Faculty of Law, Jamia Millia Islamia, New Delhi

Question Paper, May, 2020

Subject : Tax Law-I

B.A.LL.B. VI Semester Regular/Self Finance.

Important Instructions:

1. All questions are compulsory and carry equal marks.

2. Words limits for each answer is 1000 to 1500.

3. Answer should be submitted by email to eakramuddin@jmi.ac.in latest by 4:00pm on 26.05.2020.

Unit- I

Que. 1. Define the word 'Income' and 'Agricultural Income' under Income Tax Act 1965 with the
help of decided cases.

Unit- II

Que. 2. What do you mean by 'Income from Salaries' Explain the concept of diverson of income and
application of income by citing leading cases.

Unit- III

Que. 3. Discuss the concept of 'Profits and Gains from Business or Profession' and distinguish
between capital expenditure and revenue expenditure. Complete your answer with the help of leading
cases.

Unit- IV

Que. 4. Explain the idea of Clubing of Income of other person in Assessee's total income. Complete
your answer with the ruling of cases Batta Kalyani v. CIT (1985) 154 ITR 59 and J.M. Mokashi v.
CIT (1994) 207 ITR 252 (Bom). with regard to the clubing of income.

Unit- V

Que. 5. What do you mean by Assessment and Best Judgment Assessment?

Name – Shimran Zaman
Course – BA LLB (Hons.) Self Finance
Examination Roll no. – 17BLWS159
Class Roll no. – 52
ANSWERS

UNIT-I

Ans1. INCOME

Income is a periodically monetary return with some sort of a regularity. It may be recurring in the
nature. It may be broadly defined as the true increase in the amount of the income which comes to a
person during a fixed period of time. It has to be noted that it is by no means exhaustive rather can
be deemed to be as inclusive. An income can contain all the receipts in the form of cash /any kind.

Section 2(24) of the Income Tax Act, 1961 defines the term Income in great detail. It mentions that
an Income includes:

1. Profits & Gains

2. Dividends
3. Voluntary contributions received by a trust
4. Perquisites in the hands of an employee
5. Any special allowance or benefit
6. City compensatory allowance/dearness allowance
7. Any benefits or perquisites to a Director
8. Capital Gains
9. Any benefits or perquisite to a representative assessee
10. Any sum chargeable u/s 28,41 & 59
11. Insurance profit
12. Winnings form lottery
13. Employees contribution towards provident fund

The word ‘income’ includes not only those things that come within the ambit of section 2(24) of the
Income Tax Act, 1961 but shall also include, within its import, such things that the word signifies
according to its natural or its literal meaning. The definition under the Act simply specifies certain
artificial categories to the natural connotation of the term income. On the other hand, it enumerates
some of the things which ordinarily cannot be considered as an income but statutorily and legally to
be treated in such a manner.

In Universal Radiators v. C. I. T AIR 1993, the Supreme Court of India held that the term ‘income’
ordinarily means any means of earning, gain or profit on a regular basis, periodically or even daily,
whatever that source of income may be and in whatever manner it might have been achieved.

In Kamakshya Narain Singh v. C. I. T. 1935, it was held that an income may not necessarily be
recurring in nature, though generally an income comprehends that character.
It is also obvious that a person cannot produce and income out of himself and thereby needs a
connection with an outside agency to have an income. Thus, in Kikabhat Premchand v.
Commissioner of Income Tax 1953, Supreme Court held that the trading account cannot be credited
for the income tax purposes by the market value of trading stock withdrawn from the business for
the proprietor’s personal use. In such a situation, the books shall be credited merely by the cost of
the stock withdrawn by the owner.

