Best Judgment Assessment: Section 144 — Grounds to Challenge
Quick Answer
A best judgment assessment under Section 144 of the Income Tax Act is an ex-parte order passed by the Assessing Officer when the assessee fails to comply with notices, fails to file a return, or fails to get accounts audited under Section 44AB. The AO estimates income based on available material — and these estimates are almost always inflated because the assessee’s evidence and explanations are absent. The good news: a Section 144 order is fully appealable before CIT(A) under Section 246A, and the appellate authority has the power to set aside the order, admit additional evidence, and direct a fresh assessment. At Virtual Auditor, we regularly get Section 144 orders set aside on appeal by demonstrating that the assessee had reasonable cause for non-compliance and by presenting the substantive evidence that was not before the AO.
Definition — Section 144 (Best Judgment Assessment): Where any person fails to make the return required under Section 139(1) or Section 142(1)(i), or fails to comply with all the terms of a notice under Section 142(1), or fails to comply with a notice under Section 143(2), or having been required to get accounts audited under Section 44AB fails to do so, the Assessing Officer, after taking into account all relevant material, shall make the assessment of the total income or loss to the best of their judgment. The proviso mandates that before making the assessment, the AO must give the assessee an opportunity of being heard by issuing a show cause notice.
Definition — Best Judgment: The term ‘best judgment’ does not mean arbitrary estimation. The Supreme Court in Dhakeswari Cotton Mills Ltd v. CIT (1954) 26 ITR 775 (SC) held that the AO must make an honest and fair estimate on the basis of material available. The estimate must not be vindictive, capricious, or based on mere suspicion. The AO must exercise the judgment of a reasonable person acting judicially.
When Section 144 Is Invoked — The Four Triggers
Trigger 1 — Failure to File Return Under Section 139(1) or 142(1)(i)
If the assessee has not filed a return of income for the relevant assessment year — either within the due date under Section 139(1) or within the extended time allowed under a Section 142(1)(i) notice — the AO can proceed under Section 144. This is the most common trigger. The AO typically relies on information available from TDS returns (Form 26AS/AIS), Annual Information Statement, bank statements obtained under Section 133(6), and property transaction data from the registrar.
Trigger 2 — Non-Compliance with Section 142(1) Notice
Where the assessee has been served a Section 142(1) notice to produce accounts, documents, or furnish information, and fails to comply with all the terms of the notice, the AO may proceed to best judgment assessment. Partial compliance does not always save the assessee — the AO may still invoke Section 144 for the items where compliance was not made, though this is a challengeable position if substantial compliance was made.
Trigger 3 — Non-Compliance with Section 143(2) Scrutiny Notice
Where scrutiny proceedings have been initiated by issuing a Section 143(2) notice and the assessee fails to appear or provide the requested information, the AO completes the assessment under Section 144 based on available material. This typically occurs when the assessee stops participating mid-way through the scrutiny process — for instance, after initial responses, the assessee does not respond to subsequent questionnaires or does not attend hearings.
Trigger 4 — Failure to Get Tax Audit Under Section 44AB
Where the assessee is required to get their accounts audited under Section 44AB (turnover exceeding Rs 1 crore for business, Rs 50 lakhs for profession — with the Rs 10 crore threshold applicable if cash receipts and payments are within 5% of total) and fails to do so, the AO can proceed under Section 144. This trigger is independent of whether the return was filed — even if the return is filed without the tax audit report, the AO can invoke Section 144.
Mandatory Show Cause Notice — The Proviso to Section 144
The proviso to Section 144 states: “Provided that an opportunity of being heard shall be given to the assessee, 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 the AO’s judgment.”
This is a mandatory procedural requirement, not a discretionary one. The AO must issue the show cause notice and provide reasonable time to respond before passing the Section 144 order. An order passed without this show cause notice violates principles of natural justice and is liable to be set aside on appeal.
In practice, we have seen cases where the AO issues the show cause notice but allows only 2-3 days to respond, or issues the notice to an old address while the assessee has updated their address on the portal. Both situations form valid grounds for challenge.
Grounds to Challenge a Section 144 Best Judgment Assessment
Ground 1 — No Show Cause Notice or Inadequate Opportunity
If the AO failed to issue the mandatory show cause notice under the proviso to Section 144, or if the notice was not properly served (wrong address, not uploaded on the portal, inadequate time), the order violates natural justice. CIT(A) and ITAT have consistently set aside such orders.
Ground 2 — Non-Service of Underlying Notices
If the assessee can demonstrate that the Section 142(1) or 143(2) notices were not actually received — because they were sent to an old address, or the e-filing portal was not accessible, or there was a system glitch — the very basis for invoking Section 144 is undermined. The burden shifts to the Department to prove proper service of notices.
Ground 3 — Substantial Compliance Was Made
Where the assessee did comply with most requirements but missed one or two items, invoking Section 144 for the entire assessment is disproportionate. The AO should have completed the assessment under Section 143(3) based on the information provided, making additions only for the items where information was not furnished. Tribunals have held that minor non-compliance does not justify a full best judgment assessment.
Ground 4 — Arbitrary and Unreasonable Estimation
The AO’s estimate must be based on material available and must be honest and fair. Where the AO makes additions that are grossly disproportionate to the information available — for example, estimating income at 10 times the previous year’s returned income without any basis — the order is challengeable as arbitrary. The Dhakeswari Cotton Mills principle requires the AO to act judicially, not punitively.
