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Facts
Search and seizure operations on Shri M.K. Rajendran Pillai, a promoter-cum-Director of the assessee company, revealed unexplained funds from Nagaland-based parties, leading the AO to make a protective addition of Rs. 5,72,66,080/- in the assessee's hands, as the amount was substantively assessed in Pillai's case. The CIT(A) partly allowed the appeal, confirming a portion of the addition related to loans from other parties. The assessee challenged the validity of the reassessment proceedings, arguing they were initiated solely for protective purposes.
Held
The Tribunal ruled that reassessment proceedings under Section 147 read with Section 148 cannot be initiated for the purpose of making protective additions, as the statutory requirement of "reason to believe" that income has escaped assessment must be genuinely formed, not based on contingencies. It clarified that while protective assessments are permissible in regular assessments, they are impermissible for reopening assessment under Section 148. Consequently, the reassessment proceedings and the resulting order were quashed.
Key Issues
Validity of initiating reassessment proceedings under Section 147/148 solely for making protective additions. Interpretation of "reason to believe" for escapement of income in the context of protective assessments.
Sections Cited
132, 148, 143(3), 147, 10(26), 68, 151, 61, 63
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI SOUNDARARAJAN K., JM
O R D E R Per Bench Theseare cross appeals filed by the assessee as well as Revenue directed against the orders of the Commissioner of Income Tax (Appeals)-3, Kochi [CIT(A)], dated 29.12.2023 for Assessment Years (AY) 2015-16. Assessee has filed cross objection No. CO 10/Coch/2024 against ITA No. 318/Coch/2024.
Brief facts of the case are that the assessee is a private limited company incorporated under the provisions of Companies Act, 1956. Search and seizure operations under the provisions of section 132 of the Income Tax Act, 1961 (the Act) were conducted in the case of one Shri M.K. Rajendran Pillai, his wife Smt. Valsala Raj and sons Shri Varun Ran and Shri Arun Raj and also in the business concerns of Sreevalsam Group on 08.06.2017. This group of concerns is stated to be engaged in the business of running textile shops, jewellery shops, finance business, bar attached hotels, vehicle dealerships, fuel outlets, educational institutions, etc. The assessee is a company in which the family members of Shri Rajendran Pillai were interested as promoters-cum-Directors.
It is stated that during the course of search and seizure operations it was found that the appellant was in receipt of funds from sources/entities located in Nagaland to the account of the assessee company which were not explained in the return of income 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. filed for the year under consideration. Accordingly, issued a notice u/s. 148 of the Act. During the assessment proceedings it is found that the assessee company had received loans from Nagaland based parties aggregating to RS. 5,72,66,080/-details of which are available page Nos. 2 & 3 of the assessment order. It was stated that the assessee company had failed to offer any plausible explanation in support of the source of above credit. The AO also observed that during the course of assessment proceedings in the case of Shri Rajendran Pillai, it was found that the funds were transferred to the family members of the Shri Rajendran Pillai and other business entities are unaccounted income earned by him in Nagaland to the tune of Rs. 24,31,96,513/-. In the assessment of Shri Rajendran Pillai the amount so transferred were assessed to tax on substantive basis for AYs 2010-11 to 2017-18. However, the AO noting the fact that the assessment in the case of Shri RajendranPillai are subject matter of appeal before the CIT(A), proceeded to make the addition on protective basis in the hand of the assessee company. Thus, the AO made addition of Rs. 5,72,66,080/- vide assessment order dated 27.09.2021 passes u/s. 143(3) r.w.s. 147 of the Act.
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 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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. 3,04,65,856/-. However, based on the finding given by the ITAT in the case Shri Rajendran Pillai, the CIT(A) confirmed the addition in respect of loan received from other parties to the extent of Rs. 2,68,00,224/-. Thus, the appeal filed by the assessee stands partly allowed by the CIT(A).
