Assessment order invalid due to material modifications made after approval without informing Joint Commissioner under section 153D

ITAT Raipur held that assessment order u/s 143(3) r.w.s. 153B(b) was invalid due to absence of proper approval u/s 153D. The AO continued assessment proceedings after forwarding draft assessment order to Jt. CIT for approval, making material modifications without informing the approving authority. The final assessment order materially differed from the approved draft order. Court ruled that once draft assessment order is approved, AO becomes functus officio and cannot make further changes. Since Jt. CIT did not consider modifications made by AO, the assessment lacked valid approval as mandated by law. Assessment order was struck down and assessee's appeal was allowed.

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The core legal questions considered by the Appellate Tribunal in this matter are as follows:

1. Whether the addition of Rs. 1,77,86,577 on account of alleged excess stock of sponge iron, as computed by the Assessing Officer (A.O.) based on a valuation report using a sampling method without actual weighment, is justified and sustainable in law.

2. Whether the assessment order framed under Section 143(3) read with Section 153A of the Income-tax Act, 1961, is valid in the absence of a valid prior approval granted under Section 153D of the Act by the Joint Commissioner of Income Tax (Jt. CIT).

3. Whether the valuation methodology adopted by the department's valuer, relying on Global Satellite Positioning (GSP) and sampling methods, is acceptable as against the valuation based on actual weighment submitted by the assessee's registered valuer.

4. Whether the additions made on account of excess stock of pig iron and MS billets, which were vacated by the CIT(Appeals), require reconsideration before the Tribunal.

5. Whether the CIT(Appeals) erred in confirming the addition based on the department's valuer's report without proper disposal of objections raised by the assessee.

Issue-wise Detailed Analysis

1. Validity of Addition on Account of Excess Stock of Sponge Iron Based on Valuation Methodology

Legal Framework and Precedents: The valuation of stock in search assessments is governed by principles requiring actual and reliable quantification of stock. The Courts have held that additions based on presumptive or sampling methods without actual weighment are not sustainable. Notable precedents include the decisions of the Hon'ble Orissa High Court in Utkal Alloys Ltd. vs CIT and Haribhagat Agarwalla vs CIT, which emphasized that additions cannot be based on sampling or presumptive methods. The Tribunal in Sayyed Hamid Ali (2020) also underscored the necessity of actual weighment during survey or search operations.

Court's Interpretation and Reasoning: The Tribunal noted that the department's valuer, M/s Frontline Consultants Pvt. Ltd. (FCPL), had adopted a volumetric sampling method without actual weighment, which was objected to by the assessee. The assessee's registered valuer, M/s Right Value Consultants Pvt. Ltd. (RVCPL), had conducted actual weighment and physical quantification. The CIT(Appeals) rightly held that the density of stock items varies and that the A.O. ought to have relied on the density calculated by the assessee's valuer based on actual weighment rather than the presumptive method adopted by the department's valuer.

Key Evidence and Findings: The Tribunal examined the valuation reports, noting the difference in the volume and density calculations. The department's valuer's volume was 925.01 with density 1.0, while the assessee's valuer calculated density as 1.821 based on actual weighment. The CIT(Appeals) adopted the assessee's valuation, resulting in a reduced addition of Rs. 1,77,86,577 compared to the original Rs. 2,66,35,091 proposed by the A.O.

Application of Law to Facts: The Tribunal concurred with the CIT(Appeals) that additions based on estimated stock without actual weighment are arbitrary and not sustainable. The Tribunal relied on judicial precedents to uphold the principle that actual weighment and physical verification are essential for valuation of stock in search assessments.

Treatment of Competing Arguments: The revenue contended that the valuation was done in the presence of the assessee's employee and hence was valid. The assessee rebutted that mere presence does not equate to acceptance of the method. The Tribunal found merit in the assessee's argument, noting the absence of actual weighment and reliance on sampling method by the department's valuer.

Conclusion: The addition on account of excess stock of sponge iron was confirmed but restricted to Rs. 1,77,86,577 based on the valuation by the assessee's valuer. Additions on account of pig iron and MS billets were vacated as per the CIT(Appeals) order and not contested further.

2. Validity of Assessment Order in Absence of Valid Approval Under Section 153D

Legal Framework and Precedents: Section 153D of the Income-tax Act mandates that no order of assessment or reassessment under Sections 153A or 153B shall be passed by an A.O. below the rank of Joint Commissioner without prior approval of the Joint Commissioner. The approval must be given after application of independent mind to the draft assessment order and seized material. The Hon'ble High Courts of Delhi and Allahabad have held that mechanical or routine approvals without application of mind vitiate the assessment order. The Supreme Court in ACIT vs Serajuddin & Co. upheld that non-compliance with Section 153D or mechanical approval invalidates the assessment.

