If re-assessment proceedings against partners was dropped on ground of being time barred, protective addition in hands of firm does not survive

The Bench of Delhi Income Tax Appellate Tribunal deletes the addition made on a protective basis towards the capital introduced by two partners of the Assessee-Firm.

The Division Bench of Justice Yogesh Kumar U.S. and Accountant Member Pradip Kumar Kedia observed that “since the substantive addition (made in the hands of the partners) has not been survived on account of being time-barred, consequently, the protective addition made in the hands of the Assessee will also not survive”.

Relying on the Jodhpur ITAT ruling in Ramesh Chand Prem Raj Soni (HUF) Vs. Assistant Commissioner of Income Tax, 2006 (10) TMI 197-ITAT, the Bench also observed that “the protective addition presupposes the existence of substantive additions and when there is no substantive addition, there can be no protective addition as well”.

Advocate Ved Jain appeared for the Assessee/Petitioner whereas Advocate Kanti E. Khobragade appeared for the Revenue/Respondent.

The brief facts of the case were that the Assessee, for AY 2014-15, received Rs. 67.50 Lacs in its partner’s capital account from two of its partners and was subjected to scrutiny. The summons u/s 131 of the Act were served by the A.O. Revenue also initiated separate reassessment proceedings against the partners who admitted to having introduced the said amount as capital in the firm by way of cash, however, furnished no plausible explanation; Accordingly, Revenue made addition in the hands of the Assessee on protective basis to protect the interest of the Revenue, which was affirmed by the CIT(A). 

After considering the submission the Bench noted that the reassessment proceedings under Section 147, initiated against the partners of the Assessee were dropped on the ground of being time barred under Section 153(2) and the said fact is not disputed by the Revenue.

Referring to the case Ramesh Chand Prem Raj Soni (HUF) Vs. Assistant Commissioner of Income Tax, 2006 (10) TMI 197-ITAT, Jodhpur, the Bench reiterated the well-settled legal proposition that when substantive addition does not survive on account of being time-barred, then the protective addition also does not survive.

The Bench stated that ‘since both the partners of the Firm have admitted and owned the introduction of Rs. 67,50,000/- from their own source to the Assessee Firm and in the absence of no plausible explanation furnished by the partners the reassessment proceedings in their hands are being initiated separately for bringing the said amount to tax’.

The Bench also concurs with the Assessee’s contention that since the re-assessment proceedings initiated against the partners have been dropped on the grounds of being time-barred, the addition made in the hands of the Assessee on a protective basis does not survive.

Accordingly, the Bench deleted the protective addition by setting aside the order of the Lower Authorities and allowed the Assessee’s appeal. 

Cause Title: Kanav Metals Vs. Income Tax Officer, New Delhi. [ITA No.7778/Del/2019 / 2023-Enterslice-44-ITAT-Del]

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