2025 (7) TMI 238 - AT - Income Tax

Validity of Reopening of assessment - necessary step for initiating the proceedings u/s 148 - assessee argued that approval have been accorded in mechanical manner - Relevant Assessment Year - reasons to believe - escapement of income relating to unaccounted production or of stocks - bogus purchases - universal/ uniformly acceptable standard of electricity consumption for calculating the excise duty liability - HELD THAT - First necessary step for initiating the proceedings u/s 148 the approval granted by the PCIT that the reopening is automatic as per proviso (a) to Section 148A is misplaced. There is also a variance in the approval granted by the PCIT and the reasons as recorded by the AO as described above and thus we have no hesitation in holding that the issuance of notice u/s 148 without their being any finding about the escapement of income is bad in law in view of the judgment of Vasanthi Ramdas 2024 (2) TMI 793 - KARNATAKA HIGH COURT and Divya Capital One Pvt. Ltd. 2022 (5) TMI 1016 - DELHI HIGH COURT following the judgment of Hon ble Supreme Court in the case of Teleperformance Global 2025 (1) TMI 914 - SC ORDER about the variance in the reasons as recorded by the AO and approval granted by the PCIT the issuance of notice u/s 148 is quashed and thus the assessment as framed by the AO vide order dated 31.03.2023 deserves to be quashed as well. Approval as granted by the Worthy Addl. CIT - By way of single letter the AO forwarded the approval to the Addl. CIT by the single approval by the Ld. Addl. CIT granted the approval to the AO. In the present case since the show-cause-notice dated 28.03.2023 was issued for compliance on 29.03.2023 by 7 00PM and then on the same day the AO forwarded the letter for approval and on 30.03.2023 the Addl. CIT granted the approval. As decided in Shree Krishna Pvt. Ltd. 1996 (7) TMI 2 - SUPREME COURT the grant of approval must not be mere formality but a judicial function to be exercised with due care application of mind and examination of the relevant material. Thus we hold that the approval as granted by the Addl. CIT seems to be in a mechanical manner accordingly we hold that the approving authority u/s 148B had granted approval in a mechanical manner without any application of mind. Electricity consumption - Part addition as sustained by the CIT(A) by applying average power consumption of 737.50 units per metric tons on the basis of five year average consumption unit by the assessee - By way of the seized record also we find that there is a variation in the electricity units and variation is because of a number of reasons which have been dealt with by assessee by way of reply filed before the AO/ CIT(A). Simply on the basis of the variation no addition on account of the unaccounted production can be sustained and coupled with the facts that no evidence of the purchase and sale outside the books of accounts have been found. The judgment of Hon ble Supreme Court in the case of RA Casting 2011 (1) TMI 1302 - SC ORDER is relevant to the facts circumstances of the case. We hold that the AO was not justified in assuming the production outside the books of accounts and consequent sales outside the books of accounts on the basis of the consumption of electricity units @ 606 units per metric tons. Further we also hold that the adoption of 737.50 units per metric tons on the basis of the average annual power consumption for the different years by the CIT(A) is also not proper. Thus we have no hesitation in dismissing the appeal of the Department by way of ground of Appeal No. 1 to 3 and allowing the appeal of the assessee as per Ground of Appeal No. 4. Bogus purchases - Following the judgment of Prime Steel Industries 2025 (6) TMI 281 - ITAT CHANDIGARH wherein similar facts were there and the CIT(A) had sustained the addition by applying a GP rate on the bogus purchases as doubted by the AO. When the matter was agitated by both the parties the entire addition on account of bogus purchases and profit embedded on such bogus purchases was deleted. Thus we allow the appeal of the assessee wherein the CIT(A) had sustained the addition of Rs. 7, 70, 048/- on the bogus purchases from the above said party and dismiss the ground of appeal of the department bearing 4 to 7.

Summary

Issues Presented and Considered

1. Legality and validity of the approval granted under Section 148B of the Income Tax Act for reopening assessments for multiple assessment years by a single order.

