2025 (1) TMI 1576 - AT - Income Tax

Validity of Assessment u/s 153A - absence of a valid approval u/s. 153D r.w.s. 153B(1)(b) - distinction between a null and void order and an illegal or irregular order - assessment proceedings that were continued by the A.O. after forwarding of the draft assessment order HELD THAT - We find that in the case of Pr. CIT Vs. Anuj Bansal 2023 (7) TMI 1214 - DELHI HIGH COURT and Sapna Gupta 2022 (12) TMI 887 - ALLAHABAD HIGH COURT and Siddharth Gupta 2022 (12) TMI 1021 - ALLAHABAD HIGH COURT while approving the view taken by the Tribunal had held that the approving authority is required to apply independent mind to the material on record for each assessment year in respect of each assessee separately. Also it was observed that in case approval was granted in a mechanical manner without application of mind by the Jt. CIT then the same vitiated the assessment order. Supreme Court in the case of ACIT Vs. Serajuddin CO 2023 (3) TMI 785 - ORISSA HIGH COURT wherein it was held that non-compliance with the requirements of Section 153D or granting approval without proper examination can lead to the invalidation of the assessment order. It was thus observed that a mere mechanical approval without proper examination and understanding of the draft assessment order or case records vitiated the assessment order. Based on the aforesaid settled position of law we are of a firm conviction that an approval u/s. 153D of the Act granted after due application of mind and verifying the draft assessment order in the backdrop of the seized material is sine-quanon for framing of a valid assessment u/s. 143(3) r.w.s. 153B(b). Assessment proceedings continued after forwarding the draft assessment order - A.O. after forwarding the draft assessment order to the Jt. CIT Range-Central Raipur vide his letter dated 26.12.2019 (received by the Jt. CIT on the same date) for his approval u/s. 153D of the Act had thereafter not communicated to the said approving authority about the assessment proceedings that were continued by him after forwarding the said draft assessment order . Also we find no substance in the unsubstantiated claim of the department that the A.O. after forwarding the draft assessment order dated 26.12.2019 had pursuant to the subsequent modifications/developments which were carried out by him based on viz. (i) department s valuer letter dated 27.12.2019; and (ii) the reply of the assessee company dated 27.12.2019 had thereafter forwarded a fresh modified draft assessment order (revised) dated 30.12.2019 incorporating an addition u/s. 69 of the Act of Rs. 2.89 crore (supra) towards suppression of the value of stock to the Jt. CIT Range-Central Raipur for his approval u/s. 153D of the Act. A.O. in the present case before us had after forwarding the draft assessment order for approval u/s. 153D of the Act to the Jt. CIT (Central) Raipur on 26.12.2019 continued with the assessment proceedings and while framing the final assessment had tinkered with the said draft assessment order which thus had resulted to a material variance/difference between the final assessment order and the draft assessment order that was approved by the Jt. CIT. We find that in the case of CIT Vs. Akil Gulamali Somji 2013 (1) TMI 790 - BOMBAY HIGH COURT had observed that in a case where the Jt.CIT had no occasion to consider changes that were incorporated by the A.O. in the final assessment order then it was to be held that the impugned assessment order was passed without approval of the concerned authority as required per the mandate of law. We are of a firm conviction that once the draft assessment order is approved by the Jt. CIT u/s. 153D of the Act then the A.O. is rendered as functus officio and can only pass the final assessment order as approved by the Jt. CIT. An analogy in support of our aforesaid view can safely be drawn from the judgment of the Hon ble Apex Court in the case of Panchmahal Steel Ltd. Vs. U.A. Joshi ITO and another 1996 (9) TMI 8 - SUPREME COURT In the present case before us the A.O. had come up with a final assessment order which as observed by us hereinabove is found to be materially different from the draft assessment order that was approved by the Jt. CIT on 30.12.2019. Considering the aforesaid facts we are of a firm conviction that as the Jt. CIT Range-Central Raipur had not considered the changes/modifications/alterations that were carried out by the Dy.CIT(Central Circle)-2 Raipur to the draft assessment order that was forwarded to him by the A.O. on 26.12.2019 and was approved by him on 30.12.2019; nor was informed of the assessment proceedings that were continued by the A.O. after forwarding of the draft assessment order on 26.12.2019 therefore we concur with the Ld. AR that the final assessment order was passed by the A.O. without obtaining the approval of the Jt. CIT Range Central Raipur as required per the mandate of Section 153D. Accordingly in absence of a valid approval having been granted by the Jt. CIT Range-Central Raipur based on which the final assessment order had been passed by the A.O. u/s. 143(3) of the Act dated 30.12.2019 we are of the view that the same cannot be sustained and is liable to be struck down - Assessee appeal allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the addition made by the Assessing Officer (A.O.) on account of excess stock of raw materials (notably sponge iron) based on the department valuer's report using a sampling/Global Satellite Position (GSP) method, without actual weighment, is justified and sustainable.

