Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live, central. Empowers (and in stated defaults requires) the Assessing Officer to make an assessment to the best of his judgment where the assessee fails to file the return (139(1)/(4)/(5)), fails to comply with a 142(1) notice or a special-audit direction under 142(2A), or fails to comply with a 143(2) notice; the assessment must be made after giving the assessee an opportunity (except where a 142(1) notice has already been issued).
FA 2026: No substantive amendment by the Finance Act, 2026; best-judgment assessment in faceless cases is routed through section 144B.
A. SECTION COMMENTARY
Section 144 is the AO's response to non-cooperation or absence of reliable material. On the specified defaults, the AO, after giving the assessee a hearing (the proviso dispenses with a fresh hearing only where a 142(1) notice has already been issued), determines the total income or loss to the best of his judgment and the sum payable. Best-judgment assessment is not a licence for arbitrariness: it must be an honest and fair estimate grounded in such material as is available and in the AO's knowledge of local conditions and the trade, and must not be capricious, vindictive or punitive.
Two strands run through the law. First, an element of guesswork is inevitable in a best-judgment assessment and the assessee who, by his own default, deprives the AO of accounts cannot complain that the estimate is not mathematically precise — provided it is honest and reasonable. Second, the estimate must have a rational nexus to the available material; a 'best judgment' that is a mere arbitrary figure, unsupported by any basis, is liable to be set aside. The two principles are reconciled in the leading Supreme Court decisions below.
B. STATUTORY POSITION (verbatim text)
Reproduced from the local Act (base text to the Finance Act, 2025).
144. (1) If any person—
(a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) or an updated return under sub-section
(8A) of that section, or
(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or
(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment :
Provided that such opportunity shall be given by the Assessing Officer 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 his judgment :
Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.
(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year. Power of Joint Commissioner to issue directions in certain cases.
C. AUTHORITIES
The classic Supreme Court authorities define the boundaries of the best-judgment power — fair estimate with a rational basis, free of arbitrariness.
Held: Even in a best-judgment assessment the Assessing Officer must make a fair and honest estimate based on material and cannot act arbitrarily or capriciously; he must not make a 'pure guess' without reference to any evidence or material, and the assessee must be given a reasonable opportunity and be apprised of the material used against him. Natural justice applies.
Significance: Foundational: best judgment is judgment, not arbitrariness; it must rest on some material and observe fair procedure.
State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC)
Court: Supreme Court of India.
Held: 'Best judgment' must be an honest and fair estimate of the proper figure of assessment and, though there is an element of guesswork, it must not be arbitrary; there must be a reasonable nexus between the available material/surrounding circumstances and the estimate. The power to assess on best judgment is not an arbitrary power.
Significance: The 'rational nexus' test — additions in a best-judgment assessment must bear a reasonable relation to the material; mechanical extrapolation without basis is bad.
Kachwala Gems v. JCIT (2007) 288 ITR 10 (SC)
Court: Supreme Court of India.
Held: In a best-judgment assessment there is necessarily some guesswork; while the authority should try to make an honest and fair estimate and not act 'totally arbitrarily', the assessee who has not maintained proper accounts cannot demand that the estimate be made with mathematical precision. The rejection of books under section 145(3) and a reasonable estimate of profit was upheld.
Significance: Balances Dhakeswari/Velukutty: a defaulting assessee cannot insist on exactitude; an honest, reasonable estimate stands even if not precise.
Held: While a best-judgment assessment involves some guesswork, it must not be a 'wild' or capricious one; the estimate should be based on a rational basis and on the material and circumstances of the case (there, on the value of materials supplied by the contractee in a works-contract estimate).
Significance: Reiterates the rational-basis requirement and guides estimation in contract/turnover-based assessments.
Held: In best-judgment assessment the assessing authority may make a fair estimate and need not confine itself to the precise transactions detected; once suppression is established, a reasonable extrapolation is permissible provided it is not arbitrary and bears a nexus to the detected material.
Relevance: Frequently applied in income-tax best-judgment cases for the proposition that a reasonable estimate, including extrapolation from detected suppression, is valid if rationally based.