Thereby, certain general principles have been emerged to make concept of income more certain.
These are:

1. Regularity of Income: Income is generally periodical in nature coming with some sort of
regularity from definite sources. However, the nature of recurring income is not an absolute
necessity thereof. An income may not necessarily be regular in nature at all times but it is
expected to be so generally.
2. Form of Income: The payment of income may not always be in the form of cash. It may also
be in the form of kind of service, such as in the form of property or any such right which has
a monetary value. When an income is in kind like privileges, then the value of that perquisite
shall be taken as income and calculated as per rules prescribed under the Income Tax Act,
1961.
3. Illegal Income: Income earned by any unethical or illegal means shall also be considered as
income under the Act and is entitled to be taxed just like as any legal income.
4. Application of Income: Where an income is applied to discharge an obligation after such
income reaches the assessee, it is an application of income and is taxable. However, where
there is a diversion of income before it reaches the assessee, it is not treated as income of
the assessee.
5. Connection with outside agency: A person cannot have income without outside agency. A
person cannot make income out of oneself.
6. Disputed Title: Income tax assessment cannot be held up or postponed merely because of
existence of a dispute regarding the title of income. The recipient is, therefore, chargeable to
tax, though there may be rival claims to the sources of income.
7. Personal Gifts: Gift received by a person on ones’s birthday, marriage etc. is not the income
of the assessee. However, gift received from unrelated person on or after September 1, 2004
shall be chargeable to income tax if the sum of money received as gift exceeds Rs.25,000/-.
8. Contingent Income: Contingent income which may or may not rise is not chargeable to
income tax until such contingency actually occurs and income accrues to the assessee.
9. Money received by woman from husband for private or household expenses: Money
received by a woman from her husband for her any of her spending shall not be deemed as
her income. Though, any property acquired with that money or savings shall be the capital
asset belonging to the woman as held in R.B. N. J Naidu v. C. I. T. 1956.
10. Lumpsum Receipt: A lumpsum receipt is also income if it is in the nature of revenue receipt.
For instance, if a person receives arrears of salary in a lumpsum amount, it would be his
income.
11. Compensation for Death: Any compensation for death on account of fatal accident or fatal
injuries sustained by the deceased would not be an income.
12. Compensation from the Insurance Company: Compensation received from an insurance
company against the injuries sustained in a road accident is not an income and thus, not
 chargeable for tax. It is only the compensation on behalf of the loss that was suffered by the
person.

AGRICULTURAL INCOME

Under the Indian Constitution, Central Government has no power to levy tax on the agricultural
income. Only the State Government can collect tax on the agricultural income. Section 10(1) of the
Income Tax Act, 1961 states that the Central Government cannot collect taxes from the agricultural
income but from 1975 onwards, taxes can be levied from the non-agricultural income which may be
an outcome from the agricultural land. Thereby, it becomes extremely necessary to determine what
exactly is agricultural income.

Section 2(1A) of the Income Tax Act, 1961 defines agricultural income. Under this section,
Agricultural Income means:

a. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes
b. Any income derived from such a land by
a. agricultural operations including the processing of any agricultural produce,
b. raised or received as the rent in kind or any process that is ordinarily employed
by the cultivator or receiver of rent-in-kind so as to render it fit for the market,
c. sale of such a produce
c. Any income derived from any of the buildings owned and occupied by the assessee,
receiving rent or revenue from land, by carrying out the agricultural operations

Thus, the three basic conditions which must be kept in mind to understand whether a particular item
of income maybe treated as agricultural income are:

1. That the income produced has a relation to land

2. That such a land is situated within the territory of India
3. That the land used is solely for the agricultural purposes

In C. I. T. v. Raja Benoy Kumar Sahas Roy 1957, the Supreme Court explained ‘agriculture as
cultivation of field and is restricted to cultivation of land in its strict sense. It was further observed
that activities that do not involve basic operations such as tilling, sowing, planting, digging weeding
etc. would not be considered agriculture merely because they have connection to the land. Thereby,
breeding and rearing of livestock, dairy-farming, butter and cheese making and poultry farming etc.
would not be considered as agricultural processes.

Also, in C. I. T. v. Kamakshya Narain Singh, it was decided that interest on arrears of agricultural rent
cannot be treated as agricultural income.

