2025 (1) TMI 1474 - AT - Income Tax

Protective assessment becomes invalid when department confirms substantive assessment against primary assessee under Section 263

The ITAT Jaipur quashed revision proceedings u/s 263 against an assessee whose case was under protective assessment. The tribunal held that since the ... Revision u/s 263 - Validity of reassessment proceedings - case of the assessee was assessed as protective assessment - non-examination of sundry creditors - HELD THAT:- It is observed that the case of the assessee was assessed as protective assessment for the preceding year also. It confirms the stand of the Revenue that, in the matter of the assessee, the revenue is firm about the status of the matter, i.e. to be assessed under the protective scheme of assessment. It is further observed that the order of the Ld. CIT (A) in the case of Sh. Mahendra Mehra for A.Y.s 2012-13 and 2013-14 was passed on 12.10.2023 and confirmed the order as substantive assessment, whereas the notice u/s. 263 of the Act was issued first time on 04-08-2022 and final order was passed on 14.03.2024. This chronology of event has its own importance, i.e. when the status of Sh. Mahendra Mehra has been taken as substantive and further confirmed by the Ld. CIT (A), there is no protective assessment stands on its own feet now against the assessee under consideration. The notices issued u/s. 263 of the Act are no more valid as the order against which the same were issued, is no more in existence, as the department has taken a firm stand against Sh. Mahendra Mehra. Now let's consider the position of law with regard to protective assessments. The concept of protective assessment has not been defined in the Income-tax Act and there are no specific provisions governing the same. However, it is well settled by judicial precedents and it is an established departmental practice which has gained judicial recognition by the Courts over the years that in the interest of revenue, protective assessment can be framed in a situation where the revenue during the proceedings finds that a particular amount of income can be taxed in the hands of different persons/assessee but the Assessing Officer is not sure enough about such person in whose hands the income is chargeable to tax. A protective assessment is regarded as being protective because it is an assessment which is made 'ex abundanti cautela' where the department has a “doubt as to the person who is or will be deemed to be in receipt of the income'. Thus, we are of the firm view that, the revenue has taken a firm view against Sh. Mahendra Mehra; hence there can’t be any simultaneous proceedings of the same matter and amount against the assessee under consideration. Non-consideration of the assessee’s submissions - On this issue we have gone through the factual paper book submitted by the assessee, wherein it is submitted before us in the form of screen shots of reply uploaded (Copies of replies also submitted before us). It is observed that the contentions raised by the assessee are correct and the order passed by the Ld. PCIT (Central), Jaipur was being passed without due consideration of the assessee’s submission and certainly a serious violation of the Principle of the Natural Justice. In the result, Ground No. 3 raised by the assessee is also allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the invocation of Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (PCIT) was justified, given the circumstances and facts of the case.2. Whether the assessment order dated 09.06.2021, passed under Section 147 of the Act, was prejudicial to the interests of the revenue, warranting the assumption of jurisdiction under Section 263.3. Whether the principles of natural justice were violated due to the alleged non-consideration of submissions made by the assessee.4. Whether the PCIT was justified in raising a new issue regarding the alleged non-examination of sundry creditors without it being part of the original show cause notice (SCN).5. Whether the PCIT acted beyond jurisdiction by issuing directions related to the initiation/source of purchase of immovable property and sundry creditors.ISSUE-WISE DETAILED ANALYSIS1. Invocation of Section 263 of the Income Tax Act- Legal Framework and Precedents: Section 263 of the Income Tax Act empowers the PCIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The concept of protective assessment, though not explicitly defined in the Act, is recognized through judicial precedents.- Court's Interpretation and Reasoning: The Tribunal examined whether the PCIT's invocation of Section 263 was based on a valid assessment order. It noted that the protective assessment against the assessee was no longer valid as the substantive assessment had been confirmed against another party, Sh. Mahendra Mehra.- Key Evidence and Findings: The Tribunal found that the department had taken a firm stand against Sh. Mahendra Mehra, confirming the substantive assessment, which rendered the protective assessment against the assessee redundant.- Application of Law to Facts: The Tribunal concluded that the invocation of Section 263 was unjustified as the assessment order against the assessee was no longer in existence due to the confirmed substantive assessment against another party.- Conclusions: The Tribunal quashed the order passed under Section 263, allowing the assessee's appeal on this ground.2. Prejudice to the Interests of Revenue- Legal Framework and Precedents: An assessment order can be revised if it is deemed prejudicial to the interests of the revenue. The protective assessment is typically used when there is uncertainty about the correct taxpayer.- Court's Interpretation and Reasoning: The Tribunal noted that the protective assessment was initially made due to uncertainty about the correct taxpayer. However, with the substantive assessment confirmed against Sh. Mahendra Mehra, there was no longer any prejudice to the revenue.- Conclusions: The Tribunal found no basis for the PCIT's claim of prejudice to the revenue, allowing the appeal on this ground.3. Violation of Principles of Natural Justice- Legal Framework and Precedents: The principles of natural justice require that parties be given a fair opportunity to present their case. This includes considering all submissions made by the parties.- Court's Interpretation and Reasoning: The Tribunal observed that the assessee had made multiple submissions that were not considered by the PCIT, constituting a violation of natural justice.- Key Evidence and Findings: The Tribunal reviewed the submissions uploaded by the assessee and found that they were not considered in the PCIT's order.- Conclusions: The Tribunal allowed the appeal on this ground, declaring the order bad in law due to the violation of natural justice.4. Raising New Issues Beyond the Show Cause Notice- Legal Framework and Precedents: A new issue cannot be raised in the final order if it was not part of the original show cause notice, as it violates the principles of natural justice.- Court's Interpretation and Reasoning: The Tribunal found that the PCIT had raised a new issue regarding sundry creditors that was not included in the original SCN, which was beyond jurisdiction.- Conclusions: The Tribunal quashed the order to the extent it dealt with the new issue, as it was without jurisdiction.5. Jurisdictional Overreach by the PCIT- Legal Framework and Precedents: The PCIT's jurisdiction is limited to revising orders that are erroneous and prejudicial to the revenue.- Court's Interpretation and Reasoning: The Tribunal concluded that the PCIT acted beyond her jurisdiction by issuing directions related to matters not contemplated by Section 263.- Conclusions: The Tribunal quashed the order on this ground, finding that the PCIT had acted beyond her jurisdiction.SIGNIFICANT HOLDINGS- The Tribunal reinforced the principle that protective assessments cannot stand if a substantive assessment is confirmed against another party.- The Tribunal emphasized the importance of adhering to the principles of natural justice, particularly the requirement to consider all submissions made by the parties.- The Tribunal reiterated that new issues cannot be raised in the final order if they were not part of the original SCN, as it constitutes a jurisdictional overreach.- The final determination was to allow the appeal of the assessee, quashing the order passed under Section 263 of the Income Tax Act.