2025 (5) TMI 1062 - AT - Income Tax

Assessment u/s 153A - valid approval granted for various AYs u/s 153D or not? - additions dehors incriminating material found in the course of search from the premises of the assessee in concluded assessment - HELD THAT - As discernible from the combined approval memo the sanctioning authority (Addl CIT) has in fact relegated his statutory duty to the subordinate AO whose action the Addl. CIT was supposed to supervise as per the scheme of the Act. Manifestly the Addl. CIT without any consideration of factual and legal position in proposed additions/disallowances and without the availability of incriminating material collected in search etc. has buckled under statutory compulsion and proceeded to grant a symbolic approval to meet the statutory requirement. This approach of the Addl. CIT has ipso facto rendered the impugned approval to be a mere ritual or an empty formality to meet the statutory requirement and is thus incapable of being sustainable in law. Assessee has also demonstrated glaring lapses in the respective assessment orders which could easily be detected on a bare reading of such orders. Impliedly the Addl. CIT has not even cared to read the assessment orders while entrusted with the task of approval of such orders. A common approval for all assessment years in complex matters of search without identifying or discussing any issue in relation to any assessment year further shows no semblance of any application of mind to any aspect of any assessment years. CIT(A) in first appellate order has brushed aside the legal objection summarily merely on an inept indifferent premise that the assessment order makes mention of the approval from Addl. CIT u/s 153D of the Act and such powers are in the nature of administrative powers and a purely internal matter. The cryptic conclusion drawn by the CIT(A) is bereft of any plausible reasons whatsoever and thus cannot be reckoned to be a judicial finding on the point. The observations so made are not tenable in law. We are unhesitatingly disposed to hold that the integrity and propriety of various assessments under captioned appeals based on such combined approval memo under s. 153D in question cannot be countenanced in law.

Summary

The core legal issues considered by the Tribunal in these appeals arising from search assessments under the Income Tax Act, 1961, primarily revolve around the following questions:

(a) Whether additions and disallowances made under section 153A of the Act in respect of assessment years for which assessments were concluded and unabated at the time of search, but not supported by incriminating material found in the course of search of the assessee's premises, are maintainable?

(b) Whether the approval granted by the competent authority under section 153D of the Act to the draft assessment orders was a valid exercise of jurisdiction involving application of mind, or was merely a mechanical, perfunctory, and omnibus approval lacking statutory validity?

(c) On merits, whether the additions and disallowances made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] were justified and supported by evidence, or were ipse dixit and devoid of legal and factual foundation.

Issue-wise Detailed Analysis:

1. Maintainability of Additions under Section 153A in Unabated and Concluded Assessments without Incriminating Material

Legal Framework and Precedents: Section 153A of the Income Tax Act mandates reassessment of income for cases where search or requisition has been conducted. However, the scope of reassessment under this section is contingent upon discovery of incriminating material from the premises of the searched person. The Supreme Court in Pr. CIT v. Abhisar Buildwell (P.) Ltd. and subsequent decisions have clarified that in cases where assessments are unabated and concluded at the time of search, additions under section 153A must be strictly confined to incriminating material found during the search of the assessee's premises. Material collected from third parties or statements of third persons cannot be treated as incriminating material for the purposes of section 153A in such cases. If no incriminating material is found, the AO cannot reopen or interfere with the concluded assessments under section 153A.

Court's Interpretation and Reasoning: The Tribunal observed that the assessments for AY 2013-14 to 2017-18 were concluded and unabated at the time of search. The additions under section 153A primarily relied on adverse statements of third persons recorded under section 131 and material collected from third parties during post-search inquiries, rather than incriminating material found at the assessee's premises. The Tribunal noted that the CIT(A) and AO failed to demonstrate any incriminating material directly discovered from the assessee's premises that justified the additions under section 153A. Reliance was placed on authoritative judgments including Pr. CIT vs. Vikram Dhirani and CIT vs. Anand Kumar Jain (HUF), which held that statements under section 132(4) or statements of third persons do not ipso facto constitute incriminating material for section 153A purposes. The Tribunal found that the additions were based on material extraneous to the scope of section 153A in unabated assessments and were therefore legally unsustainable.

Key Evidence and Findings: The AO's reliance on statements of directors of lender companies and data collected during surveys and inquiries was not supported by any direct incriminating documents recovered from the assessee's premises. The Tribunal also noted that the financial statements and documentary evidence produced by the assessee supported the genuineness of the credits and transactions challenged. The CIT(A) disregarded such evidence without adequate reasoning.

Application of Law to Facts: Applying the settled legal principles, the Tribunal held that additions under section 153A in respect of these years were impermissible in the absence of incriminating material found during search of the assessee's premises. The use of third-party statements and material was not a valid basis for additions under section 153A in unabated assessments.

Treatment of Competing Arguments: The Revenue contended that the CIT(A) had rightly upheld the additions based on the material before the AO and that the search assessment provisions permitted such interference. The Tribunal rejected this, emphasizing the narrow scope of section 153A in unabated cases and the necessity of incriminating material found in the searched premises to justify additions.

Conclusion: The Tribunal quashed all additions and disallowances made under section 153A for the assessment years 2013-14 to 2017-18 on the ground that they were dehors any incriminating material found in the search and thus outside the legal scope of section 153A.