UNIT-II
Ans2. INCOME FROM SALARIES

The term ‘salary’ has been used in section 15 of the Indian Tax Act 1961 in the broad way possible to
include not only the salaries which are due and paid to the employee but also every amountwhich is
paid and the amount which is due.

Section 15 of the Indian Tax Act is discussed how the income shall be chargeable to income-tax
under the head "Salaries"-

a. any salary due from an employer or a former employer to an assessee in the previous year,
whether paid or not;
b. any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer though not due or before it became due to him;
c. any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, if not charged to income-tax for any earlier previous year.

In order to avoid the same income being used and taxed again and for the removal of the doubts,
section 15 has provided that any salary paid in an advance is included in the total income of any
person for any previous year, it shall therefore not be included again in the total income of the
person when that salary becomes due.

Salary that is due to or received by the assessee or by any third party on his behalf from the present
or past employee is chargeable under the term ‘salaries’. However, the amount or loan advanced by
the employer is not chargeable to income tax.

Section 17(1) provides that “Salary” includes:

i. wages
ii. any annuity or pension
iii. any gratuity
iv. any fees, commission, perquisites or profits in lieu of or in addition to any salary or
wages
v. any advance of salary
vi. Any payment received by an employee in respect of any period of leave not availed of by
him.
vii. Taxable portion of annual accretion: Where the employee is a member of a Recognised
Provident Fund, the amount contributed by the employer in this fund in excess of 12 per
cent of the salary of the employee and interest credited on the amount of the fund in
excess of the prescribed rate of interest is to be included in the salary income.
viii. Taxable portion of transferred balance: When an unrecognised provident fund is
recognised for the first time, the balance in the unrecognised provident fund is known as
“Transferred balance”. The employer’s share (contribution in unrecognised provident
fund and interest on employer’s share) is included in the salary income for income-tax
purposes at the time of such transfer.
ix. The contribution made by the Central Government in the previous year, the account of
any employee under a pension scheme referred to in Section 80CCD
Thus, the salary may be paid by the employer either voluntarily or under a contractual obligation.
Thus, the salary for the notice period payable by the employer is also taxable. Salary and wages and
signify the payments for the services rendered to an employee.

DIVERSION OF INCOME: Where by any obligation, when an income which is diverted by another
overriding title of other person to the income before it reaches to the assessee, it is known as the
diversion of income and it shall not at all be taxable.

APPLICATION OF INCOME: Where an income is required to be applied so as to discharge an

obligation after such an income reaches the assessee, it shall be taxable and be deemed tobe as
application of income.

To understand whether a payment should be regarded as diversion of income or application of

income, it is very important to determine whether payment has reached the assessee as his own
income or not. In C. I. T. v. Sunil j. Kinariwala 2003, the Supreme Court has observed that the
determinative factor is the nature and the effect of assessee’s obligation in regard to the amount in
the question. Where such an obligation shall entitle another third person to receive that amount
before the assessee could lay to receive the same as his income, there shall be diversion of income
by an overriding title. But where after the receipt of income by the assesee, the same is passed on to
a third person in discharge of an obligation, that would be a case of application of income and not
diversion of income.

Few instances of diversion of income are as follows:

o In Raja Bejoy Singh Dudhuria v. C. I. T. 1993, it was held that the income that was received
from the property charged under a court’s decree with maintenance allowance to a
dependent and spent on maintenance would amount to diversion of income.
o If an amount is credited to the assessee towards a certain fund in order to return it to the
consumer, it was held in Poona Electric Supply Co. Ltd. v. C. I. T. 1965 that it would result to
the diversion of income.
o In C. I. T. v. Harivallabhdas Kali Das & Company 1960, It was held that a part of the
commission given up under a contract before it accrued shall result in diversion of income.
o An amount paid by the widow to the minor sons out of their share of income upon the death
of a partner when his share devolved upon his widow and minor sons was said to be
considered as diversion of income in C. I. T. v. Mohinidevi 1988.

Thereby, from the cases discussed above, one can decipher that if there is an overriding obligation
which creates a charge and diverts the income to someone else, then the deduction can be made of
the amounts so paid.