Court's Interpretation and Reasoning: The Tribunal analyzed the sequence of events. The A.O. forwarded a draft assessment order dated 26.12.2019 to the Jt. CIT for approval. Subsequently, the A.O. continued assessment proceedings, received a letter from the department's valuer on 27.12.2019, issued a show cause notice and obtained the assessee's reply, and finally passed the assessment order on 30.12.2019. The Jt. CIT granted approval on 30.12.2019 based on the draft order of 26.12.2019. The Tribunal found that the final assessment order was materially different from the draft order approved by the Jt. CIT and that the subsequent developments after 26.12.2019 were not brought to the notice of the Jt. CIT for fresh approval.

Key Evidence and Findings: The Tribunal noted the absence of any record or material evidencing that a revised draft assessment order incorporating changes after 26.12.2019 was forwarded to the Jt. CIT for approval. The approval letter dated 30.12.2019 referred only to the draft order of 26.12.2019 and two letters dated 26.12.2019 and 28.12.2019, but not to any revised draft order. The Tribunal also found contradictions in the department's submissions regarding forwarding of a revised draft order on pen-drive on 30.12.2019.

Application of Law to Facts: The Tribunal applied the settled legal principle that once the draft order is approved by the Jt. CIT under Section 153D, the A.O. becomes functus officio and cannot pass a final assessment order materially different from the approved draft. The failure to obtain fresh approval for the materially different final order renders the assessment invalid.

Treatment of Competing Arguments: The revenue contended that the approval was valid, administrative in nature, and that the Jt. CIT had applied mind. They claimed that the revised draft order was forwarded on 30.12.2019 and considered before approval. The Tribunal found these claims unsubstantiated due to lack of evidence and inconsistencies in the record. The assessee's contention that the approval was mechanical and the final order was passed without valid approval was accepted.

Conclusion: The Tribunal held that the assessment order dated 30.12.2019 was passed without valid approval under Section 153D and was therefore invalid and liable to be quashed. The ground of appeal on this issue was allowed.

3. Additions on Account of Excess Stock of Pig Iron and MS Billets

The additions on account of excess stock of pig iron (Rs. 19,72,750) and MS billets (Rs. 3,13,140) were vacated by the CIT(Appeals). The assessee challenged these additions before the Tribunal, but since these additions were not sustained by the CIT(Appeals), the Tribunal dismissed the grounds as misconceived and did not interfere further.

4. Treatment of Preliminary Objections Regarding Estimation of Income Without Rejection of Books

The assessee raised preliminary objections that estimation of income without rejection of books of account and without invoking Section 144 was impermissible. The Tribunal observed that these objections were based on misconceived facts as the CIT(Appeals) had already vacated the relevant additions. Hence, these objections were dismissed.

Significant Holdings

"We are of a firm conviction that an approval u/s. 153D of the Act granted after due application of mind and verifying the draft assessment order in the backdrop of the seized material is sine-quanon for framing of a valid assessment u/s. 143(3) r.w.s. 153B(b) of the Act."

"Once the 'draft assessment order' is approved by the Jt. CIT u/s. 153D of the Act, then the A.O. is rendered as functus officio and can only pass the final assessment order as approved by the Jt. CIT."

"The final assessment order passed by the A.O. u/s. 143(3) r.w.s. 153B(b) of the Act, dated 30.12.2019 is substantially different from the 'draft assessment order' that was forwarded by the A.O. vide his letter dated 26.12.2019 to the Jt. CIT, Range-Central, Raipur for approval u/s. 153D of the Act and was approved by the latter on 30.12.2019."

"In absence of a valid approval having been granted by the Jt. CIT, Range-Central, Raipur, based on which, the final assessment order had been passed by the A.O. u/s. 143(3) of the Act, dated 30.12.2019, we are of the view that the same cannot be sustained and is liable to be struck down on the said count itself."

"Additions based on estimated stock without actual weighment are arbitrary and not sustainable."

The Tribunal allowed the assessee's appeal on the ground of invalidity of the assessment due to lack of valid approval under Section 153D and dismissed the revenue's appeal. The additions on account of excess stock of sponge iron were confirmed but restricted to the valuation based on actual weighment by the assessee's valuer. Additions on account of pig iron and MS billets were vacated. The Tribunal refrained from adjudicating other merit-based contentions in view of quashing the assessment on jurisdictional grounds.

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