2025 (5) TMI 1578 - AT - Income Tax

Assessment u/s 153A - Validity of order granting approval u/s 153D - Addition u/s 68 based on the contents of the so-called pen-drive received by the Investigation Wing from the Enforcement Directorate - HELD THAT - What is to be seen for the purpose of income tax search assessment for a completed year is as to whether the same would be incriminating in nature. As rightly stated by the Ld. CIT(A) a charge sheet is a statutory document. Hence a statutory document which is there in public domain cannot fall under the ambit of incriminating material found during the course of income tax search. We have no hesitation to hold that both the documents i.e. (i) pen drive received by Income Tax Department from ED and (ii) 5th supplementary chargesheet found with the assessee were already available with the Income-tax Department and does not construe incriminating evidence found during the course of the income tax search of the assessee. As far as the statement of Mr. M.N. Khanna Mr. R.P. Kashyap and Mr. Nagesh Kumar Azad - In the case of the assessee there was nothing found whatsoever on the basis of which statement was taken from the three persons. These were bald statements which did not throw up any allegation of undisclosed income relating to the assessee found during the course of search. Hence the statements taken from the three persons cannot said to be incriminating in nature. No hesitation to hold that there was no incriminating material found during the course of income tax search of the assessee on 2.1.2020. Since the year under consideration is an unabated /completed assessment on the date of search no additions could be made in the absence of any incriminating material found during the course of search. Hence the ratio decidendi laid down in the case of Abhishar Buildwell 2023 (4) TMI 1056 - SUPREME COURT would squarely be applicable to the facts of the instant case. Accordingly the additions made by the Ld. AO are hereby deleted on this legal issue. Mandatory approval being granted u/s 153D - No hesitation in holding that the approval u/s 153D of the Act has been granted by the Ld. Addl CIT in the instant case before us in a mechanical manner without due application of mind thereby making the approval proceedings by a high ranking authority an empty ritual. Such an approval has neither been mandated by the provisions of the Act nor endorsed by the decisions of the Hon ble Orissa High Court; Hon ble Allahabad High Court and Hon ble Jurisdictional High Court (Delhi High Court) referred to supra. Hence we find lot of force in the arguments advanced by the AR in support of the additional ground raised with regard to section 153D of the Act. Hence the assessment framed for the Asst Year 2011-12 by the Ld. AO is hereby held as void ab initio and is hereby quashed.

Summary

The core legal questions considered in this case include:

1. Whether the additions to income under section 68 of the Income Tax Act based on a pen drive received from the Enforcement Directorate (ED) constitute valid incriminating material found during the course of search under section 132 of the Act, thereby justifying assessment under section 153A.

2. Whether the pen drive and supplementary charge sheets found during the search were already in possession of the Income Tax Department prior to the search, and if so, whether they can be treated as incriminating material found during the search.

3. Whether statements recorded under section 132(4) of the Income Tax Act and section 50 of the Prevention of Money Laundering Act (PMLA) constitute incriminating evidence for the purposes of assessment under section 153A.

4. Whether contradictory statements made by the assessee before different authorities (ED and Income Tax Department) can be treated as incriminating material.

5. Whether the assessment orders passed under section 153A are barred by limitation under section 153B.

6. Whether the mandatory prior approval under section 153D of the Income Tax Act was validly obtained before passing the assessment orders.

7. Whether the approval under section 153D was granted mechanically, without application of mind and in violation of procedural safeguards, thereby vitiating the assessment orders.

Issue-wise Detailed Analysis:

1. Validity of additions based on pen drive as incriminating material found during search:

Relevant legal framework includes section 132 (search and seizure), section 153A (assessment following search), and the Supreme Court judgment in Abhisar Buildwell Pvt. Ltd., which mandates that for assessment under section 153A in case of completed/unabated assessments, incriminating material must be found during the course of search directly indicative of undisclosed income.

The Court observed that the pen drive containing five excel sheets, on which the entire addition was based, was already in possession of the Income Tax Department before the search on 02.01.2020. This fact was admitted by the Assessing Officer (AO) in the assessment order and remand report, and accepted by the Commissioner of Income Tax (Appeals) (CIT(A)).

The 32GB pen drive found during search contained only the fifth supplementary charge sheet filed by the ED, which is a statutory document and does not constitute incriminating evidence. The Court held that statutory documents such as charge sheets, which are public documents containing allegations yet to be adjudicated, cannot be treated as incriminating material found during search.

Applying the law to the facts, since the pen drive on which additions were made was not found during the search but was already with the department, it cannot be treated as incriminating material found during search under section 132. Consequently, additions made on this basis in completed/unabated assessments are not sustainable.

The Court rejected the Revenue's argument that the pen drive belonged to the assessee and that the source of the pen drive was irrelevant for the purpose of incriminating material found during search.

