In
the Income Tax Act, 1961, there is provision to make only ‘regular assessment’.
As per section 2(40) of the Act, ‘regular assessment’ means the assessment made
under section 143(3) or section 144. Again as per section 2(8) of the Act, ‘assessment’
includes reassessment; therefore, assessment made under section 143(3)/144/147
is also a ‘regular assessment’. Protective assessment is said to those
assessments which are made to ‘protect’ the interest of the revenue.
Why protective assessments ?
A protective assessment is
made to ensure that the income in question may not escape taxation altogether.
If the Assessing Officer makes the assessment of certain
income on A after rejecting the claim of B that the said income belongs to him
and he does not make a protective assessment of the said income on B,
there is a possibility that by the time the appeal against
the assessment of income in the hands of A is finally decided, the
time limit for starting proceedings against B may have expired and, therefore,
in case the assessment of the income in the hands of A is not upheld
by the appellate authorities, the income will escape taxation altogether.
There
is no statutory provision in the Income-tax Act to make assessment on
protective basis. In fact, as per the provisions of the Income-tax Act, the
income is to be assessed only in the hands of the person to whom it belongs and
it cannot be assessed in the case of any other person. This is the very basis
of the levy of the income-tax. However, it may so happen in certain cases that
the income-tax authorities are not clear as to whom the income belongs to and
hence, in such cases, the only option left with the income-tax authorities in
order to safeguard revenue is to make two assessments for the same income on
two different persons i.e. one on substantive basis and one on protective
basis. It is for this reason that the courts have recognized the concept of
protective assessment although there is no such provision in the Income-tax Act
to make protective assessment.
The concept of protective assessment is involved by judicial decisions basing upon practice prevalent in England. In Attorney General v. Aramaya (1925) 9 Tax Cas. 445 Rowlat, J. held as follows:
“Of course, there are provisions in the Act which say you shall not have
two assessments for the same property on the same person; if one has gone
wrong, you cannot have another. If it is thought that we have assessed this
business in the name of Robinson and it is really carried on by Smith, if it is
Smith now and it was Smith or Robinson before, I cannot see the slightest
objection to it in common sense, and I cannot see any from the point of view of
the statute.”
The
Gauhati High Court in the case of Jagannath Bawri and Others v. CIT has
explained the concept of protective assessment in the following manner:
“As
regards the contention of Ms. Hazarika, learned counsel for the petitioners
about income-tax returns, on perusal of annexure-A series it can only be said
that those documents are only intimation which is sent to the assessee
specifying the sum so payable under section 143(1)(a). At any rate, the
assessments made are only protective assessments. Under the law it is open to
the department to make assessments on two persons in respect of the same
income, where there is some ambiguity as to the liability to charge, Such
assessments are made to protect the interest of the revenue so much so, unless
such protective or alternate assessment is made, assessment proceedings against
the party finally found to be liable may become barred by time. It has now
become an established practice that in the case of doubt as to the person who
will be and deemed to be in receipt of the income, it is open to the department
to make protective or alternative assessment.” –
[Jagannath Bawri v. CIT (1998) 234 ITR 464 (Gauh.)]
Object of a protective assessment
The object of a protective assessment is that in case substantive
addition is made in the hands of other person and in case assessment fails,
Department must get the tax from the person in whose hands the protective assessment
is made.
Protective assessment is a precautionary assessment
Where an income has arisen, but Assessing Officer is not sure who will
pay tax on that income, he resorts to precautionary or protective assessment.
For making substantive or protective addition
satisfaction of the same Assessing Officer is necessary
For making substantive or protective addition
satisfaction of the same Assessing Officer is necessary, as protective addition
on borrowed satisfaction or on dictate of other Assessing Officer making
substantive addition will violate the principles of natural justice.
For substantive and protective addition,
income must accrue or arise and must be received or receivable
The protective assessment of an income can be
made when, in the opinion of the Assessing Officer, an income has definitely
arisen in a particular assessment year but there is some doubt about the entity
in whose hands income is to be brought to tax. Further, the question of income
being brought to tax in the hands of an assessee, whether on protective basis
or on substantive basis, can only arise when the fact of income having arisen
is established or is beyond dispute.
