2022 (4) TMI 1659 - AT - Income Tax

Invalid Section 153D approval leads to quashed assessment order for mechanical processing without proper examination

ITAT Cuttack quashed assessment order passed under Section 153A read with Section 143(3) due to invalid approval under Section 153D. The tribunal found ... Validity Assessment Order passed u/s 153A r.w.s.143(3) - as alleged no valid approval u/s. 153D accorded - HELD THAT:- On perusal of the above two approvals given in the case of two different assessees, we found that both the approvals are similar to each other. In both the approval letter, the JCIT has simply mentioned that approval is hereby accorded as per provisions of Section 153D of the Act for passing the assessment order, therefore, the arguments of the Id. CIT-DR that facts and circumstances along with the approval given in Dilip Construction Pvt. Ltd. and in the case of Ritanjali Khatai are different, cannot be accepted. Accordingly, we are in complete agreement with the contention of assessee that the issue is covered by the decision of coordinate bench of the Tribunal in the case of Dillip Construction Pvt. Ltd [2019 (12) TMI 311 - ITAT CUTTACK] wherein the Tribunal has inclined to hold that the Id JCIT has granted approval under section 153D of the Act in a mechanical manner without application of mind to the relevant assessment records and draft assessment orders. Thus, considering the fact that the approval u/s.153D of the Act given by the JCIT for passing assessment orders in case of assessee and other group concern is without application of mind as the JCIT has not mentioned in the approval orders that he has gone through the relevant assessment records/files/folders and draft assessment orders for granting approval, therefore, we hold that the impugned order passed by the CIT(A) affirming the assessment order passed by the AO, is not unsustainable. Decided in favour of assessee. The core legal questions considered by the Tribunal in these consolidated appeals pertain primarily to the validity and sustainability of assessment orders passed under section 153A read with section 143(3) of the Income Tax Act, 1961 ('the Act') following search and seizure operations. The principal issues include:1. Whether the assessment orders passed under section 153A r.w.s. 143(3) are sustainable in the absence of incriminating materials found during the search, and whether the Assessing Officer ('AO') is permitted to disturb completed assessments without such materials.2. Whether the procedure prescribed under section 153D of the Act, requiring prior approval of the Joint Commissioner of Income Tax ('JCIT') before passing assessment orders under section 153A, was properly followed, and whether failure to comply with this procedural mandate renders the assessment orders void.3. Whether the addition made by the AO of long-term capital gains exempt under section 10(38) of the Act was justified.4. Whether the imposition of interest under sections 234A, 234B, and 234C was legally correct.Given the consolidated nature of these appeals and the identical facts and grounds, the Tribunal primarily focused on the second issue concerning the validity of approval under section 153D of the Act, which has a direct bearing on the sustainability of the assessment orders themselves.Issue-wise Detailed AnalysisIssue 1 & 3 & 4: Validity of additions and imposition of interestThese issues relate to the merits of the additions made by the AO and the consequent interest levied. The AO had added Rs. 23,12,146 as long-term capital gains, which the assessee claimed were exempt under section 10(38). The CIT(Appeals) upheld these additions and the imposition of interest. However, since the Tribunal ultimately quashed the assessment orders on procedural grounds (issue 2), these substantive issues were rendered academic and were not adjudicated upon.Issue 2: Validity of approval under section 153D of the ActRelevant Legal Framework and Precedents: Section 153D mandates that no assessment or reassessment order under section 153A can be passed by an AO below the rank of Joint Commissioner without prior approval of the JCIT. This provision was introduced by the Finance Act, 2007, effective from 1.6.2007, to ensure supervisory oversight in assessments following search and seizure operations. The approval is intended to be more than a mere formality; it requires the JCIT to apply judicious mind to the draft assessment order and relevant records before granting approval.Precedents cited include:The Tribunal's decision in Dillip Construction Pvt. Ltd., where approval under section 153D was held to be invalid as it was granted mechanically without application of mind, rendering the assessment void.Hon'ble Bombay High Court in Akil Gulamali Somji, concurring with the Tribunal's view that absence of proper application of mind in granting approval under section 153D renders the assessment order void.Decisions of various ITAT benches (Delhi, Cuttack, Pune) emphasizing the necessity of application of mind by the approving authority and distinguishing cases where approval was granted mechanically.Court's Interpretation and Reasoning: The Tribunal examined