There Can Be No Protective Addition In Absence Of Substantive Addition: ITAT Delhi

In the case before the Income Tax Appellate Tribunal (ITAT) Delhi, the issue revolved around the assessment of an Assessee Firm, which had declared an income of Rs.12,220 during the relevant year. The firm was engaged in a wholesale scrap business, and scrutiny revealed an addition of Rs.67,50,000 in the firm’s capital accounts during that period.

The tax authorities sought an explanation from the assessee as to why this amount should not be added back to the income. The firm clarified that the partners had made the mentioned capital addition from their personal sources and were individually responsible for the credit.

Following further proceedings, the assessing officer (AO) initiated reassessment against the partners. However, due to time constraints, this action became time-barred and was dropped in March 2023.

Subsequently, the ITAT Delhi bench considered the matter and highlighted the legal principle that protective additions do not hold ground when substantive additions are time-barred. Given that the reassessment against the partners was time-barred, the ITAT ruled that the protective addition made in the hands of the assessee firm could not be sustained.

Consequently, the ITAT set aside the protective addition, affirming that it no longer applied due to the time limitation on the substantive addition. The appeal of the assessee was allowed in favor of assessee firm based on this decision.