2025 (6) TMI 1119 - AT - Income Tax

Validity of reopening of assessment - as argued no valid approval from the Ld. Pr. CIT u/s. 151 - Scope of phrase may be reopened - HELD THAT - As in the case of State of Kerala Ors. Vs. Kandath Distilleries 2013 (10) TMI 529 - SUPREME COURT has discussed the difference between the discretionary and mandatory powers so as to interpret the use of word may implies the discretion by the competent authority and not the satisfaction and the same is not mandatory or obligatory. Likewise in the instant case before us the Ld. Pr. CIT has been vested with the powers to satisfy him then grant approval for issuance of notice u/s. 148 of the Act. We observe from the format of approval placed before us that Ld. Pr. CIT by stating that may be reopened has casually acted in this matter without application of mind and it amounts to non-authoritative and non-mandatory direction to the AO. In our opinion the provisions of the Act have to be interpreted under the literal sense without waste or turning to change the meaning thereof. We find that in the Income Tax Act the words may and shall have been used in the different sections connoting different meaning. In this case the Ld. Pr. CIT while granting the approval has used the word may which contained that this decision of the AO to issue the notices. So far as the literal interpretation of statute is concerned we draw strength from the decision of B. Premannand Ors. Vs. Mohan Koikal Ors 2011 (3) TMI 1590 - SUPREME COURT Thus it is apparent from the above that a rule of interpretation i.e. to be followed for interpretation of statute is literal rule and the word shall cannot be changed for may . Therefore we are of the view that sanction accorded by the Ld. Pr. CIT for issuance of notice u/s. 148 of the Act is not a valid approval in terms of section 151 of the Act and accordingly the reassessment proceeding passed on the invalid approval are itself invalid and accordingly quashed. No independent application of mind while recording satisfaction by the competent authority - We are of the view that the approval u/s. 151 is not a formality which can be done by simply affixing the signature of the competent authority rather the same has to be accorded by the competent authority after due application of mind and has to be exercised judiciously after recording independent satisfaction and application of mind. Therefore we are inclined to quash the reopening of assessment on the ground of invalid approval granted by the competent authority u/s. 151 of the Act. Whether the main provisions of sec. 147 or its first proviso is applicable? - The first proviso to section 147 provides that bear assessment has been framed u/s. 143(3) and then the reopening of assessment can only be made from the period of four years if the escapement of income is attributed to the failure of the assessee and disclosed fully and truly all material facts necessary for the assessment and not otherwise. We note that the assessee falls within the main provisions of sec. 147 and not under the first proviso. In this case the four years have not elapsed from the end of assessment year when the four years have not elapsed from the end of the relevant assessment year as the notice was issued on 20.03.2020 therefore the main provisions were applicable and not the first proviso. Thus it is apparent that the Assessing Officer as well as the competent authority while granting the approval has opted in undue haste without adhering to the provisions of the act and without proper application of mind. Even on this ground the reopening of assessment is bad in law and cannot be sustained. The appeal of the assessee is allowed on technical ground.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals were:

• Whether the reopening of assessment proceedings under section 147 read with section 148 of the Income Tax Act, 1961 ("the Act") was valid in light of the approval granted under section 151 of the Act by the competent authority;
• Whether the approval granted by the Principal Commissioner of Income Tax (Pr. CIT) or Joint Commissioner of Income Tax (JCIT) under section 151 of the Act was valid, specifically examining whether the satisfaction of the competent authority was properly recorded and whether the approval was a mere formality or involved independent application of mind;
• The interpretation and legal significance of the language used in the approval, particularly the use of the phrase "may be reopened" versus a definitive expression of satisfaction, and the distinction between the words "may" and "shall" in the context of statutory interpretation;
• Whether the reassessment proceedings initiated on the basis of such approval could be sustained or were liable to be quashed;
• Whether the Assessing Officer and the competent authority complied with the mandatory procedural safeguards and legal requirements while granting approval for reopening assessments;
• Whether the appeals filed by the Revenue against the quashing of reassessment proceedings stood rendered infructuous following the Tribunal's findings on the invalidity of the approvals.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening Proceedings under Sections 147/148 read with Section 151 of the Act

Relevant Legal Framework and Precedents: Section 147 of the Act empowers the Assessing Officer to reopen an assessment if income has escaped assessment. Section 148 prescribes the procedure for issuing notice for reopening, which requires prior approval under section 151 from the competent authority before issuing the notice. The approval must be based on the satisfaction of the competent authority that reopening is justified. The language of section 148 uses the word "shall" indicating a mandatory requirement to issue notice once approval is granted. The approval under section 151 is not a mere formality but requires an independent application of mind and recording of satisfaction.

