ITAT Kolkata Deletes Protective Addition on Alleged Accommodation Entries

Avlokan Vinimay Pvt. Ltd. Vs ITO (ITAT Kolkata)

Protective Addition Cannot Stand Without a Substantive Assessment: ITAT Deletes ₹1.69 Crore

Facts of the case

The assessee challenged an addition of ₹1.69 crore made on a protective basis, contending that no corresponding substantive assessment had been made in the hands of any other person.

The company filed its return for AY 2012-13 declaring a loss of ₹34,425. During its first year of operations, it raised ₹1,69,00,000 through share capital and share premium. Its return was selected for scrutiny, and notices under sections 143(2) and 142(1) were issued.

The assessee furnished the documents and details sought regarding the share subscribers. However, the summons issued under section 131 to the company’s directors were not complied with.

The Assessing Officer concluded that the share subscriptions appeared to represent accommodation entries received from shell companies. At the same time, he recorded that the assessee was not the real beneficiary and that the money belonged to somebody else. Consequently, he added the entire amount in the assessee’s hands only on a protective basis.

The assessment was framed under section 144(1). The CIT(A) confirmed the Assessing Officer’s action.

Delay in filing the appeal

The appeal before the Tribunal was delayed by 10 days. The assessee’s counsel explained the reasons, and the Departmental Representative did not object to condonation.

Finding the reasons bona fide and genuine, the Tribunal condoned the delay and proceeded to adjudicate the appeal.

The controversy: Can a protective assessment exist independently?

The decisive question was whether an assessment could be sustained on a protective basis when the Department had not made any substantive addition concerning the same income in another person’s hands.

The assessee’s argument was that a protective assessment serves as an alternative to a substantive assessment where there is uncertainty about the person liable to tax. It cannot remain an isolated assessment against an assessee whom the Assessing Officer himself considers not to be the real beneficiary.

The Tribunal recorded that, although the Assessing Officer suspected accommodation entries, no substantive addition had been made in the hands of any other assessee.

Tribunal’s reasoning

The Tribunal explained that protective and substantive assessments are connected mechanisms used to safeguard the Revenue where there is uncertainty about whose income is being assessed.

In such circumstances, the Department may assess the amount substantively in one person’s hands and protectively in another’s, pending determination of the correct person liable to tax.

However, in the present case, the Assessing Officer had neither treated the assessee as the substantive recipient nor made a substantive assessment elsewhere. The Tribunal therefore held that the protective assessment lacked the necessary foundation and was a nullity and bad in law.

The decision rested on this legal defect. The Bench did not uphold the addition by independently determining that the share subscriptions were unexplained income substantively assessable in the assessee’s hands.

Precedents followed

The Tribunal followed Pravinkumar Valjibhai Pujara HUF v. ITO, ITA No. 142/AHD/2016, order dated 28 June 2021. That decision held that a protective assessment could not survive when no substantive assessment had been framed.

In the precedent, the Assessing Officer had identified persons in whose hands substantive additions were proposed, but those assessments were never made. A stated intention to make a substantive addition was therefore insufficient.

The reproduced reasoning also relied on Suresh K. Jajoo v. ACIT, 39 SOT 514 (Mumbai), which explained that an assessment could be regarded as protective only where a substantive assessment existed.

Further reference was made to Ramesh Chand Premraj Soni HUF v. ACIT, 13 SOT 15 (Jodhpur). There, the substantive assessment had been struck down as time-barred, and the protective additions were held unsustainable in the circumstances. The discussion distinguished that situation from a determination that the income belonged to the person assessed protectively.

Decision

Following the above reasoning, the Tribunal set aside the CIT(A)’s order and directed the Assessing Officer to delete the ₹1.69 crore addition.

The assessee’s appeal was allowed. The relief was granted on the invalidity of the unsupported protective assessment, rather than on a finding that every share subscription had been established as genuine.

Author’s comments

The ruling exposes a fundamental weakness in an assessment that says, in effect, “the income belongs to someone else, but we have assessed nobody else.” A protective addition safeguards an identified alternative tax position; it cannot substitute indefinitely for determining the person substantively liable.

For practitioners, the useful enquiry is whether a corresponding substantive assessment actually exists, what income it covers and in whose hands it has been made. The description “protective” in an assessment order should prompt verification of that underlying position.

Paragraph 6 contains an overbroad statement suggesting that a substantive addition also cannot exist without a protective assessment. The issue decided was the converse: a protective assessment without a substantive assessment could not survive. The decision should be cited for that specific proposition, rather than as requiring every substantive assessment to have a protective counterpart.

Cases Discussed

• Pravinkumar Valjibhai Pujara HUF v. ITO (ITAT Ahmedabad) – ITA No. 142/AHD/2016; Order dated 28.06.2021. Followed. A protective assessment cannot survive where no substantive assessment has been framed.
• Ramesh Chand Premraj Soni HUF v. ACIT (ITAT Jodhpur) – 13 SOT 15. Relied upon in the reproduced precedent concerning the failure of protective additions when the substantive assessment was struck down.
• Suresh K. Jajoo v. ACIT (ITAT Mumbai) – 39 SOT 514. Relied upon in the reproduced precedent for the proposition that a protective assessment presupposes a substantive assessment.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 30.04.2025 for the AY 2012-13.

