Every dealer is required to administer account books and receipts from the very first day that his business is in operation. The administration of account books is dependent upon the type of business; the rules for bookkeeping are to be found in the Income Tax Provisions (Administration of Account Books).
Many dealers and assessees are in a situation in which a best judgment assessment is offered to them, by the V.A.T. office’s auditors, or the tax inspectors of the Assessment Clerk’s offices. This is based on the conclusion that the business results of an assessee / dealer are unreasonable for his field of endeavor, or that he did not administer account books according to the legal requirements.
The normative framework
The authority to conduct a tax assessment according to best judgment is granted to the V.A.T. Director, under Article 77 of the V.A.T. Law, 5736 – 1975, an, also, to the Assessment Clerk under Article 145 of the Income Tax Ordinance (New Version), 5721 – 1961.
In these laws, a mechanism has been established, by which the dealer / assessee is entitled to disagree with the assessment, and to object thereto within 30 days of the day on which the notice of assessment was issued, or within a date later than that which the Assessment Clerk Director permitted.
Furthermore, if the V.A.T. Director or the Assessment Clerk rejects the objection, in part or in its entirety, the dealer / assessee is entitled to appeal the Director’s decision to the District Court.
In order to refute a best judgment assessment, the objection must be supported by concrete evidence.
A dealer / assessee who has been found not to have administered account books, as legally required, in his business, may be exposed, during an audit of his accounts conducted by the Tax Authority, to having an assessment determined by best judgment. Moreover, it is possible that the V.A.T. Director or the Assessment Clerk have concluded that the dealer’s / assessee’s income, in relation to his expenses, is exceptionally low relatively to the data of dealers / assessees operating in the same field. This is done over time and without a reasonable explanation. In such cases, an assessment may be determined according to best judgment; the tax assessment might reach the highest tax charge amounts, regardless of the business’s actual income and expenditure, because this assessment is unable to reflect accurately the business’s income and expenditure, as the assessment is not based on evidence, but, notwithstanding, it is based on speculation and assumptions and must be faithful to the business and the circumstances, and it will be examined by the professionalism of the V.A.T. Director and the Assessment Clerk.
Best judgment assessment should be based on concrete evidence and data, and will not be arbitrary, excessive and unfounded; A best judgment assessment is an informed hypothesis, based on expertise.
A best judgment assessment does not punish the dealer / assessee; the court gave its opinion on that, by saying:
“A best judgment assessment is not intended to punish the assessee who failed, but rather to promote the determination of a true tax”.
(Civil Appeal 5324/05 Bashir Nabhan Shehadeh v, Acre Assessment Clerk).
The Court’s intervention is a best judgment assessment.
A best judgment assessment should be considered to be a verdict, for all extents and purposes; the appeal against the rejection of the objection will be submitted to the District Court, and will be heard before a single judge, who will be entitled to appoint consultants, as applicable.
As a rule, the Court will not rush into taking the place of the V.A.T. Directors and the Assessment Clerks and exercising their discretion. Even when the assessment is given by guessing and by conjecture, the Court does not intervene in order to determine the assessment itself, but rather, deals with the procedure, an error in the law, a disregard for actual facts, a claim by the owner of a business that the assessment given to him is in an unfounded and arbitrary trend, and will have to be backed up with objective evidence, as well as the degree of proof required in civil law that the assumptions on which the Tax Assessor based the tax assessment are not reasonable.
Recently, the Court referred to the matter of making a best judgment assessment and determined that just as the V.A.T. Director’s expectations that a dealer’s business results will be reasonable, when the Director comes to the conclusion that the results presented to him are unreasonable, and therefore decides to make assessments according to best judgment, then his best judgment assessments should be reasonable and rely on tested and stable foundations. In the matter of Opal Leshem Holdings Ltd. (Tax Appeal 22007-06-13 Opal Leshem Holdings Ltd. v. V.A.T. Director – Haifa) given on August 24th, 2015 (not previously published) the Court ruled that:
“A best judgment assessment issued by the Director, in justifiable circumstances, cannot be a casual assessment “off the top of his head”, but must be based on reasonable data… A best judgment assessment does not have to be precise, since it is not based on precise evidence, but it must be as reliable as possible under the circumstances of the case”.
And later in the judgment it was determined that…
The Director must exercise the knowledge and expertise given to him, in order to determine the assessment”.
Professional legal counseling in the early stages of a process might inevitably turn into a game-changer. Objection to a best judgment assessment should be reasoned with concrete reasoning, with relevant references to the points made in the assessment, with detailed reference to all its clauses, therefore it is important to submit the objection within the period determined by law. There are situations in which an application may be submitted for an extension for submitting the objection, but that requires a sufficiently good reason.
