Best-judgment income-tax assessment requires material and fair opportunity to rebut, without mandatory disclosure of sources.
Where an assessee's books are rejected and no satisfactory evidence is produced, an assessment under Section 23(3) may still be made on the Income-tax Officer's best judgment, provided it rests on material lawfully gathered and is not arbitrary. The officer is not legally bound to disclose the source of information or recite all relied-on material in the assessment order, but natural justice requires the assessee to have an opportunity to meet adverse material. Section 13 does not alter the operation of Section 23(3) or convert it into Section 23(4).
Issues: (i) Whether, when an assessee's books are rejected and no further evidence is produced, an Income-tax Officer may make an assessment under Section 23(3) to the best of his judgment; (ii) whether the Income-tax Officer must disclose to the assessee the material gathered by him and set out that material in the assessment order; (iii) whether Section 13 of the Indian Income-tax Act alters the position under Section 23(3).
Issue (i): Whether, when an assessee's books are rejected and no further evidence is produced, an Income-tax Officer may make an assessment under Section 23(3) to the best of his judgment.
Analysis: The statutory scheme distinguishes between assessment under Section 23(3) and the more summary assessment under Section 23(4), but both require material on which an assessment can rationally be based. Where the assessee fails to produce satisfactory evidence, the Income-tax Officer is not confined to the assessee's books alone and may make his own inquiries and call evidence under the Act. The assessment under Section 23(3) must still be made on material and not arbitrarily, and if sufficient material exists the Officer must exercise judgment in making the assessment.
Conclusion: Yes. An assessment under Section 23(3) may be made to the best of the Income-tax Officer's judgment on material available or lawfully gathered, even where the assessee's books are rejected and no adequate evidence is produced.
Issue (ii): Whether the Income-tax Officer must disclose to the assessee the material gathered by him and set out that material in the assessment order.
Analysis: Nothing in the Act expressly requires disclosure of the source or contents of the material before the assessment order is made, or requires the order to recite the facts relied on. At the same time, natural justice requires that the assessee be given an opportunity to meet material obtained from outside sources before adverse action is taken. Disclosure of the source itself is not obligatory, but fairness requires that the assessee be put on notice of the substance of the material.
Conclusion: The assessee must be given an opportunity to meet the material, but the Income-tax Officer is not legally bound to disclose the source of information or to record all the material in the assessment order.
Issue (iii): Whether Section 13 of the Indian Income-tax Act alters the position under Section 23(3).
Analysis: Section 13 governs computation according to the method of accounting regularly employed, but where that method does not properly disclose income the Income-tax Officer may adopt his own basis. The section does not authorise rejection of accounts in a manner that converts Section 23(3) into Section 23(4), nor does it add to or subtract from the requirements of Section 23(3).
Conclusion: Section 13 does not alter the operation of Section 23(3) or assimilate it to Section 23(4).
Final Conclusion: The reference was answered in favour of the Revenue, with the assessment authorities directed to proceed in accordance with the observations on material and fairness made in the judgment.
Ratio Decidendi: Where an assessee fails to produce reliable evidence, an assessment under Section 23(3) must still rest on material, and the Income-tax Officer may gather and use such material while giving the assessee a fair opportunity to rebut it; the statute does not require disclosure of the source of information or convert Section 23(3) into a best-judgment assessment under Section 23(4).