2. Validity of the approval under Section 151 of the Income Tax Act, particularly regarding discrepancies between reasons recorded for reopening and the annexure appended to the approval, and whether the approval was granted with proper application of mind.

3. Legality of the addition made on account of alleged bogus purchases, specifically the application of a Gross Profit (GP) rate of 4% on the disputed purchase amount inclusive of VAT and Cenvat credits not claimed as expenditure.

4. Justification of the estimation of excess production and unaccounted sales based on assumed average power consumption per metric ton, without incriminating material found during search.

5. Validity of rejection of books of accounts under Section 145(3) on the basis of alleged bogus purchases.

6. Jurisdictional and procedural correctness of reopening assessments under Section 148 post search and seizure, especially in light of amendments introduced by the Finance Act, 2021 and the requirement of incriminating material specific to each assessment year.

7. Applicability and interpretation of Explanation 2 to Section 148 regarding deeming fiction of information suggesting escapement of income in search cases.

8. Whether the Assessing Officer and approving authorities complied with the statutory mandate to apply independent mind and judicial function before issuing notices and approvals for reassessment.

Issue-wise Detailed Analysis

1. Legality of Approval under Section 148B (Single Approval for Multiple Years)

Legal Framework and Precedents: Section 148B mandates prior approval by the Additional Commissioner of Income Tax for issuance of draft assessment orders in search cases. The approval must be a quasi-judicial act involving independent application of mind. Reliance was placed on judgments including ACIT vs. Serajuddin & Co. (SC), Principal Commissioner of Income-tax vs. Shiv Kumar Nayyar (Delhi HC), and ITAT decisions such as Ganesh Builders and SP Singla Construction Co., which emphasize that approval cannot be mechanical or perfunctory.

Court's Interpretation and Reasoning: The Court observed that a single approval order dated 30.03.2023 was granted for all three assessment years (2018-19 to 2020-21) on the very next day after the Assessing Officer forwarded the draft orders. Similar approvals were granted for other unrelated cases on the same day. The voluminous record and short time frame made it practically impossible for the Additional CIT to apply independent mind, rendering the approval mechanical.

Application of Law to Facts: The Court found that the approval was granted without proper scrutiny or consideration of the material, violating the statutory mandate and judicial precedents. This mechanical approval vitiated the reassessment proceedings.

Conclusion: The approval under Section 148B was illegal and unsustainable, leading to quashing of the assessment orders based on such approval.

2. Validity of Approval under Section 151

Legal Framework and Precedents: Section 151 requires prior approval from the Principal Commissioner of Income Tax before issuing notice under Section 148. The approval must be based on the reasons recorded by the Assessing Officer and reflect application of mind, as held in ACIT vs. Teleperformance Global Services Pvt. Ltd. (SC) and other High Court decisions including Vodafone India Ltd. (Bombay HC).

Court's Interpretation and Reasoning: The Court noted a material discrepancy between the reasons recorded for reopening (which included unaccounted production and undisclosed sales) and the annexure to the approval under Section 151, which only mentioned a Cenvat credit issue. The approval order was a mere formality stating satisfaction without detailed reasoning or reference to the key issues.

Application of Law to Facts: Since the approval did not cover the main grounds recorded by the AO and lacked independent application of mind, it was deemed mechanical and invalid. The Court emphasized that approval must not be a rubber stamp but a judicial act.

Conclusion: The Section 151 approval was held to be bad in law, rendering the reopening notice and consequent assessment void.

3. Addition on Account of Bogus Purchases and Application of Gross Profit Rate

Legal Framework and Precedents: The principle that only the profit embedded in bogus purchases can be added to income is well-established, supported by Supreme Court judgments such as Tejua Rohit Kumar and Century Plyboards Pvt. Ltd. The books of account must be rejected under Section 145(3) before making additions on bogus purchases.