2. The classic foundations of best-judgment assessment
CIT v. Laxminarayan Badridas (1937) 5 ITR 170 (PC)
Court: Privy Council.
Held: In making a best-judgment assessment the officer must not act dishonestly or vindictively or capriciously; he must make a fair estimate, and though he is not bound by strict rules of evidence, he must base the assessment on some material and his honest judgment, having regard to local knowledge and the circumstances of the assessee.
Significance: The fountain-head of best-judgment jurisprudence in India; the 'fair estimate, not capricious' standard later affirmed by the Supreme Court in Dhakeswari, Velukutty and Kachwala Gems.
Raghubar Mandal Harihar Mandal v. State of Bihar (1957) 8 STC 770 (SC)
Held: Best-judgment assessment must not be arbitrary; while the authority may use local knowledge and estimate, it cannot make a 'pure guess' without reference to any evidence or material. There must be something more than mere suspicion to support the assessment.
Significance: Reinforces the rational-basis requirement; an estimate must rest on material, not surmise.
State of Orissa v. Maharaja Shri B.P. Singh Deo (1970) 76 ITR 690 (SC)
Held: The power to make a best-judgment assessment is not arbitrary; the assessing authority must disclose the basis of the estimate, and a mere enhancement without any reason or material is unsustainable. The estimate must be founded on some relevant material and a process of reasoning.
Significance: Requires a disclosed, reasoned basis for the best-judgment figure; an ipse dixit enhancement is bad.
3. Rejection of books — defects and the resulting estimate
Awadhesh Pratap Singh v. CIT (Allahabad High Court)
Court: Allahabad High Court.
Held: It is difficult to catalogue exhaustively the defects that justify rejection of accounts under section 145(3) (leading to a best-judgment assessment under section 144); whether the absence of a stock register or cash memos is material depends on the nature of the business. The absence of a stock register may not per se render the accounts false, but where it is coupled with other factors — missing vouchers for expenses/purchases and low/abnormal profits — a legitimate inference that the accounts are incomplete or incorrect can be drawn, justifying rejection and estimation.
Significance: A practical, much-cited statement of when books may be rejected and a best-judgment estimate made; bridges sections 145(3) and 144. (Confirm the precise reported citation — reported around 201/210 ITR.)
4. Duty to examine the accounts; clear finding before rejection
S.N. Namasivayam Chettiar v. CIT (1960) 38 ITR 579 (SC)
Court: Supreme Court of India.
Held: The Assessing Officer must consider the material placed before him; if, on such consideration, he is of the opinion that the correct profits and gains cannot be deduced from the accounts, he is obliged to have recourse to the proviso to (the then) section 13 — i.e. to reject the accounts and make a best-judgment computation. The opinion is not arbitrary but must follow from an examination of the accounts.
Significance: Early Supreme Court authority linking rejection of accounts to a genuine, considered opinion that true profits cannot be deduced — the gateway to a section 144 best-judgment assessment.
Bastiram Narayandas Maheshri v. CIT (Bombay High Court)
Court: Bombay High Court.
Held: Before rejecting the books and resorting to best-judgment assessment, the Assessing Officer must record a clear finding that the system of accounting followed by the assessee is such that correct profits/income cannot be deduced from it; on the facts (a manufacturer failing to produce day-to-day manufacturing records), rejection of the books and a best-judgment assessment were justified.
Significance: Stresses the need for a recorded, reasoned finding of defect before rejection; a best-judgment assessment cannot rest on an unexplained rejection. (Confirm the precise reported citation.)
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the local Act (base text amended up to the Finance Act, 2025), with the publisher footnote apparatus and amendment-marker brackets removed; Finance Act, 2026 changes are flagged in the commentary. Citations are stated as reported; Tribunal / AAR / High Court orders are flagged. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.
CHAPTER XIV — PROCEDURE FOR ASSESSMENT
Section 144 — Best Judgment Assessment
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live, central. Empowers (and in stated defaults requires) the Assessing Officer to make an assessment to the best of his judgment where the assessee fails to file the return (139(1)/(4)/(5)), fails to comply with a 142(1) notice or a special-audit direction under 142(2A), or fails to comply with a 143(2) notice; the assessment must be made after giving the assessee an opportunity (except where a 142(1) notice has already been issued).
