DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, KOLLAM vs. ARUN RAJ PILLAI, PATHANAMTHITTA

Being aggrieved, an appeal was filed before the CIT(A). contesting that the very initiation of reassessment proceedings are void in law as the AO had deliberately not followed the procedure laid down by the Hon'ble Supreme Court and challenging the action of the AO in making protective addition in the hands of the assessee company as the same were already taxed in the hands of Shri Rajendran Pillai. The CIT(A), taking into consideration the findings of the ITAT in the case of M.K. Rajendran Pillai held that the assessee company along with the family members of Shri Rajendran Pillai and his group concerns are being subjected to separate assessments, the substantive addition in respect of credits appearing in the hand of the family members and business concerns of Shri Rajendran Pillai would no longer can be sustained, the protective assessment made in the hands of the assessee company was confirmed as substantive assessment in the hands of the assessee company. However, the CIT(A) deleted the addition based on the findings given in the case of Shri Rajendran Pillai that the addition in respect of credits found in the bank account of the assessee company stated to have been received from Shri G.K. Rengma and Excellence Associates are treated as loan, not as income. Accordingly deleted the addition to the extent of Rs. 1,76,05,006/-.

Before we deal with the issues in the present appeals and cross objection, it is significant to make a note of the factual matrix of the case of Shri Rajendran Pillai. Shri Rajendran Pillai is stated to be resident of Nagaland. He is stated to be looking after the police vehicles including procurement of spare parts, etc. Search and seizure operations u/s. 132 of the Act were conducted on 08.06.2017 in the case of Shri Rajendran Pillai along with family members and group concerns. It is found that Shri Rajendran Pillai and his family members and group concerns have received money from as many as 38 different bank accounts held in the names of various individuals and entities based at Nagaland. It is also further found that huge amount of cash was found in the bank accounts held by Shri Rajendran Pillai and his family members and group concerns. The funds received from persons as well as entities based at Nagaland were utilised for the purpose of purchase of properties during 2012- & CO 5/Coch/2023 Arun Raj Pillai 13 to 2017-18. The Assessing Officer of Shri Rajendran Pillai found that the money lenders/loan creditors had not maintained any books of account and claimed exemption u/s. 10(26) of the Act. The confirmations obtained from these creditors are found to be defective for certain discrepancies and mismatch in signatures, etc. The AO further returned a finding that all these loan creditors were deriving income from executing contracts with the government of Nagaland, were mere name lenders and opened bank accounted operated by Shri Rajendran Pillai. Business receipts credited to the bank accounts were immediately transferred to the bank account of Shri Rajendran Pillai and his family members by persons and entities and in consideration for lending names they were paid commission by Shri Rajendran Pillai. In nutshell, the sum and substance of the case set out by the AO is that Shri Rajendran Pillai was actually carrying on the business in the name of other people based in Nagaland. The amounts so transferred to the family members of Shri Rajendran Pillai and his group business concerns actually belonged to him. Accordingly, he made addition of Rs. 305.59 crores for AY 2012-13 to 2017-18, details of which are as under; -

The assessment was challenged before the CIT(A), who had confirmed the additions. On further appeal before the Tribunal, the Tribunal had deleted the addition made in respect of funds received by family members of Shri Rajendran Pillai and the group concerns by holding as under: -

Keeping in view this background we proceed to adjudicate the issues in the appeals.

Cross Objection No. 1, challenges the very validity of reopening of assessment on the ground that there were no reasons to believe that income escaped assessment to tax. It is submitted that assessment proceedings were sought to be reopened primarily on the ground that there were certain fund transfers into the bank accounts of the Assessee from Nagaland based parties-fund transfers were in the nature of loans and duly reflected as such in the audited financial statements of the Assessee - merely because certain sums of money had been received in the Assessee's bank account from certain Nagaland based entities, it could not automatically be inferred that the same were in the nature of income of the Assessee which had escaped assessment.