2. Statements recorded under sections 132(4) of the Income Tax Act and 50 of PMLA:

The Court examined whether statements recorded from the assessee and other persons constitute incriminating evidence. It was noted that the statement of the assessee under section 132(4) was largely a denial of ownership or knowledge of the pen drive and its contents. The statements of other persons (Mr. M.N. Khanna, Mr. R.P. Kashyap, and Mr. Nagesh Kumar Azad) were either recorded under PMLA (which cannot be used as evidence in Income Tax proceedings) or did not incriminate the assessee personally.

The Court referred to precedents holding that mere statements without corroborating material are not incriminating evidence. It also held that denial by the assessee cannot be construed as incriminating. The Court distinguished the facts from cases where statements were recorded after incriminating material was found during search and were corroborated by seized documents.

The contradictory statements made by the assessee before the ED and Income Tax Department were considered by the CIT(A) to constitute incriminating evidence. However, the Court found that since no incriminating material was found during search, such contradictory statements alone cannot be the basis for additions under section 153A in completed assessments.

3. Limitation and procedure under sections 153B and 153D:

The assessee challenged the assessment orders on the ground that they were barred by limitation under section 153B and that mandatory prior approval under section 153D was not validly obtained.

The Court admitted these additional grounds as jurisdictional and legal in nature. The Revenue produced the approval letters under section 153D during proceedings.

4. Validity of approval under section 153D:

Section 153D mandates prior approval by the Joint Commissioner or Additional Commissioner before passing assessment orders under section 153A. The Court analyzed whether the approval was granted with due application of mind or was a mechanical rubber-stamping exercise.

The Court examined the timing and content of the approvals. The draft assessment orders for 11 assessment years were submitted to the Additional Commissioner on 27.09.2021 and 29.09.2021, and approval was granted on 30.09.2021 by a single consolidated letter covering all years. The Court found that the Additional Commissioner granted approval for multiple cases on the same day, including 86 other cases, making it humanly impossible to apply independent mind to each case.

The approval letters were identical in language and format across multiple cases and years, indicating proforma approvals without detailed examination of case records, seized material, or appraisal reports.

The Court relied on precedents from the Supreme Court, High Courts, and Tribunals emphasizing that approval under section 153D is a quasi-judicial function requiring independent application of mind, examination of draft orders, case records, and seized material. Mere formal or mechanical approval invalidates the assessment.

The Court rejected the Revenue's argument that involvement of the Additional Commissioner from the inception of proceedings obviated the need for detailed examination at approval stage. It also rejected the contention that the statute does not explicitly require application of mind, holding that judicial precedents have established this requirement as necessary to prevent arbitrariness.

The Court held that granting consolidated approval for multiple assessment years of the same assessee is contrary to the statutory requirement of approval for each assessment year separately.

The Court held that the approval granted in this case was mechanical, without application of mind, and therefore invalid, rendering the assessment orders void ab initio.

5. Treatment of other grounds raised by the assessee:

Since the assessment orders were quashed on the grounds of absence of incriminating material found during search and invalid approval under section 153D, the Court did not adjudicate other grounds raised by the assessee as they became academic.

Significant Holdings:

"In case no incriminating material is unearthed during the search, the AO cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the AO in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961. However, the completed/unabated assessments can be re-opened by the AO in exercise of powers under sections 147/148 of the Act, subject to fulfilment of the conditions as envisaged/mentioned under sections 147/148 of the Act and those powers are saved."

"The approval granted by the Additional Commissioner under section 153D of the Act must reflect the application of mind to the facts of the case. Mere mechanical or proforma approval without perusal of draft orders, case records, seized material, and appraisal reports is invalid and vitiates the assessment."

"Granting a consolidated approval for multiple assessment years of the same assessee is contrary to the statutory requirement of approval for each assessment year separately."

"Statements recorded under section 50 of PMLA or mere statements without corroborating incriminating material found during search do not constitute incriminating evidence for the purposes of assessment under section 153A."

"Statutory documents such as supplementary charge sheets filed by Enforcement Directorate, which are allegations pending adjudication, cannot be treated as incriminating material found during search."

"Contradictory statements made by the assessee before different authorities cannot be treated as incriminating material in absence of incriminating material found during search."

"The burden to prove non-application of mind by the approving authority under section 153D lies on the assessee, and mechanical approvals with identical language for multiple cases in a short span of time constitute sufficient evidence of non-application of mind."

Final determinations:

- The pen drive on which additions were made was not found during the course of search but was already in possession of the Income Tax Department, and hence does not constitute incriminating material under section 132.

- Statements recorded under section 132(4) and section 50 of PMLA do not constitute incriminating material in absence of corroborating seized documents.

- Supplementary charge sheets found during search are statutory documents and not incriminating material.

- The assessment orders passed under section 153A are invalid in absence of incriminating material found during search.

- The approval granted under section 153D was mechanical, without application of mind, and invalid.

- The assessment orders framed for the assessment years 2011-12 to 2017-18 are quashed as void ab initio.