Income accrues only when there is a right to
receive, i.e., there must be a debt owed to him by somebody - the “debitum in
presenti solvendum in future” and the scope of the term ‘accrue’ or ‘arise’
cannot be extended so as to take the amount received in a year, unless a right
to receive is there. Accrue means to arise or to spring as a natural growth or
result to come by way of increase. Arising means coming into existence or
notice or presenting itself. Accrue connotes growth or accumulation with a
tangible shape so as to be receivable. When put together, the two words
together mean to become a present and enforceable right to become a present
right of demand. These two words, accrue or arise, are used in
contradistinction to the word receive and indicate a right to receive. They
represent a stage anterior to the point of time when the income becomes
receivable and connotes a character of income which is more or less inchoate,
and which is something less than a receipt. An unenforceable claim does not
give rise to accrual.
Addition of deemed income cannot be made on
protective basis
For enabling the Assessing
Officer to make addition of same income in two hands, the income should be
a real tangible or physical income, which has a source, which accrues at a
place, which has a time of accrual. Such an income which accrues is classified
under any of the five heads mentioned in section 14 in Chapter IV. They are
salaries, income from house property, profits and gains from business and
profession, capital gains and income from other source. On the other hand,
incomes which are required to be taxed but which are not tagged to any source
are placed elsewhere in the Income Tax Act, such as Chapter VI, being
aggregation of income and set off of losses. There is no dispute that income
placed in Chapter VI (to be specific, sections 68/69/69A/B/C) are to be
aggregated with income computed under various heads falling under Chapter IV
but their nature is different. One very relevant and important difference is
that there is a source and there is an accrual from such source, from which
income falling under Chapter IV can be said to be derived whereas there is no
source for income falling in Chapter VI.
There are four ingredients of accrual or
arising (before receipt) (i) the person in whose hands income has accrued, (ii)
the time, at which income has accrued, (iii) the place where income has
accrued, and (iv) source of accrual. For finding out whether Assessing Officer
has a right to make substantive protective addition of the same income in two
hands, it is necessary for him to give a finding that there is no doubt about
time of accrual, place of accrual and source of accrual. Once, these three
ingredients are determined, and Assessing Officer is unable to determine fourth
ingredient, i.e., the person, in whose hands income has accrued, then he can
take a recourse to substantive and protective addition.
Where substantive addition is confirmed,
protective addition cannot survive
A protective assessment comes to an end when
the substantive assessment is made in the case of a different person.
Nature of income does not change in case of substantive/protective addition
For making addition of same income in two
hands on substantive and protective basis, nature of income does not change. It
will remain the same in both hands. If it is business income it will remain
business income in both hands. If it is house property income or capital gain,
it will remain so in both the hands. If the nature of income arriving in two
hands is different then there cannot be protective or substantive addition.
For example, X as custodian, sales asset
belonging to Y. and deposit proceeds in his account. The capital gains arising
will be taxed either in the hands of X or in the hands of Y, depending upon
inter se rights between them. In this case, substantive/protective addition can
be made. On the other hand, where X deposits his money with Y who accounts for
it in his books as credit. The Assessing Officer has to decide whether source
of availability of money with X is explained or not? If it is not explained or
is not satisfactorily explained, then addition on substantive basis can be made
in the hands of X. Once an income is assessed in hands of X, then source of
receipt by Y is explained. Where source of receipt in the hands of Y is not
treated as satisfactorily explained addition under section 68 is made as deemed
income. There cannot be a protective addition in the hands of A as by making
addition in the hands of Y, the Assessing Officer exonerates X as if he has not
made any deposit with Y.
No Protective Recovery on Protective
Assessment
Protective assessment is permissible although
there is no provision in the statute. However, the protective assessment does
not extents to making protective recovery.
Board’s authorisation for taking action under section 154 beyond time
limit specified under section 154(7) in cases of protective assessments
requiring to be cancelled - Order under section 119(2)(b)
CBDT Circular No. 71, dated 20.12.1971
Subject : Board’s authorisation
for taking action under section 154 beyond time limit specified
under section 154(7) in cases of
protective assessments requiring to be cancelled - Order
under section 119(2)(b)
1. Where the same income was assessed, as a protective measure, in the
hands or more than one assessee or as the income of more than one assessment
year, and one or more of these protective assessments needs to be cancelled as
a result of some of the relevant assessments having become final and
conclusive, it has been the practice of the Income-tax Department to cancel the
redundant assessments under section 154, treating these as involving mistakes
apparent from the records. This is being done by the Income-tax Officers either
suo motu or on applications made by assessees. Sometimes, it is not possible to
take action under section 154 in such cases because of the operation of the
time limit laid down in sub-section (7) of section 154. Since the operation of
this time limit causes genuine hardship to the affected assessees, the Central
Board of Direct Taxes, in exercise of the powers vested in them under clause
(b) of sub-section (2) of section 119, hereby authorises the Income-tax Officer
to take action under section 154, or to admit or dispose of on merits
applications under section 154 filed by assessees seeking relief, for
cancelling such protective assessments as have become redundant by waiving, if
necessary, the time limit fixed under sub-section (7) of section 154.
