Best Judgement Assessment

Section 121 of the Income Tax Ordinance, 2001, allows the Commissioner to make what is termed “best judgement” assessment. This power was also to be found in the predecessor legislation (Section 63 of the repealed Income Tax Ordinance, 1979). Best judgement assessment is to be made based on any available information or material and to the best of judgement of the Commissioner.

When to make best judgement assessment
The Commissioner can make best judgement assessment under section 121 of the Income Tax Ordinance, 2001, under the following situations:
Failure to file return upon notice under subsections (3) or (4) of section 114
Subsections (3) and (4) of section 114 empower the Commissioner to issue a notice to any person who (in his opinion) is required to file a return but who has failed to do so to furnish such return within the stipulated period. A failure to comply notice under subsections (3) or (4) of section 114 brought section 121(1) (ab) into operation and consequent upon, the Commissioner can make best judgement assessment. However, best judgement assessment under section 121 cannot be framed in a situation when notice under section 114(4) was issued to the taxpayer.

Failure to furnish a return under section 143
In case the master of a ship or non-resident owner or charterer of the ship liable for tax under section 7 of the Income Tax Ordinance, 2001, failed to furnish a return under section 143, this failure to furnish a return within the stipulated period under section 143 brings section 121(1) (b) into operation and consequent upon; the Commissioner can make best judgement assessment.

Failure to furnish a return under section 144
In case a non-resident owner or charterer of an aircraft liable for tax under section 7, or an agent authorized by the non-resident person for this purpose, failed to furnish a return under section 144, this failure to furnish a return within the stipulated period under section 144 brings section 121(1) (b) into operation and consequent upon; the Commissioner can make best judgement assessment.

Failure to furnish the statement under section 116
Subsection (1) of section 116 empowers the Commissioner to issue a notice to any person who (in his opinion) is required to file a wealth statement but who has failed to do so, i.e. to furnish such statement within the stipulated period, this failure to comply notice under subsection (1) of section 116 brings section 121(1) (c) into operation and consequent upon, the Commissioner is empowered to make best judgement assessment.

Failure to produce accounts, documents and records for the purpose of audit or determination of income

If a person has been selected for audit under Section 177 of the Income Tax Ordinance, 2001, but fails to produce before the Commissioner accounts, documents and records required to be maintained under section 174, or any other relevant document or evidence that may be required by him for the purpose of audit or making an assessment of income and determination of tax due thereon, such failure to produce accounts, documents and records required for the purpose of audit or assessment of income and determination of tax due thereon brings section 121(1) (d) into operation and the Commissioner is empowered to make best judgement assessment and the assessment treated to have been made on the basis of return under section 120 or revised return under section 122(3) filed by the taxpayer shall be of no legal effect. It means deemed assessment order under Section 120 stands nullified or cancelled by virtue of making a fresh assessment of the taxable income of the taxpayer under Section 121(1) (d).

Prior to the amendment, i.e. “the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect” brought about in Sections 121 and 177(10) through Finance Act, 2010, Section 121(1) (d) did not apply to cases where the return of total income had been filed and did not envisage a second assessment order as held by the Honorable Lahore High Court Lahore in Case No: I.T.R.No.41/2011 (Commissioner Inland Revenue (Legal) Versus Commissioner Inland Revenue (Appeal), etc.) dated 12.11.2012.

Basis of best judgement assessment
Where a taxpayer’s books of accounts are accepted along with other records, there can be no ground for making a best judgement assessment. It is well-known that the best judgement assessment has to be on an estimate, which must be related to some evidence or material and it must be something more than mere suspicion. In other words, an element of guesswork is bound to be present in best judgement assessment, although it must have a reasonable nexus to the available material and the circumstance of each case. Volume of the business, the conduct of the dealer, past records and similar facts are some conditions that could be the basis for a best judgement assessment. The Commissioner must make what he honestly believes to be a fair estimate of the proper figure of assessment and, for this purpose, he must take into consideration such materials, including the taxpayer’s circumstances, knowledge of previous returns and all other matters which the Commissioner thinks will assist him in arriving at a fair and proper estimate.

Show cause notice under section 121
Section 121 does not specifically provide for providing an opportunity of being heard to the person before making best judgement assessment. However, as held by the superior Courts, the best judgement assessment can only be made after giving the taxpayer an opportunity of being heard in accordance with the principles of natural justice . Such opportunity shall be given by issuance of notice by way of a show cause as to why the assessment should not be completed to the best of the judgement.

Best judgement assessment order
After affording an opportunity of being heard, the Commissioner shall make best judgement assessment order under section 121, which is an appealable order under section 127 of the Income Tax Ordinance, 2001. As soon as possible, after making an assessment under section 121, the Commissioner shall issue the assessment order to the taxpayer stating:
(a) Taxable income;
(b) Amount of tax due;
(c) Amount of tax paid, if any; and
(d) Time, place and manner of appealing the assessment order.

Time limitation for best judgement assessment
Best judgement assessment could only be made for the last five completed tax years due to the time limitation stipulated in sub-section 3 of section 121 of the Ordinance.

Whereas in terms of proviso to sub-section 5 of section 114, notice for furnishing of a return of income under section 114(4) of the Income Tax Ordinance, 2001, can be issued for one or more of the last ten completed tax years to a person who has not filed return of income for any of the last five tax years.

However, prior to the Finance Act, 2018, in case of failure to file return in response to notice issued, best judgement assessment could only be issued within five years of the end of the tax year to which it related.

In this way, though notice for filing of return could be issued for the last ten completed years, in case of non-filing of returns, best judgement assessment could only be made for the last five completed tax years due to the time limitation stipulated in sub-section 3 of section 121 of the Ordinance.

In order to remove this anomaly, a proviso has been added in sub-section 3 of section 121 whereby a best judgement assessment can be made within two years from the end of the tax year in instances where notice calling for furnishing of return of income is issued in respect of one or more of the last ten completed tax years in terms of proviso to sub-section 5 of section 114 of the Income Tax Ordinance, 2001.

An analysis of best judgement assessment
The expression of assessment has a wide scope within the purposes of the Ordinance whether the said assessments made are correct or not. Therefore, any assessment made would not essentially mean an assessment correctly or properly but would signify all assessment made or purported to have been made under the said Ordinance. Basically, assessment is estimation for an amount assessed while paying income tax. It is a compulsory contribution that is required for the support of a government.
In a best judgement assessment, the Commissioner (IR) should really base the assessment on his best judgement i.e. he must not act dishonestly or vindictively or capriciously. Section 121 provides for compulsory best judgement assessment in cases of non-cooperation on the part of the taxpayer or when the taxpayer is in default regarding providing of required books, documents and record.

Conclusion
A general understanding of the procedure shows that the best judgement assessment procedure has given wide discretionary powers to the Commissioner to assess in the instances discussed above. Tax assessment being a difficult area of work, it is imperative that the Commissioner should be provided with adequate powers for encountering tax-evaders. The Commissioner (IR) has been given wide powers in that regard. It also aids in honest tax disclosures so as to avoid the rising concerns of tax evasion.

The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at bilal.hassan@fbr.gov.pk