Best judgment assessment.

271(1)

If any person—

• (a) fails to make the return required under sub-section 263(1) and has not made a return or a revised return under section 263(4) or (5) or an updated return under section 263(6);
• (b) fails to comply with all the terms of a notice issued under section 268(1) or fails to comply with a direction issued under section 268(5);
• (c) having made a return, fails to comply with all the terms of a notice issued under sub-section 270(8), the Assessing Officer, after taking into account all relevant materials which he 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.

271(2)

The Assessing Officer before making an assessment under sub-section (1) shall, subject to the provisions of sub-section (3), serve a notice on the assessee to show cause, on a date and time to be specified in the notice, as to why assessment should not be completed to the best of his judgment.

271(3)

It shall not be necessary to give the opportunity referred to in sub-section (2) in a case where a notice under section 268(1) has been issued prior to the making of an assessment under this section.

Explanation

Section Summary:

This section of the income tax law deals with best judgment assessment. It applies when a taxpayer fails to comply with certain requirements, such as filing a return, responding to notices, or providing necessary information. In such cases, the Assessing Officer (AO) can estimate the taxpayer's income and tax liability based on available information and their judgment, after giving the taxpayer an opportunity to be heard.

Key Changes:

1. Expanded Scope of Non-Compliance: The section now explicitly includes failure to file updated returns under Section 263(6) as a trigger for best judgment assessment.
2. Streamlined Process: The AO is no longer required to issue a show-cause notice (as per Section 271(2)) if a notice under Section 268(1) has already been issued. This reduces procedural delays.

Practical Implications:

• For Taxpayers: If you fail to file returns, respond to notices, or provide required information, the AO can estimate your income and tax liability without your input. This could lead to higher tax assessments.
• For Businesses: Non-compliance with tax notices or filing requirements can result in arbitrary assessments, increasing the risk of disputes and penalties.
• For Compliance Processes: Taxpayers must ensure timely filing of returns and responses to notices to avoid best judgment assessments, which are often less favorable.

Critical Concepts:

• Best Judgment Assessment: This is an estimation of income and tax liability by the AO when the taxpayer fails to provide necessary information. It is based on available data and the AO's discretion.
• Show-Cause Notice: A notice issued to the taxpayer to explain why a best judgment assessment should not be made. Under Section 271(3), this step is skipped if a prior notice under Section 268(1) has been issued.

Compliance Steps:

1. File Returns on Time: Ensure all returns, including revised and updated returns, are filed within the prescribed deadlines.
2. Respond to Notices: Promptly comply with notices issued under Sections 268(1), 268(5), or 270(8).
3. Maintain Records: Keep accurate records of income, expenses, and other financial details to support your tax filings and responses to notices.

Examples:

• Scenario 1: A taxpayer fails to file their income tax return for the year. The AO issues a notice under Section 268(1), but the taxpayer does not respond. The AO then proceeds with a best judgment assessment, estimating the taxpayer's income based on bank transactions and previous returns.
• Scenario 2: A business receives a notice under Section 270(8) to provide additional documents but ignores it. The AO uses available data, such as industry benchmarks, to estimate the business's income and tax liability.

This section emphasizes the importance of timely compliance to avoid arbitrary assessments and potential disputes.