2021 (4) TMI 1400 - AT - Income Tax

Approval under s.153D invalid when approving officer failed to apply mind or issue a speaking order; assessment quashed

ITAT KOLKATA held that approval under s.153D was invalid because the Addl. CIT did not apply his mind or issue a speaking order demonstrating review of ... Validity of prior approval u/s 153D - HELD THAT:- The approval of the 153D of the Act cannot be granted in the mechanical manner rather the approving authority has to apply his mind by way of a speaking order showing that the concerned officer has gone through the contents of the assessment and he has satisfied himself with the draft assessment framed by the AO. Approval in this case seems to be an empty ritual as the approval letter does not speak of any application of mind by the concerned Addl. CIT/Approving Authority. Therefore, in view of the settled legal proposition, the said approval granted by the ld. Addl. CIT, in this case, is not a valid approval. Therefore, the assessment framed, in this case, becomes bad in law and the same is accordingly quashed - The appeal of the assessee is, therefore, allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an order of assessment framed under section 153C read with section 143(3) (and within the scope of section 153B(1)(b)) is valid where the prior approval required by section 153D was granted by the supervisory authority in a mechanical manner without application of mind. 2. Whether the approval under section 153D can be treated as a mere formalism or whether the approving authority must record satisfaction after independent consideration of the material (including seized material, appraisal reports and draft assessment). 3. If the approval under section 153D is vitiated for non-application of mind, what is the legal consequence for the assessment order made pursuant to such approval. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of assessment where prior approval under section 153D is granted mechanically Legal framework: Section 153D (statutory companion to assessment provisions for search/requisition cases) requires that no order of assessment or reassessment in respect of assessment years covered by clause (b) of section 153A or clause (b) of sub-section (1) of section 153B shall be passed by an Assessing Officer below the rank of Joint Commissioner except with prior approval of the Joint Commissioner (or equivalent supervisory authority). The CBDT administrative instructions and circulars describe the legislative intent that such approval is a protective supervisory safeguard in search/requisition cases. Precedent treatment: The Court relied on an established line of decisions which hold that the approval required under statutory provisions of this nature must reflect application of mind by the approving authority and cannot be a mere ritual; approvals recorded mechanically or by perfunctory language without consideration of materials have been held invalid and the consequent assessment orders quashed. The Court followed this jurisprudence. Interpretation and reasoning: The Court examined the approval placed on record and found it to be a one-line or formulaic approval that admitted lack of time or lack of discussion with the approving authority, relied upon an undertaking by the Assessing Officer, and showed no independent consideration of the draft assessment or seized material. The Court reasoned that the statutory duty cast upon the approving authority is not discharged by blind reliance on an undertaking from the subordinate officer or by granting approval solely because of limitation pressures. The approval must be self-defending: the manner and material on which satisfaction was reached can be examined to determine whether the authority applied its mind. The legislative intent (as reflected in administrative instructions) is twofold: to protect the assessee from arbitrary or irrelevant additions and to ensure supervisory scrutiny of seized material and appraisal findings. A mechanically recorded assent frustrates both objects. Ratio vs. Obiter: Ratio - Approval under section 153D must reflect independent application of mind by the approving authority; mechanical or form-filling approvals are invalid. Obiter - Emphatic observations on the desirability of timely submission of drafts to allow meaningful scrutiny and on departmental administrative practices; these are ancillary but consistent with the holding. Conclusions: The approval in this case was an empty ritual lacking application of mind. Consequently, the statutory prerequisite for the Assessing Officer to pass an assessment under section 153C/section 143(3) (in the circumstances covered by section 153B(1)(b)) was not satisfied and the purported assessment is invalid. Issue 2: Extent of judicial scrutiny of approval and effect of invalid approval on assessment proceedings Legal framework: Where the statute requires prior approval by a senior officer before an assessment may be finalized, the absence of valid approval vitiates the assessment. The judicial role includes examination of the approval's content and context to determine whether the approving authority applied its mind, even if the statute does not prescribe a particular format for the approval. Precedent treatment: The Court applied the established principle that the reasonableness and genuineness of the approving authority's satisfaction may be examined; where the approval letter itself discloses lack of consideration (e.g., admission of no time to analyze draft order or wholesale reliance on subordinate's undertaking), courts and tribunals have annulled the resulting assessments. The Court followed these authorities. Interpretation and reasoning: The Court held that judicial scrutiny is limited to whether the approval was granted after application of mind, which can often be determined from the approval document itself. The duty of the approving authority is a statutory duty with a corresponding obligation to examine records; an approving note that expressly states inability to analyze or shows delegation back to the subordinate officer demonstrates non-application of mind. Such approvals cannot confer validity on the assessment. Because the approval is a jurisdictional precondition, its invalidity strikes at the root of the assessment order. Ratio vs. Obiter: Ratio - Courts may examine the approval for sufficiency of application of mind; if the approval is vitiated, the resulting assessment is void. Obiter - Commentary on administrative expectations (e.g., submission timelines, internal practices) and policy rationale behind supervisory approval provisions. Conclusions: Judicial review of the approval is permissible to the extent necessary to ascertain whether there was real satisfaction. The approval under challenge failed that test and therefore the assessment made pursuant to it is void. Issue 3: Consequence of quashing the assessment on other contested grounds Legal framework: When an assessment is quashed for want of jurisdictional prerequisite (invalid supervisory approval), consequential adjudication on merits becomes academic unless the defect is cured and a fresh valid assessment is made. Precedent treatment: The Court followed the principle that if an assessment is set aside on a jurisdictional ground, subsidiary issues (validity of notices under other sections, specific additions, interest/penalty contentions, procedural/natural justice claims) need not be adjudicated as they are rendered moot by quashing. Interpretation and reasoning: Given the fundamental invalidity of the approval and hence of the assessment order, the Court declined to enter into the merits of additions made (including additions under section 69, small interest income adjustments, or alleged defects in service of notice under section 143(2)) because those determinations would be rendered academic unless and until a valid assessment is framed. Ratio vs. Obiter: Ratio - Quashing an assessment for lack of valid approval renders further adjudication on merits unnecessary in that appeal. Obiter - Observations that assessee's other grounds were not addressed due to the primary legal defect. Conclusions: The assessment was quashed for lack of valid approval under section 153D; consequentially, the Court did not decide the merits of the other grounds of appeal and allowed the appeal on the legal ground of invalid approval.