2023 (2) TMI 845 - AT - Income Tax

Protective assessment/addition - No substantive assessment/addition in the hands of other assessee - Assessment under section 153A(1)(b) r.w.s 143(3) - Order passed by Settlement Commission u/s 245D(4) - HELD THAT - As in the instant case, at the time of passing of the assessment order where the protective addition was made in the case of the assessee, no substantive additions were made in the hands of M/s Bhushan Power Steel Ltd and thus, no substantive additions were in existence. Even in the order so passed by the Settlement Commission u/s 245D(4) subsequent to passing of the impugned assessment order), no substantive additions were made in the hands of M/s Bhushan Power Steel Ltd. It is therefore a case where no substantive additions have been made in hands of M/s Bhushan Power Steel Ltd and at the same time, only protective assessment has been made in the hands of the assessee. In light of aforesaid legal proposition and respectfully following the decisions cited supra, in absence of substantive addition made in hands of M/s Bhushan Power Steel Ltd or any other person, protective addition cannot be sustained in the hands of the assessee. Accordingly, the protective addition so made by the AO and confirmed by the ld CIT(A) is hereby directed to be deleted. The enhancement done by the ld CIT(A) by an amount under section 69C of the Act, the same being consequential in nature is also directed to be deleted. Appeal of assessee allowed.

Issues Involved:
1. Validity of protective addition without corresponding substantive assessment.
2. Legality of enhancement of income by CIT(A) under section 69C on a protective addition.
3. Admissibility of additional grounds of appeal regarding protective assessments.
4. Jurisdiction of AO in converting protective addition into substantive addition post-assessment.
5. Adherence to principles of natural justice in framing the assessment.

Issue-Wise Detailed Analysis:

1. Validity of Protective Addition Without Corresponding Substantive Assessment:
The primary issue concerned whether protective additions could be made by the Assessing Officer (AO) without any corresponding substantive assessment in another case. The Tribunal observed that protective assessments are recognized under tax law to safeguard revenue when there is ambiguity about the rightful recipient of income. However, it is a settled principle that there cannot be a protective assessment without a corresponding substantive assessment. The Tribunal cited several precedents, including the cases of *Suresh K. Jajoo vs. ACIT* and *Pegasus Properties (P.) Ltd. vs. DCIT*, which affirmed that protective additions are invalid without substantive assessments. Consequently, the Tribunal directed the deletion of the protective addition of Rs. 37,31,00,000/- made by the AO and confirmed by the CIT(A).

2. Legality of Enhancement of Income by CIT(A) Under Section 69C on a Protective Addition:
The Tribunal addressed the issue of whether the CIT(A) could enhance income under section 69C when the original addition was made on a protective basis. It was held that enhancement cannot be made on a protective addition, as protective assessments themselves are contingent and not final. The Tribunal cited the case of *DCIT vs. Pallavi Mishra*, emphasizing that any enhancement on a protective addition is not permissible. Therefore, the Tribunal directed the deletion of the enhancement of Rs. 37,31,000/- made under section 69C.

3. Admissibility of Additional Grounds of Appeal Regarding Protective Assessments:
The Tribunal considered the admissibility of additional grounds of appeal raised by the assessee, which questioned the legality of protective assessments without corresponding substantive assessments. The Tribunal admitted these additional grounds, citing the Supreme Court's decisions in *Chitturi Subbanna vs. Kudapa Subbanna* and *National Thermal Power Co. Ltd. vs. CIT*, which allow legal grounds to be raised at the Tribunal stage if they involve questions of law and do not require further factual investigation.

4. Jurisdiction of AO in Converting Protective Addition into Substantive Addition Post-Assessment:
The Tribunal examined the jurisdiction of the AO in converting protective additions into substantive additions post-assessment. It was noted that the AO had passed an order converting the protective addition into a substantive one based on the Income Tax Settlement Commission's order. However, the Tribunal held that such a conversion was beyond the AO's jurisdiction without invoking sections 154 or 147 of the Income Tax Act. The Tribunal referred to the case of *DCIT vs. Pallavi Mishra*, which held that the AO becomes functus officio post-assessment and cannot alter the nature of additions without proper legal sanction.

5. Adherence to Principles of Natural Justice in Framing the Assessment:
The Tribunal also addressed the issue of whether the assessment was framed in violation of the principles of natural justice. The assessee contended that the assessment was based solely on pre-search enquiries and investigations without giving the assessee a fair opportunity to present its case. The Tribunal emphasized that any assessment must adhere to the principles of natural justice, ensuring that the assessee is given a fair chance to respond to the findings against them.

Conclusion:
The Tribunal allowed the appeals of the assessee, directing the deletion of both the protective addition and the enhancement made under section 69C. The corresponding stay applications were dismissed as infructuous. The Tribunal's decision reaffirmed the legal principles governing protective assessments and the necessity of corresponding substantive assessments, ensuring adherence to procedural fairness and jurisdictional boundaries.

← Previous Next →