• No tax can be levied or collected without Authority of law- Article 265 of Constitution of India.

  • Circular: No. 14(XL-35) of 1955, dated 11-4-1955 [Extracted from Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.)] also long back instructed and directed the department and said-

    Department not to take benefit of assessee’s ignorance.

  • The Honourable Supreme Court from time and again had commented and suggested the Tax Authority to be humane and justified while applying the Provisions of law. Refer the following Judgments-

    Pannalal Binjraj v. Union of India [1957] 31 ITR 565 (SC).

Provisions should be applied in a humane and considerate manner – A human and considerate administration of the relevant provisions of the Income-tax Act would go a long way in allaying the apprehensions of the assessee and if that is done in all the true spirit, no assessee will be in a position to charge the revenue with administering the provisions of the Act with ‘an evil eye and an unequal hand’

CIT v. Simon Carves Ltd. [1976] 105 ITR 212 (SC).

Authorities must act in a fair and not partisan manner – The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from the assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighed against the assessee. It is impossible to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to the assessee, they should be deemed to have exercised it in a proper and judicious manner.

  • Despite the aforesaid instructions and also suggestions from apex Courts, the Department do function in a very arbitrarily manner and the Assessee is taxed for the receipt which legitimately is not an income for him.

  • The processing and issue of intimation has been made mandatory from AY 2017-18 (Proviso to Sec. 143(1D))

Therefore, We are now getting the Assessment/intimation order under sec.143(1)(a) but having the adjustments even for the income/expenses not authorized under the provision.

We for ready reference reproduce Sec.143(1)(a) as under :

  1. [(1) where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner, namely:—

    1. the total income or loss shall be computed after making the following adjustments, namely:—

      1. any arithmetical error in the return;

      2. an incorrect claim, if such incorrect claim is apparent from any information in the return;

      3. disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

      4. disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

      5. disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or

      6. addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:]

[Provided also that no adjustment shall be made under sub- clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;]

The Central board of direct taxes has from time and again issuing the instructions and also circular as direction and procedure to be followed for making the adjustments while processing the Return. Such Instructions and circular are as under-

  • INSTRUCTION NO.9/2017 [F.NO.225/333/2017-ITA.II], DATED 11-10-2017

  • INSTRUCTION NO.10/2017 [F.NO.225/333/2017-ITA.II], DATED 15-11-2017

  • CIRCULAR NO.1/2018 [F.NO.225/333/2017-ITA.II], Dated 10-1-2018 (143(1)(a)(vi))

From the reading of Sec.143(1)(a) of the Act, only adjustments of the nature as specified can be adjusted while processing the Return of Income and that too only after informing of the intention to Assessee.

o Adjustments which are subject to interpretation and debatable can not be made

  1. ACIT v. Haryana Telecom Pvt Ltd, 14 taxmann.com 122 (Delhi HC)

It is beyond any doubt that when a deduction is claimed in the return of income and it is somewhat controversial, it cannot be treated to be prima facie disallowable. If the claim is made by the assessee is treated not to be free from debate and argument, it is bound to be regarded as debatable issue, which is not enable to prima facie adjustment within the meaning of section 143(1)(a) of the Act. Thus, where the issue involved is debatable, an intimation under section 143(1)(a) disallowing the claim based on such debatable issue on the ground that it is prima facie inadmissible, cannot be sustained

  1. CIT v. Mekins Agro Products Limited (2015)( 55 Taxmann.com 216 (Andhra Predesh and Telangana High Court)

By its very nature, a claim under section 80HHC of the Act is surrounded by several uncertainties and debatable questions of fact and law. Before the Assessing Officer disallowed a part of the claim made under that provision, he ought to have issued notice under sub-section (2) of section 143 of the Act. It is not even asserted by the Revenue that the disallowance of part of the claim was on the basis of settled principles of law and there was nothing debatable about it. There cannot be any hard and fast rule as to when a particular aspect can be treated as debatable and when not. Much would depend upon the nature of claim and the adjudications that have taken place on the subject. (Para 10).

