Section 144 Best Judgment Assessment: How to Challenge an Ex-Parte Order

Few things unsettle a taxpayer more than receiving an assessment order they never saw coming. A Section 144 best judgment assessment is exactly that - the Assessing Officer determines your client's income unilaterally, without their participation. The resulting demand can be wildly inflated, based on assumptions rather than actual books of account.

For Chartered Accountants, these cases are both frustrating and full of opportunity. Frustrating because the client often shows up after the damage is done. Full of opportunity because best judgment orders are, by their very nature, vulnerable to challenge - especially when the AO has cut procedural corners.

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What Is a Best Judgment Assessment Under Section 144?

Section 144 of the Income Tax Act, 1961 empowers the Assessing Officer to make an assessment to the best of their judgment. This happens when the assessee has either failed to file a return or has failed to cooperate with the assessment process.

The key phrase here is "best of judgment." It does not mean the AO can pluck a number out of thin air. The Supreme Court has made it abundantly clear that even in best judgment assessments, the AO must make an honest and fair estimate based on whatever material is available. More on that in the case law section below.

In practice, a Section 144 order is an ex-parte order. The assessee is absent from the proceedings - either because they chose not to participate or because they never received the notices. The AO proceeds without them, estimates income based on available information (past returns, third-party data, Form 26AS, bank statements obtained independently), and issues a demand.

The triggers for a Section 144 assessment typically fall into three buckets:

• Non-filing of return: The assessee did not file a return under Section 139(1) (voluntary), Section 142(1) (notice to file), or Section 148 (reassessment notice).
• Non-compliance with notices: The assessee received a notice under Section 142(1) or Section 143(2) but failed to respond or appear.
• Failure to get accounts audited: When directed by the AO under Section 142(2A) to get accounts audited by a nominated accountant, and the assessee does not comply.

Each of these failures gives the AO independent jurisdiction to invoke Section 144. In many cases you will encounter as a CA, the client simply did not respond to notices - sometimes out of ignorance, sometimes out of fear, and sometimes because the notices were served at an old address.

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When Can the AO Pass a Best Judgment Order?

Section 144 lays down specific conditions, and the AO must satisfy at least one of them before invoking this power. Understanding these conditions precisely matters because challenging jurisdiction is one of the strongest grounds available in appeal.

Failure to File a Return

If the assessee has not filed a return of income under Section 139(1) within the due date, and has also not filed it in response to a notice under Section 142(1) or Section 148, the AO can proceed under Section 144. This is the most common trigger in non-filer cases where the department has information suggesting taxable income (from TDS returns, property registrations, or cash deposits flagged during demonetisation).

Failure to Comply with Section 142(1) Notice

A Section 142(1) notice can require the assessee to file a return, produce documents, or furnish information. If the assessee ignores this notice entirely - no response, no appearance, no communication - the AO gets the green light for best judgment assessment. Note that partial compliance (filing some documents but not all) does not automatically justify a Section 144 order, though the AO may still attempt it.

Failure to Comply with Section 143(2) Notice

When a return has been filed and the case is selected for scrutiny, the AO issues a Section 143(2) notice requiring the assessee to appear and produce evidence. Repeated non-compliance here - missing hearings, not uploading documents on the e-proceedings portal, ignoring questionnaires - gives the AO grounds to complete the assessment ex-parte under Section 144.

Failure to Get Accounts Audited Under Section 142(2A)

This is less common but does arise in complex cases. If the AO directs a special audit under Section 142(2A) and the assessee does not cooperate with the auditor or refuses to get the audit done, the AO can invoke Section 144. The cost of such audit is borne by the Central Government, so the assessee cannot cite financial burden as a reason for non-compliance.

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Procedural Safeguards the AO Must Follow

Here is where things get interesting for CAs. Section 144 is not a blank cheque. Even when the assessee has been non-compliant, the AO must follow certain procedural safeguards before passing the order. Failure to follow these safeguards is one of the most reliable grounds for getting the order set aside.

Mandatory Show Cause Notice

Before passing a best judgment assessment order, the AO is required to issue a show cause notice to the assessee. This notice must clearly state that the AO intends to complete the assessment under Section 144 and give the assessee one final opportunity to comply. The proviso to Section 144 explicitly states that the AO shall serve a notice giving the assessee an opportunity of being heard.

Reasonable Opportunity of Being Heard

The show cause notice is not a formality. The assessee must be given a reasonable opportunity to be heard - meaning adequate time to respond, clear communication of what is required, and a genuine chance to present their case. A notice giving three days to produce voluminous records, for instance, would not constitute a reasonable opportunity. Courts have consistently held that the standard of "reasonable opportunity" must be assessed on the facts of each case.

Proper Service of Notice

This is a critical procedural requirement that is frequently violated in practice. The notice must be served on the assessee at their correct address through a recognized mode of service - ordinary post, speed post, or electronic communication through the income tax portal. If the notice is sent to a wrong address, or if there is no proof of service, the entire assessment can be challenged on the ground that the assessee was never given an opportunity of being heard.