Precedents relied upon include the decisions of the Hon'ble Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., State of Kerala v. Kandath Distilleries, B. Premannand & Ors. v. Mohan Koikal & Ors., and various High Court decisions including CIT v. SPL's Siddhartha Ltd., SBC Minerals P. Ltd. v. ACIT, and Capital Broadways (P) Ltd. v. ITO.

Court's Interpretation and Reasoning: The Tribunal carefully examined the approval letters granted by the competent authorities for the respective assessment years. It was found that in several cases, the approval was either non-existent, mechanically rubber-stamped, or used non-definitive language such as "may be reopened" instead of a clear expression of satisfaction. The Tribunal emphasized the literal rule of statutory interpretation, stating that the word "shall" in section 148 imposes a mandatory duty on the Assessing Officer to issue notice once valid approval is obtained, and the competent authority must record satisfaction unequivocally.

The Tribunal noted that the use of the word "may" in the approval letter indicated discretion left to the Assessing Officer rather than a mandatory approval by the competent authority. This was held to be inconsistent with the statutory mandate and legislative intent. The Tribunal relied on the Hon'ble Apex Court's clarification that "may" is directory and "shall" is mandatory, and that the competent authority's satisfaction is a sine qua non for valid approval.

Key Evidence and Findings: The approval letters for AY 2012-13 to 2015-16 were scrutinized. For AY 2012-13, the Pr. CIT's approval stated "Yes, I am satisfied. May be reopened," which the Tribunal found to be a non-authoritative and non-mandatory direction amounting to invalid approval. For AY 2013-14 and AY 2014-15, the approvals were rubber-stamped without any independent application of mind or recording of reasons. For AY 2015-16, the approval was either blank or conflicting, with no valid approval on record.

Application of Law to Facts: Applying the statutory provisions and judicial precedents, the Tribunal held that the approvals were invalid due to lack of proper satisfaction and application of mind by the competent authorities. Consequently, the notices issued under section 148 and the reassessment proceedings under section 147 initiated on the basis of such invalid approvals were themselves invalid and liable to be quashed.

Treatment of Competing Arguments: The Revenue argued that the approval process involved multiple levels and the final approval by the Pr. CIT stating "Yes, I am satisfied. May be reopened" was sufficient. The Revenue contended that the Assessing Officer's discretion was preserved and the approval could not be questioned. The Tribunal rejected these contentions, emphasizing the mandatory nature of the approval and the necessity for unequivocal satisfaction. It held that the phrase "may be reopened" indicated discretion rather than satisfaction and was inadequate to constitute valid approval.

Conclusions: The Tribunal concluded that the reopening proceedings were invalid due to defective approvals under section 151, and the reassessment orders passed pursuant to such proceedings were quashed for AY 2012-13 to 2015-16.

Issue 2: Interpretation of the Words "May" and "Shall" in the Approval Process

Relevant Legal Framework and Precedents: The Tribunal relied heavily on the Hon'ble Supreme Court's rulings in Vidarbha Industries Power Ltd. and B. Premannand & Ors. which clarified the difference between the words "may" (directory/discretionary) and "shall" (mandatory/imperative) in statutory provisions. The principle of literal interpretation was emphasized, whereby clear and unambiguous statutory language must be given effect without judicial modification.

Court's Interpretation and Reasoning: The Tribunal observed that section 148 uses the word "shall" indicating a mandatory duty to issue notice once approval is granted. The approval under section 151 requires the competent authority to be "satisfied" and record such satisfaction in clear terms. The phrase "may be reopened" used by the Pr. CIT in the approval letter was found to be inconsistent with this mandatory requirement, as it left the decision to issue notice to the Assessing Officer's discretion rather than constituting a clear approval.

Key Evidence and Findings: The Tribunal extracted the relevant portion of the approval letter where the Pr. CIT stated "Yes, I am satisfied. May be reopened" and held that this was a non-authoritative and non-mandatory direction. The Tribunal also cited authoritative judicial observations that the literal rule of interpretation is the first principle and cannot be departed from unless the language is ambiguous or leads to absurdity.

Application of Law to Facts: The Tribunal applied the principle that the competent authority must record satisfaction in definitive language, and the use of "may" in the approval letter failed to meet this standard. The statutory scheme contemplates a mandatory and authoritative approval, not a discretionary or tentative one.

Treatment of Competing Arguments: The Revenue's argument that "may be reopened" was sufficient approval was rejected as it diluted the mandatory nature of the approval and was contrary to the legislative intent and judicial precedents.

Conclusions: The Tribunal held that the use of the word "may" in the approval letter was insufficient to constitute valid approval under section 151 and that the literal meaning of "shall" in section 148 must be followed.