2. Every case of the relaxation of the time limit on the authority of
this order shall be reported by the Income-tax Officer to the Inspecting
Assistant Commissioner, in whose jurisdiction he is functioning within one
month of the passing of such order.
Where
there was no substantive addition made in hands of any other person, protective
assessment made in case of assessee in respect of excess cash recovered
from registered office of assessee under section 69A would not survive
During
course of search proceedings at registered office of assessee, excess cash was
found. It was submitted that assessee and ‘F’, had common Director and hence,
cash belonging to ‘F’ was kept in premises of assessee. It was also submitted
that source of such cash for ‘F’ was from subscription from members for health
club facilities. Assessing Officer, however, disregarded these contentions of
assessee and proceeded to tax aforesaid excess cash in hands of assessee on
protective basis under section 69A. However, it was found that no substantive
addition had been made in hands of ‘F’ or in hands of any other person. Therefore,
protective addition made in hands of assessee company did not survive and thus
addition made in hands of assessee on protective basis under section 69A was to
be deleted. [In favour of assessee] (Related Assessment years : 2016-17 to
2018-19) – [Pegasus Properties (P) Ltd. v. DCIT (2022) 193 ITD 514 : 135
taxmann.com 294 (ITAT Mumbai)]
Protective
assessment made in case of assessee in respect of credit in bank account as
income from other sources to be deleted as there was no substantive
assessment/addition in hands of other party
Case
of assessee was selected for scrutiny through CASS and reason for scrutiny
selection was ‘substantial cash deposit in bank account’. Assessing Officer noted that there were withdrawals
amounting to Rs. 94,55,938/- by the members on various dates. According to him,
the assessee could not prove that the said bank account was exclusively used
for the purpose of college and that the gross receipt shown by the assessee
society (Assessment year 2016-17) does not match with the cash deposits as
claimed by the assessee. Therefore, the Assessing Officer was of the opinion
that the total credit made in the said bank account amounting to Rs.
1,51,56,830/- need to be treated as “income from other sources” in the hands of
the assessee and added to the total income of the assessee on protective basis
to safeguard the interest of revenue and he also observed in the assessment
order that the substantive addition would be made by the respective Assessing Officer
of M/s Society of Education (Alpha Beta College) and that the information
regarding this is being passed to the that Assessing Officer of the college and
thus he made protective assessment in the hands of the assessee to the tune of
Rs. 1,51,56,830/-.
Assessee
explained that savings bank account where deposits were made was opened for
purpose of Junior college, run by Society of Education. As gross receipts shown
by Society of Education did not match with cash deposit claimed by assessee,
total credit made in bank account treated as income of assessee on protective
basis.
Aggrieved
the assessee preferred an appeal before the Ld. CIT(A) who was pleased to hold
that in the absence of any prior substantive addition in the case of M/s.
Society of Education, no protective assessment could have been made by the Assessing
Officer in the hands of assessee and, therefore, the action of the Assessing Officer
is bad in law and, therefore, he deleted the same. Held : Since there was no
substantive assessment/addition in hands of Society of Education, protective assessment
made in hands of assessee was to be set aside. [In favour of assessee] (Related
Assessment year : 2016-17) – [ITO, Nagaon v. Keshava Nanda Kakati (2022) 192
ITD 445 : (2021) 133 taxmann.com 316 (ITAT Gauhati)]
Where assessment was completed under section
143(3) read with section 153A and protective addition was made in hands of
assessee and Assessing Officer wanted to convert said protective assessment
into substantive assessment, he could have invoked his jurisdiction in terms of
section 147 on satisfaction of conditions specified therein and in absence of
thereof, action of Assessing Officer would not be sustainable
Assessing Officer can assess income in more
than one hand but this procedure can be permitted at stage of assessment and
once assessment is done, taxability in right hands need to be decided by
appellate authority and pursuant to decision by appellate authority, Assessing
Officer can take necessary action to finally assess income in right hands and
enforce recovery of taxes. Once an assessment has been framed by Assessing
Officer, he becomes functus officio and whenever Assessing Officer wishes to
modify and/or enhance assessment, he is required to reassume jurisdiction under
Act after satisfying conditions as contained in section 154 or section 147. Where
pursuant to search & seizure operations carried out at various business and
residential premises of NIMS Group of which assessee was a part, assessment was
completed under section 143(3) read with section 153A and protective addition
was made in hands of assessee and Assessing Officer wanted to convert said
protective assessment into substantive assessment, he could have invoked his
jurisdiction in terms of section 147 on satisfaction of conditions specified
therein and in absence of thereof, action of Assessing Officer could not be
sustained in eyes of law. [In favour of assessee] (Related Assessment year : 2013-14)
– [DCIT(C) v. Smt. Pallavi Mishra (2021)
191 ITD 13 : 130 taxmann.com 139 (ITAT Jaipur)]
Protective assessment without substantive
assessment is invalid
In the case of ITO v. Fussy Financial Services (P)
Ltd., it was held/averred, as follows, by the Hon'ble ITAT-Delhi :
We further note that the analysis of the investment account reveal that
the company has made investment of Rs. 5,04,01,000/. The statement given by Sh.
