“arbitrary and capricious”
The decision most relied on for arbitrary and capricious is Commissioner of Sales Tax v. H.M. Esufali H.M. Abdulali (90 ITR 271), cited in 232 judgments on BharatTax.
Leading authorities on arbitrary and capricious
The Supreme Court established principles for best judgment assessments, stating that some guesswork is inevitable but the assessment must be bona fide, rational, and free from bias or capriciousness. An appellate authority cannot substitute its judgment for that of the Assessing Officer unless the AO's assessment is shown to be biased, irrational, vindictive, or capricious, especially when the assessee fails to provide proper accounts or counter-evidence.
The Supreme Court holds that an Assessing Officer, when making a best judgment assessment or estimating income, must act fairly, honestly, and rationally, basing the estimation on available material and avoiding arbitrary or capricious decisions. Adherence to natural justice principles is crucial during assessment proceedings.
Best judgment assessments under Section 144 must be a fair and rational estimation of income by the Assessing Officer, not capricious or arbitrary. Appellate authorities should accept clarificatory evidence to test the fairness of such assessments, even if produced for the first time.
An Assessing Officer cannot make a capricious assessment or estimate income/profit without assigning reasons and supporting material, even when rejecting the assessee's books of account or making a best judgment assessment. The Assessing Officer must act judiciously and not based on pure guesswork.
Where books of account are rejected or not produced, the Assessing Officer may compute profits by applying a flat rate to the turnover or gross receipts. A best judgment assessment must have a nexus to the material on record and cannot be arbitrary or capricious.
When assessing expenses under Section 40A(2), tax authorities must consider the entire position judiciously from the viewpoint of a prudent businessman, not arbitrarily or capriciously. The revenue must demonstrate tax evasion and cannot disallow expenses if the recipient is taxed at the same or higher rate.
A loose slip containing entries of payment found at the premises of another person, without the assessee's name, date of payment, or payer's name, is not sufficient to establish an addition, especially when no search was conducted in the assessee's case.
A best judgment assessment is not arbitrary and must be guided by principles of justice, equity, and good conscience. It cannot be made capriciously or in disregard of the material on record.
