Summary: The Income Tax Appellate Tribunal deleted an addition of ₹23,30,000 made under Section 68 read with Section 115BBE of the Income Tax Act on a protective basis against a firm in the case of Santlal Enterprise Vs ITO (ITAT Kolkata). The addition was initially made by the Assessing Officer (AO) and sustained by the CIT(A) for unexplained cash deposits. However, the Tribunal found that the same cash deposits had already been declared as taxable income by the firm’s partners in their individual returns, and the tax due was fully paid by them. The Tribunal referenced the legal concept of protective assessment, which is permissible only when there is uncertainty about the rightful entity to be charged with the income to safeguard revenue interests. It affirmed that once the substantive tax liability for the amount is established and paid by the correct assessee (in this case, the partners), the corresponding protective addition against the firm becomes redundant and lacks jurisdictional justification. Therefore, the Tribunal deleted the protective addition, as double taxation on the same income is not permissible, even where protective assessments are used as an administrative safeguard.
Issue : addition under Section 68 r/w Section 115BBE on a protective basis.
Brief Facts:
The AO added ₹23,30,000 as unexplained cash deposits under Section 68 r/w 115BBE on a protective basis.
The addition was sustained by CIT(A), while the larger addition under Section 56(2)(x) was deleted.
It was found that the same amount had already been declared as taxable income by partners, and tax was duly paid.
Tribunal’s Findings:
The Tribunal recognized that protective assessment is permissible only when the substantive liability is uncertain.
Since the cash deposits had already been explained and assessed in the partners’ individual returns, the protective addition in the firm’s hands lacked jurisdictional justification.
Once the substantive tax is paid by the partners, no second assessment can be sustained protectively against the firm.
Therefore, the protective addition under Section 68 became redundant and otiose, leading to its deletion.
Section 68 – Unexplained Cash Credits
Where any sum is found credited in the books of the assessee and the assessee offers no satisfactory explanation as to its nature and source, the sum may be charged to income tax as income of the assessee of that previous year.
The burden lies primarily on the assessee to prove identity, creditworthiness, and genuineness of the transaction [CIT v. P. Mohanakala (2007) 291 ITR 278 (SC)].
Section 115BBE – Tax on Income Referred in Sections 68 to 69D
- Provides that where income is determined under section 68, it shall be chargeable to tax at a flat rate of 60% (plus applicable surcharge and cess).
- No deduction or set-off of any expense or loss is allowable against such income.
However, Section 68 applies only when income accrues in the hands of the assessee; it cannot be used protectively where the same sum stands taxed substatively in someone else’s assessment.
Concept of Protective Assessment:
The Income Tax Act, 1961 does not expressly provide for “protective assessment.” Yet, courts have long recognized it as an administrative safeguard in cases where there is doubt about the rightful person in whose hands an income should be taxed. Key legal principles:
- Protective assessment/addition may be made only to safeguard the revenue interest where uncertainty exists over ownership or linkage of income.
- Tax recovery can only be made on the substantive assessment once it attains finality.
- Once the substantive tax liability is established on the correct assessee, the corresponding protective assessment becomes redundant and infructuous.
Case Law References:
1. CIT v. Ram Chand Tilli Works (2013) 217 Taxman 76 (Allahabad)
Held that protective assessments can be made when there is doubt about the real entity chargeable to tax. Once doubt is resolved, the protective assessment falls automatically.
2. Lalji Haridas v. ITO (1961) 43 ITR 387 (SC)
Recognized the concept that the Department may assess an income protectively in more than one case where there is uncertainty about who earned it but clarified that recovery can only be made once.
3. Jagannath Hanumanbux v. ITO (1957) 31 ITR 603 (Cal.)
Laid the foundation that double assessment cannot result in double taxation; only one person can be substantively assessed on the income.
4. ITO v. Bachubhai Patel (1975) 101 ITR 169 (Guj.)
Reaffirmed that the protective assessment is merely a procedural device and becomes nugatory once the substantive assessment is determined.
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