FA 2026: No substantive amendment by the Finance Act, 2026; best-judgment assessment in faceless cases is routed through section 144B.
A. SECTION COMMENTARY
Section 144 is the AO's response to non-cooperation or absence of reliable material. On the specified defaults, the AO, after giving the assessee a hearing (the proviso dispenses with a fresh hearing only where a 142(1) notice has already been issued), determines the total income or loss to the best of his judgment and the sum payable. Best-judgment assessment is not a licence for arbitrariness: it must be an honest and fair estimate grounded in such material as is available and in the AO's knowledge of local conditions and the trade, and must not be capricious, vindictive or punitive.
Two strands run through the law. First, an element of guesswork is inevitable in a best-judgment assessment and the assessee who, by his own default, deprives the AO of accounts cannot complain that the estimate is not mathematically precise — provided it is honest and reasonable. Second, the estimate must have a rational nexus to the available material; a 'best judgment' that is a mere arbitrary figure, unsupported by any basis, is liable to be set aside. The two principles are reconciled in the leading Supreme Court decisions below.
B. STATUTORY POSITION (verbatim text)
Reproduced from the local Act (base text to the Finance Act, 2025).
144. (1) If any person—
(a) fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) or an updated return under sub-section
(8A) of that section, or
(b) fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or
(c) having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of section 143, the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment :
Provided that such opportunity shall be given by the Assessing Officer 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 his judgment :
Provided further that it shall not be necessary to give such opportunity in a case where a notice under sub-section (1) of section 142 has been issued prior to the making of an assessment under this section.
(2) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year. Power of Joint Commissioner to issue directions in certain cases.
C. AUTHORITIES
The classic Supreme Court authorities define the boundaries of the best-judgment power — fair estimate with a rational basis, free of arbitrariness.
1. Principles of best-judgment assessment
Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC)
Court: Supreme Court of India.
Held: Even in a best-judgment assessment the Assessing Officer must make a fair and honest estimate based on material and cannot act arbitrarily or capriciously; he must not make a 'pure guess' without reference to any evidence or material, and the assessee must be given a reasonable opportunity and be apprised of the material used against him. Natural justice applies.
Significance: Foundational: best judgment is judgment, not arbitrariness; it must rest on some material and observe fair procedure.
State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC)
Court: Supreme Court of India.
Held: 'Best judgment' must be an honest and fair estimate of the proper figure of assessment and, though there is an element of guesswork, it must not be arbitrary; there must be a reasonable nexus between the available material/surrounding circumstances and the estimate. The power to assess on best judgment is not an arbitrary power.
Significance: The 'rational nexus' test — additions in a best-judgment assessment must bear a reasonable relation to the material; mechanical extrapolation without basis is bad.
Kachwala Gems v. JCIT (2007) 288 ITR 10 (SC)
Court: Supreme Court of India.
Held: In a best-judgment assessment there is necessarily some guesswork; while the authority should try to make an honest and fair estimate and not act 'totally arbitrarily', the assessee who has not maintained proper accounts cannot demand that the estimate be made with mathematical precision. The rejection of books under section 145(3) and a reasonable estimate of profit was upheld.
Significance: Balances Dhakeswari/Velukutty: a defaulting assessee cannot insist on exactitude; an honest, reasonable estimate stands even if not precise.
Brij Bhushan Lal Parduman Kumar v. CIT (1978) 115 ITR 524 (SC)
Court: Supreme Court of India.
Held: While a best-judgment assessment involves some guesswork, it must not be a 'wild' or capricious one; the estimate should be based on a rational basis and on the material and circumstances of the case (there, on the value of materials supplied by the contractee in a works-contract estimate).
Significance: Reiterates the rational-basis requirement and guides estimation in contract/turnover-based assessments.
CST v. H.M. Esufali H.M. Abdulali (1973) 90 ITR 271 (SC) — cognate (sales tax)
Held: In best-judgment assessment the assessing authority may make a fair estimate and need not confine itself to the precise transactions detected; once suppression is established, a reasonable extrapolation is permissible provided it is not arbitrary and bears a nexus to the detected material.