2. At the outset, we note that the appeal of the assessee is barred by limitation by 10 days. At the time of hearing the counsel of the assessee explained the reasons for delay in filing the appeal. The Ld. D.R did not raise any objection in condoning the delay. After hearing the rival contentions and perusing the materials available on record, we find that the delay is for bonafide and genuine reasons and hence, we condone the delay and adjudicate the appeal in the following paras.

3. The only issue raised by the assessee is against the order of ld. CIT (A) upholding the assessment framed by the ld. AO on the protective basis despite the fact that there cannot be protective assessment without there being substantive assessment and therefore, the assessment framed on protective basis may kindly be quashed.

4. The facts in brief are that the assessee filed the return of income declaring loss of ₹34,425/-, which was selected for scrutiny. Accordingly, the notices u/s 143(2) and 142(1) of the Act were issued and duly served upon the assessee. This being the first year of the company, the company collected by way of share capital/ share premium a sum of ₹1,69,00,000/-. The assessee during the course of assessment proceedings filed and furnished the documents and details as called for by the ld. Assessing Officer qua the share subscribers. The ld. AO also issued summon u/s 131 of the Act which were not complied with. Finally, the ld. AO noted that the assessee has received money by issuing equity shares to shell companies and therefore, the same is treated as unexplained cash credit. Simultaneously, the ld. AO noted that the addition is made on protective basis as the real beneficiary is not the assessee but somebody else. The ld. AO framed the assessment u/s 144(1) of the Act dated 19.03.2025 and added ₹1,69,00,000/- to the income of the assessee.

5. The ld. CIT (A) in the appellate proceedings, confirmed the order of the ld. Assessing Officer.

6. After hearing the rival contentions and perusing the materials available on record, the undisputed facts are that the assessee has collected ₹1,69,00,000/- by issuing of equity shares including share premium. During the course of assessment proceedings, the assessee filed before the ld. AO the details and evidences as called for by the ld. AO, however the summons issued u/s 131 of the Act to the directors of the assessee company were not complied with. The ld. AO recorded a finding that the money received by the assessee appears to be accommodation entries from shell companies, however, the assessee is not real beneficiary and the real beneficiary is someone else. Therefore, he made the addition on protective basis in the hands of the assessee while no substantive addition was made qua the said accommodation entry in the hands of any other assessee. Now the issue before us is whether a protective assessment without there being any substantive addition is valid or non-est in the eyes of law. Therefore, we note that the concept of substantive and protective addition is integrated to each other. There cannot be a substantive addition without there being any protective assessment or vice-versa. In our opinion, where the AO is not sure as who is the beneficiary of the accommodation entry or in whose hands the income should be assessed then in order to protect the interest of the Revenue the addition is made on protective basis in the hands of one person and at the same time on substantive basis in the hand of other person. So that if once addition is not sustained on account of being not sustainable any reason then the other additions made qua the same income attains finality. Therefore, the assessment framed by the ld. AO is nullity and bad in law as there was no substantive assessment in the hands of any other person. The case of the assessee is squarely covered by the decision of co-ordinate Bench in the case of Pravinkumar Valjibhai Pujara HuF Vs. ITO in ITA No. 142/AHD/2016 vide order dated 28.06.2021, wherein the co-ordinate bench has held as under:-

“6. We have heard the rival contentions of both the parties and perused the materials available on record. There is no provision under the law for making the assessment on protective basis. However it is well settled by the judicial precedent that in the interest of the revenue, the protective assessment can be framed. The circumstances arise for making the protective assessment in a situation where the revenue during the proceedings finds that a particular amount of income can be taxed in the hands of the different persons/assessee and the AO is not sure enough about such person in whose hands the income is chargeable to tax. Few of the instances where the situation for making the protective viz a viz substantive assessment arise are given as under:

i. The income is received by one person but its fruits are enjoyed by another person or the beneficial owner is a different person.

ii. The income is received by 2 persons apparently but both of them do not have any association in the earning of such income.

iii. There are 2 claimants in respect of a particular income but legally only one person can claim the ownership.

iv. The income flows to one person but the same is received by another person.

6.1 In the above circumstances where the legal ownership of the income is under suspicion, the AO can resort to make the addition in the hands of 2 persons or more than 2 persons on the basis of protective and substantive basis. But the demand of tax is not enforceable in the case of protective assessment until and unless it changes its shape by becoming substantive assessment.

6.2 The concept of protective assessment also becomes important in a situation where the addition on substantive basis is deleted and in such an event, protective assessment shall change its colour by becoming substantive assessment. Had there not been such protective assessment, then assessment with respect to such person (protective assessment) would have become barred by time.

