Concept of Protective Assessment

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.)]