2022 (8) TMI 789 - AT - Income Tax

Addition on protective basis - addition has been confirmed on substantive basis in the hands of firm - assessee had introduced the capital in cash and received interest on partner s capital and remuneration - addition of capital introduced by the firm in the hands of the firm and AO disallowed the interest and remuneration paid to the partners on substantive basis - HELD THAT - It is imperative to mention that in the case of Jagannath Bawri and Others vs CIT and Others 1998 (8) TMI 83 - GAUHATI HIGH COURT has explained the concept of protective assessment. We are of the view that protective assessments are a particular type of assessment that focuses on those assessments which is made to protect the interest of the Revenue. Although, there is no provision in the Income Tax Act authorizing the levy of income tax on a person other than whom income tax is payable but the object of the protective assessment is that in case substantive addition is made in the hands of other person and in case assessment fails then in that eventuality the Department must get the tax from the person in whose hands protective assessment is made or ultimately if substantive addition made is confirmed then in that eventuality protective addition cannot survive. Therefore, keeping in view the above proposition and also keeping in view the judgement discussed by us herein above , we are of the view that in the present facts and circumstances of the case, no loss is going to suffer by the assessee, in case, we uphold the order of the ld. CIT(A) in upholding the protective addition made by the AO in the hands of the assessee. In this view of the matter, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Confirmation of addition on protective basis in the hands of the assessee.
2. Validity of protective assessment when substantive assessment is made in the hands of the firm.

Detailed Analysis:

1. Confirmation of Addition on Protective Basis in the Hands of the Assessee:

The assessee, a partner in M/s Shri Ram Borewell & Construction Company, filed her return of income declaring Rs.1,89,250/- for the assessment year 2011-12. The AO received information that the assessee introduced capital in cash of Rs.32,00,000/- and received interest and remuneration amounting to Rs.3,84,000/- and Rs.9,09,520/- respectively. The AO noted that the assessee did not establish the source of the capital nor declared the interest and remuneration received. Consequently, a notice under section 148 was issued, and the assessee filed a return declaring Rs.2,20,150/-. The assessee explained that no capital was introduced, nor any remuneration or interest was received, attributing discrepancies to miscommunication between the tax auditor and the accountant. The ITAT set aside the assessment order and directed a de novo assessment. However, the AO made an addition of Rs.44,93,520/- on a protective basis, pending verification of submissions by the firm's AO. The CIT(A) upheld the protective addition, agreeing with the AO's stance.

2. Validity of Protective Assessment When Substantive Assessment is Made in the Hands of the Firm:

The assessee argued that once the addition is confirmed in the hands of the firm on a substantive basis, the same cannot be confirmed in the hands of the assessee on a protective basis. The firm's assessment was completed on 28.12.2017, wherein the AO made additions and disallowed interest and remuneration paid to the partners substantively. The CIT(A) confirmed the protective addition without considering the substantive assessment in the firm's case. The ITAT noted that the firm's appeal against the AO's order was still pending, and the substantive addition had not attained finality. The ITAT emphasized that while there is no statutory provision for protective assessments, they are recognized to safeguard revenue when there is ambiguity regarding the income's rightful owner. The ITAT referred to the Gauhati High Court's explanation of protective assessments, highlighting their purpose to protect revenue interests and ensure tax collection from the correct entity if substantive assessment fails.

Conclusion:

The ITAT concluded that protective assessments are valid to safeguard revenue interests. Since the substantive addition in the firm's case had not attained finality, the protective addition in the assessee's case was upheld. The ITAT dismissed the assessee's appeal, affirming the CIT(A)'s order.

Order:
The appeal of the assessee is dismissed.