17 - Assessment

In the case of HM Esufali HM Abdulali [1973 (4) TMI 49 - SUPREME Court] it was explained that the distinction between a "best judgment" assessment and assessment based on the accounts submitted by an assessee must be borne in mind. Sometimes there may be innocent or trivial mistakes in the accounts maintained by the assessee. There may be even certain unintended or unimportant omissions in those accounts; but yet the accounts may be accepted as genuine and substantially correct. In such cases, the assessments are made on the basis of the accounts maintained even though the assessing officer may add back to the accounts price of items that might have been omitted to be included in the accounts. In such a case, the assessment made is not a "best judgment" assessment. It is primarily made on the basis of the accounts maintained by the assessee.

But, when the assessing officer comes to the conclusion that no reliance can be placed on the accounts maintained by the assessee, he proceeds to assess the assessee on the basis of his "best judgment". In doing so, he may take such assistance as the assessee's accounts may afford; he may also rely on other information gathered by him as well as the surrounding circumstances of the case. The assessments made on the basis of the assessee's accounts and those made on "best judgment" basis are totally different types of assessments.

The assessing authority while making the "best judgment" assessment, no doubt, should arrive at its conclusion without any bias and on rational basis. That authority should not be vindictive or capricious. If the estimate made by the assessing authority is a bona fide estimate and is based on a rational basis, the fact that there is no good proof in support of that estimate is immaterial. Prima facie, the assessing authority is the best judge of the situation. It is his "best judgment" and not of anyone else. The High Court could not substitute its "best judgment" for that of the assessing authority. In the case of "best judgment" assessments, the courts will have to first see whether the accounts maintained by the assessee were rightly rejected as unreliable. If they come to the conclusion that they were rightly rejected, the next question that arises for consideration is whether the basis adopted in estimating the turnover has reasonable nexus with the estimate made. If the basis adopted is held to be a relevant basis even though the courts may think that it is not the most appropriate basis, the estimate made by the assessing authority cannot be disturbed.

Best judgment assessment: courts may not substitute their own estimate if the assessing authority's basis has reasonable nexus. Assessment based on accounts is proper where books are genuine and substantially correct, with only minor adjustments; a best judgment assessment is used when accounts are unreliable and the authority estimates liability using available accounts, other information and surrounding circumstances. Courts reviewing a best judgment assessment must first confirm that rejection of accounts was justified and then assess whether the estimating basis has a reasonable nexus to the estimated turnover; if so, the authority's bona fide estimate should not be displaced.