PN Jha assumes importance wherein he categorically admitted that the company
was doing the business of investment and finance and during the year the bank
accounts of the company have been used to provide the accommodation
entries. The addition of Rs. 3,17,67,951/- made by the Assessing Officer
on protective basis, which is not sustainable in the eyes of law,
because in this case the Assessing Officer himself stated in the assessment order
that the Department is looking after the cases of beneficiaries and the amounts
channelized through this group would be taxed in the hands of the
beneficiaries, the amount of total credits of Rs. 3,17,67,951/- made in
its bank account with Kotak Mahindra Bank, KG Marg, New Delhi, during the year
is added to the income of the assessee on protective basis. In this
case we find that Assessing Officer has not made any substantive assessment. There
may be Substantive assessment without any protective assessment,
but there cannot be any protective assessment without there being a
substantive assessment. (Related Assessment year :
2005-06) – [ITO v. Fussy Financial Services (P) Ltd. –
Date of Judgement : 05.06.2017 (ITAT Delhi)]
Addition
once made on substantive basis in case of firm or other partners and same was
sustained, same addition could not be made on protective basis in hands of
assessee being partner of firm
A
search and seizure operation was carried out in the case of partnership firm ‘GK’
and the assessee happened to be the partner of firm and was also subjected to
search, the other partners were also subjected to search. During
the course of search, certain books of account documents and other
incriminating documents/material were found and seized. During the course of
assessment proceedings, the Assessing Officer scrutinized the said documents
and had made additions on account of some of the documents and it was claimed
that these documents pertained to the assessee. The Assessing Officer also made
additions on account of some papers/documents in the case of firm on
substantive basis but since the assessee being a partner and the documents
having been found in the possession and custody and at the residence of the
assessee, therefore, on protective basis, the addition was also made in the
hands of the assessee as well. On appeal, the Commissioner (Appeals) deleted
additions in the case of the assessee. The revenue carried the matter in appeal
before the Tribunal and the Tribunal after appreciation of evidence on record
and on account of factual finding. When the addition had already been made, the
same was deleted in the case of assessee. On
reference Application to the High Court:
Under
the Income-tax Act though there is no such word as substantive
addition/assessment or protective addition/assessment, however, the Courts have
held that in case where it appears to the Income-tax authorities that certain
income has been received during the relevant year or for that matter
documents/loose papers have been found and it is not clear to whom it pertains
or it is not clear who has received that income and prima facie it appears that
the income or/and documents/loose papers pertains to either A or B or by both together
and thus it will be open to the relevant Income-tax authority to determine the
said question by taking appropriate proceedings both against A and B.
When
the facts are perused in the present reference application, then it is an
admitted fact and the revenue also does not deny that protective addition was
made in the case of assessee whereas substantive addition was either made in
the case of firm or/and in the case of ‘RC’ or/and in the case of ‘NR’ ‘DD’ and
when the above additions have finally been sustained, as observed by the
Tribunal in the case of firm or/and in the case of ‘RC’ or/and ‘NR’ ‘DD’, then
it is a finding of fact and no question of law can be said to arise with the
facts found by the Tribunal. When ultimately, the addition of these very
documents had been sustained in some other case relating to the search or other
partners or then the Tribunal had rightly deleted the addition as the same
cannot be or could not have been made in two hands. The revenue should not have
been aggrieved as the additions on the basis of loose papers/documents has
ultimately been made/sustained in other cases of the group. In view of what
have been observed herein above, the reference application does not involve any
question of law and accordingly the same stands rejected. [In favour of
assessee] Assessment year 1986-87 – [CIT, Jaipur v. Sobhrajmal (2015) 228
Taxman 308 : (2014) 51 taxmann.com 506 (Raj.)]