  1. Modern Fibotex India Ltd. v. Dy. CIT [1995] 126 CTR (Cal.) 69 : [1995] 212 ITR 496 (Cal.),

The jurisdiction of the AO under s. 143(1)(a) to make an adjustment and to issue an intimation is, in my view, limited not only to the obvious but also to that which is deducible from the return as filed, without doubt or debate. This is clear form the language of the section and is supported by the authority as well as the circulars issued by the CBDT in this connection.

The said decision of the learned Single Judge was also affirmed by the Hon’ble Division Bench of this High Court in APO No. 383 of 1995 decided on 23rd Nov., 2000 and the said decision of the learned Single Judge also approved by the Hon’ble Supreme Court in CIT v. Hindustan Electro Graphites Ltd. [2000] 160 CTR (SC) 8 : [2000] 243 ITR 48 (SC)

  1. Khatau Junkar Ltd. v . K.S. Pathania, Dy. CIT [1992] 102 CTR (Bom.) 194 : [1992] 196 ITR 55 (Bom.)

This is because the scope of the powers to make prima facie adjustments under s. 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record under s. 154 In its literal sense, ‘prima facie’ means on the fact of it. Hence, on the face of the return and the documents and accounts accompanying it, the deduction claimed must be inadmissible. Only then can it be disallowed under the proviso to s. 143(1)(a). If any further enquiry is necessary, or if the ITO feels that further proof is required in connection with the claim for deduction, he will have to issue a notice under sub-s. (2) of s.143.’

o Instances of Debatable Issues

Employees Contribution to PF and ESI

Relevant clauses and provisions are clause 20(b) of the Form 3CD, Sec. 2(24) (x), Sec.36 (1) (va) and Sec.43B.

Sec.43B- Certain deductions to be only on actual payment

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(a)………………………………….. or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, [or]



shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

Courts Interpretation :

Regarding the Word “Contribution” in Sec.43B

  1. The Honorable Karnataka High Court in the case of ESSAE TERAOKA (P) LTD v. DCIT 366 ITR 408 (KAR)has analyzed the entire PF ACT and PFscheme in this regard and held that-

    From bare perusal of sub-para (1) of paragraph 30, it is clear that the word ‘contribution’ is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly. [Para 19]

    Paragraph 38 of the PF scheme provides for Mode of payment of contributions. As provided in sub-para (1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under the ESI Act within fifteen days of the closure of every month pay. It is clear that the word ‘contribution’ used in clause (b) of section 43B means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section (1) of section 139 is made, the employer is entitled for deduction. [Para 20]

  2. Patna High Court in Bihar State Warehousing Corporation Ltd v. CIT 386 ITR 410 (PAT)has also taken the same view that the word contribution in 43B(a) would include both employer and employee contribution. It was held-

    The issue as to whether a distinction can be made between the employees’ contribution and employer’s contribution with regard to applicability of section 43B was raised before the Bombay High Court in CIT v. Ghatge Patil Transports Ltd. [2014] 368 ITR 749/228 Taxman 340/53 taxmann.com 141 (Bom.) and before the Punjab and Haryana High Court in CIT v. Hemla Embroidery Mills (P.) Ltd. [2014] 366 ITR 167/217 Taxman 207/37 taxmann.com 160 (Punj. & Har.) and both the High Courts have answered the same by holding that both the employees and employer’s contributions are covered by the amendment
    to section 43B after considering Alom Extrusion Ltd.’s case (supra). [Para 15]