Court's Interpretation and Reasoning: The assessee produced extensive documentary evidence including purchase invoices, bank payments, stock registers, and movement of goods certified by Excise and Taxation authorities. The AO's addition was based solely on alleged wrong Cenvat credit claims without rejecting the books of accounts. The CIT(A) applied a 4% GP rate on the entire purchase amount, including VAT and Cenvat credits not claimed as expenses, resulting in inflated addition.

Application of Law to Facts: The Court found no basis for the addition as the purchases were genuine and properly recorded. The application of GP rate on gross amount including credits was erroneous. The Court also relied on ITAT decisions (Prime Steel Industries) and High Court rulings to hold that such addition is not sustainable.

Conclusion: The addition on account of bogus purchases was deleted, and the CIT(A)'s partial sustaining of the addition was reversed.

4. Estimation of Unaccounted Production and Sales Based on Electricity Consumption

Legal Framework and Precedents: Electricity consumption as a sole basis for estimating production or sales has been consistently held unreliable by the Supreme Court and various ITAT benches (e.g., Commissioner of Central Excise vs. RA Casting Pvt. Ltd., Vishal Paper Industries vs. JCIT, and ITAT Chandigarh decisions). Variations in power consumption depend on multiple factors and cannot conclusively establish unaccounted production.

Court's Interpretation and Reasoning: The AO estimated excess production based on average power consumption in AY 2021-22 and compared it with the year under consideration. CIT(A) modified this by taking a five-year average consumption. However, no incriminating material was found during search to corroborate unaccounted production or sales. Statements of factory personnel were inconsistent and later clarified. The Court emphasized fluctuations in power consumption due to scrap quality, power failures, and operational factors.

Application of Law to Facts: The Court rejected the addition based on electricity consumption as arbitrary and unsupported by evidence. It noted internal departmental circulars allowing 15% variation in power consumption and the absence of any direct evidence of unaccounted transactions.

Conclusion: The estimation of unaccounted production and sales based on electricity consumption was held unsustainable, and the additions were deleted.

5. Rejection of Books of Accounts under Section 145(3)

Legal Framework: Books of account can be rejected only if they do not truly represent the income or are unreliable. Rejection must be justified with cogent reasons.

Court's Reasoning and Application: Since the additions on bogus purchases and unaccounted production were deleted, the rejection of books of accounts became academic and was not sustained.

Conclusion: The rejection of books of accounts was not upheld.

6. Jurisdictional Validity of Reopening under Section 148 Post Finance Act 2021 Amendments

Legal Framework and Precedents: The Finance Act, 2021 amended Sections 147 and 148, removing the phrase "reason to believe" and introducing a requirement that "income chargeable to tax has escaped assessment" for the relevant year, supported by "information" as defined in Explanation 1 to Section 148. Explanation 2 creates a deeming fiction that search initiated post 1.4.2021 provides information suggesting escapement for three years preceding the search year. However, the proviso to Section 148 requires prior approval and existence of information specific to each assessment year. The Supreme Court in Principal CIT v. Abhisar Buildwell Pvt. Ltd., Karnataka High Court in Vasanthi Ramdas Pai, and Delhi High Court in Divya Capital One Pvt. Ltd. have held that mere search does not automatically justify reopening without incriminating material specific to the year.

Court's Interpretation and Reasoning: The Court analyzed the reasons recorded by the AO and found no incriminating material relating to unaccounted production or sales for the relevant years. The approval under Section 151 by PCIT was limited to bogus purchases issue and did not cover unaccounted production. The Court held that the deeming fiction in Explanation 2 cannot override the statutory requirement of information specific to each year. The approval was mechanical and did not satisfy the statutory mandate.

Application of Law to Facts: The Court found that reopening notices were issued without proper satisfaction of the statutory conditions, rendering the reopening and assessments void. The Court relied on the recent Supreme Court judgment in Teleperformance Global Services Pvt. Ltd. and other High Court and ITAT decisions emphasizing the need for independent application of mind and proper approval.

