An assessment when completed ought to be an assurance of taxpayers’ tax liability. There should be no margin of error for any kind of guess work in such determination. More particularly an assessment under section 143(3) of the Income-tax Act, 1961 (corresponding to section 270 of the Income-tax Act, 2025) determines the taxpayer’s tax liability and, therefore, must be founded on relevant material and evidence. The Assessing Officer cannot make additions on mere guess work or conjectures or arbitrary assumptions.
The Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC) reiterated that although a best judgment assessment under section 144 may necessarily involve some degree of estimation, such estimation must be based on material available on record and cannot amount to arbitrary or wild guesswork. While laying down this principle, the Court relied upon three earlier landmark decisions.
In CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC), the Privy Council held that an Assessing Officer must exercise an honest and fair judgment and cannot act dishonestly, vindictively or capriciously. Although some guesswork may be inevitable, it must be an honest estimate based on relevant considerations.
Similarly, in Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770,778 (SC), the Supreme Court held that once the returns and books of account are rejected, estimation becomes necessary; however, the estimate must be related to some evidence or material and cannot rest upon mere suspicion.
The principle was reaffirmed in State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC), where the Supreme Court observed that while a best judgment assessment may involve an element of guesswork, it cannot be arbitrary and must bear a reasonable nexus with the available material and circumstances of the case.
These authorities establish that estimation is permissible only when supported by relevant material or evidence and rational reasoning and not otherwise.
The Bangalore Bench of the Tribunal recently reiterated these principles in Kempaiah Kemparaju v. Deputy Commissioner of Income-tax [2026] 186 taxmann.com 772 (Bang. – Trib.). In that case, the Assessing Officer estimated the assessee’s profit at 15 per cent while framing an assessment under section 144 without relying upon any supporting material. The Tribunal held that the estimate could not be a “blunt arrow”, a fluke or a blind guess. It must be fair and reasonable, having regard to the nature of the business, prevailing industry margins, the assessee’s past assessments, local knowledge and all other relevant material available with the Assessing Officer. In reaching this conclusion, the Tribunal relied upon the 1978 decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar.
The same legislative principle finds place in the Income-tax Act, 2025. Section 270(10) requires the Assessing Officer, before making a regular assessment, to consider the evidence produced by the assessee as well as all relevant material gathered during the proceedings. Likewise, section 271(1), governing best judgment assessments, specifically mandates that the Assessing Officer shall make the assessment only after taking into account all relevant materials gathered and after providing the assessee an opportunity of being heard.
Thus, irrespective of whether the assessment is made under section 270 or section 271 of the Income-tax Act, 2025, the statutory requirement remains the same. The Assessing Officer is required to:
- take into account all relevant material and evidence gathered during the proceedings; and
- determine the taxable income on the basis of such material.
Relevant sections 270 (10) and 271 (1) in this regard provide the following basis for assessment :
S. 270 (10) On the day specified in the notice issued under sub-section (8), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer, subject to the provisions of sub-sections (11) and (13), shall—
(a) by an order in writing, make an assessment of the total income or loss of the assessee; and
(b) determine the sum payable by him or refund of any amount due to him on the basis of such assessment.
271. (1) If any person—
(a) fails to furnish the return required under section 263(1) or (4) or (5) or (6); or
(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); or
(c) having made a return, fails to comply with all the terms of a notice issued under 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.
Thus neither provision authorises additions based solely on guess work. The words ‘after taking into account all relevant materials’ suggest of an honest promise or assurance. If this promise fails, the assessment also fails.
Another important aspect emerges from the decision of the Supreme Court in J.J. Enterprises v. Commissioner of Income-tax [2002] 122 Taxman 124 (SC). In that case, the Tribunal found that the impugned addition had been made purely on guesswork. The High Court sought to remand the matter to the Assessing Officer for fresh examination. Reversing the High Court, the Supreme Court held that the Tribunal’s finding was one of fact and, therefore, final. Once an addition is held to be based on pure guesswork, the Revenue cannot seek a remand merely to provide the Assessing Officer with another opportunity to justify the addition.
The statutory provisions governing assessments under both the Income-tax Act, 1961 and the Income-tax Act, 2025, read with the consistent judicial pronouncements of the Privy Council, the Supreme Court and the Tribunal, make the legal position abundantly clear. Even in a best judgment assessment, estimation cannot substitute evidence. Every estimate must have a rational nexus with the material or evidence available on record. Consequently, any addition founded on pure guesswork is legally unsustainable and liable to be deleted and not remanded.