    Although technical reading of section 43B and the provisions of
    sub-section (2) of section 24(x), read with section 36(1)(va)
    the impression that the employees’ contribution would continue to be treated
    differently under a different head of deduction, as the head of deduction is
    separate under section 43B and section 36 but on a broader reading of the
    amendments made to section 43B repeatedly and going by the intention of the
    Parliament there appears to be sufficient justification for taking the view that
    the employees’ and the employer’s contribution ought to be treated in the same
    manner. In Alom Extrusion Ltd.’s case (supra) the Supreme Court has not made any
    distinction between the two as similar problem of implementation would arise in
    both the cases, although specific issue was not raised therein; but both the Bombay High Court and the Punjab and Haryana High Court in the above referred to cases, after considering Alom Extrusion Ltd.’s case (supra), have answered the question treating the two contributions on the same footing. [Para 16]

  3. Punjab & Haryana High Court in Commissioner of Income-Tax v. Hemla Embroidery Mills (P.) Ltd.held that Section 43B shall apply to both ‘contributions’ i.e. employers’ and employees’.

    Overriding effect-

    The Honorable Mumbai ITAT in case of ATE Pvt. Limited v. ACIT, Mumbai, Bench G reported on 84TTJ 186 has dealt with this aspect and held that Sec.43B has an overriding effect over other provisions of the Act, 1961.

    Courts considered due date under Sec. 139(1) and allowed deduction-

    Since the Assessee Company has paid/deposited the liability before the due date of filing of Return, the same cannot be disallowed. The Assessee places its reliance on the judgments of the various High Court where the deposit of PF and ESI if paid within due date of filing of Return under sec.139 (1) of the Act was allowed.-

  4. The Jurisdictional Delhi High Court in case of CIT v. AIMIL LTD. (2010) 188 Taxmann 265 (DHC)held-

    Section 2(24) enumerates different components of income. It, inter alia, stipulates that income includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees. It is clear from the above that as soon as employees’ contribution towards provident fund or ESI is received by the assessee-employer by way of deduction or otherwise from the salary/wages of the employees, it will be treated as ‘income’ at the hands of the assessee. It clearly follows therefrom that if the assessee does not deposit this contribution with provident fund/ESI authorities, it will be taxed as income in the hands of the assessee. However, on making deposit with the concerned authorities, the assessee becomes entitled to deduction under the provisions of section 36(1)(va ). Section 43B(b), however, stipulates that such deduction would be permissible only on actual payment. This is the scheme of the Act for making an assessee entitled to get deduction from income insofar as employees’ contribution is concerned. [Para 11]

    If the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as in the ESI Act. Therefore, the Act permits the employer to make the deposit with some delay, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down by the Supreme Court in CIT v. Vinay Cement Ltd. [2007] 213 CTR (SC) 268. [Para 17]

  5. CIT v. SPL Industries Ltd, 9 taxmann.com 195 (Delhi)-2011

    Upon perusal of the aforesaid, we are of the considered opinion that the decisions rendered in P.M. Electronics Ltd.’s case (supra) and AIMIL Ltd.’s case (supra) have correctly laid down the law and there is no justification or reason to differ with the same. In the result, we do not perceive any merit in this appeal and accordingly the same stands dismissed.

    Followed in other cases-

    • ACIT v. Ranbaxy Laboratories Ltd, 20 taxmann.com 334 (Delhi)

    • ACIT v. Dixon Technologies (I) (P.) Ltd32 taxmann.com 218 (Delhi-Trib.)

    • All saints School v. Income Tax Officer (Exemption), Ward, Ghaziabad (2019) 105 taxmann.com 149 ( Delhi-ITAT).

    • Unitech Ltd. v. DCIT, 112 taxmann.com 162 (Delhi-Trib.)

    • Universal Precision Screws v. ACIT, 69 taxmann.com 368 (Delhi-Trib.)

    – CIT v. State Bank of Bikaner and Jaipur (2014) 43 Taxmann.com 411(Rajasthan) 06-01-2014

    Where PF and/or EPF, CPF, GPF, etc., was paid after due date under respective Acts but before filing of return of income under section 139(1), same could not be disallowed under section 43B or under section 36(1)(va).

