Section 144 of the Income Tax Act: A Comprehensive Guide

Understanding Section 144: Best Judgment Assessment

What is Section 144 of the Income Tax Act?

Understanding income tax concepts can be challenging, especially when dealing with specific sections like Section 144 (Income Tax Act). This provision, known as the Best Judgment Assessment, is invoked when a taxpayer fails to comply with certain requirements. 

Section 144 of the Income Tax Act allows the Assessing Officer to make an assessment to the best of their judgment when the taxpayer fails to furnish necessary information. This process is used when the tax authorities do not receive adequate details to complete the assessment in the regular course. The Best Judgment Assessment is based on available data and the officer’s judgment to estimate the taxpayer’s income and tax liability.

Historical Context and Evolution of Section 144

Originally designed to address non-compliance, Section 144 has evolved to handle instances where taxpayers are uncooperative or fail to submit accurate information. Over time, amendments have aimed to make the process more transparent, especially with the introduction of Section 144B of the Income Tax Act, which outlines faceless assessment procedures.

When is Section 144 Invoked?

Circumstances Triggering a Best Judgment Assessment

An Assessing Officer (AO) can invoke Section 144 under the following situations:

1. Non-filing of Returns

If you do not file your income tax returns despite receiving a notice, the AO may initiate a Best Judgment Assessment.

2. Incomplete or Inaccurate Returns

Submitting returns with incomplete or incorrect information can prompt the officer to assess your income based on their discretion.

3. Failure to Cooperate with Tax Authorities

If you do not respond to notices, fail to provide requested documents, or do not attend hearings, the officer may proceed with an assessment based on available information.

4. Insufficient Evidence Provided by the Taxpayer

If the evidence you submit does not substantiate your claims, the officer may estimate your income using their judgment.

The Best Judgment Assessment Process

Assessing Officer’s Powers and Discretion

When the Assessing Officer (AO) uses Section 144 of the Income Tax Act, they can make a Best Judgment Assessment if you don’t comply with their requests or provide necessary information. The AO will estimate your income using information from various sources, including third-party information, and its discretion. 

But this decision should be fair and based on evidence. The rules in Section 144B of the Income Tax Act help keep this process transparent, especially in faceless assessments.

Determining Tax Liability under Section 144

Once Section 144 is invoked:

• You’ll receive a notice from the Assessing Officer (AO) asking why they shouldn’t proceed with a Best Judgment Assessment. This step might be skipped if you’ve already received a notice under Section 142(1).
• You can submit any missing documents, explain your side, or clear up any confusion.
• If the AO isn’t satisfied with your response or if you don’t respond, they will complete the assessment based on the information available.
• The AO will then send you an order detailing your tax liability. You’ll receive a demand notice for payment if you owe additional tax.

The Role of Evidence and Documentation

Providing comprehensive documentation can significantly impact the assessment. Documents like financial statements, investment proofs, and previous returns help establish a clear picture of your income. 

The AO will look at the documents to decide your income and tax. If you give complete and accurate information on time, you reduce the chance of an unfavorable assessment. Even after the assessment, if you have proof that wasn’t considered, you can bring it up during an appeal.

Communication with the Assessing Officer

It’s important to keep the communication open with the AO:

• Respond quickly to their notices to avoid the assessment.
• If anything is unclear, ask for more details.
• Explain any genuine reasons for delays or missing documents, like illness or lost papers, and provide proof.
• Getting help from a tax advisor or stock advisory services can make this easier and improve your chances of a fair assessment

Time Limits and Procedures

Time Limits for Completing a Section 144 Assessment

The time to begin an assessment under Section 144 depends on the assessment year: 

Assessment Year	Time Limit to Start Assessment
2017-18 or earlier	Within 21 months from the end of the assessment year
2018-19	Within 18 months of the end of the fiscal year
2019-20	Within 12 months from the end of the assessment year
2020-21	Within 18 months of the end of the fiscal year
2021-22	Within 9 months from the end of the assessment year
2022-23 onwards	Within 12 months from the end of the fiscal year

Notice Issuance and Response Procedures

If your assessment falls under Section 144, you will receive a notice from AO under Section 142(1)requesting you to file your return or submit required details, which can include statements of assets and liabilities even if not reflected in your accounts. Responding with accurate documents and clarifications helps avoid unfavorable assessments.

Consequences of a Section 144 Assessment

Potential Penalties and Interest

Failure to file returns or providing inaccurate details can lead to penalties under Section 144. Interest may also be charged on unpaid tax amounts.

Impact on Future Tax Assessments

Once an assessment under Section 144 is made, it may influence future evaluations, particularly if similar discrepancies are observed.

Protecting Yourself from a Section 144 Assessment

Maintaining Proper Documentation

Keep meticulous records of financial transactions, income proofs, and investments. This practice helps provide accurate information when required.

Tips for Tax Compliance and Cooperation

Filing returns on time, responding to notices, and cooperating with tax authorities help reduce the risk of being assessed under Section 144.

Seeking Professional Tax Advice

Consulting with experts in stock advisory services and tax planning can guide you in maintaining compliance. They can help address income tax basics and guide you through complex income tax concepts.

Challenging a Best Judgment Assessment

Grounds for Challenging an Assessment

You can challenge a best judgment assessment if you believe it is incorrect or unfair. The assessment must only be made after allowing you to be heard. You can appeal under Section 246A or request a revision under Section 246.

The Appeal Process

File an appeal with the Commissioner of Income Tax (Appeals) within 30 days of receiving the assessment order. Provide all relevant documents and explanations to support your case. If your appeal is rejected, you can escalate it to the Income Tax Appellate Tribunal, then the High Court, and finally the Supreme Court.

Seeking Legal Representation

Tax professionals and legal experts can represent you during appeals, ensuring that your perspective is clearly presented.

Conclusion: Key Takeaways and Best Practices

Understanding what is income tax and keeping up with income tax basics can help you avoid complications under Section 144 of the Income Tax Act. Additionally, to steer clear of such complexities, maintain clear documentation, respond to notices promptly, and seek professional assistance when needed. Staying compliant helps you avoid penalties and maintain a positive tax record.

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