Protective Assessment Quashed: No Protective Addition Without a Substantive One

Protective Assessment Quashed: No Protective Addition Without a Substantive One

Issue

Can the Revenue department frame a “protective” assessment against an assessee (by adding alleged accommodation entries and commission income) under Section 147/148 proceedings without establishing or discussing who the corresponding “substantive” addition has been made against?

Facts

• Assessee: Sh. Surendra Kumar Jain.

• Assessment Year: 2012-13.

• The Allegation: The Assessing Officer (AO) alleged that the assessee was involved in a complex web of providing accommodation entries through various entities without carrying out actual business.

• The Additions: Based on this, the AO made two additions on a “protective” basis:

  1. Rs. 160.49 Crores as unexplained cash credits (accommodation entries).

  2. Rs. 2.88 Crores as estimated commission income (at 1.8%) on the above entries.

• Assessment Order: Passed on 31.12.2019 under Section 147 read with Section 143(3).

• Appeal: The CIT(A) upheld the order. The assessee appealed to the ITAT.

Decision

• The Income Tax Appellate Tribunal (ITAT) allowed the appeal and deleted the additions.

• Missing Substantive Link: The Tribunal inquired whether any corresponding substantive additions had been made in anyone else’s hands (i.e., the beneficiaries of the alleged entries). The record showed no discussion or evidence of substantive additions forming the basis of this protective assessment.

• Legal Principle: Relying on the Supreme Court decision in Lalji Haridas Vs. ITO, the Tribunal noted that while protective assessments are permissible when ownership of income is in doubt, they cannot exist in a vacuum.

• Invalid Reopening: Citing DHFL Venture Capital Fund Vs. ITO, the Tribunal held that Section 148/147 proceedings cannot be initiated solely to make a protective assessment to safeguard revenue interests without identifying the substantive liability.

• Outcome: Since the foundational substantive assessment was absent, the protective additions against the assessee were legally unsustainable and were deleted.

Key Takeaways

• Protective vs. Substantive: A “protective assessment” is a backup mechanism used when the department is unsure who the real owner of the income is. However, for a protective assessment to be valid, there must generally be a primary “substantive assessment” against another person claiming that income belongs to them.

• No Reopening for Protective Assessment: The reassessment powers under Section 148 are for income that has escaped assessment. Courts have held that these powers cannot be used merely as a precautionary measure to make a protective addition without a concrete finding of escapement in the hands of the right person.

• Lalji Haridas Doctrine: While the Supreme Court allows protective assessments to resolve doubts about ownership, it implies the existence of a dispute between two potential owners. Without a substantive target, a protective attack fails.