    – Pr. CIT v. Rajasthan State Beverages Corporation Ltd. (2017) 84 taxmann. com 173-August 2, 2016

    So far as the question relating to privilege fees amounting to ₹ 26.00 Crores in the instant year as well as the deduction of claim of ₹ 17,80,765/- on account of Provident Fund (PF) and ESI is concerned, this Court has extensively considered the aforesaid two questions in assessee’s own case vide judgment and order dt.26.05.2016 referred to (supra) and has held that the privilege fees being a revenue expenditure, is required to be allowed as a revenue expenditure. This court in the aforesaid case has also allowed the claim of the assessee, in so far as payment of PF & ESI etc. is concerned, on the finding of fact that the amounts in question were deposited on or before the due date of furnishing of the return of income and taking in consideration judgment of this Court in CIT v. State Bank of Bikaner & Jaipur [2014] 363 ITR 70/43 taxmann.com 411/225 Taxman 6 (Mag.) (Raj.) and CIT v. Jaipur Vidhut Vitaran Nigam Ltd. [2014] 363 ITR 307/49 taxmann.com 540/[2015] 228 Taxman 214 (Mag.) (Raj.) and accordingly both the questions are covered by the aforesaid judgment and against the revenue.

    SLP filed by the Department with SC was also dismissed in this case.

    – Commissioner of Income -Tax v. Kichha Sugar Co. Ltd. [2013] 35 taxmann.com 54 (Uttarakhand) May 20, 2013

    The due date referred to in section 36(1)(va) must be read in conjunction with section 43B(b) and a reading of the same would make it amply clear that the due date as mentioned in section 36(1)(va), is the due date as mentioned in section 43B(b) i.e., payment/contribution made to the Provident Fund Authority any time before filing the return for the year in which the liability to pay accrued along with evidence to establish payment thereof. The Assessing Officer proceeded on the basis that ‘due date’, as mentioned in section 36(1)(va) is the due date fixed by the Provident Fund Authority, whereas in the matter of culling out the meaning of the word ‘due date’, as mentioned in the said section, the Assessing Officer was required to take note of section 43B(b) and by not taking note of the provisions contained therein committed gross error, which having been rectified by the Appellate Authority and confirmed by the Tribunal, there is no scope of interference. [Para 4]

    – Commissioner of Income-Tax (Central), Pune v. Ghatge Patil Transports Ltd. [2015] 53 taxmann.com 141 (Bombay)

    In this manner, the amendment provided by Finance Act, 2003 put on par the benefit of deductions of tax, duty, cess and fee on the one hand with contributions to various Employees’ Welfare Funds on the other. All this came up for consideration before the Supreme Court in the case of Alom Extrusions Ltd. (supra). The Tribunal in the case at hand relied upon the said judgment. There is no reason to fault the order passed by the Tribunal. The decision of the Supreme Court in Alom Extrusions Ltd. (supra) applies to employees’ contribution as well as employer’s contribution.[Para 15]

    Thus, both employees’ and employer’s contributions are covered under the amendment to section 43B and the Alom Extrusions Ltd. judgment (supra). Hence the Tribunal was right in holding that payments thereof are subject to benefits of section 43B. Both the appeals are decided in favour of the assessee and against the revenue and are disposed of accordingly[Para 16]

    The following Honorable High Courts also have taken the same view as above on the question of allowability of Employees Contribution to PF and ESI under sec.43B of the Act.

  6. Sagun Foundry Pvt. Limited v. CIT, Kanpur (2017)78 taxmann.com 47 (Allahabad), Dec.21. 2016

  7. Spectrum Consultants India Pvt. Limited v. CIT, Banglore-III(2013) 34 Taxmann.com 20 (Karnataka HC)

  8. CIT, Circle-1, Kolkata v. Vijay Shree Ltd. Sep.06, 2011 (2014) 43 Taxmann.com 396 (Kol)

  9. CIT, Shamla v. Nipso Poly Fabriks Limited(2013) 30 taxmann.com 90(HP High Court)

  10. CIT-1, Chennai v. Rambal (P) Limited (2018) 96 taxmann.com 170( Madras HC)

Thus Majority of the Honorable High Court has accepted that late Payments of PF and ESI but before the due date under sec.139(1) shall be allowable and has not considered any difference between Employers Contribution and the Employees Contribution.

