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Protective Assessments: Concept & Implementation
If there is doubt or ambiguity about the real entity in whose hands a particular income is to be assessed, the assessing authority is entitled to have recourse to making protective assessment in the case of one and regular assessment in the case of the other. The problem is that Assessing Officers very often now resort to the technique of ‘protective’ assessments without even making any real effort to determine the taxability of income in the hands of a particular assessee or for a particular year.
It may be noted that aking of protective assessment does not affect the validity of the other assessment inasmuch as if ultimately one of the entities is really found to be liable to the assessment, then, the assessment in the hands of that entity alone remains the effective assessment and the other becomes infructuous. The levy is enforceable only under one assessment and not under both. [Banyan & Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj)].
Many taxpayers are not well versed with the concept of protective assessment as there is no specific provision in the Income Tax Act for this. Undeniably, income tax authorities have enormous powers and discretion for the purpose of assessment which include the power to either accept the return or even hold that the income returned is for fraudulent purposes to accommodate some other person and thereby reject the return after giving a finding in this regard. While in some cases there are genuine problems in identifying the person to be taxed, more often it is resorted to as a matter of administrative convenience resulting in locked up demands and unnecessary harassment to the taxpayer.
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The point came up for consideration before the Calcutta High Court in the case of Jagannath Hanumanbux vs. ITO (1957) 31 ITR 603 (Cal), as to whether it is possible to have such a thing as protective assessment under the Indian Income-tax Act, and to the nature thereof. The Court observed as under:
“…..‘To start with, it is conceded that there is no specific provision in the Indian Income-tax Act, and that the concept has been borrowed from the law and practice as prevalent in England. The leading case on the subject is Attorney General vs. Aramayo & Ors. (1925) 1 KB 86 : 9 Tax Cases 445. The facts of this case were as follows :
An English company was formed to carry on the business of general merchants and mine-owners in Bolivia. The control and management of its Bolivian business was transferred to a local board of that country, the duties of the directors in London being confined to the declaration of dividends and the formal business necessary for its continuance as a company. The English company denied liability to pay income-tax. The Special Commissioners made an assessment on the local board in the name of the London firm as agents. As the tax due under the assessment remained unpaid, proceedings for its recovery were commenced by way of information against the individual members of the London firm who then took various objections. Meanwhile as a precautionary measure before the time limit expired, the Special Commissioners made an alternative assessment for 1917-18 on the company itself in the same amount as that previously made on the local board.
One of the questions raised was that this alternative assessment was valid or not. Rowlatt, J., said as follows :
‘Now I pass from that information to the two cases stated; they arise out of these facts : When the matter had been dragging on for nearly two years more, just before the time ran out, the Revenue to make sure of their ground caused an assessment to be made upon the company (which undoubtedly, at any rate so far as the Special Commissioners were concerned, always wanted to go before them) as resident in London and not upon the Bolivian Board by its agent here. So that the case comes before me alternatively; is this business liable to income-tax either by way of assessment upon the firm as representing the Bolivian Board, or by way of assessment upon the company ? If it is resident in London, of course it is assessed directly in its own name. Now it looks at first sight that one or the other must be right if these profits are assessable at all. There cannot be any difficulty about the person to be assessed now, as you have them both alternatively before the Court. But Mr. Edwards Jones does not agree with that. He says, ‘No, because you had one assessment which may be on the wrong man, that prevents you having another assessment on the right man.’ That seems to me a hard saying, and I am perfectly satisfied that it is not well founded. Of course there are provisions in the Act which say you shall not have two assessments for the same property on the same person; if one has gone wrong, you cannot have another. If it is thought that we have assessed this business in the name of Robinson and it is really carried on by Smith, if it is Smith now and it was Smith or Robinson before, I cannot see the slightest objection to it in common sense, and I cannot see any from the point of view of the statute; so that that difficulty goes and the next thing I have to consider is who is the right person to be assessed.’