Where certain amount of premium arising on sale of land was added to income of AOP consisting of nine persons including assessee in substantive assessment, said amount could not be added to assessee’s individual income again in course of protective assessment
Assessee-society
was dealing in sale and purchase of land - In course of assessment, Assessing
Officer noted that a plot of land belonging to assessee was sold on heavy
premium which was not disclosed in its books of account. Assessing Officer thus
assessed an income of Rs. 10 lakhs being amount of premium received on sale of
plots on protective basis at hands of assessee. Simultaneously, substantive
assessment of same amount was also made in case of AOP consisting of nine
persons connected with assessee. Commissioner (Appeals) as well as Tribunal
held that when said amount had been assessed on substantive basis at hands of
AOP consisting of nine persons who had actually received premium and
appropriated same to themselves, said amount could not be taxed in hands of
assessee on protective basis. On facts, impugned order passed by Tribunal did
not require any interference. [In favour of assessee] (Related Assessment year :
1987-88) - [CIT v. Teachers Housing Co-operative Society (2014) 221 Taxman
191 : 41 taxmann.com 90 (Mag.) (All.)]
Where
Assessing Officer sought to make protective assessment by reopening an
assessment on ground that a contingency may arise in future resulting in
escapement of income, that would be wholly impermissible and would amount to
rewriting statutory provision
Undoubtedly
issue of Protective assessment of the Revenue submits the concept of a
protective assessment is well known to the law of income tax in India. A
protective assessment summed up succinctly in Sampath Ayengar’s Law of Income
tax indicates that it is regarded as being protective because it is an
assessment which is made ex abundanti cautela where the department has a doubt
as to the person who is or will be deemed to be in receipt of the income. A
departmental practice, which has gained judicial recognition, has emerged where
it appears to the Assessing Officer that income has been received during the
relevant assessment year, but where it is not clear or unambiguous as to who has
received the income. Such a protective assessment is carried out in order to
ensure that income may not escape taxation altogether particularly in cases
where the revenue has to be protective against the bar of limitation. But
equally while a protective assessment is permissible a protective recovery is
not allowed. However, such an exercise which is permissible in the case of a
regular assessment must necessarily yield to the discipline of the statute
where recourse is sought to be taken to the provisions of section 148.
Protective assessments have emerged as a matter of departmental practice which
has found judicial recognition. Any practice has to necessarily yield to the
rigour of a statutory provision. Hence, when recourse is sought to be taken to
the provisions of section 148, there has necessarily to be the fulfilment of
the jurisdictional requirement that the Assessing Officer must have reason to
believe that income has escaped assessment. To accept the contention of the
revenue in the present case would be to allow a reopening of an assessment
under section 148 on the ground that the Assessing Officer is of the opinion
that a contingency may arise in future resulting an escapement of income. That
would, be wholly impermissible and would amount to a rewriting of the statutory
provision. Tax legislation cannot be rewritten by the Revenue or the Court by
substituting the words ‘may escape assessment’ in future. Writing legislation
is a constitutional function entrusted to the legislature. [In favour of
assessee] (Related Assessment year : 2008-09) – [DHFL Venture Capital Fund
v. ITO (2013) 358 ITR 461 : 361 CTR 482 : 217 Taxman 116 ; 34 taxmann.com 300
(Bom.)]
Assessing Officer has power to make protective assessment in block assessment proceeding under section 158BD/BC
During
a search and seizure operation conducted at the residential and business
premises of one ‘P’, who was the managing director of assessee-companies,
certain documents were found wherein it was recorded that during the block
assessment period ‘P’ was indulged in giving accommodation entries to various
parties on commission basis and some of such accommodation entries were
represented under the head ‘introduction of share capital’ by ‘P’ in the
assessee-companies. During the block assessment in the case of ‘P’ he could not
explain the source of aforesaid income and, therefore, said amount was added to
his income as undisclosed income by the Assessing Officer. At the same time,
the Assessing Officer had also issued notice under section 158BD to the
assessee-companies as 'P' was the managing director of those companies through
whom he was allegedly of providing accommodation entries. The assessees were
required to prove the introduction of share capital within the parameters of
section 68. According to the Assessing Officer, the assessees were not able to
prove the same. Since addition on substantive basis had been made in the block
assessment of ‘P’, in the case of the assessees, the Assessing Officer
completed the assessment by making additions on protective basis. On appeal
before the Commissioner (Appeals), the addition was deleted. The Tribunal also
maintained the deletion of addition on the ground that there could not be
protective assessment under section 158BD.