Issue 3: Requirement of Independent Application of Mind by the Competent Authority in Granting Approval

Relevant Legal Framework and Precedents: The law mandates that the competent authority granting approval under section 151 must apply its independent mind to the reasons recorded by the Assessing Officer. The approval cannot be mechanical, borrowed, or rubber-stamped. The Tribunal relied on the decisions of the Hon'ble Delhi High Court in CIT v. SPL's Siddhartha Ltd., SBC Minerals P. Ltd. v. ACIT, Capital Broadways (P) Ltd. v. ITO, and the Supreme Court's decision in Anirudb Sinhji Karan Sinhji Jadeja v. State of Gujarat.

Court's Interpretation and Reasoning: The Tribunal examined the approval records and found that in multiple instances, the competent authority merely affixed signatures on pre-printed forms or rubber-stamped the approval without recording any reasons or demonstrating application of mind. The Tribunal emphasized that the approval is a safeguard against arbitrary reopening and must be exercised judiciously and independently.

Key Evidence and Findings: The approvals for AY 2013-14 and 2014-15 were found to be mere signatures on pre-printed forms without any recorded reasons or independent satisfaction. For AY 2015-16, the approval was either blank or conflicting in records, leading to adverse inference against the Revenue.

Application of Law to Facts: The Tribunal applied the principle that the absence of recorded reasons or independent satisfaction renders the approval invalid. The mechanical or ritualistic approval fails the statutory requirement and judicial standards.

Treatment of Competing Arguments: The Revenue's argument that the approval process involved multiple hierarchical stages and was valid was rejected as the final approval must be independent and reasoned. The Tribunal noted that mere signature or rubber stamping does not meet the legal threshold.

Conclusions: The Tribunal held that the approvals under section 151 without independent application of mind and recorded reasons were invalid, vitiating the reassessment proceedings.

Issue 4: Applicability of the First Proviso to Section 147 in Approval Process

Relevant Legal Framework and Precedents: The first proviso to section 147 restricts reopening beyond four years from the end of the relevant assessment year if the escaped income is fully and truly disclosed. The approval under section 151 must correctly identify the applicable provision to ensure valid reopening.

Court's Interpretation and Reasoning: In the case of AY 2015-16, the approval incorrectly applied the first proviso to section 147 when it was not applicable, indicating non-application of mind by the Assessing Officer and competent authority.

Key Evidence and Findings: The approval form indicated that the first proviso was applicable, whereas the facts showed the main provisions of section 147 applied. This discrepancy was held to demonstrate haste and lack of proper application of mind.

Application of Law to Facts: The incorrect application of the proviso invalidated the approval and reopening.

Treatment of Competing Arguments: The Revenue did not effectively counter this point.

Conclusions: The reopening on this ground was also held invalid.

Issue 5: Consequences for Revenue Appeals

Following the quashing of reassessment proceedings for the assessee on the ground of invalid approvals, the Tribunal held that the Revenue's appeals against such quashing became infructuous and dismissed them accordingly.

3. SIGNIFICANT HOLDINGS

"The competent authority has to record his satisfaction and then approval for issuance of notice in definitive language/words and use the words that 'Yes, I am satisfied and may be reopened' in contravention with the origin of the Act."

"It is apparent that the Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary." (Applied by analogy to the use of "shall" and "may" in the Income Tax Act.)

"The first and foremost principle of interpretation of a statute in every system of interpretation is the literal rule of interpretation. The other rules of interpretation e.g. the mischief rule, purposive interpretation etc. can only be resorted to when the plain words of a statute are ambiguous or lead to no intelligible results or if read literally would nullify the very object of the statute."

"If a particular authority has been designated to record his/her satisfaction on any particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and satisfaction so recorded should be 'independent' and not 'borrowed' or 'dictated' satisfaction."

"Mere appending the expression 'Yes I am satisfied' says nothing. The entire exercise appears to have been ritualistic and formal rather than meaningful, which should be the rationale for the safeguard of an approval by a high ranking official."

"The sanction accorded by the Ld. Pr. CIT for issuance of notice u/s. 148 of the Act is not a valid approval in terms of section 151 of the Act and accordingly, the reassessment proceeding passed on the invalid approval are itself invalid and accordingly quashed."

"The approval u/s. 151 is not a mere formality which can be done by simply affixing the signature of the competent authority rather the same has to be accorded by the competent authority after due application of mind and has to be exercised judiciously after recording independent satisfaction and application of mind."

"The reopening of assessment is bad in law and cannot be sustained where the approval granted by the competent authority is without any independent satisfaction and application of mind."

"The appeals of the assessee are allowed and all the appeals of the revenue stand dismissed."