SMT. KANIKA CHAWLA,NEW DELHI vs. ITO, NEW DELHI

As a lead case, we are taking up the appeal in the case of Smt. Kanika Chawla and findings therein will apply mutatis mutandis in the appeal of M/s. Ramesh Chawla (HUF).

The facts in brief are that an information was received by the Assessing Officer from ITO, Ward-28(4), New Delhi vide letter No.164 dated 21.01.2008, stating that assessee has 3 I.T.As. No.6652 & 6653/DEL/2015 received gift of Rs.1,00,00,000/- from one Sri Harish Kumar, (donor of the gifts) who had duly admitted in his statement on oath recorded on 28.03.2007 u/s.131, that he had received cash from various parties and deposited the same in his account no. 3756 with Punjab and Sind Bank, Fatehpuri, New Delhi, then transferred the amounts to another account no.3755 with the same bank and issued drafts to the said parties in the form of gifts. Out of these drafts, four drafts have been issued to Mrs. Kanika Chawla, the details of which are as under:

Based on this information, the Assessing Officer initiated reopening proceedings and has recorded the following reasons for reopening the assessment u/s.147/148:

Thereafter, assessment was made u/s. 143(3)/147 vide order dated 29.12.2008 at an income of Rs.1,00,90,100/- as against the income of Rs.90,100/-. Thus, the addition of Rs.1,00,00,000/- on account of gift was added u/s 68 as income from undisclosed sources. The said addition was confirmed by the Ld. CIT (A) also. However, the Tribunal has set aside the matter to the file of the Assessing Officer after observing and holding as under: “11. Considering the above submission we find substance in the contention of the ld. AR as it is very much evident from the statements of Mr. Harish Kumar recorded by the Assessing Officer u/s.131 of the Act that he in his statements has nowhere alleged specifically that the gifts in question given by him to the assessees were bogus and the money involved therein was the money of the assessees which came to him and in lieu thereof he had issued having accepted the amount as the income of the partners themselves, it could not be added to the income of the firm. The assessment of the partners had resulted in the sum being charged to tax in their hands and it did not make any difference whether the sum was taxed in the hands of the partners or in the hands of the firm, held the Hon’ble High Court. Applying the ratio laid a own in these decisions of the Hon’ble Jurisdictional High Court, we hold that if the donor has already paid tax on the amount gifted, the same is required consideration while deciding the assessability of the same in the hands of the donee i.e. the present assessees. We thus in the interest of the justice set aside the matter to the file of the AO to afford opportunity to the assessees to cross- examine Shri Harish Kumar by securing his presence before him and to examine this aspect of the case regarding payment of tax on the gifted amount by the donor in view of the above stated decisions of Hon’ble Delhi High Court and decide the issue accordingly as per the 6 I.T.As. No.6652 & 6653/DEL/2015

Now in the set aside proceedings, one very important observation and fact recorded by the Assessing Officer is that, similar addition was made on substantive basis in the hands of the donor in scrutiny proceedings and order passed u/s. 143(3) by the Assessing Officer of Shri Harish Kumar. He further observed that assessee was provided opportunity to produce the donor, Shri Harish Kumar for cross-examination, but assessee has failed to do so. The ld. Assessing Officer after detailed discussion had again made the addition, but ultimately he has made the addition on protective basis. However, before reaching to the said conclusion, he observed that the Assessing Officer in the case of Shri Harish Kumar should not have made the addition on substantive basis and there is inadvertent error kept in the said assessment order, because the addition should have been made on substantive basis in the case of the assessee. However, despite such observations, he has finally made the addition on protective basis after observing and holding as under: “27. Here, it is being made clear that addition made on substantive basis hands of Harish Kumar for A.Y. 2004-05 in respect of same amount which is being taxed in the present case on substantive basis does not vitiate the assessment proceedings in the present case. The assessee cannot take plea that the AO in the present case is bound by findings in the assessment order passed by the AO in the case of Harish Kumar

If the Assessing Officer has made the addition on protective basis, but Ld. CIT (A) being an appellate authority should not have perpetuated by confirming the addition on protective basis. As an appellate authority, he should have firstly, ascertain the fate of substantive addition made in the hands of Harish Kumar; and then only he should have either deleted or confirmed the addition on substantive basis. There is no provision for confirming the addition on protective basis. The relevant conclusion in paragraph 10.1 of the Ld. CIT(A) in this regard read as under: “10.1 In view of above, I hold that the addition of Rs.1,00,00,000/- made by Assessing Officer u/s.68 of the Act on protective basis is justified and the grounds taken by appellant are liable to be dismissed.”