The effect of the above judgements appears to have been nullified by the Finance Act, 2021 wherein Explanation (5) to sec. 43B and Explanation to Sec.36(1)(va) were introduced.

Courts against the Assessee

CIT v. Gujarat State Road Transport Corporation, 41 taxmann.com 100 (Gujarat)

Where assessee did not deposit employees’ contribution to employees’ account in relevant fund before due date prescribed in Explanation to section 36(1)(va), no deduction would be admissible even though he deposits same before due date under section 43B

CIT v. Merchem Ltd, 61 taxmann.com 119 (Kerala)

In case of employee’s contribution, an assessee is entitled to get deduction of amount as provided under section 36(1)(va) only if amount so received from employee is credited in specified account within due date as provided under relevant statute.

Same court taking contrary view of its earlier decision- may be per incuriam order

  1. Bharat Hotels Limited reported on 410 ITR 417has some what taken the different view and allowed the deduction only in terms of Sec.36(1)(va) of the Act. The aforesaid order very respectfully be said to be an order where the Court has itself not considered the orders passed in earlier Years of the bench of the same strength. The Order may very respectfully be said to be per incuriam as the Court while disposing of the Same issue is duty bound to have reference and to consider the Judgements passed earlier by the Bench of the same strength and composition. The Honorable Apex courts in the following cases have talked of the said judicial discipline.

  2. State of Bihar v. Kalika Kuer alias Kalika Singh & others, (2003) 5 SCC 448

    “A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of coordinate jurisdiction which covered the case before it, in which case it must decide which case to follow; or when it has acted in ignorance of House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.”

  3. Siddharam Satlingappa Mhetre v. State of Maharashtra and Others, [AIR 2011 SC 312 : ( 2011) 1 SCC 694]

    “The analysis of English and Indian Law clearly leads to the irresistible conclusion that not only the judgment of a larger strength is binding on a judgment of smaller strength but the judgment of a co-equal strength is also binding on a Bench of Judges of co-equal strength…….In case there is no judgment of a Constitution Bench or larger Bench of binding nature and if the court doubts the correctness of the judgments by two or three judges, then the proper course would be to request Hon’ble the Chief Justice to refer the matter to a larger Bench of appropriate strength.”

Where two Views are possible

Even in a case where there are different views regarding the interpretation of a particular provision of the Act, the view favorable to the Assessee has to be applied. The Honorable Supreme Court in case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (S.C.) wherein it was held that when the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessse.

[Also see CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC), CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC), CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC), CED v. R. Kanakasabai [1973] 89 ITR 251 (SC) and Sun Export Corpn. v. Collector of Customs [1997] 6 SCC 564.].

Thus while processing the return of Income, the Department tries to exceed its power by making adjustment which are prima facie not covered in Sec. 143(1)(a) of the Act. The Solution for the Assessee than available to the Assessee is to file Appeal with CIT(A) and get the relief.


Similarly, the Assessing officer also feel pride in making the high pitched Assessment under Sec.144 of the Act and make the additions against the sprit and discipline of Sec.144 of the Act. The Courts have time and again given guidelines as to what considerations to be taken care while passing the ex parte Assessment order.

Sec. 144 of the Act, for better understanding is reproduced hereunder:

144. [(1)] If any person—

  1. fails to make the return required [under sub-section (1) of section 139] and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or

  2. fails to comply with all the terms of a notice issued under sub-section (1) of section 142 [or fails to comply with a direction issued under sub-section (2A) of that section], or

  3. having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143,

the [Assessing] Officer, after [shall, after giving the assessee an opportunity of being heard, make the assessment] taking into account all relevant material which the [Assessing] Officer has gathered, of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment :

[Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment :

Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.]