2. Whether the assessment order framed by the A.O. under section 143(3) read with section 153A of the Income-tax Act, 1961 (the Act) for the assessment year 2018-19 is valid in the absence of prior approval of the Joint Commissioner of Income Tax (Jt. CIT) under section 153D of the Act.

3. Whether the CIT(Appeals) erred in partially sustaining the additions made by the A.O. despite the objections raised by the assessee on valuation methodology and procedural irregularities.

Issue-wise Detailed Analysis

Issue 1: Validity of Addition on Excess Stock Based on Departmental Valuer's Sampling Method

Legal Framework and Precedents: The law requires that any addition on account of stock discrepancies must be based on reliable and corroborative material. Judicial precedents such as the Hon'ble Orissa High Court in Utkal Alloys Ltd. and Haribhagat Agarwalla have held that additions based on estimation or sampling methods without actual weighment or physical verification are not sustainable. Similarly, the principle that estimation of income without rejection of books of account or without invoking section 144 is impermissible was relied upon.

Court's Interpretation and Reasoning: The Tribunal examined the valuation reports prepared by the department's valuer (M/s. Frontline Consultants Pvt. Ltd. - FCPL) and the assessee's valuer (M/s. Right Value Consultants Pvt. Ltd. - RVCPL). It was found that FCPL's valuation was based on volume measurement and sampling methods without actual weighment, whereas RVCPL's valuation was based on actual weighment and physical quantification of stock.

The Tribunal noted that density, a critical factor for stock valuation, varied significantly between the two reports, with the assessee's valuer providing a more accurate density based on actual weighment. The CIT(Appeals) had rightly rejected additions based on the department's valuer report for pig iron and MS billets due to lack of actual weighment and accepted the assessee's valuer's density for sponge iron valuation.

Key Evidence and Findings: The valuation report of the assessee's valuer was detailed with calculations of volume, weight (gross and tare), and net weight, establishing a reliable basis for stock valuation. The department's sampling method was found to be arbitrary and lacking corroborative evidence.

Application of Law to Facts: The Tribunal applied the legal principle that additions based on presumptive or estimated stock without actual weighment and corroborative material cannot be sustained. It upheld the CIT(Appeals)'s reduction of the addition on sponge iron stock from Rs. 2.66 crores to Rs. 1.77 crores based on the assessee's valuer report and vacated additions on pig iron and MS billets.

Treatment of Competing Arguments: The department argued that the valuation was done in the presence of the assessee's employee who did not object. The assessee contended that the employee only witnessed measurement but did not approve the method. The Tribunal accepted the assessee's contention and judicial precedents supporting rejection of sampling-based valuation.

Conclusion: Additions based on the department's sampling method were not sustainable. Only the addition on sponge iron based on actual weighment was confirmed, while others were deleted.

Issue 2: Validity of Assessment Order in Absence of Proper Approval under Section 153D

Legal Framework and Precedents: Section 153D mandates that no assessment or reassessment order under sections 153A or 153B shall be passed without prior approval of the Joint Commissioner of Income Tax. The approval must be for each assessment year and each assessee separately, with independent application of mind. Precedents from the Hon'ble Delhi and Allahabad High Courts (Pr. CIT Vs. Sapna Gupta, Pr. CIT Vs. Shiv Kumar Nayyar, Pr. CIT Vs. Anuj Bansal) and the Supreme Court (ACIT Vs. Serajuddin & Co.) emphasize that mechanical or routine approval without application of mind vitiates the assessment order.