2. Validity of Approval under Section 153D of the Act

Legal Framework and Precedents: Section 153D mandates that any assessment order passed under section 153A requires prior approval of the Joint or Additional Commissioner of Income Tax (the competent authority). The approval is not a mere formality but a substantive safeguard intended to ensure that the draft assessment order is fair, balanced, and legally sustainable. The competent authority is required to apply independent mind and scrutinize the draft order and the underlying materials before granting approval. Judicial pronouncements have consistently held that mechanical, omnibus, or ritualistic approvals under section 153D are invalid and render the assessment orders passed thereunder liable to be quashed. Important precedents include ACIT vs Serajuddin & Co., PCIT vs Anuj Bansal, PCIT vs Shiv Kumar Nayyar, and others.

Court's Interpretation and Reasoning: The Tribunal examined the approval memo dated 25.05.2021, which granted consolidated approval for multiple assessment years in complex search cases. The approval was accorded on the basis of assurances from the AO that proper opportunities were given to the assessee, all issues were examined by the AO, and relevant seized documents were verified by the AO before passing the draft order. The competent authority admitted to not independently verifying the seized documents or applying his own mind to the draft orders. The Tribunal found this to be a "technical approval" amounting to a mere formality without any substantive application of mind, which is contrary to the statutory mandate.

Key Evidence and Findings: The Tribunal highlighted glaring lapses in the assessment orders, such as repeated references to statements purportedly reproduced but no actual reproduction of statements or replies in the orders. There were also factual errors, such as reference to summons issued prior to the date of search. The order sheets showed no record of any correspondence or involvement of the competent authority during the assessment proceedings, indicating lack of active participation. The consolidated nature of approval for multiple years without issue-wise or year-wise consideration further evidenced non-application of mind.

Application of Law to Facts: The Tribunal applied the legal principle that the approval under section 153D must be a considered and reasoned act, not a rubber-stamping exercise. The approval memo's reliance solely on AO's assurances without independent scrutiny or verification rendered the approval invalid. The statutory safeguard envisaged by section 153D was thus frustrated.

Treatment of Competing Arguments: The Revenue argued that the statutory approval creates a presumption of due process and application of mind, pointing to a prior correspondence dated 18.05.2021 where the AO informed the competent authority of corrections to the draft order. The Tribunal found this argument unconvincing, noting the absence of such correspondence in the order sheets and the express admission by the competent authority that the approval was based on AO's assurances alone. The Tribunal rejected the CIT(A)'s brief dismissal of the objection as an administrative matter without judicial scrutiny.

Conclusion: The Tribunal held that the approval under section 153D was mechanical, perfunctory, and devoid of application of mind. Consequently, the assessment orders passed pursuant to such approval were invalid and liable to be quashed.

3. Merits of the Additions and Disallowances

Legal Framework and Precedents: Additions under sections 68 (unexplained credits) and 69C (bogus purchases) require the AO to establish that the credits or purchases are not genuine, and the assessee has failed to satisfactorily explain the nature and source of such entries. The burden of proof lies on the AO, and the assessee is entitled to rely on documentary evidence such as invoices, confirmations, and banking transactions to establish genuineness.

Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) upheld the additions without adequately considering the documentary evidence furnished by the assessee. The AO and CIT(A) relied heavily on adverse statements of third parties and financial statements of lenders, disregarding the tangible evidence presented by the assessee. However, since the Tribunal had already quashed the additions on jurisdictional and approval grounds, it did not delve deeply into the merits of the additions.

Key Evidence and Findings: The assessee produced invoices, bank statements, and confirmations supporting the credit entries and purchases. The AO's adverse inferences were primarily drawn from statements of third parties and post-search inquiries unrelated to incriminating material from the assessee's premises.

Application of Law to Facts: Given the legal infirmities found in the jurisdictional aspects and invalidity of approval, the Tribunal did not find it necessary to adjudicate the merits. However, it observed that the additions lacked a solid foundation in evidence and were primarily ipse dixit.

Treatment of Competing Arguments: The Revenue maintained that the additions were justified based on the material before the AO and affirmed by the CIT(A). The Tribunal, however, prioritized the jurisdictional and procedural infirmities over the merits.

Conclusion: The Tribunal refrained from adjudicating the merits in light of the quashing of the assessments on legal grounds but indicated that the additions were not objectively justified.

Significant Holdings:

"In the absence of any incriminating material in an unabated assessment, additions/disallowances made by the AO in all captioned appeals require to be quashed."

"The Addl. CIT, without any consideration of factual and legal position in proposed additions/disallowances and without the availability of incriminating material collected in search etc. has buckled under statutory compulsion and proceeded to grant a symbolic approval to meet the statutory requirement. This approach of the Addl. CIT has ipso facto rendered the impugned approval to be a mere ritual or an empty formality to meet the statutory requirement and is thus incapable of being sustainable in law."

"The requirement of law to grant approval under section 153D is not merely a formality but a mandatory requirement involving due application of mind by the competent authority to ensure fair play and just and proper order by the AO."

"Additions made under section 153A in unabated assessments must be strictly confined to incriminating material found in the course of search of the assessee's premises and cannot be based on statements or material collected from third persons."

"The integrity and propriety of various assessments under captioned appeals based on such combined approval memo under section 153D cannot be countenanced in law."

Accordingly, the Tribunal allowed all the captioned appeals for assessment years 2013-14 to 2019-20, quashing the additions and disallowances made under section 153A and invalidating the assessments due to defective approval under section 153D.