Court rules protective assessment without substantive assessment illegal, directs officer to re-assess within 3 months.

The Court held that recovery based on protective assessment without substantive assessment was illegal. It set aside the demand notice and recovery certificate, directing the assessing officer to conduct a substantive assessment within three months. Failure to do so would require the revenue to refund the recovered amount to the petitioner.

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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.

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