Being aggrieved by that part of the order of CIT(A), which is against the assessee, the assessee company is in appeal before this Tribunal in ITA 117/Coch/2024 and being aggrieved by that part of
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- 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 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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; -
No. Particulars Amount (Rs.) 1 Credit received from 38 Bank Accounts of 243.19 crores Nagaland based entities/concerns 2 Cash Deposits in the bank accounts of assessee 24.74 crores and his family members 3 Cash deposits in Vrindavan Builders Pvt. Ltd. 2.27 crores 4 Cash component in land transaction 16.10 crores 5 Other credits in bank accounts of assessee and 19.28 crores his family members Total 305.59 crores
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
“10. After due consideration of material facts, we find that the debit / transfer entries aggregating to Rs.243.19 Crores have been treated to be the assessee’s income on the allegation that assessee’s unaccounted income has been routed through these accounts for the benefit of group as a whole. However, in para 7.10, we have already taken a position that the credit transfer received by the other family members and group concerns could not be assumed to be assessee’s undisclosed income since it is nowhere been established by the lower authorities that the assessee was de-facto owner of either Nagaland based bank accounts or the owner of bank accounts of various recipients. The other family members and group concerns of the assessee were separate Income Tax assessee and subjected to separate assessment. Therefore, the credit received in those accounts to 586/Coch/2022 - 57 - could not be held to be the assessee’s income. Under these circumstances, the assessee’s onus would remain confine to explain the credit received by it in his own bank accounts. Further, the assessment proceedings for AY 2018-19 have already been quashed by us on legal grounds. Therefore, at the outset, the addition, to that extent, could not be sustained in the hands of the assessee. We order so.”
This order was appealed by the Revenue before the Hon'ble Kerala High Court, which confirmed the findings of the Tribunal as under: -
“9. As for the cash deposits received in the bank accounts of the assessee, his family members and group concerns, the Appellate Tribunal found that, apart from adding the cash deposits found in all the accounts to the total income of the assessee towards unexplained cash deposits under Section 68 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. of the I.T. Act, the authorities below had also rejected the explanation given by the assessee that the amounts received by him were by way of loan from persons in Nagaland. Based on its earlier finding that the Revenue had not established that the bank accounts held by the other family members and group concerns actually belong to the assessee himself, the cash deposits in the said accounts were directed to be excluded from the additions made to the taxable income of the assessee.”
Keeping in view this background we proceed to adjudicate the issues in the appeals.
ITA 117/Coch/2024 – AY: 2015-16 10. At the first instance we shall take up the assessee’s appeal which goes to the root of the matter. The assessee company raises the following grounds of appeal: -
1. That on the facts and circumstances of the case the objection raised against the reopening of the assessee's assessment was not disposed off before completion of the assessment and the re-assessment order was passed without following the procedure as laid down by the Honorable Supreme Court in case of reopening of Assessment. Therefore the assessment order is bad in law and it should be deleted.
2. That on the facts and circumstances of the case the basis of reopening of assessment was not correct and the reopening was bad in law therefore the addition made should be deleted.
3. That on the facts and circumstances of the case the learnt A.O erred in treating the credit entries in assessee's bank accounts as unexplained cash credit. The credit entries in assessee's bank accounts were unsecured loans which was 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. disclosed in assessee's balance sheet, therefore the addition made u/s 68 of the Income Tax Act 1961 is bad in fact and the addition so made should be deleted.
4. The assessment order was passed without conducting any independent inquiry but on borrowed satisfaction. The A.O. has not made any independent inquiry in relation to addition made but relied on the information of the investigation wing. Therefore the assessment order is bad in law and addition made should be deleted.
5. That the A.O. has made protective addition in assessee's case making the addition u/s 68 as unexplained cash credit whereas the same has already been added substantially in the case of one of the family member of director. Therefore the addition made resulted in double taxation and is bad in fact and should be deleted.
6. That the assessment order was passed against the principles of natural justice. The order was passed without giving the assessee proper opportunity of being heard. No show cause notice was given before passing the order. Tharefore the assessment order is bad in law and addition made should be deleted 7. The assessee craves to add additional ground at the time of hearing.”
11. Ground Nos. 1 & 2 challenges the very validity of reopening of assessment on the ground that there were no reason 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 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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.