the approval letters dated 23.11.2017 issued by the JCIT in the present case and found them to be identical in form and content to those in the Dillip Construction case. The approval letters merely stated that 'approval is hereby accorded as per the provisions of section 153D of the I.T. Act for passing the assessment orders' without any indication that the JCIT had perused the assessment records, draft orders, or seized materials, or applied any judicial mind.The Tribunal rejected the Revenue's argument that the approval is an administrative act not subject to judicial scrutiny, emphasizing that the statutory mandate requires the JCIT to apply mind to relevant materials before granting approval. The Tribunal held that the absence of any indication of such application of mind in the approval letter renders the approval mechanical and invalid.The Tribunal noted that subsequent letters by the JCIT attempting to explain the approval did not cure the defect as the approval itself must reflect the due application of mind. It also distinguished precedents cited by the Revenue where the supervisory officer had explicitly recorded his reasons or had sufficient time and opportunity to apply mind, unlike the present case.The Tribunal held that the approval under section 153D is a supervisory act that safeguards both the revenue and the assessee from arbitrary or unjust assessments. It is mandatory and not a mere formality. The approving authority must exercise judicious, vigilant, and cautious efforts, which should be discernible from the approval order itself.Key Evidence and Findings: The approval letters in question were brief and formulaic, lacking any mention of perusal of relevant documents or application of mind. This was the same pattern as in the Dillip Construction case, where the Tribunal had already held such approvals invalid.Application of Law to Facts: Applying the legal principles and precedents, the Tribunal concluded that the JCIT's approval was granted mechanically without application of mind, violating the statutory mandate of section 153D. Consequently, the assessment orders passed on such approval are void and bad in law.Treatment of Competing Arguments: The Revenue's contentions that the approval was administrative and not justiciable, that the JCIT had sufficient time to apply mind, and that the facts differ from the Dillip Construction case were rejected. The Tribunal emphasized that the approval letter itself must reflect application of mind and that subsequent explanations or correspondence cannot cure the defect. The Tribunal also distinguished cases cited by the Revenue on their facts, where dissenting notes or recorded reasons indicated application of mind.Conclusions: The Tribunal held that the approval under section 153D was granted in a mechanical manner without application of mind, rendering the assessment orders passed under section 153A/143(3) void and unsustainable. Accordingly, the appeals were allowed, and the assessment orders quashed.Significant Holdings'The obligation on the approval granting authority is of two folds, one the one hand, he has to apply his mind to secure inbuild for the department against any omission or negligence by the AO in taxing right income in the hands of right person in the right assessment year and on the other hand he is also responsible and duty bound to do justice with the taxpayer/assessee by granting protection against arbitrary or unjust or unsustainable exercise and decision by the AO creating baseless tax liability on the assessee and thus he has to discharge his duties as superior authority.''Granting approval u/s. 153D of the Act is not merely an official formality but it is 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.''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 approving authority has undertaken any such exercise should be discernible from the order of the approval and the subsequent internal correspondence between the lower authorities have no relevance and the defects or omissions or non-application of mind cannot be cured or rectified by any other exercise or working undertaken by the approving authority after grant of approval and after passing the assessment orders u/s. 153A of the Act by the Assessing officer.''The approval letter itself must reflect the due application of mind and the manner and the material on the basis of which approval has been granted can be challenged by the assessee and following proper procedure and application of mind by the approving authority should be discernible from the order of approval.''The assessments/reassessment orders passed by the AO on such approval are declared to be void and bad in law.'In conclusion, the Tribunal set aside the impugned orders of the lower authorities and quashed the assessment orders passed under section 153A r.w.s. 143(3) of the Act for the relevant assessment years, holding that the approval under section 153D was granted without application of mind and thus the assessments were invalid. Consequently, all other grounds raised by the assessee challenging the merits of additions and imposition of interest were rendered academic and were not adjudicated upon.