Court's Interpretation and Reasoning: The Tribunal scrutinized the timeline and correspondence relating to the approval process. The A.O. forwarded a draft assessment order for approval on 26.12.2019, which was approved by the Jt. CIT on 30.12.2019. However, the A.O. continued assessment proceedings after forwarding the draft, receiving additional reports and issuing show cause notices on 27.12.2019, and ultimately passed a final assessment order on 30.12.2019 that materially differed from the draft approved by the Jt. CIT.

The Tribunal found no evidence that the revised final draft, incorporating post-26.12.2019 developments, was forwarded to the Jt. CIT for approval. The approval letter referred only to the draft sent on 26.12.2019 and did not mention any revised draft. The department's claim that a revised draft was forwarded via pen-drive on 30.12.2019 was unsupported by any material evidence.

Key Evidence and Findings: The Tribunal highlighted the material variances between the draft and final assessment orders, the sequence of letters and notices issued post forwarding of the draft, and the absence of any record showing that these were placed before the Jt. CIT for approval. The Jt. CIT's approval letter indicated a presumption that the A.O. had performed due diligence but did not confirm consideration of the final order.

Application of Law to Facts: The Tribunal applied the legal requirement of prior approval with independent application of mind to the exact draft assessment order that is ultimately passed. Since the final order was different and no fresh approval was obtained, the assessment was held invalid and liable to be quashed.

Treatment of Competing Arguments: The department contended that the approval was administrative in nature and that the Jt. CIT had applied mind over several days. It argued that the subsequent developments were placed before the Jt. CIT along with a revised draft. The Tribunal found these contentions unsubstantiated and contradicted by the record. The department's reliance on a recent High Court decision was distinguished on facts, as the present case involved a material variance and lack of fresh approval.

Conclusion: The assessment order passed without valid approval of the Jt. CIT under section 153D, especially when the final order differs materially from the approved draft, is invalid and liable to be quashed for want of jurisdiction.

Issue 3: Merits of Addition and CIT(Appeals) Order

The Tribunal noted that since it was quashing the assessment order for lack of valid approval under section 153D, it refrained from adjudicating the merits of the additions sustained or deleted by the CIT(Appeals). However, it observed that the CIT(Appeals) had rightly vacated certain additions based on lack of actual weighment and had correctly restricted the addition on sponge iron stock based on the assessee's valuer's report.

Significant Holdings

"An approval u/s. 153D of the Act granted after due application of mind and verifying the draft assessment order in the backdrop of the seized material is sine qua non for framing of a valid assessment u/s. 143(3) r.w.s. 153B(b) of the Act."

"Once the draft assessment order is approved by the Joint Commissioner u/s. 153D of the Act, then the Assessing Officer is rendered functus officio and can only pass the final assessment order as approved by the Joint Commissioner."

"The final assessment order passed by the Assessing Officer which is materially different from the draft assessment order approved by the Joint Commissioner without obtaining fresh approval is invalid and liable to be quashed."

"Additions based on presumptive or estimated stock without actual weighment and corroborative material cannot be sustained."

"Valuation of stock based on sampling or volume estimation methods without actual weighment or physical verification is arbitrary and not acceptable in law."

"A mechanical or routine approval by the Joint Commissioner without independent application of mind vitiates the assessment order."

"The Assessing Officer continuing assessment proceedings and making additions after forwarding the draft assessment order for approval without informing the approving authority of such developments violates the procedural safeguards under section 153D."

In view of the above, the Tribunal allowed the assessee's appeal challenging the validity of the assessment order for want of valid approval under section 153D and dismissed the revenue's appeal. The additions on excess stock of pig iron and MS billets were deleted, and the addition on sponge iron was restricted as per the assessee's valuer report by the CIT(Appeals). However, since the assessment was quashed, the merits of additions were left open for fresh adjudication.