Facts of the Case

The assessee, a partnership firm engaged in construction activities, filed its return of income for Assessment Year 2013-14. The assessment was completed under section 143(3) of the Income Tax Act, 1961, determining total income at ₹1,69,93,140 as against returned income of ₹15,46,480.

During assessment, the Assessing Officer made two additions:
(i) an addition of ₹8,73,656 to net profit on estimation basis; and
(ii) an addition of ₹1,45,73,000 under section 68 on account of unsecured loans received from four persons. The addition of unsecured loans was made on a protective basis, and information was forwarded to the respective Assessing Officers of the loan creditors for making substantive additions.

The learned CIT(A), while disposing of the appeal, not only confirmed the additions but also converted the protective addition of ₹1,45,73,000 into a substantive addition in the hands of the assessee.

 Issues Involved

  1. Whether an addition made on a protective basis under section 68 can be converted into a substantive addition by the CIT(A).
  2. Whether the same income can be taxed twice on a substantive basis in the hands of different assessees.
  3. Whether enhancement of income by changing the nature of addition without issuing notice under section 251(2) is valid in law.
  4. Whether estimation of net profit by applying a higher rate was justified.

 Petitioner’s Arguments

The assessee contended that the unsecured loans had already been assessed on a substantive basis in the hands of the respective loan creditors after due verification by the Department. Once substantive assessments had been completed and had attained finality, the protective addition in the hands of the assessee could not survive.

It was further argued that the learned CIT(A) exceeded his jurisdiction by converting the protective addition into a substantive one without issuing a show-cause notice under section 251(2), thereby violating principles of natural justice. Reliance was placed on several judicial precedents holding that the same income cannot be taxed twice.

 Respondent’s Arguments

The Revenue supported the order of the learned CIT(A) and argued that the Assessing Officer had erred in making a protective addition in the absence of a substantive addition for the same assessment year in the hands of the loan creditors. It was contended that merely changing the nature of addition from protective to substantive did not amount to enhancement requiring issuance of notice.

 Court Order / Findings

The Tribunal observed that the Assessing Officer had consciously chosen to make a protective addition in the hands of the assessee and had simultaneously forwarded information for substantive assessment in the hands of the loan creditors. It was an admitted position that substantive additions had already been made in the hands of the loan creditors in an earlier assessment year and such assessments had attained finality.

The Tribunal held that once the Revenue had exercised its choice to assess the income substantively in the hands of the loan creditors, it was impermissible and unsustainable to tax the same amount again on a substantive basis in the hands of the assessee. Such action would amount to double taxation of the same income, which is not sanctioned by law.

Accordingly, the addition of ₹1,45,73,000 under section 68 was deleted. However, the Tribunal upheld the addition of ₹8,73,656 made to net profit on estimation basis.

 Important Clarification

The Tribunal clarified that protective and substantive assessments are alternative mechanisms and cannot coexist once substantive assessment has attained finality in one hand. Conversion of a protective addition into a substantive one without following the statutory procedure and without issuance of notice under section 251(2) is contrary to law. The same income cannot be subjected to substantive taxation in multiple hands.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770628691_MSDIVYACONSTRUCTIONCOBHADOHIVS.DCITCIRCLE3MIRZAPUR.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.