected application to justify the reduction. That material was not evidence in the assessment proceedings. The figure of Rs. 1,00,000 had no evidentiary basis and could not be worked out by any rational process, whereas the figure of Rs. 4,60,000 was founded on the materials and calculations already on record.

Conclusion: The reduction to Rs. 1,00,000 was arbitrary and unsupported by material. The higher figure of Rs. 4,60,000 was justified and stood against the assessee.

Issue (ii): Whether, on a reference under section 66 of the Income-tax Act, 1922, the High Court could answer the questions so as to restore the higher assessment found by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner.

Analysis: The reference jurisdiction under section 66 required the High Court to decide the questions of law arising from the statement of case. In answering those questions, the Court could examine whether a finding of fact was perverse or unsupported by evidence. A finding based on no material could be set aside in law. Since the Tribunal's figure of Rs. 1,00,000 was a pure guess and the higher assessment had evidentiary support, the Court was not confined to the Tribunal's reduction merely because the reference was at the instance of the assessee.

Conclusion: The High Court could answer the reference in a manner that restored the assessment to Rs. 4,60,000. The Tribunal's lower figure could not be sustained.

Final Conclusion: The reference was answered in favour of the Revenue, the Tribunal's reduction was disapproved, and the assessment of Rs. 4,60,000 was upheld as a proper best judgment estimate.

Ratio Decidendi: In a tax reference, a finding of fact unsupported by any material or amounting to a pure guess is erroneous in law and may be corrected; the High Court may answer the reference so that the legally sustainable assessment is restored even if that has the effect of increasing the assessed income.

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