On
appeal to the High Court, the revenue contended that when it was not clearly
ascertainable as to whether the addition should be made in the case of ‘P’ or
in case of assessees, it was very well within the powers of the Assessing
Officer to make substantive addition in the case of ‘P’ and protective addition
in cases of assessees.
Held
: It clearly emerges from the various judgments that even when there is no
specific provision in the Act for protective assessment, power lies with the
Assessing Officer to make such an assessment on protective basis under certain
circumstances. When there is such a power to make the protective assessment
while carrying out the normal assessment proceedings even in the absence of
specific provision, the absence of provision should not be a ground to preclude
the Assessing Officer for making protective assessment in block assessment
proceedings under section 158BC/BD. Principle of law laid down by the Supreme
Court in the case of Lalji Haridas v. ITO/Chhotalal Haridas v. M.D. Karnik (1961)
43 ITR 387 holding that the Assessing Officer has power to make protective assessment
even when there is no specific provision under the Act would equally apply to
the block assessment also. Therefore, the protective assessment can be framed
in the proceedings under section 158BC/158BD. Since the appeals were not be
disposed on merits, the matters were to be remitted back to the Tribunal for
deciding the appeals on merits. – [CIT v. Mahindra Finlease (P) Ltd. (2012) 343
ITR 464 : 204 Taxman 141 : (2011) 11 taxmann.com 362 (Del.)]
Protective
assessment is always successive to the substantive assessment
In
the case of M.P. Ramchandran v. DCIT (2010) 129 TTJ 190 at page 195, it
was held/averred, as follows, by the Hon’ble ITAT :
“In
order to give a different colour, the ld. DR contended that this disallowance
was made on protective basis only and hence cannot be equated with the
substantive disallowance. We have noted above about the validity and
presumption of the protective assessment in general. Protective assessment
cannot be independent of substantive assessment. Thus protective assessment is
always successive to the substantive assessment. There may be a substantive
assessment without any protective assessment but there cannot be any protective
assessment without there being a substantive assessment. In simple words there
has to be some substantive assessment/addition first which enables the Assessing
Officer to make a protective assessment/addition. Substantive
addition/assessment is made in the hands of the person in whose hands the Assessing
Officer prima facie holds the opinion that the income is rightly taxable.
Having done so and with a view to protect the interest of the Revenue, if the Assessing
Officer is not sure that the person in whose hands he had made the substantive
addition rightly, he embarks upon the protective assessment. Thus the
protective assessment is basically based on the doubt of the Assessing Officer
as distinct from his belief which is there is the substantive assessment.” – [M.
P. Ramchandran v. DCIT (2010) 129 TTJ 190 : (2009) 32 SOT 592 (ITAT Mumbai)]
A protective assessment
comes to an end when substantive assessment is made in case of a particular
person - There cannot be two assessments in respect of very same income - Where
Assessing Officer had made substantive addition in case of certain person, he
could not make protective assessment of same addition in hands of assessee
The Assessing Officer made
certain addition to the income of the assessee on protective basis. The
assessee filed instant appeal against the said order and contended that the
very same addition was made substantively in the case of one ‘P’, and that once
the substantive addition was confirmed in the case of ‘P’, the protective
assessment made in his hands could not stand.
The assessee has challenged
before this Tribunal only in respect of the addition made on protective basis.
It is not in dispute that the very same addition was made substantively in the
case of Shri P. Uttamchand. There is no specific provision in the Income-tax
Act for the purpose of making a protective assessment. However, now it is well
settled by judicial precedent that in order to protect the interest of the
revenue, protective assessment can be made. However, no recovery can be made on
the basis of the protective assessment. A protective assessment will come to an
end when the substantive assessment is made in the case of a particular person.
In this case, admittedly, the substantive addition has been made to the extent
of Rs. 51,96,706. As soon as the substantive assessment is made in the case of
Shri P. Uttamchand in respect of very same amount, in our view, the protective
assessment has to be vacated. The revenue cannot have two assessments in
respect of the very same income. Since, admittedly the substantive assessment
has been made in respect of very same income in the hands of Shri P.