6.3 From the above discussion, it is inferred that an assessment can be considered protective only when there is substantive assessment. Thus the substantive assessment has to precede protective assessment. However, in the case on hand there is no ambiguity to the fact that there was only protective assessment in the hands of the assessee and there was no substantive assessment. This fact can be verified from the letter issued by the Income Tax Officer ward-3, Patan bearing number PTN/WD-3/Misc/ITAT/2019-20 dated 14 June 2019. The relevant extract is reproduced as under:

Date 14.06.2019

No PTN/WD-3/Misc/ITAT/2019-20
The Senior Departmental Representative,
ITAT 3(1), Ahmedabad. 2n Floor, Neptune Tower,
Opp-Nehru Bridge, Ashram Road, Ahmedabad.

Respected Sir,

Sub: ITA No.l42/Ahd/2016in the case of Shri. Pravinkumar V. Pujara HUF for A.Y. 2011-12-reg

Ref: No. Sr. D.R./ITAT-3(1)/’C’ Bench/2019-20 dated 04.04.2019

***************

Kindly refer to the above.

On verification of the ITD System and current demand & collection register it is noticed that neither scrutiny assessment nor any substantive additions were made in these cases:-

Submitted for kind information

Yours faithfully.
(J.J. Raval)
Income-tax Officer
Ward-3, Patan

6.4 The facts of the present case are like this. The assessee has deposited cash of Rs. 77,01,600/- in his bank account which was subsequently transferred to the parties as discussed above through the mode of banking channel. Such amount of cash deposit was treated as unexplained investment in the hands of the assessee under the provisions of section 69 of the Act and therefore the same was added to the total income of the assessee on protective basis.

6.5 However, the AO was conscious while framing the assessment of the assessee about the fact that the substantive assessment has to be framed in the name of the persons as discussed above. The relevant observations of the AO as recorded in his order with respect to the substantive assessment reads as under:

Sustantive addition is to be made on the same issue in the cases of 1) Shri Sureshbhai Nathalal Thakkar, 2)Shri Rakesh Sureshbhai Thakkar, 3) Shri Sunil Sureshbhai Thakkar and 4) Smt. Jyotsnaben Sureshbhai Thakkar as the transaction are done by the them, in the bank account of the assessee and they have also failed to give their explanation in this matter, despite of opportunities being given to them to attend by issuing summons and also by the assessee.

6.6 Undoubtedly, there was no assessment framed in the hands of persons as discussed above. Thus in our considered view in the absence of such substantive assessment, the protective assessment cannot survive. In holding so we draw support and guidance from the order of Mumbai Tribunal in the case of Suresh K.Jajoo Vs. ACIT reported in 39 SOT 514 wherein it was held as under:

“Thus, protective assessment has to be done only after substantive assessment is done. An assessment can be considered as protective only when there is substantive assessment. Thus, substantive assessment has to precede protective assessment.”

6.7 We also note that the ITAT Jodhpur in the case of Ramesh Chand Premraj Soni (HUF) Vs. ACIT reported in 13 SOT 15 has held that if the substantive assessment in the case of the assessee is struck down being barred by time, the additions made in the protective assessment cannot survive. The relevant extract is reproduced as under:

“In the instant case, there was no dispute with regard to the facts that all the additions, which were the subject-matter of appeal or for that matter that of assessment order passed under section 158BD in the case of the HUF were made on protective basis. All parallel additions were made in the case of ‘R’ individually. The assessment made under section 158BC in the case of ‘R’ did not survive at all, since it had been struck down being timebarred. The additions made on substantive basis had not been decided by deleting the same from assessee’s individual hands rather they were thrown along with the block assessment order, meaning thereby, there was no substantive addition in existence at all; and the protective addition presupposed the existence of substantive additions. In another words whenever additions were made, they were only substantive additions. The term ‘protective addition’ is a misnomer; actually it is a substitutive addition. The ‘protective addition’ name has been given to it since it protects the interest of the revenue. In such a case, there happens to be some doubt as to whom a particular income belongs to; when it is not clearly established as to in whose hands a particular income should be added, when there are evidences that it may belong to either of the two, or when scintillating evidences are available from which it is not possible to come to clear-cut conclusion, readily. In the instant case, the substantive additions had not been declared to not belong to ‘R’. Had that been the case, the protective addition could have been considered and added substantially if it was found to belong to ‘protective assessee’. From the above observations, it follows that when the substantial additions go, protective additions cannot survive. When the very base of income ‘goes’, the addition in the assessee’s hands, who was treated as ‘protective’, would also not survive. Consequently, on this legal ground, the assessment order was quashed.”

6.8 In view of the above and after considering the facts in totality, we hold that the protective assessment framed by the AO without making the substantive assessment is not sustainable. Hence, the assessee succeeds on this technical ground. As the assessee has succeeded on the technical ground, we do not find any reason to adjudicate the issue raised by the assessee on merit. Hence the grounds raised by the assessee on merit are dismissed.

7. In the result, the appeal of the assessee is partly allowed.”

7. We therefore, respectfully following the same, set aside the order of ld. CIT (A) and direct the AO to delete the addition.

8. In the result, the appeal of the assessee is allowed.

Order pronounced on 07.10.2026.