This is the kind of assessment which is known as protective assessment. There is no reported authority in India with regard to protective assessment but the matter came up before the Court of Appeal in this High Court in B. K. Bagchi & Anr. vs. Ladhuram Taparia [Appeal from the original Order No. 71 of 1951, dated 17th January. 1952]. Harries, C.J., considering the same set of facts that we are considering here, stated as follows :
‘The Income-tax authorities also made an alternative assessment, assessing each of the firms separately and this was what is referred to as a protective assessment and is permissible in order to prevent assessment being barred by limitation.’
Thus, I must hold that under the Indian law it is permissible to make a protective assessment. I do not think that the principles of law put forward by Mr. Roy are in any way wrong. There can be no doubt that taxing statutes must be strictly construed in favour of the assessee. It is also true that there cannot be any assessment excepting of an assessee, and there can be no doubt that the Income-tax authorities must confine themselves within the four corners of the statute and not invent new procedures outside the limits of the Indian Income-tax Act. But let us see what they have really done. It is not as if they have made an assessment outside the Indian Income-tax Act. The trouble is that owing to the various litigations mentioned above, it is not established finally as to who is the proper assessee. It is not permissible to assess a fictitious person, but I do not see that there is anything to prevent assessment of a person of whom it is not finally known whether he is fictitious or not. What is the most important thing to consider is the running of time. If the Income-tax authorities are precluded from making an alternative assessment, then, by the time the disputes are over, the real assessment would be barred. Therefore, I cannot see why an alternative assessment, that it to say, protective assessment, should be declared to be illegal. But while a protective assessment is permissible, I do not see that a protective recovery is to be allowed. It is one thing to say that the authorities are merely making an assessment and leaving it as a paper assessment until the matter is decided one way or the other, and another thing to say that at one and the same time they could not only make two assessments in respect of one set of dues but proceed to realise both. Mr. Meyer argues that if in the case of protective assessment the principle is followed, namely, that the revenue has to be protected against the bar of limitation, equally, protective recovery should be allowed because recovery also may be barred. I cannot agree. If the Income-tax authorities decided that the present assessment was the valid assessment and kept another alternative assessment in cold storage, then I could understand the force of the argument that the present assessment should proceed to the stage of recovery. But having once stated that the present assessment was not correct, because according to the authorities the firm was a mere benamidar of another firm, it would be entirely against the spirit and tenor of the Income-tax Act to proceed to recover the tax on the basis of the professedly wrong assessment. From this point of view, the notices given to the various parties to pay money appear to be defective. The question, therefore, is as to whether on the facts and circumstances of the case as I have stated above, the petitioner is entitled to any relief in this application. The position is that the monies in the hands of these various parties are prima facie due to M/s Jagannath Hanumanbux. If that firm consists of the partners Ganpatrai and Hanumanbux, then the Income-tax authorities will be entitled to receive these sums direct. But supposing that they are not the partners and that Ladhuram Taparia is the real assessee and that Jagannath Hanumanbux is the benamidar of Ladhuram Taparia, then also the monies in the hands of these parties will be payable to the Income-tax authorities, because taxes are payable by Ladhuram Taparia and notices under section 46(5A) have also been served, in respect of taxes due from that firm. If that is the position, then should this Court come to the aid of the petitioner, which will only mean that it will be enabled to take away the monies and defeat the claim of the Income-tax authorities. Mr. Meyer on behalf of the income-tax authorities agreed to give an undertaking that they will take this money and keep it in a suspense account until the Supreme Court has decided the rights of the parties one way or the other, and further that the income-tax authorities will not execute or enforce the taxes twice over, that is to say, once against Jagannath Hanumanbux and a second time against Ladhuram Taparia. The petitioners, however, are not agreeable to this course. It is quite evident that they are anxious to take away the money. After all, relief under Article 226 is discretionary and it ought not to be exercised so as to defeat a lawful claim, particularly that of the State’s revenue. So far as these debtors are concerned, I do not think that they can with any safety to themselves pay the monies to M/s Jagannath Hanumanbux. Under the circumstances, I do not see why I am compelled to make an order which will confuse all these debtors and be instrumental in aiding the immediate petitioner before me to realise monies and take it beyond the reach of the income-tax authorities. While I cannot hold that a protective recovery is permissible in law, I do hold that on the facts and circumstances of the case, this Court ought not to come to the aid of the petitioner under Article 226 of the Constitution. If they have any other relief and remedies, it is open to them.”