Uttamchand, in our opinion, the protective assessment has no leg to stand.
Therefore, we set aside the protective assessment made in the hands of the
assessee. (Block period 1985-86 to 07.12.1995) – [Parasmal
Dangi v. ACIT (2006) 100 TTJ 608 : (2007) 17 SOT 19 (URO) (ITAT Chennai)]
It
is settled law that where there is doubt or ambiguity about the real entity in
whose hands a particular income is to be assessed, the assessing authority is
entitled to have recourse to making protective assessment in the case of one
and regular assessment in the case of other. However, making of protective
assessment does not affect the validity of the other assessment in as much as
if ultimately one of the entities is really found to be liable to the
assessment, then, the assessment in the hands of that entity alone remains the
effective assessment and the other becomes infructuous. The levy is enforceable
only under one assessment and not under both. - [Banyan & Berry v. CIT
(1996) 222 ITR 831 : 131 CTR 127 : 84 Taxman 515 (Guj.)]
No
protective assessment is possible unless a substantive assessment is made in
the hands of another person. - [ITO v. Pruthu Trust (1996) 86 Taxman 325 : 55
TTJ 70 (ITAT Ahmedabad)]
Assessment on substantive basis must be made first and thereafter protective assessment should follow
The assessee filed a return
of income declaring Rs. 5,995 as income. In the course of the assessment
proceedings, it was found by the ITO that the assessee was not having any
capital to start the business and the investment was made by her mother-in-law
and it was the income of the assessee’s husband. In such circumstances, a
protective assessment was made in the hands of assessee and unexplained cash
credits and other item of Rs. 13,080 were added. The AAC upheld the order of
the ITO.
On second appeal, the
Tribunal held that no addition could be made unless the Department came to the
conclusion that the income really belonged to the assessee. It further directed
that the substantive assessment be made on the assessee along with the
assessment of her husband who according to the Department really earned said
income. On reference :
If a protective assessment
is made, the additions have to be made in the hands of the person who has
really earned the income or is liable to pay tax thereon. The object if making
the protective assessment is that the assessment is also made in the hands of
some other person, and, if such other person objects to the assessment, or
finally it is held that it is not liable for payment of tax on such income,
then the Department must get the tax from the person in whose hands the
protective assessment is made.
In the instant case, if the
assessment made in the hands of assessee’s husband had already been upheld,
then the addition could also be made in respect of unexplained cash credits and
other items of business, which had not been considered of assessee but of her
husband. If the assessment in the hands of her husband had not been upheld then
substantive assessment be made in the hands of the assessee. The position of
the two persons, namely, assessee and her husband, had to be taken together
with regard to their final liabilty and then the question of addition had to be
considered. The Tribunal was, therefore, justified in not upholding the
additions which were made on a protective basis and directing the revenue to
proceed with the substantive assessment. [In favour of the assessee] (Related Assessment year : 1978-79) - [CIT v. Smt. Saraswati Devi (1995) 212
ITR 445 (Raj.)]
Penalties are levied after assessment orders and not before assessment orders and, therefore, protective penalty cannot be imposed
The
ITO enhanced the income disclosed by the assessee-firm and also levied a
protective penalty. On appeals, the Commissioner (Appeals) as well as the
Tribunal affirmed the order of ITO. On reference. Held : Penalties are levied
after assessment orders and not before the assessment orders. The protective
penalty thus, was conceptually antithetical and could not be conceived in law.
[In favour of the assessee] – [Metal Stores v. CIT (1990) 186 ITR 612
(Gauh.)]
No Protective order for Penalty - Under the
law, a protective order of assessment can be passed but not a protective order
of penalty
There
were certain changes in the constitution of the firm in years 1960 and 1962.
During the assessment years 1961-62 and 1962-63 the firm had paid sales tax
which was later refunded in 1967. The assessee-firm did not show the same as
its own income in the assessment year under consideration, but was so included
by the Assessing Authority.
IAC
imposed penalty under section 271(1)(c) as a protective measure, because a
similar penalty had already been imposed on the two partners. On appeal, the
Tribunal deleted the penalty on the grounds that under law a protective order
of assessment could be passed but not of penalty, and that the income did not
accrue to the present firm. Revenue conceded that it was not able to cite any
provision of law or decided case which warranted a protective order of penalty.