Few instances of the application of the income are as follows:

o Voluntary deductions such as the salary of an employee as discussed in Smyth v. Stretton,

shall be deemed as an application of income.
o In Bell v. Gribble 1903, it was held that the application of income would also constitute
compulsory deductions from the salary of an employee, such as compulsory provident fund.
o In P. K. Mitter v. C. I. T. 1961, it was held that the dividend assigned by the shareholder to his
wife for the future, while the shares remain in the name of the assessee, it shall be deemed
as application of income.
o In The Performing Right Society Ltd. v. C. I. T 1977, it was held that the royalties payable by
the licensee to the appellant society for the issue of the licences granting permission for
performing right in musical works, out of the receipts were deducted the expenses and also
such other sums as in the discretion of the General Council of the Society and distributed to
the rest of the member, it would be called as application of income.
UNIT-III

Ans3. CONCEPT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION

Business arises out of various commercial transactions between two or more persons. A business
cannot take place with oneself. A business includes trade, commerce and manufacturing processes.
Section 2(13) of the Act defines business. The word ‘business is defined in a very broader way
covering every facet of occupation carried on by a person with a view to earn profits.

Profession is an occupation requiring either purely an intellectual skill or a manual skill which is
controlled by an intellectual skill of the person Section 2(36) of the Income Tax Act, 1961 states that,
‘profession includes vocation’. Vocation means the work or profession in which an individual is more
or less regularly employed, but not necessarily, in order to earn livelihood and which needs certain
special fitness or special duty.

Income chargeable under ‘Profits and gains of Business or profession’, shall be computed in
accordance with cash or mercantile system of accounting. Section 28(i) of Income Tax Act, 1961, says
that the incomes can be considered chargeable to income-tax under ‘Profits and Gains of Business
and Profession’ if the profits and gains of any profession or business were carried on by the assessee
at any time during the previous year. The income tax is not concerned with legality or illegality of the
nature business. Also, it an be inferred that the it shall not necessarily mean that the business should
have been carried on for the whole previous year but can also be carried on for a very limited period
of time as well. The activities which constitute the business or the profession should be that of the
assessee. This also means that the taxability does not only depend upon the ownership of the
business or profession.

In C. P. Pictures v. C. I. T. 1962, the Supreme Court held on the facts of the case that the income
which the assessee received from the lease of the cinema house and its equipments shall be deemed
as a business income.

DISTINCTION BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

The Income Tax Act 1961 does not defines ‘capital expenditure’ and ‘revenue expenditure’, but it is
very important to know the difference between the two, so that one can understand in order for
computing the taxable income of the assessee, the revenue expenditure is deducted therefrom and
not the capital expenditure. The following tests can be applied for this:

1. Test of Enduring Benefit: In Artherton v. British Insulated and Helby Cables, 1924, Viscount
Cave LC formulated this test which was followed by the Supremen Court of India in various
judgements. This test species that when an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or advantage for the enduring benefit of a
trade, there is very good reasonfor treating such expenditure as property attributable not to
the revenue but to the capital.
In Empire Jute Company v. C. I. T. (1980), The Supreme Court observed that if the advantage
consists merely in facilitating the assessee’s business to be carried on more efficiently or
more profitably while leaving the fixed capital untouched the expenditurewould be on
revenue account even though the advantage may endure for an indefinite future. The test of
enduring benefit is not free from difficulties. There may be cases where expenditure, even, if
 incurred for obtaining an advantage of enduring benefit be on the revenue account and the
test of enduring benefit may break down.

2. Test of Fixed or Circulating Capital: An expenditure which acquires a capital asset is capital
expenditure, if it acquires stock in trade, then it is revenue expenditure. In C. I. T. v. Jalan
Trading Company Pvt. Ltd., it was observed by the Supreme Court that these are mutually
exclusive and have to be applied to the facts of each particular case in the manner indicated
therein.
In R. B. Seth Moolchand Sugan Chand v. C. I. T. 1972, the expenditure incurred for acquiring
a mining right for 20 years was held to be a capital expenditure.
In M. A. Jabbar v. C. I. T. 1949, the expenditure upon the right to pick and carry tendu leaves
from a forest area by a bidi manufacturer was held to be revenue expenditure.

