[Opinion] Substantive vs. Protective Assessment – Legal Validity & Key Case Laws

Kushal Soni & Sohel Ahmed – [2025] 175 taxmann.com 1044 (Article)

1. Introduction

During assessment proceedings or related investigations, situations may arise where the ownership or accrual of income is unclear. The Assessing Officer (AO) may face complexity in identifying the true recipient or rightful owner of an income. Some of the scenarios where such confusion typically arises include – Income is received by one person but enjoyed by another or The beneficial owner is different from the recipient or Income is apparently received by two persons, even though they are not legally associated or Two individuals claim ownership over the same income, although legally it can belong to only one or The source of income arises from one person, but it is received by another. In such cases, where legal ownership of income is under dispute or suspicion, the AO may resort to making additions in hands of two persons:

• Substantive addition in the hands of the person considered the actual owner.
• Protective addition in the hands of the alternative claimant.

Practical Example – The Income Tax Department finds a deposit of Rs. 50 lakhs in Mr A’s bank account. However, Mr A claims that the money belongs to his brother, Mr B, and Mr B denies ownership as well. Since the identity of the true owner is unclear and the assessment deadline is approaching (say, 31 March 2025), the Department will:

• Make a substantive assessment on Mr A (the primary suspect).
• Make a protective assessment on Mr B (the alternative possibility).

Once the ownership is conclusively determined, only the substantive assessment on the real owner will stand, and the protective assessment will be dropped.

Origin of the Concept of Substantive and Protective Assessments, Judicial Recognition and the Evolution of the Concept and Why Protective and Substantive Assessments Introduced?

The Income-tax Act, 1961 doesn’t specifically define “substantive assessment” or “protective assessment”. However, these terms have developed through tax department practices and court rulings. They are mainly used when there is uncertainty about who exactly owns certain income, allowing the tax department to protect revenue without missing legal deadlines.

The concepts of substantive and protective assessments were first recognized in the case of Lalji Haridas v. ITO [1961] 43 ITR 387 (SC). This case laid the groundwork for a practical solution to situations where the ownership of income was disputed or unclear.

Fact – In this case, both the appellant and his brother disowned certain income.

To solve this problem, the Department adopted a smart approach:

• A substantive assessment was made on the person who was primarily believed to be the true owner of the income.
• At the same time, a protective assessment was made on the alternative person, just to keep the option open in case the first assumption turned out to be wrong.

If the tax department taxed the wrong person and later found the actual owner of the income, statutory time limits often made it too late to take action, leading to revenue loss. This approach helped avoid such losses and ensured the income was still taxed correctly, despite any delays.

In this way, both substantive and protective assessments gained judicial recognition and became an important tool in safeguarding revenue in complex cases involving disputed ownership of income. This case legally validated the practice of protective assessments and became the foundation for several other judgments. Accordingly, this led to the gradual development of the concept.

Protective Assessment

The main purpose of a protective assessment is to safeguard the Revenue when there’s doubt about who should be taxed. If a substantive assessment (on the presumed owner of income) fails later due to legal or procedural issues, the protective assessment allows the Department to still recover tax.

However, a protective assessment cannot exist on its own—it must be supported by a corresponding substantive assessment, as confirmed in Suresh K. Jajoo v. Asstt. CIT [2010] 39 SOT 514 (Mum.).

Also, the AO must clearly mention who is being assessed substantively. If not, the protective assessment may be treated as substantive by default, as held in Dilipkumar Jain v. ITO [1983] 5 ITD 552 (Indore).

Substantive Assessment Must Precede Protective Assessment – Legal Prerequisite

Protective assessment cannot be started before the substantive assessment and can not be initiated unless a substantive assessment has first been made. The primary assessment determines the correct assessee and year of taxability. Only when there is uncertainty about ownership or source of income can a protective assessment be made — and that too, only in support of a valid substantive addition. This principle was clearly affirmed in Krishna Das Agarwal v. DDI/ADIT (Inv.) [2023] 150 taxmann.com 290 by ITAT Jaipur. In that case, Rs. 146 crore worth of foreign assets were added substantively in A.Y. 2019–20 under the Black Money Act, based on a search conducted in July 2018. The same amounts were also added on a protective basis in A.Y. 2016–17 to 2018–19, even though the assets came to the AO’s knowledge only in 2018. The Tribunal held that once the substantive addition was rightly made in A.Y. 2019–20, the year of discovery, then protective additions for earlier years were not legally valid. The Tribunal held that once substantive addition is made in the correct year when the asset comes to notice, protective additions in other years are not sustainable and amount to double taxation.

This principle was also reinforced in ITO v. Keshava Nanda Kakati [2021] 133 taxmann.com 316/192 ITD 445 by ITAT Gauhati. In that case, a large cash deposit in a bank account was treated as income on a protective basis in the assessee’s hands. However, since no substantive addition was made in the hands of the main entity (the Society of Education) that actually owned the account, the Tribunal held that the protective addition could not stand on its own. The ruling emphasised that a protective assessment cannot exist independently, it must always be backed by an existing and valid substantive assessment. Protective assessment can a be made as a backup. Protective assessment alone is not valid without a substantive assessment.

Failure of Substantive Assessment Leads to Protective Being Treated as Substantive

When there is confusion about who should pay tax or in which year, and to avoid revenue loss in such uncertain cases, a protective assessment is made alongside a substantive assessment. If the substantive assessment later fails or is held invalid, the protective one is treated as the main (substantive) assessment, allowing the department to collect tax without any legal difficulty.

This principle was applied in R.C. Nirula & Sons HUF v. Asstt. CIT [[2024] 164 taxmann.com 308 (Delhi – Trib.)], where the Tribunal found that the actual transfer of property rights occurred in Assessment Year 2009–10, not 2008–09 as originally assessed. Since the substantive addition in AY 2008–09 was incorrect, the protective addition made in AY 2009–10 was converted into a substantive one, ensuring proper tax collection without any loss to the revenue.

Protective Assessment Alone Cannot Justify Tax Recovery

A tax recovery cannot be made based only on a protective assessment. For any recovery to be valid, there must first be a substantive assessment, which clearly confirms who is legally responsible for the tax. A protective assessment is just a temporary step taken when the department is unsure about who exactly should be taxed.

This was clearly explained in the case of Amarjit Singh Sekhon v. Tax Recovery Officer [[2023] 154 taxmann.com 288 (Punj. & Har.)], where the High Court held that recovery based on a protective assessment alone is not allowed under law. In that case, the department had made a protective addition against the assessee but failed to make any substantive assessment. The Court ruled that such recovery was invalid and must be reversed unless a proper substantive assessment is made within the given time.

This case confirms that no taxpayer can be forced to pay tax without a final and valid assessment.

Does Protective and Substantive Assessment Lead to Double Taxation?

No, protective and substantive assessments do not lead to double taxation. Protective and substantive assessments are precautionary tools used when there is uncertainty about who is liable to pay tax on certain income. The income is taxed substantively in the hands of the person primarily considered liable, and protectively in another’s case as a safeguard. Once the correct taxpayer is identified through assessment or judicial decision, tax is collected only from that person, and the protective addition is removed. Protective assessments are simply a safeguard and not a final tax liability. This ensures there is no double taxation.

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