Before the ld. counsel for the assessee, Shri Salil Agarwal and ld. Sr. D.R. had vehemently argued the case on merits after referring to various materials. However, we are not inclined to decide and adjudicate the issue on merits, because there is a clear cut finding by the authorities below that the addition in the case of the assessee has been made and confirmed on protective basis and substantive addition has been made in the hands of the donor, Sri Harish Kumar.

After considering the relevant findings given in the impugned orders, here in this case as discussed above, the Assessing Officer despite his reservation about the finding given in the case of Shri Harish Kumar for the Assessment Year 2004-05 wherein the similar amount has been taxed on substantive basis, after observing that substantive addition should have been made in the case of the assessee because it is the assessee who must have paid the cash for getting the accommodation entry, he went ahead and made the addition on protective basis. And rightly so, because same addition cannot be made in two hands on substantive basis and cannot be subject to double taxation. Here Assessing Officer has rightly accepted the fact that, since addition in the case of Shri Harish Kumar has been made on substantive basis; therefore, he is proceeding to tax the alleged gift on protective basis. Further, he was correct in observing that it is the appellate authority to take the decision, whether addition should have been made on substantive basis or protective basis. The Ld. CIT (A) being an appellate authority should

Before us, the ld. DR had pointed out that since taxes have not been paid by Shri Harish Kumar, therefore, such an addition should be confirmed in the hands of the assessee and Revenue’s interest should be protected. However, we are unable to subscribe to this view because protective addition as such cannot be sustained at second appellate stage and consequently no proceedings either for recovery of tax or for initiating any penalty proceedings could be initiated. If the addition has been made on substantive basis in case of another person, here in this case alleged entry provider Mr. Harish Kumar wherein the amount of gift given by him to the assessee has been added on substantive basis, then whether tax is recoverable from him or not is relevant at all. What is relevant is that same addition cannot be taxed twice and there has to specific finding in whose hand the amount is taxable. Before us both the parties could not provide the detail of fate of substantive addition, whether any appellate authority has held that the addition made in the case of Mr. Harish Kumar should be made on protective basis and substantive addition should be made in the case of the donees, i.e., the person who has received the gift. Until and unless there is such finding by the appellate authority in the 10 I.T.As. No.6652 & 6653/DEL/2015 case of Sri Harish Kumar, then protective addition has no legs to stand.

Under these circumstances, we direct the Assessing Officer as under:  firstly, to ascertain whether in the case of Shri Harish Kumar any finding has been given by the appellate authority that additions made in his hand should be taxed on protective basis and substantive addition should have been made in the hands of the donee, i.e. the assessee who has received the gift;  secondly, if addition has been deleted on merits in the case of Shri Harish Kumar then again no addition can be confirmed against the assessee. Until and unless the appellate authority has held that addition made in the hands of Shri Harish Kumar is to be examined or made in the case of the assessee no addition can be made or confirmed; and  lastly, if the substantive addition made in the hands of Shri Harish Kumar had attained finality then also no addition or any proceedings can be initiated against the assessee.

We are not deciding the issue on merit which has been argued by both the parties and same is kept open. In view of the observation made above, the appeal of the assessee is partly allowed for statistical purposes.

Similarly in the case of M/s. Ramesh Chawla (HUF) also, the Assessing Officer has made the addition on protective basis by making similar observation and even the Ld. CIT (A) has confirmed the addition on protective basis as he has followed the appellate order in the case of Mrs. Kanika Chawla. Accordingly, our finding and direction given above will apply mutatis mutandis in this appeal also. Accordingly, this appeal is also treated as partly allowed for statistical purposes.

In the result, both the appeals of the assessees are partly allowed.