It is settled law that when there is a doubt as to which person amongst two is liable to be assessed, parallel proceedings may be taken against both and alternative assessments may be framed. The Supreme Court in Lalji Haridas vs. ITO (1961) 43 ITR 387, 392 (SC) approved the concept of protective assessment as under :
“In cases where it appears to the income-tax authorities that certain income has been received during the relevant assessment year but it is not clear who has received that income and prima facie it appears that the income may have been received either by A or B or by both together, it would be open to the relevant income-tax authorities to determine the said question by taking appropriate proceedings both against A and B.”
The Supreme Court further explained the concept in ITO vs. Bachu Lal Kapoor (1966) 60 ITR 74, 82, 83 (SC) :
“Some argument was advanced on the question of the validity of what are called ‘protective or precautional assessments’. Reference was made to Jagannath Hanumanbux vs. ITO (1957) 31 ITR 603 (Cal) and to the decision of this Court in Lalji Haridas vs. ITO (1961) 43 ITR 387 (SC). In the former, the validity of protective assessment was approved ; and in the latter, this Court, though the question of assessment was raised, did not express its final opinion thereon. This Court held that when there was a doubt as to which person among two was liable to be assessed, parallel proceedings might be started against both; and it also laid down an equitable procedure to be followed in that situation. In this case, the question of protective assessment does not call for our decision and we do not express our opinion thereon.”
It is thus settled law that where there is doubt or ambiguity about the real entity in whose hands a particular income is to be assessed, the assessing authority is entitled to have recourse to making protective assessment in the case of one and regular assessment in the case of the other. “However, making of protective assessment does not affect the validity of the other assessment inasmuch as if ultimately one of the entities is really found to be liable to the assessment, then, the assessment in the hands of that entity alone remains the effective assessment and the other becomes infructuous. The levy is enforceable only under one assessment and not under both.” [Banyan & Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj)].
The problem, as far as tax administration is concerned, relates to the demand created on account of these protective assessments which is neither enforceable nor determinable for collection till considerable lapse of time. On the other hand, this also results in the sword of uncertainty hanging over the assessee’s head and also militates against the concept of finality in legal matters. The demand created on account of protective assessments could perhaps be done away with if corrective action is permitted by law based on a finding of fact given by the appellate authorities. The Income-tax Appellate Tribunal being the final fact finding authority, its decision on fact is binding and has the force of law. However, it may be appropriate to take a look at some Court pronouncements in this regard.
In the case of Smt. Hemlata Agarwal vs. CIT (1967) 64 ITR 428, 436 (All) the Allahabad High Court observed :
“When the Tribunal itself is not able to make up its mind and the Income-tax Officer was also not able to make up his mind, it is quite impossible to say that the Income-tax Officer entertained a reasonable belief that some income of the assessee had escaped assessment. The Income-tax Officer cannot blow hot and cold in the same breath. It was properly noticed by the Tribunal that in the assessment upon the husband, in respect of this very income, the Income-tax Officer had said that it could not be the income of the wife as she had no business or source of income, and, after saying so, how could he on the very next day have proceeded to issue a notice to the assessee on the basis that he had a reasonable belief that some income in her hands had escaped assessment ? Even if the Income-tax Officer can blow hot and cold, it is certainly not open to the Tribunal to blow hot and cold. Again, it might be open to the Income-tax Officer to make a protective assessment, but it is certainly not open to the Income-tax Appellate Tribunal, which is the final Court of fact, to make a protective order. The Act requires the Tribunal to give final findings of fact which, in this case, can only mean that it must find, as a fact, that the impugned sum was the income of the assessee and of no one else. When the Tribunal refused to give any such finding, then it is not possible for the Tribunal to confirm such an assessment, albeit under section 34(1)(a). It is not for the Tribunal to make excuses for the Income-tax Officer or to justify his action, first, in making the assessment in the hands of the undivided Hindu family, and then in the hands of the husband and, while an appeal against that assessment order made against the husband of the assessee is still pending, to proceed and dispose of the appeal of the assessee. What the Tribunal ought to have done in a case like this was to hear both the appeals together, and finally determine as to whether the impugned sum is, if at all, the income of the husband or the wife.”