Ground 5 — Available Material Not Considered
If the AO had the return of income (even if filed belatedly), Form 26AS showing TDS credits, AIR/SFT data, or bank statements obtained under Section 133(6), and did not consider this material while framing the best judgment assessment, the order is flawed. The AO is required to take into account all relevant material — not just the material that supports a higher income figure.
Ground 6 — Reasonable Cause for Non-Compliance
If the assessee can demonstrate reasonable cause for the non-compliance — serious illness, natural disaster, death in the family, migration abroad, genuine inability to access the e-filing portal — this mitigates the non-compliance and strengthens the case for setting aside the order. While reasonable cause does not prevent the AO from passing a Section 144 order, it strengthens the appeal before CIT(A) and supports a request for fresh assessment.
Expert Insight — CA V. Viswanathan, FCA, IBBI/RV/03/2019/12333
In our experience, the most effective strategy for challenging a Section 144 order is to seek a set-aside and remand rather than arguing the additions on merits at the appellate stage. When CIT(A) sets aside the Section 144 order and directs a fresh assessment, the assessee gets a full opportunity to present evidence and the AO is required to pass a speaking order after considering all submissions. This is preferable to asking CIT(A) to decide the additions on merits, because CIT(A) proceedings are not a substitute for a proper assessment hearing. The key to getting a set-aside order is demonstrating reasonable cause for non-compliance and showing that the assessee is now ready and willing to cooperate fully with the assessment proceedings.
Appeal Strategy — Section 246A Before CIT(A)
A Section 144 best judgment assessment is appealable before CIT(A) under Section 246A(1)(a). The appeal must be filed within 30 days of the date of service of the assessment order through the e-filing portal in Form 35. The appeal fee is: Rs 250 (income determined up to Rs 1 lakh), Rs 500 (income between Rs 1 lakh and Rs 2 lakhs), or Rs 1,000 (income exceeding Rs 2 lakhs).
Admission of Additional Evidence — Rule 46A
In a Section 144 case, Rule 46A of the Income Tax Rules permits CIT(A) to admit additional evidence if the assessee was prevented by sufficient cause from producing the evidence before the AO, or if the AO passed the order without giving sufficient opportunity. Since the very nature of a Section 144 order is that the assessee did not participate, CIT(A) generally admits additional evidence in such cases — provided the assessee demonstrates readiness to cooperate.
ITAT Appeal — Second Appellate Forum
If CIT(A) upholds the Section 144 order or reduces additions only partially, a further appeal lies before the ITAT under Section 253. The ITAT has co-terminus powers with CIT(A) and can set aside the order with a direction for fresh assessment. For the complete ITAT appeal procedure, see our Income Tax Appeal Services Guide.
Summary — Key Takeaways
Section 144 best judgment assessment is the AO’s response to non-compliance — but it is not the final word. The order must be preceded by a show cause notice (mandatory proviso). The AO must exercise honest and fair judgment, not arbitrary estimation. Every Section 144 order is appealable before CIT(A), where additional evidence can be admitted under Rule 46A. The most effective strategy is to seek a set-aside and remand for fresh assessment. At Virtual Auditor, we handle Section 144 challenges from appeal drafting through CIT(A) and ITAT representation. Contact us at +91 99622 60333 or visit our pricing page for fee details.
Frequently Asked Questions
What is a best judgment assessment under Section 144?
A best judgment assessment under Section 144 is an ex-parte assessment made by the AO when the assessee fails to file a return, fails to comply with notices under Section 142(1) or 143(2), or fails to comply with Section 44AB tax audit requirements. The AO determines income based on available material using their best judgment. The estimate must be honest and fair — not arbitrary or punitive — as held by the Supreme Court in Dhakeswari Cotton Mills Ltd v. CIT.
Can I appeal against a Section 144 best judgment assessment?
Yes. A Section 144 order is appealable before CIT(A) under Section 246A within 30 days of the order. At the appellate stage, you can produce all evidence and arguments that were not presented before the AO. CIT(A) has the power to set aside the assessment and direct a fresh assessment after giving you an opportunity to be heard.
What is the difference between Section 144 and Section 143(3) assessment?
Section 143(3) is a regular scrutiny assessment where the assessee participates, provides evidence, and the AO passes the order after considering submissions. Section 144 is an ex-parte assessment passed without the assessee’s participation due to non-compliance. In Section 144, the AO relies on available material and best judgment, often resulting in significantly higher additions.
Can the AO pass a Section 144 order without giving an opportunity of hearing?
No. The proviso to Section 144 mandates that the AO must issue a show cause notice giving the assessee an opportunity to explain why the assessment should not be completed on a best judgment basis. An order passed without this show cause notice violates principles of natural justice and is liable to be set aside.
What are the grounds to challenge a Section 144 best judgment assessment?
Key grounds include: no show cause notice before passing the order; non-service of underlying notices (Section 142(1)/143(2)); the assessee made substantial compliance; the AO’s estimation is arbitrary and not based on available material; available material (return, Form 26AS, bank statements) was not considered; and the assessee had reasonable cause for non-compliance.
How much does it cost to challenge a Section 144 best judgment assessment?
Appeal before CIT(A) including drafting and representation: from Rs 25,000. ITAT appeal if CIT(A) upholds the order: from Rs 40,000. Setting aside with fresh assessment representation: from Rs 35,000. Contact Virtual Auditor at +91 99622 60333 for a case-specific quote.
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