Wednesday, April 3, 2024

Appeal against Best Judgment Assessment & Income Escaping Assessment [Section 147]

Navigating the complexities of the income tax system, one may encounter various assessment procedures initiated by the Income Tax Department. Among these, the Best Judgment Assessment under Section 144 of the Income Tax Act stands out for its unique application. This mechanism is employed when an assessee fails to comply with the tax assessment process, necessitating an estimation of taxable income by the Assessing Officer based on the available information. Understanding the nuances of Best Judgment Assessment is crucial for taxpayers to ensure compliance and mitigate potential disputes.

What is Best Judgment Assessment?

Best Judgment Assessment entails the estimation of an assessee's taxable income by the Assessing Officer, utilizing the information and resources at hand. This form of assessment is typically invoked in instances where the assessee either does not cooperate in the assessment proceedings or if determining the correct profit based on the maintained books of accounts is infeasible.

This assessment is bifurcated into two distinct categories:

·         Compulsory Best Judgment Assessment

·         Discretionary Best Judgment Assessment

Compulsory Best Judgment Assessment

In certain specified scenarios, the Assessing Officer is mandated to conduct an assessment to the best of his judgment. These scenarios include:

·         Failure to file a valid return: This encompasses situations where the assessee has not filed the income tax return by the due date, failed to file a belated or updated return, or did not respond to a notice under Section 142 demanding the filing of the return.

·         Failure to produce evidence: If an individual, after submitting a return, does not comply with a notice under section 143(2) that requires their presence or the production of evidence and documents, a judgment-based assessment is warranted.

·         Failure to get the special audit or inventory valued: Non-compliance with a directive issued under Section 142(2A) necessitating an audit of accounts or valuation of inventory results in a best judgment assessment.

·         In case of a defective return: An assessee failing to rectify defects within the allowed timeframe can request the Assessing Officer for condonation of the delay. If the defects are rectified following the condonation, the return is deemed valid.

Discretionary Best Judgment Assessment

The Assessing Officer may opt for a best judgment assessment if he doubts the accuracy or completeness of the assessee's accounts, or if no consistent accounting method or standards have been applied by the assessee.

Time Limit for Completion of Best Judgment Assessment

The timeline for conducting a Best Judgment Assessment under Section 144 is within 12 months from the end of the assessment year in which the income first became assessable, applicable from the assessment year 2022-23 onwards. Notably, if a reference is made to a Transfer Pricing Officer (TPO), this period extends by an additional 12 months. Similarly, if a return is furnished under section 139(8A), the assessment order must be passed within 12 months from the end of the fiscal year in which such return was submitted.

Appeal against Best Judgment Assessment

An assessee dissatisfied with the assessment order under this provision has the right to appeal before the Commissioner of Income Tax (Appeals) or initiate an application for revision. This step ensures that taxpayers have a recourse to challenge the assessment if they believe it to be unjust or inaccurate.

In conclusion, the Best Judgment Assessment serves as a critical tool for the Income Tax Department to ensure tax compliance in cases of non-cooperation or inadequacy of information from the assessee. Taxpayers should be aware of the conditions triggering such assessments and the procedural aspects to safeguard their interests effectively

 Income Escaping Assessment [Section 147]: A Detailed Examination

Income Escaping Assessment under Section 147 of the Income Tax Act is a critical mechanism for correcting under-assessments or omissions in the taxation process. This provision allows the Assessing Officer (AO) to reassess previously unassessed incomes. However, specific conditions and procedural guidelines govern the application of this section to ensure fairness and transparency in its execution. Herein, we delve into the nuances of when and how re-assessment under Section 147 can be initiated.

Initiation of Re-assessment by the Assessing Officer

The AO is empowered to reassess an income if two primary conditions are met: (a) Existence of an income chargeable to tax that has escaped assessment for any assessment year; (b) Adherence to the procedural requisites specified in Sections 148 to 153.

Upon satisfying these conditions, the AO is entitled to reassess the income that has escaped assessment, regardless of whether the initiation process aligns perfectly with the prescribed procedure, provided that the discovery occurs during the re-assessment proceedings.

Criteria for Deeming Income as Escaped Assessment

Income is considered to have escaped assessment when the AO possesses information suggesting such a scenario. This includes information arising from:

·         Risk Management Strategies by the CBDT;

·         Audit objections;

·         Information received under international agreements;

·         Notifications under Section 135A;

·         Judicial orders necessitating action.

In cases involving search, survey, or requisition, specific circumstances automatically imply escaped income, such as initiation of a search under Section 132 or a survey under Section 133A.

Mandatory Notice for Filing Return of Income

Prior to issuing a notice under Section 148, the AO is required to conduct necessary enquiries, provide a hearing opportunity to the assessee, and decide on the appropriateness of proceeding under Section 147. The assessee must submit a return within three months from the notice date or within an extended period as permitted by the AO.

Conditions for Issuance of Notice

A notice under Section 148 is contingent upon the AO having information that suggests income has escaped assessment and obtaining prior approval from designated authorities, except in circumstances dictated by Section 148A(d).

Time Limitations for Issuing Notice

The timeframe for issuing a notice varies based on the nature of the escaped income:

·         Generally, no notice is issued after three years from the relevant assessment year's end.

·         For significant cases involving assets, transactions, or entries amounting to or likely to amount to Rs. 50 lakhs or more, notices can be issued up to ten years from the assessment year's end.

Assessee's Course of Action

Upon receiving a notice, the assessee is advised to cooperate with the AO, file a truthful income tax return, and actively participate in the assessment proceedings. An appeal can be filed against adverse orders.

Completion Timeline and Dropping of Re-assessment Proceedings

Re-assessment under Section 147 must conclude within 12 months from the financial year end in which the notice was served. Additionally, an assessee can request the dropping of re-assessment proceedings by demonstrating accurate initial assessments.

Legal Validity and Appeals

Notices, even if improperly served, attain validity if the assessee has participated in proceedings without raising timely objections. Aggrieved parties have the right to appeal against the reassessment order, ensuring a layer of judicial scrutiny over the reassessment process.