Protective assessment cannot result in double taxation when amount already taxed in firm's hands

ITAT Visakhapatnam held that protective assessment cannot result in double taxation. The assessee withdrew amounts from firm's capital account, and AO proposed taxing 20% of withdrawals on protective basis. Since 20% of the amount was already taxed in the firm's hands based on seized material, the same amount cannot be taxed again in the assessee's hands on protective basis. Following the principle that income should be taxed only once, the Tribunal directed deletion of the protective addition. Appeal decided in favor of assessee.

---

---

Issues Involved:

1. Condonation of Delay
2. Taxation of Withdrawals on Protective Basis
3. Substantive vs. Protective Addition

Summary:

Condonation of Delay:

The Tribunal noted a delay of 58 days in filing the appeals, which the assessee attributed to being unaware of the receipt of the order, preoccupation with finalizing accounts, and an inadvertent mistake. The Tribunal found the explanation reasonable and sufficient, thus condoning the delay and proceeding to adjudicate the appeals on merits.

Taxation of Withdrawals on Protective Basis:

For AY 2013-14, the assessee, a managing partner of M/s. Polisetty Somasundaram, was subjected to a search operation revealing unaccounted cash transactions. The Assessing Officer (AO) added Rs. 2,25,13,508/- on a protective basis and Rs. 11,48,96,159/- on a substantive basis to the assessee's income. The Commissioner of Income Tax (Appeals) [CIT(A)] sustained 20% of the protective addition, leading to the assessee's appeal to the Tribunal.

The assessee argued that the withdrawals were from the capital account with the firm and already taxed in the firm's hands based on seized material. The Tribunal agreed, noting that taxing the same amount in the assessee's hands on a protective basis would result in double taxation, which is against the law.

Substantive vs. Protective Addition:

The Tribunal referenced its earlier decision in ITA No. 173/Viz/2023, which confirmed the taxation of 20% of the amount in the firm's hands. The Tribunal reiterated that income should be taxed only once and directed the AO to delete the protective addition in the assessee's hands.

Conclusion:

The appeal for AY 2013-14 was allowed, and the Tribunal's decision for this year was applied mutatis mutandis to the appeals for AYs 2014-15 to 2020-21, resulting in all appeals being allowed. The judgment was pronounced in the open Court on 28th February 2024.

---