ORDER
K.S. Viswanathan, Accountant Member
1. These are two departmental appeals against the order of the Appellate Assistant Commissioner setting aside the order of the Income-tax Officer under Section 144.
2. The assessee is a Hindu undivided family. For the assessment year 1978-79, the assessee filed a return declaring a loss of Rs. 57,725. The HUF did not respond to the several notices issued by the Income-tax Officer. A final hearing was fixed on 20-3-1981. Again there was no compliance. The Income-tax Officer drew an inference that the assessee was wilfully failing to comply with the notices issued. He, therefore, proceeded to make an ex parte assessment to the best of his judgment. He found on scrutiny of the Profit & Loss A/c that the interest payment of Rs. 1,60,800 was excessive. There were several cash credits but these were not supported by evidence regarding the genuineness. The Income-tax Officer, therefore, ignored the loss returned and assessed at an estimated income of Rs. 30,000.
3. For the year 1977-78, the assessee had repeated his indifference to the department’s notices. In this case also, after filing a return of loss of Rs. 54,508, the assessee did not produce any evidence to support the claim for loss. The Income-tax Officer made ex parte assessment of Rs. 30,000.
4. The Appellate Asst. Commissioner on appeal referred to the decision of the Madras High Court in the case of Dhanalakshmi Pictures v. CIT [1983] 144 ITR 452 and stated that the Income-tax Officer ought to have given the assessee an opportunity to explain why an income of Rs. 30,000 should not have been computed. He also held that merely because there was interest payment it would not necessarily follow that the result should be rejected. He, therefore, set aside the assessment and directed the Income-tax Officer to make a fresh assessment according to law.
5. The department is on further appeal. It was submitted that in an appeal against the ex parte assessment under Section 144, the Appellate Asst. Commissioner was not justified in holding that this assessment deserves to be set aside because the Income-tax Officer was not given adequate opportunity to the assessee before completing the assessment under Section 144. It was submitted before us that there was no procedural irregularity and it is not required that the Income-tax Officer should be given one more opportunity to the assessee who has been indifferent to the notices from the department. Mr. Krishna Kumar appearing for the assessee submitted that the Madras High Court’s decision has laid down the correct ratio in ex parte assessment and direction given to the Income-tax Officer was proper.
6. We have considered the submissions. There is no plea before us regarding the non-compliance of the various notices issued by the Income-tax Officer. It is quite clear that the assessee has been indifferent to the notices. He did not even file a copy of the balance sheet of the company even when it was specifically asked for. It will be difficult for an Income-tax Officer to make any worthwhile scrutiny of accounts without balance sheet. The Income-tax Officer, therefore, was entitled to make an assessment under Section 144. That section enables him to make an assessment after taking into account all the relevant materials which the Income-tax Officer has gathered.
7. Now the section requires the Income-tax Officer to make a best judgment assessment if there is default of the notices. In other words, it is his duty to make an ex parte assessment under those circumstances. It is well settled that in making a best judgment assessment he was not acting dishonestly or vindictively or capriciously. He must make what is honestly believed to be a fair estimate and for this purpose he may take into account all materials of which he was in possession of. It is accepted that in such estimated assessment, there is an element of guesswork but it shall not be a wild guess and should have reasonable nexus to the available materials and circumstances of the case. In our opinion, if the Income-tax Officer has made an assessment on the basis of the materials and on the basis of the records and if the assessment is not wild one, then such an assessment must be accepted as valid and reasonable.
