2023 (9) TMI 949 - AT - Income Tax

Addition in the hands of the Assessee Firm on protective basis to protect the interest of the Revenue - addition in capital accounts of the Partnership Firm - why addition in partners capital account may not be added back to the income of the assessee? HELD THAT - It is brought to our notice that the said reassessment proceedings u/s 147 of the Act against the partners of the Assessee Firm was dropped on account of same becoming time barred as per the provision of Section 153(2) of the Act on 31/03/2023, which was not disputed by the DR. It is well settled proposition of law that when substantive addition does not survive on account of being time barred, then the protective addition also does not survive. The said view of ours have been fortified by the order of Ramesh Chand Prem Raj Soni (HUF) 2003 (5) TMI 225 - ITAT JODHPUR . Accordingly, since the substantive addition has not been survived on account of being time barred, consequently, the protective addition made in the hands of the assessee herein also will not survive, accordingly, we delete the protective addition by setting aside the order of the Lower Authorities.

Summary

Issues Involved:
The issues involved in the judgment are the addition of funds to the assessee firm's capital account, confirmation of interest addition under Section 244(A), and the validity of the protective addition made in the hands of the assessee firm.

Addition of Funds to Capital Account:
The assessee firm had an addition of Rs. 67,50,000 in the capital accounts of the partners during the assessment year. The partners confirmed the introduction of cash in the firm as a contribution to their capital. The partners and the firm were treated as separate taxable entities. The partners owned responsibility for the credit in the form of the addition in the capital account, and the responsibility shifted to them. The reassessment proceedings against the partners were initiated, and the AO made a protective addition in the hands of the assessee firm. The Tribunal observed that when substantive addition does not survive due to being time-barred, the protective addition also does not survive. Citing precedent, the Tribunal held that protective additions are substitutive in nature and are made to protect the interest of the revenue.

Confirmation of Interest Addition:
The Learned CIT(A) confirmed the addition of Rs. 4,879 as interest under Section 244(A) for not being declared in the statement of accounts. The appellant contended that the addition was not justified and that there was an error in law. The Tribunal did not find merit in the revenue's argument and ruled in favor of the appellant, deleting the interest addition.

Validity of Protective Addition:
The protective addition made in the hands of the assessee firm was challenged by the appellant. The reassessment proceedings against the partners were dropped due to being time-barred, which led to the argument that the substantial addition made in the hands of the assessee firm did not survive. Relying on precedent, the Tribunal held that when substantive addition does not survive, the protective addition also does not stand. Consequently, the Tribunal allowed the appeal of the assessee and deleted the protective addition made in the hands of the firm.

This judgment highlights the importance of considering the separate tax entities of partners and firms, the nature of protective additions, and the impact of time-barred reassessment proceedings on additions made in the hands of the assessee.