Relevance: Frequently applied in income-tax best-judgment cases for the proposition that a reasonable estimate, including extrapolation from detected suppression, is valid if rationally based.
2. The classic foundations of best-judgment assessment
CIT v. Laxminarayan Badridas (1937) 5 ITR 170 (PC)
Court: Privy Council.
Held: In making a best-judgment assessment the officer must not act dishonestly or vindictively or capriciously; he must make a fair estimate, and though he is not bound by strict rules of evidence, he must base the assessment on some material and his honest judgment, having regard to local knowledge and the circumstances of the assessee.
Significance: The fountain-head of best-judgment jurisprudence in India; the 'fair estimate, not capricious' standard later affirmed by the Supreme Court in Dhakeswari, Velukutty and Kachwala Gems.
Raghubar Mandal Harihar Mandal v. State of Bihar (1957) 8 STC 770 (SC)
Held: Best-judgment assessment must not be arbitrary; while the authority may use local knowledge and estimate, it cannot make a 'pure guess' without reference to any evidence or material. There must be something more than mere suspicion to support the assessment.
Significance: Reinforces the rational-basis requirement; an estimate must rest on material, not surmise.
State of Orissa v. Maharaja Shri B.P. Singh Deo (1970) 76 ITR 690 (SC)
Held: The power to make a best-judgment assessment is not arbitrary; the assessing authority must disclose the basis of the estimate, and a mere enhancement without any reason or material is unsustainable. The estimate must be founded on some relevant material and a process of reasoning.
Significance: Requires a disclosed, reasoned basis for the best-judgment figure; an ipse dixit enhancement is bad.
3. Rejection of books — defects and the resulting estimate
Awadhesh Pratap Singh v. CIT (Allahabad High Court)
Court: Allahabad High Court.
Held: It is difficult to catalogue exhaustively the defects that justify rejection of accounts under section 145(3) (leading to a best-judgment assessment under section 144); whether the absence of a stock register or cash memos is material depends on the nature of the business. The absence of a stock register may not per se render the accounts false, but where it is coupled with other factors — missing vouchers for expenses/purchases and low/abnormal profits — a legitimate inference that the accounts are incomplete or incorrect can be drawn, justifying rejection and estimation.
Significance: A practical, much-cited statement of when books may be rejected and a best-judgment estimate made; bridges sections 145(3) and 144. (Confirm the precise reported citation — reported around 201/210 ITR.)
4. Duty to examine the accounts; clear finding before rejection
S.N. Namasivayam Chettiar v. CIT (1960) 38 ITR 579 (SC)
Court: Supreme Court of India.
Held: The Assessing Officer must consider the material placed before him; if, on such consideration, he is of the opinion that the correct profits and gains cannot be deduced from the accounts, he is obliged to have recourse to the proviso to (the then) section 13 — i.e. to reject the accounts and make a best-judgment computation. The opinion is not arbitrary but must follow from an examination of the accounts.
Significance: Early Supreme Court authority linking rejection of accounts to a genuine, considered opinion that true profits cannot be deduced — the gateway to a section 144 best-judgment assessment.
Bastiram Narayandas Maheshri v. CIT (Bombay High Court)
Court: Bombay High Court.
Held: Before rejecting the books and resorting to best-judgment assessment, the Assessing Officer must record a clear finding that the system of accounting followed by the assessee is such that correct profits/income cannot be deduced from it; on the facts (a manufacturer failing to produce day-to-day manufacturing records), rejection of the books and a best-judgment assessment were justified.
Significance: Stresses the need for a recorded, reasoned finding of defect before rejection; a best-judgment assessment cannot rest on an unexplained rejection. (Confirm the precise reported citation.)
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced from the local Act (base text amended up to the Finance Act, 2025), with the publisher footnote apparatus and amendment-marker brackets removed; Finance Act, 2026 changes are flagged in the commentary. Citations are stated as reported; Tribunal / AAR / High Court orders are flagged. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.