11.1 It is further submitted that Formation of belief based on definite material and information is a mandatory condition for acquiring jurisdiction to issue notice u/s 148-such formation of belief cannot be based on suspicion, surmises, conjectures but must be based on cogent material that establishes a live link or casual nexus between the information available and inference so drawn by the A.O., reliance placed on the decisions of the Hon'ble S.C. in Calcutta Discount 1961 41 ITR 191(SC), ITO v. Lakmani Mewal Das, 1976 103 ITR 437 (SC), and Sheo Nath Singh v. AACIT, 972 SCR (1) 175 (SC).
11.2 Reassessment proceedings were initiated merely on the basis of 'reason to suspect' and not 'reason to believe' for the purpose of making fishing and roving enquiries in connection with the various items depicted in the regular books of account of the Assessee-not permissible - reliance placed on Chhugamal Rajpal vs. S.P. Chaliha [1971] 79 ITR 603 (SC); Bakulbhai Ramanlal Patel vs. Income Tax Officer (2011) 79 CCH 0204 (Guj). Reassessment proceedings initiated by the Ld. A.O on the basis of the satisfaction borrowed from the unverified information received from the Investigation Wing without any independent application of mind and without 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. conducting any such independent enquiry/investigation by the Ld. A.O. not permissible reliance placed on PCIT vs. Meenakshi Overseas Pvt. Ltd, reported in 82 taxmann.com 300 (Del HC); Signature Hotels (P) Ltd. vs. ITO (2011) 60 DTR (Del) 60; CIT vs. Odeon Builders Pvt. Ltd. [2019] 418 ITR 315 (SC) etc. It is further submitted that the reassessment proceedings initiated by the AO is bad in law for the reasons that the AO has failed to provide the reasons recorded u/s. 147 of the Act for issuance of notice u/s. 147 of the Act. Further it is submitted that the A.O had failed to provide the Assessee with copy of the satisfaction sheet where the Reasons for escapement of income had been recorded by him and also failed to provide the copy of approval granted by the appropriate authority u/s 151 of the Act despite categorical request copy of approval u/s 151 which has a reference to the reasons recorded are to be mandatorily provided to the Assessee, in absence of which the assumption of jurisdiction by the Ld. AO in initiating the proceedings u/s 147 will be rendered invalid -reliance placed on Saraswati Garewal [2024] 158 taxmann.com 37 (Raipur ITAT), Tata Capital Financial Services Ltd. v. Asst. CIT [2022] 137 taxmann.com 315 (Bom) and Sabh Infrastructure Ltd. v. ACIT [2018] 89 taxmann.com 409 (Del). Finally it is contended that no reassessment proceedings can be initiated for the purpose of making protective addition placing reliance on the decision of the Hon'ble
On merits, it is submitted that the loans received from Nagaland parities of Rs. 5,72,66,080/- were genuine and creditworthiness and identity of the parties was proved. Therefore, no addition is called for. Thus, he submitted that the appellant had discharged the onus of proving the ingredients of section 68 of the Act. Since the identity, genuineness and creditworthiness of the transaction are proved, not addition is required to be made.
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 ground of appeal
No. 1 challenging the very validity of initiation of reassessment proceedings. The appellant company 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 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, 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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 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 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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 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 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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 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 147 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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 endure 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 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 are bad in law. Accordingly, we quash the reassessment proceedings and the consequent assessment made u/s. 317 & CO 10/Coch/2024 Allebasi Builders and Developers Pvt. Ltd. 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. Appeal allowed.
AY: 2015-16 15. Since in the assessee’s appeal we quashed the assessment order on the grounds of validity of the initiation of reassessment proceedings the appeal filed by the Revenue also stand dismissed as assessment order does not survive. Appeal dismissed.
CO No. 10/Coch/2024 (Arising out of 15. Since the Revenue appeal in is dismissed on account of low tax effect, the cross objection becomes infructuous.
In the result, appeal filed by the assessee stands allowed and Revenue’s appeal and assessee’s cross objection stand dismissed.
Order pronounced in the open court on 9th June, 2025.