Examples of Capital Expenditure:

In Assam Bengal Cement Company Ltd. v. C. I. T. 1995, annual payment made by the lessee of
limestone quarries to the Government who were the lessor in consideration of the latter’s entering
into certain Government which ensured to the lessee elimination of competition during the period
of lease was held to the capital expenditure.

In Swadeshi Cotton Mills Co. Ltd. v. C. I. T. 1967, compensation that was payable for beach of
contract to acquire capital assets was held to be capital expenditure.

In Sultanpur Sugar Works Ltd. v. C. I. T. 1963, it was held that the cost of shifting a plant to another
place would be deemed as capital expenditure.

Quarry lease rent paid by assessee for acquiring right to excavate granite on lease for ten years was
held to be capital expenditure in Enterprising Enterprises v. C. I. T. 2004.

Examples of Revenue Expenditure:

In C. I. T. v. Piem Hotels Ltd. 2005, it was held that the replacement of carpets, napkins and other
toiletries in a hotel business shall be considered as revenue considered as they not be replaced very
frequently.

In C. I. T. v. Tata Sponge Iron Ltd. 2004, Expenditure incurred by the assesseee company on
construction of railway siding, which belonged to the Government, for easy movement of raw
materials and finished goods is allowable for revenue expenditure.

Expenditure on the bonus shares shall be revenue expenditure as decided in C. I. T. v. General

Insurance Corporation 2006.

In Honda Siel Cars India Ltd. v. C. I. T. 2006, it was held that expenditure that is incurred on sale
promotion and holding seminars for a new model is a revenue expenditure.

Payment made in lump sum by an assessee company doing entertainment business to a film star by
virtue of an agreement for obtaining his services for 120 days a year for next years was held to be
revenue expenditure in Amitabh Bachchan Corporation Ltd. v. C. I. T. 2006.
UNIT-IV

Ans4. An assessee is generally taxed in respect of his own income, but sometimes in some
exceptional circumstances, the basic principle is shifted and that assessee may be taxed as well in
respect of income which legally and actually belongs to somebody else. According to the section 60
to 64 of the Income Tax Act, 1961, a person is liable to pay tax on his own income as well as the
income belonging to others, enclosure of such kind of income is known as clubbing of income.

Normally, a person is taxed only in respect of the income earned by him. However, in certain special
cases and situations, the income of other person is included, i.e., clubbed in the taxable income of
the taxpayer and in such a case he/she will be liable to pay the tax in respect of his own income and
as well as the income of other person too and the income which is included is known as the deemed
income. Thereby, the situation in which income of other person is included in the income of the
taxpayer is called as clubbing of income. For instance, the income of a minor child is clubbed with
the income of his/her parent.

Section 60 specifies the transfer of the income without the transfer of the asset. Thus, the income
from the asset would only be taxable in the hands of the transferor if the below mentioned
conditions are satisfied:

1. The taxpayer shall be owning an asset

2. The ownership of that asset would not have been transferred by him
3. The income gathered from the asset shall be transferred to any other person under a
settlement or an agreement

For instance, if A owns a debenture that is worth Rs. 1000,000 annually of a company at an interest
of Rs. 1000,000. On April 1st 2005, he then transfers the interest income to B, without transferring
the ownership of the debentures. Even though, during 2005-2006, the interest of Rs. 100,000 is
received by B but still it will be taxable in the hands of A.