[(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.]

Honourable Courts on Assessment under Sec.144 of the Act.


    Aspect dealt in case of Mubarak Trading Co. v. CIT [2008] 174 Taxman 339 (Ker).

    Failure of any of the conditions mentioned in clauses (a) to (c) of section 144(1) need not always lead to best judgment assessment under section 144.

    For example, if an assessee fails to file return in time, but he produces entire books of account against the notice issued by the Assessing Officer, still assessment can be completed based on the book results and such assessment is certainly not a best judgment assessment under section 144. A best judgment assessment arises only when the Assessing Officer determines income based on materials gathered by him and not when assessment is made based on books of account submitted by the assessee.

    A best judgment assessment can arise even in case of income escaping assessment under section 147 because section 148 makes it clear that a return filed against notice issued under section 148 should be proceeded with as if it is a return under section 139. This means that in a proceeding initiated under section 147, the Assessing Officer can make a best judgment assessment if the books of account produced by the assessee are unacceptable. Even though word ‘or’ is used in clauses (a) to (c) of section 144, yet a best judgment assessment is called for only when there is cumulative failure of all conditions including failure to furnish his details of income and to prove same through his accounts and documents.


    Matter dealt in case of State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC).

    The mere fact that the material placed by the assessee before the assessing officer is unreliable does not empower the officer to make an arbitrary order. The power to make a best judgment assessment is not an arbitrary power.

    Kachwala Gems v. Joint Commissioner of income Tax, jaipur (2007) 158 taxmann.com 71 (SC)

    It is well-settled that in a best judgment assessment, there is always a certain degree of guess work. No doubt, the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment, and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to blame as he did not submit proper accounts.


    CIT v. Ranicherra Tea Co. Ltd. [1994] 207 ITR 979 (Cal.)

    In making a best judgment assessment, the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes. Although he is not bound by strict judicial principles, he should be guided by rules of justice, equity and good conscience.

    Dhakeshwari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC)

    …….., although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23(3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. CIT [1944] 12 393. In the instant case, the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the assessee to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result was that the assessee had not had a fair hearing.

    The estimate of the gross rate of profit on sales, both by the ITO and the Tribunal, was based on surmises, suspicions and conjectures. The Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills but did not show that statement to the assessee did not give him an opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It was not known whether the mills which had disclosed these rates were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the assessee, but it refused even to look at books and papers which assessee’s representative produced before the Accountant Member in his chamber. The assessment in this case and in the connected appeal, was above the figure of ` 55 lakhs and it was just and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub-Divisional Officer. Thus both the ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It was thus a fit case for the exercise of power under Article 136.


    Where there was no finding by the ITO that there had been any non-compliance with any of the notices mentioned in sub-clauses (a), (b) and (c) of section 144, the order of best judgment assessment should be struck down, even if there was valid service of notice under section 131 and there had been non-compliance with the terms of such notice – Mohini Debi Malpani v. ITO [1970] 77 ITR 674 (Cal.).


    The assessee will have to be given an opportunity of being heard and a right to question the correctness or the relevancy of the materials on the basis of which the ITO proposes to make the best judgment assessment-Dhanalakshmi Pictures v. CIT [1983] 144 ITR 452 (Mad.); T.C.N. Menon v. ITO [1974] 96 ITR 148 (Ker.).

    While making a best judgment assessment on the basis of comparable cases, the assessee must be apprised of those cases and given an opportunity to have his say in the matter – K. Baliah v. CIT [1965] 56 ITR 182 (Mys.).

