Protective Addition Cannot Stand Once Substantive Addition is Settled in the Hands of Others

Protective Addition Cannot Stand Once Substantive Addition is Settled in the Hands of Others

1. The Legal Conflict

The core dispute involved the taxability of entries found in “Diary No. SGF-XIV” impounded during a survey at the premises of the assessee society.

• Substantive Addition: The Assessing Officer (AO) added the amounts found in the diary to the individual incomes of Shri Gurmail Singh (Administrator) and his son, Shri Arshpreet Singh, believing they were the real beneficiaries.

• Protective Addition: To “protect” the interests of the Revenue, the AO added the same amount (approx. ₹6.81 Crores) to the income of the Assessee Society (Satguru Foundation) on a protective basis, in case the individuals successfully argued they weren’t liable.

2. The Critical Facts

• ITAT Amritsar Ruling: The individual cases of the father and son traveled to the ITAT Amritsar Bench. The Tribunal there ruled that while the diary did belong to them, they should only be taxed on the “Peak Credit” (the highest amount of unexplained cash at any point, considering both receipts and payments).

• Set-off Granted: The Amritsar Bench found that the individuals had already declared ₹3 Crores in a subsequent year, which was more than enough to cover the calculated peak credit (₹1.40 Crores). Thus, no further tax was payable by the individuals, but the income was legally “accounted for” in their hands.

3. The ITAT Chandigarh Decision

The Chandigarh Bench dismissed the Revenue’s appeal and confirmed the deletion of the protective additions based on these principles:

1. Rule Against Double Taxation: It is a settled principle of law that the same money cannot be taxed twice. Since the income from the diary was already substantively attributed and adjudicated in the hands of the individuals (Gurmail Singh and Arshpreet Singh), it could not be taxed again in the hands of the Society.

2. Extinguishment of Protective Basis: A protective addition is a temporary measure. Once the substantive addition is finalized—even if the final tax amount is reduced due to peak credit calculations or set-offs—the protective addition must be deleted.

3. Ownership Established: The Tribunal noted that by calculating peak credit and granting set-offs in the individuals’ cases, the judiciary had effectively “treated and accounted” the diary as belonging to the individuals, not the Foundation.

4. Final Outcome

The Revenue’s attempt to keep the addition alive in the hands of the Foundation was rejected. The ITAT held that the CIT(Appeals) was correct in deleting the protective additions.

• Result: Revenue’s Appeals Dismissed.

• Impact: The Assessee Society is cleared of the ₹6.81 Crore protective tax liability.

Key Takeaway for Tax Practitioners

In cases of “Substantive vs. Protective” additions, the life of the protective addition is tied strictly to the outcome of the substantive case. If the substantive addition is confirmed (even partially or after set-offs), the protective addition becomes legally unsustainable and must be quashed.