8. It is true that in the case of Dhanalakshmi Pictures (supra), the Madras High Court has held that even in an assessment under Section 144, the assessee will have to be given an opportunity of being heard and a right to question the correctness of the material on which the Income-tax Officer proposed to estimate the assessment. This observation was given on the facts of the case. Therein, the Income-tax Officer has based the estimate of an ex parte assessment on the basis that the assessee, a firm of distributors of films had successful run of two films for which they had distribution rights during the accounting year, as it turns out the Income-tax Officer’s information was totally wrong. It was tinder these circumstances that the Madras High Court made the observation. This will be clear when we see the submissions of the assessee before the High Court which are given at page 457. It was submitted that whatever may be the default of the assessee it is the duty of the Income-tax Officer, even while making a best judgment assessment to place before the assessee any material which the Officer had gathered on the basis of any outside enquiry made by him. It should be noted that the emphasis in the submission was the assessee’s right to know the material gathered by the Income-tax Officer on the basis of an outside enquiry. At page 459, the High Court observed as follows :
The problem before us, however, is whether in any assessment made by the ITO under Section 144 of the Act following the default of the assessee in making a return and in complying with the terms of a notice under Section 142(1), it is still required of the ITO that he should be given an opportunity to the assessee before utilising the materials gathered from elsewhere.
(italicised is ours)
It will be seen from the above that the ratio of the Madras High Court is confined to the utilisation of the Income-tax Officer of materials gathered by him elsewhere. It, therefore, follows that if the Income-tax Officer had not used any material outside the records, then it is not necessary for him to give another opportunity.
9. It now remains to see whether the Appellate Asst. Commissioner could have set aside the assessment and sent it back to the Income-tax Officer. It is no doubt true that he has got the powers to set aside any assessment order but in an ex parte assessment by setting aside the assessment order, the assessee would be given a fresh opportunity of producing all the evidence as if it is the original assessment proceedings. In the original assessment proceedings, the assessee had. not made use of the opportunity generously granted by the Income-tax Officer. Under these circumstances, an ex parte assessment made by the Income-tax Officer as indeed he is bound to do when there is no compliance with the notices, would be nullified if the Appellate Asst. Commissioner sets aside and allows the assessee the same privilege as in the original assessment. Therefore, in an ex parte assessment on appeal, the powers of the Appellate Asst. Commissioner necessarily must be exercised in such a way that the assessee does not get any benefit which it was not entitled to.
10. At the same time, it is undeniable that the Appellate Asst. Commissioner has powers to set aside an ex parte assessment also. In order to reconcile these various provisions, we should give a finding that on an order of the Appellate Asst. Commissioner setting aside an ex parte assessment the Income-tax Officer is only to reappraise the materials on records and frame an assessment on an estimated basis, on the basis of that material and further, in case he has framed an assessment by utilising any material which he has gathered by his enquiries and which he has not placed before the assessee, then, to give an opportunity to the asses-see why the materials gathered should not be used as a basis for framing the assessment. In other words, the assessments which have to be set aside by the Appellate Asst. Commissioner are those which, in his opinion, the materials on which the assessment is based are insufficient or that some fresh evidence has been considered or there has been a failure of natural justice, i.e., not giving an opportunity of being heard to the assessee.
11. The assessee had referred to a decision of the Andhra Pradesh High Court in the case of P.N. Balasubramanian v. ITO [1978] 112 ITR 512. We do not find anything in this decision which goes against the principles laid down in the earlier paragraphs. The main contention considered by the High Court therein, as seen at page 518 is that the assessment orders passed under Section 144 against which there was no application for reopening under Section 146 can be a subject matter of an appeal before the Appellate Asst. Commissioner. The assessee had contended that he cannot go on appeal whereas the department had pointed out that the assessee can file appeals. The High Court accepted the department’s contention that the Appellate Asst. Commissioner can hear an appeal against the order under Section 144. Under these circumstances, we will uphold the order of the Appellate Asst. Commissioner setting aside the assessment to the extent of directing the Income-tax Officer to reappraise the evidence on record and the past assessments of the earlier years and frame the estimate suitably. It is not the asses-see’s case before us that the Income-tax Officer had used any materials which were not placed to the assessee. Therefore, the ratio of the Madras High Court’s decision in Dhanalakshmi Pictures’ case (supra) does not apply here.
12. Since we have upheld the order of the Appellate Asst. Commissioner setting aside the assessment order, we will dismiss the departmental appeals subject to the above observations.