“protective assessment”
The decision most relied on for protective assessment is Lalji Haridas v. ITO (43 ITR 387), cited in 238 judgments on BharatTax.
Leading authorities on protective assessment
When an assessing authority is uncertain about the true ownership of funds or in whose hands income should be assessed, it can frame a protective assessment to safeguard the Revenue's interest. Such protective assessments remain valid until the substantive assessment is finalized.
Protective assessments should not be deleted or disposed of by lower authorities, but rather allowed to remain in effect until the related substantive assessment proceedings attain finality before the High Court or Supreme Court.
Reassessment proceedings cannot be initiated solely for the purpose of making a protective addition. Such proceedings are not valid in the eyes of law.
Penalty under section 271(1)(c) cannot be imposed based on a protective assessment order. Initiation of penalty proceedings is impermissible without a substantive assessment order that finally adds income to the assessee's hands.
An assessee can raise an objection regarding the validity of the Assessing Officer's jurisdiction for reopening a concluded assessment even if the issue was not raised before the CIT(Appeals), by invoking Rule 27 of the Income Tax Appellate Tribunal Rules, 1963. This is permissible if the issue is ancillary to the main issue and does not require additional evidence.
A protective assessment is permissible when the assessing officer has doubt regarding who is in receipt of income, but a recovery based on a protective assessment is not allowed. If an assessment is intended to be protective, it must be clearly stated as such.
A penalty under Section 271(1)(c) for concealment of income cannot be levied when the assessment was made on a protective basis, especially if the income was actually assessed in the hands of another person and it was uncertain who had concealed the income.
A protective assessment cannot be made without a prior substantive assessment.