On the other hand, the ld. CIT-DR seriously opposed the above submissions.

We heard the rival submissions and perused the material on record. Now we shall take up cross objection No. 1 challenging the very validity of initiation of reassessment proceedings. The appellant challenged the validity of the reassessment proceedings on several scores. No we shall deal with the submission of the appellant that no reassessment proceedings can be initiated for the purpose of & CO 5/Coch/2023 Arun Raj Pillai making a protective addition. From the mere reading of the para 7 of assessment order, it would be crystal clear that the Assessing Officer had initiated the reassessment proceedings in the appellant’s case for the purpose of making protective addition in the hands of the appellant, on the contingency that if the CIT(A) in the case of Mr. Rajendran Pillai were to hold against the Department, the additions should be made in the hands of the appellant. Thus it is clear that the Assessing Officer sought to reopen the assessment based on the contingency of outcome of the appeal proceedings in the case of Mr. Rajendran Pillai, which does not meet the requirement that income should escaped assessment. However, such and exercise is permissible in the case of regular assessment not in the case of reassessment proceedings as held by the Hon’ble Bombay High Court in the case of DHLF Venture Capital Fund v. ITO [2013] 358 ITR 471. The relevant findings of the Hon’ble High Court are extracted as below: - 16. The basis on which the Assessing Officer has purported to reopen the assessment is placed beyond any doubt by the affidavit which has been filed in reply to the Petition. As we have noted, there is no ambiguity whatsoever in the reasons which have been communicated to the assessee in the order dated 18 May 2012, but in the affidavit in reply, it has been stated that the income of Rs.32.83 Crores arising from the investment of contributions of the contributors to the Venture Capital Fund which has been claimed as exempt in the hands of the Petitioner should be assessed as income in the hands of the AOP of the contributors of the Petitioner "on a protective basis". Again it has been stated that the issue of & CO 5/Coch/2023 Arun Raj Pillai taxing the AOP of the contributors of the Petitioner "has arisen from the submission of the Petitioner before the appellate authorities" where the Petitioner has contended that the transactions amount to a revocable transfer and that the income which would arise should be taxed in the hands of the individual contributors. The reopening of an assessment under Section 148 on the basis of a submission which is raised before the appellate authority by the assessee is clearly impermissible because what Section 147 requires is a formation of a reason to believe by the Assessing Officer. In the present case, there is clearly a want of compliance with the jurisdictional condition. The Assessing Officer has not formed a reason to believe that income has escaped assessment since the reopening is based purely on a contingency that may arise upon a particular outcome before the appellate tribunal.

Undoubtedly as counsel appearing on behalf of the Revenue submits the concept of a protective assessment is well known to the law of income tax in India. The basis on which a protective assessment is carried out is summed up succinctly in SampathAyengar's Law of Income Tax (11th edition, Vol. VI, page 9724) : "Protective assessment - The Assessing Officer may often have to assess the same income in more than one place. Sometimes they may be made by different officers as, for example, where an officer assessing A thinks that certain income belongs to him but another officer assessing B is of the opinion that the income is his. Sometimes the same officer may find that an assessee before him is returning a particular income but is of the opinion that it should be assessed in the hands of a firm or a family and not in the hands of the person who returned it. It has been held that the officer may, when in doubt (Not otherwise: CIT v. Shri Ramchandraji Maharaj Ka Bada Mandir [1988] 73 CTR (MP) 79), to safeguard the interests of the Revenue assess it in more than one hand (Lalji Haridas v. ITO\[1961] 43 ITR & CO 5/Coch/2023 Arun Raj Pillai 387 (SC)). But this procedure can be permitted only at the stage of the assessment as, at higher levels, it is possible for the appellate or revisional authority to give a clear finding as to the assessee who is liable to be so assessed leaving the one who is aggrieved to get redress by appropriate proceedings. (See Dayabaiv.CIT [1985] 154 ITR 248 (MP)). In any event, if, at the stage of the Tribunal or High Court it is found that the same income is assessed in both places, the Department should provide relief suomotuto one of them. (ITO v. Bachu Lal Kapoor [1966] 60 TR74 (SC)). There can be precautionary assessments but not protective recovery. (CIT v. Cochin Co. Pvt. Ltd.[1976] 104ITR655 (Ker.)). But where an assessment is intended to be protective, it should be so expressed. (CIT v. Khalid Mehdi [1987] 165 ITR 685 (AP)).

