2025 (5) TMI 1788 - AT - Income Tax

Validity of assessment u/s 153A - assessment was completed without obtaining proper / valid approval u/s 153D - HELD THAT -We find substance in the contention raised by the Ld. AR that in absence of relevant documents i.e. assessment records and seized material the approval granted by the approval authority with a rider that the draft assessment orders are gone through within the limited time available thus it cannot be said that there was due application of mind by the approving authority as the relevant documents are not available to him nor the revenue could establish by way of any material evidence or submission to dislodge the said fact. The approval granted u/s 153D therefore can be construed as mere formality and in mechanical manner. The approval u/s 153D in the subject matters before us cannot constitute a valid approval as per the mandate and settled position of law. Consequently the assessment completed u/s 153A/143(3) on the foundation of an invalid approval are bad in law invalid and liable to be quashed. Resultantly the common assessment order dated 15.03.2016 stands quashed and the impugned orders of Ld. CIT(A) assailed before us are set aside. Appeal of assessee allowed.

Summary

The primary legal issue considered by the Tribunal pertains to the validity of the approval granted under section 153D of the Income Tax Act, 1961, which is a mandatory prerequisite for passing assessment orders under section 153A/143(3) following search and seizure operations. The appeals challenge the assessment orders for multiple assessment years on the ground that the required prior approval was granted mechanically, without proper application of mind or examination of relevant materials, rendering the assessments void ab initio.

Additional issues raised include the correctness of various ad hoc additions made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)], the jurisdictional validity of the AO's notices and assessments, and the initiation of penalty proceedings under section 271(1)(c). However, these were not adjudicated upon as the Tribunal's decision on the approval issue rendered them academic.

The Tribunal undertook a detailed issue-wise analysis focusing primarily on the legality and propriety of the approval under section 153D:

Relevant Legal Framework and Precedents: Section 153D mandates that no assessment or reassessment order under section 153A or 153B shall be passed by an AO below the rank of Joint Commissioner without prior approval of the Joint Commissioner. The legislative intent is to ensure supervisory oversight and prevent arbitrary or unjust assessments in search cases. The approval must reflect an independent application of mind by the approving authority based on the materials on record, including seized documents and draft assessment orders.

Judicial precedents extensively relied upon include decisions of various High Courts and Tribunals, notably:

• The Hon'ble Orissa High Court's ruling that approval cannot be mechanical and must indicate the thought process involved;
• The Supreme Court's observations in Rajesh Kumar v. DCIT and Sahara India (Firm) Lucknow v. CIT emphasizing that approval is a protective mechanism against arbitrary power and must involve application of mind;
• Tribunal decisions in cases such as Arch Pharmalabs Ltd. v. ACIT and MDLR Airline (P) Ltd. v. DCIT, which held that bulk approvals without examination of seized materials or assessment records are invalid;
• The Hon'ble Allahabad High Court's detailed analysis in Pr. CIT v. Subodh Agarwal and Pr. CIT v. Sapna Gupta underscoring the necessity of separate and considered approval for each assessment year and case;
• Decisions highlighting that approval granted on the same day as submission of draft orders for multiple cases, without examination of records, amounts to a mechanical exercise and vitiates the assessment.

Court's Interpretation and Reasoning: The Tribunal scrutinized the facts and found that the approval dated 14.03.2016 by the Additional Commissioner of Income Tax was granted on the basis of draft assessment orders alone, without submission or examination of the assessment records, seized materials, or appraisal reports. The approving authority himself admitted that the approval was given within limited time and did not indicate any application of mind or satisfaction derived from perusal of relevant documents.

The Tribunal held that such approval is a mere formality and mechanical, which defeats the legislative purpose of section 153D. The approval must be a supervisory act requiring judicious, vigilant, and cautious application of mind, which was absent here. The Tribunal relied heavily on the principle that the approval must be self-speaking and discernible from the approval order itself, without recourse to extraneous materials or subsequent correspondence.

Key Evidence and Findings: The critical evidence was the approval letter itself, which lacked any mention of examination of seized materials or assessment records. The AO's letters seeking approval contained only draft assessment orders without supporting documents. The approval was granted on the same day, indicating lack of time for proper scrutiny. The Tribunal also noted that the approval was granted for multiple assessment years and for other assessees simultaneously, making it humanly impossible to apply independent mind to each case.

Application of Law to Facts: Applying the settled legal principles, the Tribunal concluded that the approval was invalid as it was granted mechanically without application of mind. Consequently, the assessment orders passed under such approval were void ab initio and liable to be quashed. The Tribunal emphasized that the approval is a mandatory condition precedent to passing assessment orders under section 153A/143(3) in search cases, and non-compliance vitiates the entire assessment.

Treatment of Competing Arguments: The Revenue contended that the approval was valid and that the approving authority had discussed the cases with the AO and thus had applied mind. The Revenue also relied on a recent decision of the Chhattisgarh High Court which held that the approval need not be a detailed order and that there is a presumption of due diligence in official acts.

The Tribunal distinguished the High Court decision on facts, noting that in the present case, there was no evidence that relevant documents were submitted to or examined by the approving authority. The mere statement of having gone through draft orders within limited time was insufficient to establish application of mind. The Tribunal also pointed out that the Revenue failed to produce any material to rebut the presumption of mechanical approval.

Conclusions: The Tribunal held that the approval granted under section 153D was invalid due to lack of application of mind and failure to examine relevant materials. The assessment orders passed on the basis of such approval were consequently void and quashed. Since the legal ground was decisive, other grounds raised by the assessee were not adjudicated.

Following the quashing of the assessment order for AY 2008-09, the Tribunal allowed all appeals for subsequent years arising from the common order on the same terms.

Significant Holdings:

"If an approval has been granted by the approving authority in a mechanical manner without application of mind then the very purpose of obtaining of approval u/s. 153D and mandate of enactment by the legislature will be defeated."

"The approval must be a supervisory act which requires proper application of administrative and judicial skill by the authority on the application of mind and this exercise should be discernible from the order of approval u/s. 153D of the Act."

"The approval granted u/s 153D of the Act is not in accordance with the provisions contained u/s 153D of the Act, keeping in view the ratio laid down in various judicial precedents. Thus, in our view, the approval granted u/s 153D of the Act is invalid. Consequently, the assessment orders passed in pursuance to such approval are also invalid."

"The careful and conjoint reading of Section 153A(1) and Section 153D leave no room for doubt that approval with respect to 'each assessment year' is to be obtained by the Assessing Officer on the draft assessment order before passing the assessment orders under Section 153A."

"The obligations of the approval of the Approving Authority serves two purposes: (i) to ensure the interest of the revenue against any omission or negligence by the Assessing Officer in taxing right income in the hands of right person and in right assessment year; and (ii) to do justice with the taxpayer by granting protection against arbitrary or creating baseless tax liability on the assessee."

"The approval is a mandatory condition precedent to passing assessment orders under section 153A/143(3) in search cases, and non-compliance vitiates the entire assessment."

"The approval must reflect the application of mind to the facts of the case and cannot be a mere formality or mechanical exercise of power."

In sum, the Tribunal's decision reinforces the principle that the supervisory approval under section 153D is not a perfunctory formality but a substantive safeguard requiring careful and independent scrutiny by the approving authority before assessments in search cases can be validly framed. Failure to comply with this procedural mandate results in invalidation of the assessment orders.