Conclusion: The reopening notices and consequential assessments were quashed for want of jurisdiction and mechanical approvals.

7. Treatment of Competing Arguments

The Department contended that reopening was automatic in search cases and approvals were valid. They relied on the reasons recorded by AO and the CIT(A)'s partial sustaining of additions. The assessee countered with detailed documentary evidence, legal precedents, and statutory interpretation emphasizing the need for specific information and proper approvals.

The Court gave primacy to statutory safeguards introduced by the Finance Act, 2021, and judicial pronouncements requiring independent application of mind and specific incriminating material for reopening. The Court rejected the Department's contention of automatic reopening and mechanical approvals.

Significant Holdings

"The scheme of the Act mandates the Additional CIT to discharge a quasi-judicial function by independently evaluating the issues raised in the draft assessment order, examining the material relied upon by the Assessing Officer, and considering the explanations and documents submitted by the assessee in response. The Additional CIT is not bound by the conclusions drawn in the investigation wing's appraisal report or the draft order, and is required to apply his own mind to determine the sustainability of proposed additions. The fact that approvals for multiple assessment years were granted on the very same day on which the draft orders were received clearly indicates a perfunctory process, defeating the legislative intent behind the statutory safeguard of prior approval. Such mechanical approval renders the consequential assessment order bad in law and unsustainable."

"Section 151, read with sections 147 and 148, of the Income-tax Act, 1961 - Income escaping assessment - Sanction for issue of notice (Approval) - For assessment year 2019-20, order under section 148A(d) and a consequent notice under section 148, both approved by Principal Commissioner under section 151, were issued against assessee - Assessee contended that sanction/approval under section 151 had been obtained and granted without application of mind as quantum of income which had escaped assessment as mentioned in approval and in draft order varied from each other - In reply, department mentioned it as a typographical error - High Court by impugned order held that said explanation could not be accepted because a typographical error could have been committed by Assessing Officer, who was seeking approval, but if only Additional/Joint Commissioner or Principal Commissioner had read approval application and draft of order to be issued under section 148A(d), they would have certainly noticed discrepancy and they should have either refused approval or sent application back to Assessing Officer for filing correct form for approval - Thus, in such circumstances, order under clause (d) of section 148A as well as consequent notice issued under section 148 was to be quashed and set aside."

"The Finance Act, 2021 has overhauled the reassessment regime under sections 147 and 148 of the Income Tax Act. Pursuant to the amendments, even search cases are now governed by the provisions of section 147, with requisite safeguards introduced under section 148, proviso to section 148 and explanation 2 to section 148. Despite the deeming provision in Explanation 2 to 148 that the conduct of a search is treated as 'information' suggesting escapement of income, this deeming fiction only facilitates initiation of proceedings, not the making of addition per se. The Assessing Officer must still have information suggesting escapement of income specific to the relevant assessment year and obtain prior approval before issuing notice under Section 148."

"Electricity consumption cannot be the sole or reliable basis for estimating production or sales for the purposes of taxation, as consumption varies due to multiple operational and technical factors. Additions based solely on such estimation without corroborative evidence are unsustainable."

"Where the books of accounts are not rejected under Section 145(3), additions on account of bogus purchases cannot be made merely on the basis of alleged wrong credits or information without cogent evidence."

Final Determinations

- The approvals under Sections 148B and 151 were granted mechanically without application of mind; thus, the reopening notices and consequential assessments were invalid and quashed.

- The addition on account of bogus purchases was not sustainable as the purchases were genuine and properly recorded; the application of GP rate on gross amount including unclaimed credits was erroneous; the addition was deleted.

- The addition based on estimation of unaccounted production and sales from electricity consumption was arbitrary and lacked evidentiary support; the addition was deleted.

- The rejection of books of accounts was not upheld as it became academic post deletion of additions.

- The appeals of the assessee were allowed, and the appeals of the Department were dismissed accordingly.