2025 (6) TMI 1377 - AT - Income Tax

Addition u/s 69A on protective basis - no addition was made on substantive basis in case of sender party - appellant has contended that the supplier M/s. Om Jewellers Delhi is the owner of the gold and they had sent parcel to the appellant for the job-work purposes and had submitted all the details during the post-search proceedings HELD THAT - We find that the Department was unable to collect the taxes from the true owner then in that situation the Department cannot collect the taxes from the person in whose hands the protective addition was made just to protect the revenue till the time the substantive addition has been made in the hands of the true owner. Since the Department has failed to frame the substantive addition in the hands of the True owner therefore assessee is not liable to accept these transactions as there is no any facts which shows that assessee under consideration is true owner of the transactions. We have examined the facts and find that assessee under consideration is not true owner of the gold. Therefore considering these facts and circumstances we delete the addition. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this judgment revolve around the validity and propriety of making a protective addition under section 69A of the Income-tax Act, 1961, in the hands of the assessee when no substantive addition has been made in the hands of the true owner of the seized gold. Specifically, the issues are:

1. Whether the addition made under section 69A on a protective basis in the hands of the assessee is justified when no substantive addition has been made against the sender party (true owner) of the gold.

2. Whether the assessee fulfilled the onus to prove that the gold sent by the sender party was for job work and not unexplained investment.

3. The legal and factual correctness of the Assessing Officer's and Commissioner of Income Tax (Appeals)'s actions in upholding the addition under section 69A.

4. The applicability and scope of protective addition under section 69A in the context of seized goods and the procedural requirements for substantive addition against the true owner.

Issue-wise Detailed Analysis

Issue 1: Justification of Protective Addition under Section 69A in the Absence of Substantive Addition Against True Owner

The legal framework involves section 69A of the Income-tax Act, 1961, which deals with unexplained investments. The principle of protective addition is to safeguard the revenue interest when income is prima facie unexplained but the true owner's assessment is pending or under investigation. The protective addition is contingent and meant to be reversed if substantive addition is made in the true owner's hands.

The Court noted that the Assessing Officer made a protective addition of Rs. 14,01,303/- corresponding to 460.955 grams of fine gold seized from parcels allegedly consigned by M/s. Om Jewellers, Delhi to the assessee for job work. The AO did not make a substantive addition against M/s. Om Jewellers but added the value in the assessee's hands on a protective basis to prevent revenue leakage.

The assessee contended that since no substantive addition was made in the hands of the true owner, the protective addition in his hands was unwarranted. The Revenue, however, argued that protective addition was necessary to safeguard revenue pending substantive assessment.

The Court examined the documents submitted by the assessee, including stock ledgers and issue vouchers from Om Jewellers, and e-proceedings indicating no assessment was carried out against Om Jewellers for the relevant year. The Revenue conceded that no substantive addition was made in Om Jewellers' hands.

Applying the principles from the Supreme Court judgment in Lalji Haridas vs. ITO (1961) 43 ITR 367 (SC), the Court held that protective addition is permissible only when there is a prima facie case against either the true owner or the recipient. Since the Department failed to initiate or complete substantive assessment against the true owner, the protective addition in the assessee's hands could not be sustained. The Court reasoned that the Department cannot collect tax from the person in whose hands the protective addition was made if it fails to make substantive addition in the hands of the true owner.

Issue 2: Onus on the Assessee to Prove the Nature of the Gold Transaction

The Assessing Officer and CIT(A) held that the assessee failed to discharge the onus to prove that the gold was sent for job work and not as unexplained investment. The AO observed that no satisfactory details or documentary evidence were furnished by the assessee to explain the ownership and nature of the gold.

The assessee submitted documents such as stock ledgers, issue vouchers, and other evidences to establish that the gold was sent by Om Jewellers for job work. However, the Court noted that these documents were already examined by the AO and no new evidence was brought during appellate proceedings. The assessee also failed to explain the fate of the gold despite multiple opportunities.

Nonetheless, the Court emphasized that since the substantive addition was not made against Om Jewellers, the protective addition in the assessee's hands could not be justified solely on the ground of failure to prove ownership or job work nature. The onus to make substantive addition against the true owner lies with the Department.

Issue 3: Validity of AO's and CIT(A)'s Orders Upholding the Addition

The AO's order was based on the interception of gold parcels at Rajkot airport, seizure of 460.955 grams of fine gold, and failure of the assessee to furnish satisfactory evidence regarding ownership. The AO made a protective addition under section 69A to protect revenue interests pending substantive assessment against Om Jewellers.

The CIT(A) confirmed the AO's order, holding that the AO followed due procedure and no infirmity was found. The CIT(A) rejected the assessee's grounds challenging the addition and the failure to furnish details.

The Court, however, found that the Department did not initiate or complete substantive assessment against Om Jewellers, the true owner, and therefore the protective addition in the assessee's hands was not sustainable. The Court held that the AO and CIT(A) erred in upholding the addition without ensuring substantive addition against the true owner.

Issue 4: Applicability and Scope of Protective Addition under Section 69A

The Court reiterated that protective addition under section 69A is a contingent measure to prevent revenue loss pending substantive assessment. It is not a substitute for substantive addition and cannot be used to tax a person who is not the true owner when the Department fails to assess the true owner.

The Court observed that the protective addition was made in the assessee's hands based on the presumption that if substantive addition is made against Om Jewellers, the protective addition would be adjusted. However, since no substantive addition was made, the protective addition lost its basis.

The Court emphasized that the Department's failure to make substantive addition against the true owner disentitles it from taxing the assessee on a protective basis. The protective addition is not a final assessment but a safeguard measure, which must be reversed if substantive addition is not made.

Significant Holdings

"The Department was unable to collect the taxes from the true owner, then in that situation, the Department cannot collect the taxes from the person in whose hands the protective addition was made, just to protect the revenue till the time the substantive addition has been made in the hands of the true owner."

"Since the Department has failed to frame the substantive addition in the hands of the True owner, therefore assessee is not liable to accept these transactions as there is no any facts which shows that assessee under consideration is true owner of the transactions."

"Protective addition can only be made when prima facie it appears to the revenue that income has been received either by the true owner or by the assessee under consideration, then it would be open to the Income Tax Authorities either to tax the income in hands of the true owner or in the hands of the assessee under consideration."

Core principles established include:

• Protective addition under section 69A is contingent and dependent on substantive addition against the true owner.
• Failure of the Department to make substantive addition against the true owner disentitles it from taxing another party on a protective basis.
• The onus to prove ownership and nature of transaction lies with the assessee, but protective addition cannot be sustained if the Department does not act against the true owner.
• Protective addition is not a final assessment but a temporary measure to protect revenue interest pending substantive assessment.

Final determinations on each issue are:

• The protective addition under section 69A in the assessee's hands was not justified as no substantive addition was made against the true owner, M/s. Om Jewellers.
• The assessee's failure to prove the nature of the gold transaction does not justify sustaining the protective addition in absence of substantive addition against the true owner.
• The AO's and CIT(A)'s orders upholding the addition were set aside.
• The addition of Rs. 14,01,303/- made on protective basis was deleted and the appeal was allowed.