AMARJIT SINGH SEKHON vs. TAX RECOVERY OFFICER AND ANR

Facts

The petitioner, Sh. Amarjit Singh Sekhon, an assessee, was a 5% partner in M/s Deep Cinema. The firm owned a property in Delhi which was damaged in the 1984 riots. A dispute among partners led to a receiver's appointment in 1983. In AY 1994-95, partners sold their shares. The petitioner declared long-term capital gains of Rs. 5,50,290/- on his share of sale proceeds. The assessing officer made an addition of Rs. 5,50,290/- on a protective basis, deeming it capital gain. The CIT revised this order, remanding the case. The Tribunal upheld the CIT's revision but reiterated the addition was protective. A fresh assessment was made, and subsequent appeals by the petitioner were dismissed, with the Tribunal reiterating the protective nature of the assessment. A demand notice for Rs. 7,28,178/- was issued, and Rs. 15,27,302/- was recovered from the petitioner's bank account.

Held

The High Court held that while a protective assessment is permissible, a protective recovery is not. Recovery can only be effected after a substantive assessment is done. The Court noted that the Tribunal's observation that a protective assessment may become substantive did not amount to declaring the impugned assessment as substantive or directing the authorities to frame one. In the present case, no substantive assessment was made in the hands of the petitioner before effecting recovery. Therefore, the demand notice and recovery certificate were set aside. However, to protect the interest of the revenue, the case was remitted to the assessing officer to consider making a substantive assessment against the proper assessee within three months. If no substantive assessment is made within this period, the revenue must refund the recovered amount.

Key Issues

1. Whether the revenue authorities could effect recovery of tax and charge interest on an amount assessed on a protective basis, without a substantive assessment being made against the petitioner? Assessee's contentions: The assessment against the petitioner was made on a protective basis, and no substantive assessment was ever made. Therefore, the respondents had no right to recover the amount or charge interest. Protective recovery is not permissible under law. Revenue's contentions: The petitioner failed to prove the existence of the firm or that the firm filed a return. Since the petitioner's claim of capital gain was based on the firm's existence, which could not be proven, the protective assessment automatically became substantive. The revenue was therefore within its rights to recover the amount and interest.