A protective assessment as the learned author indicates (Vol. 1 page 272) is regarded as being protective because it is an assessment which is made ex abundanticautela where the department has a "doubt as to the person who is or will be deemed to be in receipt of the income". A departmental practice, which has gained judicial recognition, has emerged where it appears to the Assessing Officer that income has been received during the relevant Assessment Year, but where it is not clear or unambiguous as to who has received the income. Such a protective assessment is carried out in order to ensure that income may not escape taxation altogether particularly in cases where the Revenue has to be protected against the bar of limitation. But equally while a protective assessment is permissible a protective recovery is not allowed. However, such an exercise which is permissible in the case of a regular assessment must necessarily yield to the discipline of the statute where recourse is sought to be taken to the provisions of Section 148. Protective assessments have emerged as a matter of departmental practice which has found judicial recognition. Any practice & CO 5/Coch/2023 Arun Raj Pillai has to necessarily yield to the rigour of a statutory provision. Hence, when recourse is sought to be taken to the provisions of Section 148, there has necessarily to be the fulfillment of the jurisdictional requirement that the Assessing Officer must have reason to believe that income has escaped assessment. To accept the contention of the Revenue in the present case would be to allow a reopening of an assessment under Section 148 on the ground that the Assessing Officer is of the opinion that a contingency may arise in future resulting an escapement of income. That would, in our view, be wholly impermissible and would amount to a rewriting of the statutory provision. Moreover, the reliance which is sought to be placed on the provisions of Explanation 2(a) to Section 147 is misconceived. Explanation 2 provides a deeming definition of cases where income chargeable to tax has escaped assessment and clause (a) includes a case where no return of income has been furnished by the assessee although his income or the income of any other person in respect of which he is assessable exceeds the maximum amount which is not chargeable to tax. As the reasons which have been disclosed to the assessee would indicate, this is not a case where an assessee has not filed a return of income simplicitor. The whole basis of the reopening is on the hypothesis that if the provisions of Sections 61 to 63 are attracted as has been claimed by the assessee, and the income of Rs.32.83 Crores which has been claimed by the assessee to be exempt is treated as exempt, in that event an alternate basis for taxing the income in the hands of the AOP of the contributories is sought to be set up. For the reasons already indicated, the entire exercise is only contingent on a future event and a consequence that may enure upon the decision of the Tribunal, that again if the Tribunal were to hold against the Revenue. A reopening of an assessment under Section 148 cannot be justified on such a basis. There has to be a reason to believe that & CO 5/Coch/2023 Arun Raj Pillai income has escaped assessment. 'Has escaped assessment' indicates an event which has taken place. Tax legislation cannot be rewritten by the Revenue or the Court by substituting the words 'may escape assessment' in future. Writing legislation is a constitutional function entrusted to the legislature. The ratio that can be culled out is that resort to provisions of section 147 cannot be made in order to make a protective assessment or addition. The ratio of the decision of the Hon’ble Bombay High Court cited supra is squarely application to the facts of the case. Therefore, we are of the considered opinion that initiation of reassessment proceedings is bad in law. Accordingly, we quash the reassessment proceedings and the consequent assessment made u/s. 143(3) r.w.s. 147 of the Act. Since, we quashed the reassessment proceedings accepting one of the contentions of the appellant that no resort to provisions of reassessment cannot be made for the purpose of making protective additions, all other contentions raised by the appellant are kept open.

In the result, the cross objection filed by the assessee company stands allowed.