2023 (7) TMI 806 - HC - Income Tax

Capital gain addition on protective basis or substantive basis - assessee/partner holding 5% share in a partnership firm - whether the act of the respondents of recovering the amount assessed as protective addition against the petitioner and charging interest thereon and subsequently recovering the same without framing any substantive assessment is illegal and not sustainable in the eyes of law? - HELD THAT - On applying the legal proposition to the effect that without substantive assessment, no recovery can be effected to the instant case, it is observed that since at the time of passing of assessment order by respondent No.2 where the protective addition was made in the case of the petitioner, no substantive addition had been made in the hands of the firm, therefore, no substantive additions were infact in existence. Subsequent demand in the absence of substantive addition being specifically made in the hands of the petitioner, recovery could certainly not be effected from him. Though the Tribunal had made observation that protective assessment may become substantive, however, it had neither declared the impugned assessment as substantive assessment nor gave any direction to the assessing authorities to frame the same qua the petitioner assessee. It is also not the case of the respondents that at any stage thereafter, the authorities had framed substantive assessment in respect of the additions made in the income of the petitioner against him. When without framing any substantive assessment, the respondents sought to recover the amount assessed protectively rather recovered the same by issuing the impugned demand notice and recovery certificate, their action cannot be stated to be sustainable in law. Accordingly, the impugned demand notice and recovery certificate have become liable to be set aside and it is ordered accordingly. Recovery pursuant to the impugned notice and certificate has already been effected from the petitioner by the respondents and further keeping in view the interest of the revenue who might be entitled to recover the amount protected by way of protective assessment as made against the petitioner from him or from the firm or any other person, by making substantive assessment, we consider it proper to remit the case with a direction to the assessing officer to consider the question of making substantive assessment in the matter against the proper assessee and then to pass an order of recovery in this case. It is made clear that if the assessing officer/proper officer fails to make any substantive assessment against the petitioner within a period of three months from the date of passing of this order, then the revenue shall be liable to refund the amount so recovered from the petitioner.

Summary

Issues Involved:
1. Legality of protective assessment and recovery.
2. Validity of the demand notice and recovery certificate.
3. Requirement of substantive assessment for recovery.

Summary:

1. Legality of Protective Assessment and Recovery:

The petitioner, an assessee under the Income Tax Act, 1961, filed a writ petition challenging the protective assessment of Rs. 5,50,290/- as capital gain by the assessing officer. The Commissioner of Income Tax (CIT) invoked Section 263 of the Act, setting aside the initial assessment and directing a fresh assessment, which was upheld by the Appellate Tribunal. The Tribunal reiterated that the assessment was on a protective basis and not substantive. The petitioner argued that no substantive assessment had been made, and thus, recovery based on protective assessment was unjustified. The Court noted that protective assessments are permissible when there is doubt about the rightful recipient of income, but protective recovery is not allowed. The Court cited precedents, including Lalji Haridas v. ITO and DHFL Venture Capital Fund v. ITO, to support this position.

2. Validity of the Demand Notice and Recovery Certificate:

The petitioner contested the demand notice dated 06.09.2005 and the recovery certificate, arguing that since the assessment was protective, no tax, interest, or penalty could be recovered. The respondents contended that the petitioner failed to prove the existence of the firm and the filing of its return, thus justifying the conversion of protective assessment into substantive recovery. The Court found that the revenue's action of recovering Rs. 15,27,302/- without substantive assessment was unsustainable in law. It emphasized that recovery can only be effected after substantive assessment, as protective recovery is not permissible.

3. Requirement of Substantive Assessment for Recovery:

The Court highlighted that the Tribunal had not declared the protective assessment as substantive nor directed the authorities to do so. The respondents failed to produce any fresh facts or inquiries justifying the recovery. The Court ordered that the impugned demand notice and recovery certificate be set aside. However, it remitted the case to the assessing officer to consider making a substantive assessment within three months. If no substantive assessment is made within this period, the revenue must refund the recovered amount to the petitioner.

Conclusion:

The Court concluded that the recovery based on protective assessment without substantive assessment was illegal. It ordered the setting aside of the demand notice and recovery certificate and directed the assessing officer to consider substantive assessment within three months, failing which the recovered amount must be refunded to the petitioner.