Similarly, the Madhya Pradesh High Court held in the case of Smt. Dayabai vs. CIT (1985) 48 CTR (MP) 143 : (1985) 154 ITR 248, 250 (MP) :
“It is, therefore, clear that after the Tribunal’s judgment in the appeals filed by M/s Vinit Talkies and also the appeal filed by Smt. Dayabai, the Tribunal confirmed both the assessments. The net result is that the income earned from the matinee shows displayed in the premises of Vinit Talkies has been assessed in the hands of M/s Vinit Talkies and also has been assessed as the income of Smt. Dayabai which only means that the same income has been assessed twice, which, in law, is not permissible. It is, therefore, clear that the protective assessment made against Smt. Dayabai was only to meet a situation that in case the assessment on M/s Vinit Talkies is not made, this assessment could become operative, cannot now be maintained as the same income has already been assessed as the income in the hands of the firm M/s Vinit Talkies, Jabalpur.”
Similar question was considered by the Supreme Court in Lalji Haridas vs. ITO wherein their Lordships observed as under :
“If in the proceedings taken against Lalji it is finally decided that it is Lalji who is responsible to pay tax for the income in question, it may not become necessary to make any order against Chhotalal. If, however, in the said proceedings Lalji is not held to be liable to pay tax or it is found that Lalji is liable to pay tax along with Chhotalal, it may become necessary to pass appropriate orders against Chhotalal. When we suggested to the learned counsel that we propose to make an order on these lines, they all agreed that this would be a fair and reasonable order to make in the present proceedings.”
In Rajinder Nath vs. CIT (1979) 12 CTR (SC) 201 : (1979) 120 ITR 14 (SC), on the question of whether the firm was the owner of a building and the legal propriety of reassessment of one of its partners was under jural consideration, their Lordships made the following observations :
“The expressions ‘finding’ and ‘direction’ are limited in meaning. A finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case. It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for. For instance, where the facts show that the income can belong either to A or B and to no one else, a finding that it belongs to B or does not belong to B would be determinative of the issue whether it can be taxed as A’s income. A finding respecting B is intimately involved as a step in the process of reaching the ultimate finding respecting A. If, however, the finding as to A’s liability can be directly arrived at without necessitating a finding in respect of B, then a finding made in respect of B is an incidental finding only. It is not a finding necessary for the disposal of the case pertaining to A. The same principles seem to apply when the question is whether the income under enquiry is taxable in the assessment year under consideration or any other assessment year. As regards the expression ‘direction’ in section 153(3)(ii) of the Act, it is now well settled that it must be an express direction necessary for the disposal of the case before the authority or Court. It must also be a direction which the authority or Court is empowered to give while deciding the case before it. The expressions ‘finding’ and ‘direction’ in section 153(3)(ii) of the Act must be accordingly confined.”
The above observations would seem to indicate that directions are mandatory only in respect of the case, including the assessment year before the authority or Court. While it is unarguable that the Assessing Officer has to be left unfettered to act in the light of his judgment to consider the law and to pass orders, in accordance therewith, it is trite that Parliament is continuously concerned with the evils or undesirability of the proverbial sword hanging over the head of the assessee. Therefore, the powers of direction given to appellate authorities need to be exercised in a manner where every aspect, computation and dimension is taken into consideration. Where the appellate authority issues directions or gives a finding, the uncertainty or discomfort of the sword of uncertainty provides no peril to the assessee. All the parties are fully aware of the parameters within which the fresh enquiry is circumscribed and limited. However, this solution again may not help us in reducing the time required to come to a final conclusion and settle matters.