Section 61 mentions about the revocable transfer of the assets. A revocable transfer means that the
transferor of the assets assumes certain rights to re-acquire such asset or income from such an
asset, either wholly or in parts at any time in the future. The following conditions have to be satisfied
in order for the applicability of section 61:

1. An asset needs to be transferred under revocable transfer

2. The transfer for this purpose would include any agreement or any settlement
3. Any income from such kind of an asset would be taxable in the hands of the transferor and
not the transferee

Section 64(1)(ii) mentions the renumeration from any kind of business or profession in which in
which the spouse has a substantial interest. The following conditions will make this section
applicable:

1. If the spouse of an individual receives any salary or fees from his/her business or profession
or any such concern
2. The individual contains certain interest in such a concern
3. The renumeration that is paid to the spouse would not be due to any technical or
professional knowledge of the spouse
For example, if X has a substantial interest in a company and Mrs. X is employed by that company
without any such technical or professional qualification to justify that renumeration. Then, the salary
income of Mrs. X shall be taxable in the hands of X.

In J.M Mokashi v. C. I. T. (2004), the facts of the case were that the assessee was a practicing
physician and a cardiologist. His wife was employed under him as his accountant as well as a
receptionist. During the period of accounting, the assessee was paying a sum of Rs. 28,100 as an
income to his wife. The following amount was included by the income tax officer in the income of
assessee byt applying the provisions of section 64(1)(ii) of the Act. The first appeal was rejected due
to which the assessee appealed in the tribunal where it was referred to a special bench due to to the
conflicting decisions of the tribunal. Many contentions that was put begore the special bench were:

1. The word ‘concern’ being used in section 64(1)(ii) that did not include the business being
distinguished from profession.
2. Substantial interest appearing in section 64(1)(ii) referred only to a proportion of interest
and not the whole interest.
3. The assessee had set forth that the possession of the technical qualification by the spouse
does not mean that she should hold a degree of the competent authority in any particular
technical subject.

The tribunal thereby rejected these contentions and held that the spouse of the assessee neither
had possessed any technical or professional qualification nor was she paid for any such technical or
professional services rendered by her. Admittedly, she had passed first year from Arts of the Bombay
University and thus, that was her only qualification. She was employed by her husband, in this case
the assessee, as receptionist-cum-accountant and was paid a salary for that employment. In such a
case, it is not only difficult but also impossible to hold that she possessed any kind of a technical or a
professional qualification which is necessary to bring her within the proviso. That being so, the
provision to section 64(1)(ii) is thereby not applicable to her and, as such, the assessee is not entitled
to get the benefit thereof to bring her the income out of the purview of the clubbing provision
contained in section 64(1)(ii).

Reliance was even placed on the verdict of the Andhra Pradesh High Court in Batta Kalyani v. C. I.
T. (1985), where it was held that the harmonious construction of the two parts of the provision
would be that if a person possesses any kind of technical or professional knowledge and the income
is solely attributable to the application of such a technical or professional knowledge and
experience, the requirements for the application of the proviso shall be satisfied, although the
person concerned may not possess any qualification issued by a recognised body. It was further held
that it is enough for the purposes of the provision if the recipient of the salary possesses the
attributes of these technical or professional qualifications, in the sense that he has got expertise in
such a profession or technique. If by the use of such expertise in the profession or the technique, the
person concerned earns salary, then the latter part of the proviso shall also be satisfied.
UNIT-V

Ans5. ASSESSMENT

Whenever the amount that is paid by the assessee falls short of the aggregate of tax and interest as
a foresaid, the amount that is paid shall be first adjusted towards the interest payable and that
balance, if any, should be adjusted towards the tax that is payable. Thereby, every person before
submitting his incomes under the section 139 or section 142 or section 153A and all the other
sections therein must make a self-assessment of the income and after taking into the account the
amount of the tax, if any, already that is paid under the provisions of the Act, thus pay the self-
assessment tax, if it is payable. It is thereby mandatory for that assessee to pay the interest that is
payable upto the date of the filing the return for any of the delay in filing the return or any other
default or delay in payment of the advance tax, before furnishing and completing the return.