Under Section 282 of the Act, service can be made by post or as if it were a summons issued by a court. Deemed service provisions apply, but the burden of proving that the notice was served rests on the department. In faceless assessment proceedings, notices are served through the e-filing portal, and the assessee is expected to check the portal regularly. Even so, if the registered email and mobile number on the portal are outdated, practical service may fail.

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Your Rights When Facing a Section 144 Assessment

Many assessees and even some practitioners assume that once a Section 144 order is passed, the battle is lost. That is simply not true. The assessee retains substantial rights even in best judgment proceedings.

Right to Be Heard

As discussed above, the AO cannot pass a Section 144 order without giving the assessee an opportunity of being heard. If this right was denied - and this includes situations where the notice was not actually received - the entire order is vulnerable. The right to be heard is a principle of natural justice that transcends the specific language of the statute.

Right to Present Evidence

Even in best judgment cases, the assessee has the right to present books of account, documents, and evidence. If the assessee was willing to cooperate but was denied the chance (perhaps because the AO was rushing to complete the assessment before the limitation deadline), this denial is a strong ground for setting aside the order in appeal.

Right to Cross-Examine

If the AO has relied on third-party statements, information from banks, or data from other assessees to make additions, the assessee has the right to cross-examine those parties. Reliance on statements without giving the assessee an opportunity to cross-examine violates principles of natural justice. The Supreme Court affirmed this in Andaman Timber Industries v. CCE (2015), and while that was an excise case, the principle applies equally to income tax proceedings.

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How to Challenge a Best Judgment Assessment Order

This is the section CAs will use most. A Section 144 order is not the end of the road. There are multiple remedies available, and choosing the right one depends on the facts.

Appeal Under Section 246A

The primary remedy is filing an appeal before the Commissioner of Income Tax (Appeals) - or the Joint Commissioner (Appeals) for smaller cases - under Section 246A. The appeal must be filed within 30 days of the date of service of the order. However, there is a provision for condonation of delay if the assessee can show sufficient cause.

Grounds that work well in Section 144 appeals:

• No opportunity of hearing was given: If you can demonstrate that the show cause notice was not served or was served at a wrong address, this alone can get the order set aside. The appellate authority will typically remand the matter back to the AO for a fresh assessment after giving the assessee a proper hearing.

• Assessment not based on material: If the AO has made additions without any factual basis - for instance, estimating business income at 25% of turnover when the industry standard is 5-8% - you can argue that the assessment was not based on any relevant material and was arbitrary.

• Unreasonable and excessive additions: Even in best judgment cases, the AO's estimate must bear some rational connection to the available facts. If the additions are grossly disproportionate - say, the AO added Rs 50 lakh as undisclosed income when the assessee's bank account shows total credits of Rs 12 lakh - the appellate authority is likely to intervene.

• Non-application of mind: If the order simply states "the assessee did not comply, therefore income is assessed at Rs X" without any reasoning or analysis, it reflects non-application of mind and is liable to be set aside.

Rectification Under Section 154

If the Section 144 order contains a mistake apparent from the record - an arithmetical error, double counting of the same income, or reliance on a provision that does not apply - you can file an application for rectification under Section 154. This is faster than an appeal but has a narrow scope. The mistake must be "apparent" - it cannot require elaborate argument or fresh investigation.

Revision Under Section 264

If the appeal period has expired and condonation of delay is not possible, the assessee can file a revision application before the Principal Commissioner or Commissioner under Section 264. This is a discretionary remedy - the Commissioner is not bound to grant relief - but it is useful in cases where the ex-parte order resulted from genuine hardship (medical emergency, natural disaster, death of the assessee during the proceedings). The application must be filed within one year of the date of the order.

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Key Case Laws on Section 144

These are the judgments you should cite when challenging a best judgment assessment. Every CA handling Section 144 cases should have these at their fingertips.

Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC)

This is the foundational Supreme Court judgment on best judgment assessment. The Court held that while the AO has the power to make a best judgment assessment, that power must be exercised honestly and fairly. The estimate must be based on some relevant material, not on pure guesswork. The Court observed: "The estimate must be related to some evidence or material and it must be something more than mere suspicion."

This judgment remains the touchstone for evaluating every Section 144 order. If the AO's estimate has no connection to available evidence, cite Dhakeswari Cotton Mills.

CIT v. Laxman Das Khandelwal [2019] 417 ITR 325 (SC)

The Supreme Court reiterated that even in best judgment assessments, the AO is not free to act arbitrarily. The assessment must be based on some cogent material. The Court held that where the books of account are available and the AO rejects them to make a best judgment assessment, the AO must record specific reasons for rejecting the books. A blanket rejection without pointing to specific defects is not permissible.