That apart, no finding was recorded by the IAC that there was any wilful
concealment of the income and in the absence of such a finding, the order of
penalty would be unsustainable. The other reason given for deleting the penalty
was that the income did not accrue to the present firm. The amount received by
the firm was not credited in its account and instead credited to the accounts
of ‘L’ and ‘S’ who were partners in the earlier firm. The assessee-firm,
therefore, did not treat the said amount as its own and it being a firm
different from the one to whom the refund had been made could not be held
guilty of any concealment. The Tribunal, therefore, rightly deleted the penalty
On
reference : The penalty was imposed by the IAC as a protective measure because
a similar penalty had already been imposed on the two partners for concealment
of the said income. The Tribunal found that, under law, a protective order of
assessment can be passed but not of penalty. The learned counsel for the
Revenue was unable to challenge this view of the Tribunal and frankly conceded
that he was not able to cite any provision of law or decided case which
warranted a protective order of penalty. That apart, no finding was recorded by
the IAC that there was any wilful concealment of the income and in the absence
of such a finding, the order of penalty would be unsustainable. The other
reason given for deleting the penalty was that the income did not accrue to the
present firm. As is apparent from the facts stated above, the amount received
by the firm was not credited in its account and instead credited to the
accounts of Lachhman Dass and Sat Parkash who were partners in the earlier firm.
The assessee-firm, therefore, did not treat the said amount as its own and it
being a firm different from the one to whom the refund had been made could not
be held guilty of any concealment. The Tribunal, therefore, rightly deleted the
penalty and accordingly answered against
the Revenue and in favour of the assessee. - [CIT v. Behari Lal Pyare Lal
(1983) 141 ITR 32 : 32 CTR 279 (P& H)]
In
cases where it appears to income-tax authorities that certain income has been
received during relevant assessment year but it is not clear who has received
that income and prima facie, it appears that income may have been received
either by A or B or by both together, it would be open to relevant income-tax
authorities to determine said question by taking appropriate proceedings both
against A and B
In the above case, issue was to pay tax on a sum of Rs. 97 lakhs
received by either of the two brothers as remittance from abroad. The Assessing
Officer was not certain who was liable to pay tax on such receipts. Thus, where
receipt of income was ascertained but Assessing Officer was not sure who was
liable to pay tax then protective assessment in one hand was resorted
to.
In
the notices issued by the respective Income-tax Officers against the two
appellants-brothers an enquiry was proposed to be held in regard to the
liability to pay tax on the alleged total income of Rs. 97,00,000 received by
either of both of the two appellants. This income represented the remittances
of monies through the Indian Overseas Bank Ltd., Pondicherry, and the United
Commercial Bank Ltd. Pondicherry, and had accrued during the assessment year
1952-53 respectively.
We
would, however, like to add one direction in fairness to the appellants. The
proceedings taken against both the appellants should continue and should be
dealt with expeditiously having regard to the fact that the matter is fairly
old. In the proceedings taken against Lalji the Income-tax Officer should make
an exhaustive enquiry and determine the question as to whether Lalji is liable
to pay the tax on the income in question. All objections which Lalji may have
to raise against his alleged liability would undoubtedly have to be considered
in the said proceedings. Proceedings against Chhotalal may also be taken by the
Income-tax Officer and continued and concluded, but until the proceedings
against Lalji are finally determined no assessment order should be passed in
the proceedings taken against Chhotalal. If in the proceedings taken against
Lalji it is finally decided that it is Lalji who is responsible to pay tax for
the income in question it may not become necessary to make any order against
Chhotalal. If, however, in the said proceedings Lalji is not held to be liable
to pay tax or it is found that Lalji is liable to pay tax along with Chhotalal
it may become necessary to pass appropriate orders against Chhotalal. When we
suggested to the learned counsel that we propose to make an order on these
lines they all agreed that this would be a fair and reasonable order to make in
the present proceedings. In the result the appeals fail and are dismissed. [In favour of
revenue] (Related Assessment year : 1952-53) – [Lalji Haridas v. ITO (1961)
43 ITR 387 (SC)]
It
was held that though there is no provision in the Act authorizing the levy of
income-tax on a person other than “the assessee”, i.e., the person by whom the
income-tax is payable, etc., it is open to the income-tax authorities to make a
“protective” or “alternative” assessment where, owing to litigation between the
parties concerned in Civil Court or for other reasons, the person who is really
liable to pay the tax cannot be finally determined by the income-tax authorities.
(Related Assessment year : 1945-46) - [Jagannath Hanumanbux v. ITO (1957) 31
ITR 603 (Cal.)]