    It is not open to Assessing Officer to make best judgment assessment under section 144, otherwise than, on basis of all relevant materials which he had gathered after giving an opportunity of hearing to assessee –Triyogi Narayan Singh v. CIT, Kolkata (2015) 60 Taxmann.com 351(Calcutta)
    Also refer First proviso to Sec.144- Proper show cause notice


    Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC).

    Kachwala Gems v. Jt. CIT [2007] 158 Taxman 71 (SC).

    The authority making a best judgment assessment must make an honest and fair estimate of the income of the assessee and though arbitrariness cannot be avoided in such an estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case.

    State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC).

    Though there is an element of guesswork in a ‘best judgment assessment’, it should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case. Though the section provides for a summary method because of the default of the assessee, it does not enable the assessing authority to function capriciously without regard to the available material.

    Commissioner of Income Tax v. Bhagat Steel and Forging P. Ltd. [2014] 52 taxmann.com 28 (Delhi)

    The best judgment assessment order under section 144 recorded that notices under section 143(2) were issued and served by affixture. Thereafter, questionnaire was issued alongwith notice under section 142(1), but no compliance was made. Another notice was sent at the address of the assessee-company, but there was no response. Addition of ₹ 90, lakhs was made on account of fresh investments as details with regard to the same were not available. The Assessing Officer noticed that there was increase in liabilities but he did not make any adjustment or addition on the said account. The loss return of ₹ 3.67 lakhs was thus subject to addition of ₹ 90 lakhs and the net income was assessed at ₹ 86.32 lakhs.

    On appeal, the Commissioner (Appeals) referred to the documents placed on record and the contention of the assessee that investment of ₹ 90 lakhs in the two sister concerns; could be easily explained. He observed that the payments were made by way of cheque or by bank transfer. The assessee had established sources in the form of secured loan from Bank, unsecured loan and advance for sale of land from unrelated and a third party. Accordingly, the addition was deleted on merits holding that the investment stands explained.

    On second appeal, the Tribunal indicted that the Departmental Representative had proceeded and argued on the basis that the Commissioner (Appeals) had annulled the assessment, which was factually incorrect. As noticed, the Commissioner (Appeals) examined merits and deleted the addition on merits.


    Pr. CIT v. IBILT Technologies Ltd. (2018) 98 Taxmann.com 255 (DHC)

    If there is fall in the gross profit ratio, reasons and grounds given by the respondent/assessee have to be examined objectively, fairly and in a non-partisan manner. Past results could be a good reason to conduct detailed verification, albeit would not be the only ground and reason to make addition by rejecting the books of account. Good and cogent reason why the financial results should be rejected has to be given. Books of account cannot be rejected as the respondent- assessee has suffered losses, where as in the immediate earlier year, profit was made. Fall in gross profit ratio could be due to various reasons, and cannot be the sole and only ground to reject the book results in entirety and frame best judgment assessment [see CIT v. Poonam Rani [2010] 326 ITR 223/192 Taxman 167 (Delhi), Action Electricals v. Dy. CIT [2003] 132 Taxman 640/[2002] 258 ITR 188 (Delhi)]. The reasoning given in the assessment order to compute income on hypothetical basis by applying gross profit ratio of 4% is completely fallacious, wrong and is contrary to well-settled law, as expounded vide judgments reported as CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC), Dhakeshwari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC) and Raghubar Mandal Harihar Mandal v. State of Bihar AIR 1957 SC 810.


    Swadeshi Polytex Ltd. v. ITO [1983] 144 ITR 171 (SC).

    If, for a frivolous reason, the chartered accountant declines to undertake the audit of a company’s accounts under a direction issued under section 142(2A), obviously the company could not be held responsible. There is neither default nor failure to comply with the direction issued under section 142(2A) on the part of the company so as to attract a best judgment assessment by invoking section 144(b)


Thus the Assessee of course against the arbitrariness of the Tax department, has to its disposal the security from the Judiciary and the arbitrary additions made are set aside. Still there must be some sort of accountability as to save the Assessee from the trouble of unjust additions being made by the department.


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