Protective Assessment Without Substantive Addition Invalid: ITAT Ahmedabad

Pravinkumar Valjibhai Pujara HUF Vs ITO (ITAT Ahmedabad)

Summary: The Ahmedabad Bench of the Income Tax Appellate Tribunal, in Pravinkumar Valjibhai Pujara HUF Vs ITO, ITA No. 142/AHD/2016, decided on 28 June 2021 for Assessment Year 2011-12, held that a protective assessment cannot survive in the absence of a corresponding substantive assessment. The Tribunal consequently held the protective addition of ₹77,01,600 made under Section 69 of the Income-tax Act, 1961, unsustainable and partly allowed the assessee’s appeal.

The dispute arose from cash deposits amounting to ₹77,01,600 in a bank account maintained with Dena Bank, Harij, in the name of the assessee-HUF. The Assessing Officer treated the deposits as unexplained investments and made an addition on a protective basis through an assessment order dated 28 February 2014 passed under Section 143(3). The assessee contended that the account had been operated by four other individuals without its knowledge and that the deposited funds were transferred through banking channels to those individuals and subsequently to M/s Shivkrupa Ginning & Pressing Private Limited. The Commissioner of Income Tax (Appeals), Gandhinagar, confirmed the addition by order dated 16 November 2015.

Before the Tribunal, the central legal question was whether a protective assessment could remain valid when no substantive assessment had been completed against any other person in respect of the same income. The assessee argued that the existence of a substantive assessment was a necessary foundation for a protective assessment. The Revenue maintained that, in the absence of a substantive assessment, the protective assessment could effectively acquire substantive character and remain enforceable.

The Tribunal explained that although the Income-tax Act does not expressly provide for protective assessments, judicial precedents recognise their use where the Revenue is uncertain about the person in whose hands particular income should be assessed. However, a protective assessment presupposes a substantive assessment concerning the disputed income. It also observed that tax demand arising from a protective assessment is not enforceable unless the protective assessment assumes substantive character in accordance with law. In the present case, an official communication dated 14 June 2019 from the Income Tax Officer, Ward-3, Patan, confirmed that no scrutiny assessments or substantive additions had been made in the cases of the relevant individuals. The Assessing Officer had himself contemplated substantive additions in their hands, but no such assessments had materialised.

Relying upon Suresh K. Jajoo Vs ACIT, 39 SOT 514 (ITAT Mumbai), and Ramesh Chand Premraj Soni (HUF) Vs ACIT, 13 SOT 15 (ITAT Jodhpur), the Tribunal held that a substantive assessment must precede a protective assessment and that protective additions cannot survive where their substantive foundation is absent. Accordingly, the assessment made on a protective basis was held unsustainable. Since the assessee succeeded on this technical legal ground, the Tribunal declined to adjudicate the merits of the cash deposits and dismissed the substantive grounds as unnecessary for deciding the appeal. The assessee’s appeal was therefore partly allowed.

Cases Discussed:

1. Suresh K. Jajoo Vs ACIT — 39 SOT 514 (ITAT Mumbai). Relied upon for the proposition that an assessment can be treated as protective only where a substantive assessment exists and that the substantive assessment must precede the protective assessment.

2. Ramesh Chand Premraj Soni (HUF) Vs ACIT — 13 SOT 15 (ITAT Jodhpur). Relied upon for the principle that protective additions cannot survive where the corresponding substantive assessment has been struck down as time-barred and no substantive addition remains in existence.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The captioned appeals have been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), Gandhinagar, dated 16/11/2015 (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3)of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Years 2011-12

2. The assessee has raised the following grounds of appeal:

1. The Learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs.77,01,600/- made by the Assessing Officer u/s.69 of the I.T.Act,1961 on protective basis.

2. The learned Commissioner of Income tax (Appeals) has erred in confirming the action of the Assessing Officer in holding that Appellant had opened Bank account with Dena Bank, Harij and deposited his own cash of Rs. 77,01,600/- even though the Appellant has clearly stated in his statement recorded u7s.!31 of the Act by the A.O. that the said account has been operated by four persons namely Smt. Jyotsanaben Sureshkumar Thakkar, Shri Rakeshkumar Sureshkumar Thakkar, Sunil Sureshkumar Thakkar and Shri Sureshkumar Nathalal Thakkar without his knowledge and the said cash deposits therein belongs to them.

3. The Learned Commisisoner of Income Tax (Appeals) has erred in not considering the fact that the amounts in cash deposited by the above stated four persons in the saving account of Appellant with Dena Bank, Harij have been transferred to their personal accounts on the very same date and thereafter transferred in the Bank account with the same bank i.e. Dena Bank, Harij of their Co. named M/s. Shivkrupa Ginning & Pressing Private Limited. These facts clearly establishes the fact that the said cash deposits in the bank account of the Appellant belongs to the unaccounted cash of the four persons named herein above in ground no.2.

4. The Learned Commissioner of Income Tax (Appeals) has erred in not considering the fact that the Assessing Officer has failed to record the statement of Shri Sureshbhai Thakkar who personality appeared on 3070972015 during remand report proceedings.

5. The appellant craves leave to add, alter, amend or modify any of the grounds of appeal on or before the date of hearing of appeal.

3. At the outset, it was observed that the assessment in the present case was made under section 143(3) of the Act vide order dated 28/02/2014 on protective basis after making an addition of Rs. 77,01,600/- on account of unexplained investment under section 69 of the Act. As the word protective assessment implies that there was the substantive assessment in the case of the other assessee with respect to the same disputed income. But in the case on hand the addition was made in the hands of the assessee on protective basis only without making any addition on substantive basis in the hands of the other assessee. Therefore, in such a situation a question arises whether the assessment framed on protective base in the case of the assessee is sustainable in the eyes of law. Accordingly, a question was raised to the learned AR and the DR.

4. The ld. AR submitted that there cannot a valid protective assessment without having a substantive assessment. Therefore, the impugned assessment should be quashed.

5. However, the DR contended that the absence of substantive assessment cannot lead to draw an inference that the assessment framed on protective basis is not sustainable in the eyes of law. As per the learned DR once there was no substantive assessment in the case of other assessee, then the protective assessment will take the colour of substantive assessment. Therefore, such protective assessment is valid in the eyes of law. The learned DR vehemently supported the order of the authorities below.

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:

No PTN/WD-3/Misc/ITAT/2019-20      Date 14.06.2019

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 the 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 time-barred. 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.

Order pronounced in the Court on 28/06/2021 at Ahmedabad.