Blog # 18. Protective Assessment Under Income Tax Act, 1961

In the Income Tax Act, 1961 (the Act), there is provision to make only ‘regular assessment’. As per section 2(40) of the Act, ‘regular assessment’ means the assessment made under section 143(3) or section 144. Again as per section 2(8) of the Act, ‘assessment’ includes reassessment; therefore, assessment made under section 143(3)/144/147 is also a ‘regular assessment’. Protective assessment is said to those assessments which are made to ‘protect’ the interest of the revenue. Now the question is whether there is any provision of ‘protective assessment’ in the Act. The answer is that there is no such provision in the Act. Then how can an Assessing Officer (AO) make such assessment and how is it tenable in the law? The AO is not to execute the Act alone; he is required to execute the Income tax law in its entirety. Income tax law includes i) the Act, ii) the Income tax Rules, 1962, iii) the circulars issued by the CBDT or other competent authority, iv) the instructions issued by the CBDT or other competent authority and v) the judicial pronouncements.
Income tax is a charge on income and not on any other thing. The person who earns the income or to whom the income accrues or arises is only to be assessed. When the AO isn't certain of the person whom the income belongs to, by the time it becomes certain, the assessment may get barred by limitation. In these circumstances the AO may proceed to complete the assessment on protective basis. In a leading English case, it was held that the AO cannot be expected to be a silent spectator of the uncertainty as the inherent power given to him in the law is to protect the interest of the revenue which will be frustrated if he fails to act within the time of limitation. This principle was reaffirmed by the judiciary in India.
In England the leading case on the ‘Protective Assessment’ is Attorney-General v. Aramayo & Others (1925) 9 Tax Case 445 (F). As a precautionary measure before the time limit expired, the Special Commissioners made an alternative assessment for 1917-18 on the company itself in the same amount as that previously made on the Local Board. This has been reaffirmed in Jagannath Hanumanbux v. ITO, (1957) 31 ITR 603 Cal, it was held that though there is no provision in the Act authorizing the levy of income-tax on a person other than ‘the assessee’, i.e., the person by whom the income-tax, etc. is payable, it is open to the income-tax authorities to make a ‘protective’ or ‘alternative’ assessment where, owing to litigation between the parties concerned in Civil Court or for other reasons, the person who is really liable to pay the tax cannot be finally determined by the income-tax authorities. There are various other case laws which recognize the protective assessment.
The demand raised by a protective assessment cannot be recovered. It is required to be stayed by the AO. Similarly there cannot be any penalty on protective assessment. After recording the facts and circumstances of the case and the reason for making the assessment on protective basis in the assessment order, the AO may write that the demand that is attributable to the protective income is being stayed till substantive assessment is made.