Case Law Details
DCIT Vs Cholan Buildings & Estates (ITAT Bangalore)
Protective Addition Cannot Continue Indefinitely Once Substantive Addition is Sustained Elsewhere- Bangalore ITAT Deletes Addition in Firm’s Hand
The Bangalore ITAT upheld deletion of a protective addition made in the hands of a partnership firm after noting that the very same income had already been assessed substantively and sustained in the hands of the managing partner. The Tribunal observed that once the Revenue itself had identified the person in whose hands the income substantively belongs, the protective assessment in another person’s hands could not continue indefinitely.
The case arose out of a search where the managing partner admitted undisclosed income. Based on the material found, the AO made a substantive addition of deemed dividend u/s 2(22)(e) in the hands of the partner, Shri N. Gunasekaran, while simultaneously making a protective addition of the same amount in the hands of the partnership firm. Subsequently, the substantive addition in the partner’s case was also confirmed by the CIT(A).
The Department argued before the ITAT that the CIT(A) ought not to have deleted the protective addition until the substantive addition attained finality. Rejecting this contention, the Tribunal held that a protective assessment is not intended to become a permanent assessment mechanism. Once the Revenue chooses the substantive assessee and succeeds in sustaining the addition there, the corresponding protective addition deserves deletion.
The ITAT further observed that the Revenue itself is responsible for pursuing substantive and protective proceedings together and cannot indefinitely keep both alive. However, as a safeguard, the Tribunal granted liberty to the AO to seek restoration of the matter in case the substantive addition in the partner’s hands is later deleted on the ground that the income actually belongs to the firm.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is filed by the Department in the case of CHOLAN BUILDINGS & ESTATES [the Assessee] against the appellate order passed by the Ld. CIT(Appeals)-15, BENGALURU dated 04-SEPT-2025 for the Assessment Year 2020-21 wherein the consolidated appellate order was passed for AYs 2010-11 to 2012-13 allowing the appeal filed by the assessee against the assessment order passed by the AO u/s. 143(3) of the Act on 24-MAR-2014.
2. Therefore the ld. AO is aggrieved and has preferred the appeal. The only grievance is that the ld. CIT(A) has deleted the protective addition in the hands of the assessee, whereas the substantive addition in the hands of Shri Gunasekaran had not attained finality.
3. The brief facts of the case show that the assessee is a partnership firm engaged in the business of real estate. It has filed the return of income u/s. 139(1) of the Act on 18.9.2012 at a total income of Rs.38,68,120.
4. Search took place u/s. 132 of the Act in the case of Team Life Care India Private Limited on 20.10.2011 wherein the premises of the assessee was also covered. Based on the evidence found, the Managing Partner, Sri N. Gunasekaran, in his statement, admitted undisclosed income of Rs.12,18,07,871. In the return of income filed by the assessee for AY 2012-13, sum of Rs.16,60,000 was included as income pursuant to statement u/s. 132 of the Act. After issuing notice the assessee was saddled with an addition of deemed dividend u/s. 2(22)(e) of the Act on protective basis, whereas the same is taxed in the hands of N. Gunasekaran on substantive basis of Rs.2,08,57,499. The assessment order was passed by making protective addition in the hands of partnership firm and substantive addition in the hands of the partner.
5. The assessee challenged the above addition before the ld. CIT(A) wherein the assessee stated that substantive addition made in the hands of the assessee by the AO in hands of N. Gunasekaran vide order dated 24.3.2014 which is confirmed by the ld. CIT(A) by appellate order dated 27.7.2023 and therefore as the substantive addition is confirmed, protective addition could not have been sustained, the ld. CIT(A) deleted the same.
6. The AO is aggrieved with the same. The ld. CIT(DR) vehemently submitted that the ld. CIT(A) should have waited till the addition in the hands of N. Gunasekaran attained finality. None appeared on behalf of the assessee.
7. We have carefully considered the issue and find that when the substantive addition has already been made and sustained in the hands of the partner of the firm, protective addition deserves to be deleted in the hands of this assessee. Naturally a protective assessment is effectively not a final assessment and cannot by itself justify permanent additions against the protective assessee. When in doubt, protective assessments are permissible but must not continue indefinitely; the Department must decide whose income it is and make substantive assessment accordingly. The ld. DR could not show any reason that the addition made in the hands of N. Gunasekaran should have been made in the hands of the assessee.
8. It is also true that position of the two persons, in whose hands substantive and protective additions are made, must be taken together with regard to their final liability and then the question of additions has to be considered. But question is who must do it and pursue it, the answer is naturally the revenue. In this case the ld. Revenue authorities have failed to pursue both the matters i.e. substantive and protective addition together.
9. In view of the above facts, we do not find any infirmity in the order of the ld. CIT(A), however, if in case the substantive addition is deleted in the hands of the N. Gunasekaran holding that the addition should have been made in the hands of the assessee, we give liberty to the ld. AO to appropriately move an application for restoration of this appeal. However, at present, we do not find any such circumstances to upset the order of the ld. CIT(A).
10. In the result, appeal filed by the Assessee stands dismissed.
Order pronounced in the open court on 22nd May, 2026.
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