Section 140A (1) of the Income Tax Act, 1961 states that “where any tax is payable on the basis of
any return required to be furnished under section 115WD or section 115WH or section
139 or section 142 or section 148 or section 153A or, as the case may be, section 158BC, after taking
into account-

i. the amount of tax, if any, already paid under any provision of this Act;
ii. any tax deducted or collected at source;
iii. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax
paid in a country outside India;
iv. any relief of tax claimed under section 90A on account of tax paid in any specified territory
outside India referred to in that section; and
v. any tax credit claimed to be set off in accordance with the provisions of  section
115JAA or section 115JD,

the assessee shall be liable to pay such tax together with interest payable under any provision of this
Act for any delay in furnishing the return or any default or delay in payment of advance tax, before
furnishing the return and the return shall be accompanied by proof of payment of such tax and
interest as such.

PROCEDURE FOR ASSESSMENT

The following are the ways by which an Assessing Officer can make the assessment:

1. Summary Assessment, i.e., under section 143(1), it constitutes that the assessment can be
made on the basis of return of income.
2. Scrutiny Assessment, i.e., on the basis of return of income and thereby taking further
evidence as prescribed under section 143(3).
3. And thirdly, Best Judgement Assessment under Section 144.

Section 142 of the Indian Tax Act, 1961 says that an enquiry can be made before the procedure of
assessment is followed. The enquiry can be constituted and made in the following ways as dpecified
in section 142:

1. Giving notice to the assessee to submit returns, produce accounts, documents etc.
2. Making inquiry and giving away opportunity to the assessee
3. Giving direction to the assessee to get his accounts audited
In U. P. State Handloom Corporations Ltd. v. C. I. T 2000, it was held that any mechanical and
perfunctory order directing special audit would thereby be liable to be quashed.

The Assessing Officer may make a reference to a Valuation Officer to estimate for the purposes of
assessment or reassessment, including fair market value of any asset, property or investment and
submit a copy of report to him. Such a reference can be made whether or not he is satisfied about
the correctness or completeness of the accounts of the assessee. The Assessing Officer may, on
receipt of the report from the Valuation Officer and after giving the assessee an opportunity of being
heard, take into account such report in making the assessment or reassessment according to section
142A.

BEST JUDGEMENT ASSESSMENT

The best judgement assessment is an ex-parte assessment made by the Assessing Officer under
section 144 or 145 to the best of his judgement in certain circumstances mentioned therein. In the
circumstances mentioned in section 144, the assessing officer is bound to make such an assessment.
On the other hand, in the circumstances mentioned in section 145, the Assessing Officer may make
following assessment such as:

Compulsory Best Judgement Assessment: Section 144 provides that if any person:

a. Fails to make the return required under section 139(1) and has not made a return or revised
under section 139(4) or section 139(5)
b. Fails to comply with all the terms of a notice issued under section 142(1) or fails to comply
with a direction issued under section 142(2A)
c. Having made a return, fails to comply with all terms of a notice issued under section 143(2)

The Assessing Officer after taking into account all relevant material which the Assessing Officer has
gathered, shall make the assessment of the total income or loss to the best of his judgement and
determine the sum payable by the assessee on the basis of such assessment.

The Best Judgement Assessment can only be made after giving the assessee an opportunity of being
heard. Such an opportunity shall be thereby given by giving notice to the assessee to show a cause
why the assessment should not be completed to the best judgement. However, the provisions of
section 144 are deemed to be mandatory in nature. Even if there is one of the defaults mentioned in
section 144 on the part of the assessee, the Assessing Officer shall be bound to make assessment to
the best of his judgement.

In C. I. T. v. Segu Buchiah Setty 1970, it was held that best judgement assessment is mandatory to
made for any defaults under section 144.

In State of Kerala v. C. Velukutty 1966, it was thereby held that “judgement is a faculty to decide
matters with wisdom truly and legally. Judgement does not depend upon the arbitrary caprice of a
judge, but on settled and invariable principle of justice. Though there is an element of guess work in
best judgement assessment, it shall not be a wild one, but shall have a reasonable nexus to the
available material and the circumstances of each case.”

In Brij Bhushan Lal Parduman Kumar v. C. I. T. 1978, it was held that a best judgement can be made
only when the return is not signed and thereby verified as such.