It is also considered necessary to discuss the statutory provisions regarding limitation with respect to assessment/reassessment to better appreciate the issue. The provisions in this regard are contained in section 150. Section 150 is in the nature of a proviso to section 149.
A reading of sub-section (1) of section 150 shows that where the reassessment proceedings are initiated “in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law”, the time limits prescribed in section 149 shall not apply and that notice under section 148 can be issued at any time. Sub-section (2), however, is again in the nature of a proviso to sub-section (1). It says that the provisions of sub-section (1) shall not apply where, by virtue of any other provision limiting the time within which action for assessment, reassessment or recomputation may be taken, such assessment, reassessment or recomputation is barred on the date of the order which is the subject-matter of the appeal, reference or revision in which the finding or direction is contained.
Section 153 provides the time limits for completion of assessments and reassessments. Sub-section (1) says that an order of assessment under section 143 or section 144 shall not be made after the expiry of certain periods prescribed therein (at present, it is two years). Sub-section (2) similarly provides that no order of assessment, reassessment or recomputation shall be made beyond the periods prescribed therein. Sub-section (3) is in the nature of proviso to sub-sections (1) and (2). It says that the provisions contained in sub-sections (1) and (2) of section 153 shall not apply in certain cases. Clause (ii) of sub-section (3) provides one such situation, viz., “where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 250, 254, 260, 262, 263 or 264 or in an order of any Court in a proceeding otherwise than by way of appeal or reference under this Act.” In other words, according to sub-section (3), where proceedings are taken under section 147 in consequence of or to give effect to any finding recorded by any appellate or revisional authority, or by any Court in any proceeding, the time limit prescribed in sub-section (2) shall not apply.
A reading of the Explanations to section 153 clearly shows that they merely illustrate and clarify the meaning of the words “in consequence of or to give effect to any finding or direction” contained in an appellate, revisional or any other order. Explanation 2 says that where an appellate, revisional or other order excludes any income from the total income of the assessee for an assessment year, the assessment of such income for another assessment year shall, for the purposes of both section 150 and section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the order. Similarly, Explanation 3 says that where by an appellate, revisional or other order any income is excluded from the total income of one person and held to be the income of another person, the assessment of income of such other person shall, both for the purposes of section 150 and section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the order, provided, of course, such other person was given an opportunity of being heard before the said order was made. What is, however, clear is that Explanations 2 and 3 do not purport to obliterate or remove the restriction contained in sub-section (2) of section 150. They, no doubt, refer to section 150, but for a limited purpose, mentioned above.
A review of the above provisions makes it clear that the Act provides certain time limits both for initiation of proceedings under section 147 as well as for completion of such proceedings. The time limits for initiation of such proceedings are contained in sections 149 and 150, while the time limits for completion of such proceedings are mentioned in sub-sections (2) and (3) of section 153 just as section 150 is a proviso to section 149, sub-section (3) of section 153 is a proviso to sub-section (2) thereof. Explanations 2 and 3, no doubt, are relevant both for section 150 and section 153(3), but their purpose is merely to illustrate certain words occurring therein, and not to remove or obliterate the time limits prescribed in the several provisions referred to above.
Though there is no restriction in making an assessment in the case of any person if a finding regarding taxability thereof in another hand or in another year emerges as a finding or direction contained in an order under section 250, 254, 260, 262, 263 or 264 or in an order of any Court in a proceeding otherwise than by way of appeal or reference under this Act.
Thought the power of protective assessment cannot be challenged, authorities need to ensure that the power is exercised judiciously and every efforts first should be done to make the assessment in the rights hands only.