Section 144 of the Income Tax Act: Best Judgment Assessment Explained

Section 144 of the Income Tax Act deals with what is known as a best judgment assessment. This happens when the taxpayer does not cooperate with the income tax department—either by not filing a return, ignoring notices, or failing to keep proper books of accounts. In such cases, the Assessing Officer (AO) does not have reliable data from the taxpayer and instead estimates the taxpayer’s income based on his “best judgment.”

Why This Provision Exists in Tax Law

The purpose of Section 144 is simple: ensure that taxpayers do not escape their tax liability just because they refuse to cooperate. Without this power, the tax department would be helpless in cases of non-compliance. Best judgment assessment gives the AO authority to use available data, market information, and past records to arrive at a fair (but often higher) estimate of taxable income.

Applicability of Section 144

Best judgment assessment can be applied in several situations:

Cases Where Taxpayer Fails to File Return

If a taxpayer does not file their income tax return even after being reminded or served notices, the AO can proceed under Section 144.

Cases Where Taxpayer Fails to Comply With Notices

If notices are issued under Section 142(1) or Section 143(2) and the taxpayer ignores them, the AO can move to the best judgment assessment.

Cases Where Books of Account Are Rejected

Even when a return is filed, if the books of accounts are incomplete, unreliable, or incorrect, the AO can reject them and estimate income under Section 144.

Process of Best Judgment Assessment

The law has laid down a clear process to ensure fairness.

Issue of Notice by Assessing Officer

Before making a best judgment assessment, the AO issues a notice to the taxpayer, giving them a final chance to explain or provide documents.

Opportunity of Being Heard

The taxpayer has the right to be heard. They can appear before the AO, submit explanations, or provide missing records.

Passing of Assessment Order

After considering all available information (and whether the taxpayer responded or not), the AO passes the assessment order, estimating income and calculating tax payable.

Powers of Assessing Officer Under Section 144

The AO has wide powers under this section:

• Estimating income based on available information, such as bank statements, TDS details, or third-party reports.
• Using past records, market data, or third-party details to calculate income. For example, if a shopkeeper shows unusually low profits, the AO may compare it with profits earned by similar businesses in the same locality.

Rights of the Taxpayer

Even in a best judgment assessment, the taxpayer has important rights.

• Right to be heard: Before finalizing the order, the AO must give the taxpayer an opportunity to explain their side.
• Right to appeal: If the taxpayer disagrees with the order, they can file an appeal before the Commissioner of Income Tax (Appeals) and further to higher authorities if needed.

Consequences of Best Judgment Assessment

A Section 144 order can be costly for the taxpayer.

• Higher tax liability: Since income is estimated, the AO often makes conservative (and higher) calculations.
• Penalties and interest: Non-compliance may also attract penalties under Sections 270A and interest under Section 234A/B/C, increasing the overall burden.

Difference Between Section 144 and Section 143(3)

• Section 143(3) is a regular assessment, where the taxpayer provides all information, books of accounts, and the AO makes a fair determination.
• Section 144 is a best judgment assessment, where the AO estimates income due to non-compliance.

In short, Section 143(3) is based on cooperation and voluntary compliance, while Section 144 is based on forced estimation.

Example of Best Judgment Assessment

Consider a businessman who fails to file his return despite receiving a notice. The AO checks GST data and bank transactions, estimates income at ₹50 lakh, and issues a tax demand under Section 144.

In another case, a company submits books that show extremely low profits, but the AO finds mismatches in purchase records. He rejects the books and estimates income based on past profit margins, leading to a higher tax order.

Common Mistakes Leading to Section 144 Proceedings

• Ignoring income tax notices: Many taxpayers assume notices can be ignored, but this almost always leads to Section 144 action.
• Not maintaining proper books of accounts: Incomplete or manipulated records often get rejected, pushing the AO to estimate income.

Key Takeaways for Taxpayers

• Filing returns on time and complying with notices is the easiest way to avoid Section 144.
• Always maintain proper books and respond quickly to queries from the tax department.
• Transparency and cooperation save time, money, and stress compared to an estimation-based order.