R.B. Shreeram Durga Prasad v. Settlement Commission [Allahabad HC]

The Allahabad High Court held that the term "best judgment" implies that the AO must use all available information and make the most reasonable estimate possible. It does not mean "worst judgment against the assessee." The assessment must reflect what a fair and reasonable officer would estimate based on the material before them.

S. Narayanappa v. CIT [1967] 63 ITR 219 (SC)

Another important Supreme Court decision where the Court held that in best judgment assessment, the AO must make an honest estimate of income based on all available material. The AO is not entitled to make an arbitrary assessment or to penalize the assessee for non-cooperation by inflating the income estimate. The estimate should be what the AO genuinely believes to be correct.

Smt. Kamlesh Devi v. CIT (ITAT Delhi)

The ITAT held that when the assessee appeared before the CIT(A) and furnished all relevant documents, the CIT(A) was justified in deleting the additions made in the Section 144 assessment. The first appellate authority has co-terminus powers and can receive fresh evidence, making the appeal stage a genuine opportunity to present the case that was not presented before the AO.

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Section 144 vs Section 144B: Understanding the Difference

This is a source of frequent confusion, so let us clear it up definitively.

Section 144 is a substantive provision. It defines the AO's power to make an assessment to the best of their judgment when the assessee has not cooperated. It specifies when this power arises and what conditions must be met.

Section 144B is a procedural provision. It prescribes the manner in which assessments (including best judgment assessments) must be conducted - through the faceless assessment mechanism, with automated allocation, anonymity of the AO, and electronic communication.

Think of it this way: Section 144 answers the question "Can the AO assess income without the assessee's participation?" Section 144B answers the question "How must the AO conduct the assessment process?"

In practice, when a best judgment assessment is made today, it is typically made under Section 144 read with Section 144B. The substantive power comes from Section 144, while the procedural framework comes from Section 144B. An order passed under Section 144 without following the Section 144B faceless procedure (where applicable) can be challenged on procedural grounds as well.

There are exceptions to faceless assessment - cases involving search and seizure (Section 132), international taxation, and certain sensitive matters are excluded from the Section 144B procedure and continue to be assessed by jurisdictional AOs in the traditional manner.

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Practical Tips for CAs Handling Best Judgment Cases

Having handled numerous Section 144 matters, here are the strategies that consistently work.

Act Immediately on Receiving the Order

Time is not on your side. The 30-day appeal window under Section 246A starts from the date of service, not from the date your client walks into your office. If the order has been pending on the e-filing portal for weeks before the client noticed it, you may already be close to the deadline. File the appeal first, build the detailed submission later.

Document Why the Client Did Not Comply

The strongest Section 144 appeals are those where the CA can demonstrate a legitimate reason for non-compliance. Was the client seriously ill? Were notices sent to an address the client had vacated years ago? Did the client's earlier CA fail to respond? Were there technical issues with the e-proceedings portal? Gather evidence - medical records, address change applications, email screenshots, portal error logs - before drafting the appeal.

Compare the AO's Estimate with Available Data

Pull the client's Form 26AS, AIS, TIS, and bank statements. Compare the actual figures with the AO's estimated income. In most Section 144 cases, the AO's estimate is significantly higher than what the actual data supports. Presenting this comparison in a clear tabular format makes the appellate authority's job easier and your argument stronger.

File the Return if Not Already Filed

If the Section 144 order was triggered by non-filing, file the return of income before or along with the appeal. Section 249(4) requires that the return must be filed before the appeal can be admitted (though this requirement has been read down in some judgments). Filing the return also provides a concrete baseline for the appellate authority to compare against the AO's estimate.

Consider Using TaxNoticeAI for Response Preparation

When you are working against a tight deadline and need to identify relevant case laws, draft submissions, and cross-reference statutory provisions quickly, platforms like TaxNoticeAI can significantly reduce the time spent on research. The platform helps identify the strongest grounds for challenging an assessment order and surfaces relevant precedents based on the specific facts of your case.

Request a Stay of Demand

A Section 144 order almost always comes with a demand notice under Section 156. If the demand is substantial, file a stay application along with your appeal. Under the CBDT's own instructions, the AO should grant a stay if the assessee pays 20% of the disputed demand (subject to the prima facie merits of the case). Do not let the demand go into recovery proceedings while the appeal is pending.

Keep a Paper Trail Going Forward

Once you take over the case, maintain meticulous records of every communication with the department. Acknowledge every notice in writing, request adjournments formally (not verbally), and upload submissions on the portal well before deadlines. If the matter is remanded for fresh assessment, the client must not repeat the mistakes that led to the Section 144 order in the first place.

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Best judgment assessment is a powerful tool in the AO's arsenal, but it is far from unassailable. The procedural requirements are strict, the case law strongly favours honest estimation over arbitrary numbers, and the appellate machinery is well-equipped to correct excesses. As a CA, your job is to build the strongest possible case for setting aside the order - and that starts with understanding the legal framework inside out.