2026 (1) TMI 1539 - AT - Income Tax

Protective assessment versus substantive assessment in tax cases: delete protective additions once real assessee is substantively assessed.

Protective assessment is a temporary safeguard when the taxable person is uncertain; once the real assessee is identified and substantive additions are ... Substantive assessment in the hands of the partnership firm - substantive addition in the hands of partners - question of any protective assessment - Double taxation on the same income - determination of real assessee HELD THAT:- In the assessee's case under consideration, we find that assessing officer has identified the partners, as the persons in whose hands the substantive addition should be made. And in fact, the assessing officer made the substantive addition in the hands of the partners, and the substantive addition, so made, in the hands of the partners, were confirmed by the learned CIT(A) also. The partners of the firm have acknowledged and accepted the responsibility of the substantive addition, therefore, since the substantive addition have already been made in the hands of the partners, therefore, protective addition made in the hands of the partnership-firm, should be deleted, as the revenue is fully protected by the substantive addition made by the assessing officer in the hands of the partners. Indian tax jurisprudence clearly holds that protective additions cannot survive once substantive additions on the same income are finally sustained in the hands of the correct assessee, because the same income cannot be taxed twice. Protective assessment/addition is only a temporary measure adopted by the Assessing Officer when there is doubt about the real person in whose hands income is taxable. Once such doubt is resolved and the income is finally assessed substantively in the hands of one person, the protective addition in the hands of the other person must be deleted. Allowing both (substantive and protective) to stand, would amount to double taxation of the same income, which is impermissible. Protective assessment is permissible only to safeguard the interest of Revenue. Once it is found as to who is the real assessee, the income can be assessed only in his hands and not in the hands of any other person. Same income cannot be assessed in the hands of two different assessee’s. The Protective assessment loses its relevance once substantive assessment is made. Revenue had initiated substantive assessment and additions have been made on substantive basis in the hands of partners, hence, there is no question of any protective assessment in the present case in the hands of the partnership - firm. As we have noted above that the Protective assessment loses its relevance once substantive assessment is made. Appeal filed by the assessee is allowed. Issues: Whether protective additions made in the hands of the partnership firm should be deleted where substantive additions on the same income have been made and sustained in the hands of the partners.Analysis: The issue concerns the legal effect of a protective assessment/addition once substantive assessment and additions on the same income are made and upheld against the correct assessee. Protective assessment is a temporary measure to safeguard revenue when there is doubt about the person assessable; it operates as an alternate or stand-by assessment and is intended to be cancelled if the substantive assessment is sustained. The statutory provisions invoked for computing capital gain on transfer/recorded value (notably Section 45(3) and Section 48 of the Income-tax Act, 1961) were applied by the assessing officer and CIT(A) to make substantive additions in the hands of the partners and parallel protective additions in the hands of the partnership firm. The protective addition in the firm was retained only as an alternate measure pending resolution of who is the correct assessee.Conclusion: Protective additions in the hands of the partnership firm are deleted because substantive additions on the same income have been made and sustained in the hands of the partners; allowing both substantive and protective additions to stand would amount to double taxation. Appeal allowed in favour of the assessee and protective additions in the hands of the firm deleted.