2015 (5) TMI 711 - AT - Income Tax

Addition made on account of the cash embezzlements - Protective assessment - CIT(A) deleted the addition - Held that - We find that there is no dispute that the addition has been made in this case purely on protective basis . On the facts of this case, it is also an incorrect assumption that in the event of embezzlement having actually taken place in Vam Airtex, the corresponding income must belong to this assessee. Even if one is to reach a conclusion that embezzlement has taken place in Vam Airtex, the assessee is not the only person needle of suspicion points to. It is a matter of record that allegations have been raised against Sunil Shah, one of the directors of Vam Airtex, and the Assessing Officer himself has taken note of these allegations. When the matter is sub judice and there are allegations and counter allegations by the assessee against the Vam Airtex as also against its directors and vice versa, it is premature to assume that this assessee could be the only beneficiary of the criminal activity of embezzlement. We have also noted that the Assessing Officer has not rejected the assessee s explanation that he was operating the bank account concerned as a benamidar of Sunil Shah, a director of Vam Artex, but yet held taxability of income in the hands of the assessee that the assessee could not having been doing so without a consideration. As a corollary to the approach so adopted by the Assessing Officer, at best hawala commission could have been brought to tax in the hands of the assessee and not the entire amount of bank on account of alleged bogus purchases. However, the Assessing Officer has added entire bank credit as income of the assesse, which, by no stretch of logic, could be added to the income of the assessee on the basis of findings so far. There is thus an inherent contradiction in the approach of the Assessing Officer. In any case, there is nothing more than an allegation of embezzlement by the assessee and such allegations, by itself, cannot be legally sustainable foundation for the addition being made in the hands of the assessee. - Decided in favour of assesse.

Summary

Issues Involved:
1. Validity of protective assessment.
2. Allegations of embezzlement and its tax implications.
3. Substantive vs. protective addition of income.
4. Legal principles governing protective assessments.

Detailed Analysis:

1. Validity of Protective Assessment:
The primary issue was whether the protective assessment of income was valid under the circumstances. The Assessing Officer (AO) made protective additions citing the potential embezzlement by the assessee. The court noted that protective assessments are permissible when there is uncertainty about the entity in whose hands the income should be taxed. However, in this case, the AO himself was unsure about the embezzlement, making the protective assessment unwarranted. The court emphasized that protective assessments can only be made when the income's occurrence is beyond dispute, which was not the case here.

2. Allegations of Embezzlement and its Tax Implications:
The AO alleged that the assessee embezzled funds from Vam Airtex Pvt. Ltd. and made protective additions based on this allegation. The court found that the AO did not have concrete evidence of the embezzlement, as the matter was still sub judice. The court highlighted that mere allegations cannot form a legally sustainable foundation for tax additions. Furthermore, the court noted that the AO did not reject the assessee's claim of being a benamidar for Sunil Shah, a director of Vam Airtex, which further weakened the basis for the protective assessment.

3. Substantive vs. Protective Addition of Income:
The court examined the distinction between substantive and protective additions. It was noted that substantive additions were already made in the case of Vam Airtex Pvt. Ltd., which were under appeal. The court ruled that protective additions in the hands of the assessee were not justified, as the AO had not conclusively established the embezzlement or the assessee's benefit from it. The court also pointed out the inherent contradiction in the AO's approach, as the entire bank credit was added to the assessee's income without adequate justification.

4. Legal Principles Governing Protective Assessments:
The court referred to several legal precedents to elucidate the principles of protective assessments. It cited the Supreme Court's decision in Lalji Haridas vs. CIT, which allows protective assessments when there is doubt about the recipient of the income. However, the court clarified that such assessments are only valid when there is no dispute about the income itself. The court also mentioned the principle of conservatism, which allows deductions for anticipated losses even before they occur, further complicating the AO's rationale for the protective assessment.

Conclusion:
The court concluded that the protective additions made by the AO were unsustainable in law. It emphasized that protective assessments should not be made based on mere allegations or without clear evidence of income. The court upheld the CIT(A)'s decision to delete the protective additions and dismissed the appeals, reinforcing the need for concrete evidence and clear legal grounds for such assessments. The judgment clarified that the observations made should not affect the deductibility of the alleged embezzlement loss in the case of Vam Airtex Pvt. Ltd.

Final Judgment:
The appeals were dismissed, and the protective additions made by the AO were deemed unsustainable. The court's decision was based on the principles of substantive and protective assessments under income tax law, ensuring that such assessments are made only with clear evidence and legal justification.