2024 (3) TMI 1494 - HC - Income Tax

Approval under section 151 lacked independent application of mind; section 148 reassessment notice quashed as invalid

PCIT, Delhi-7 Versus Omkam Developers Ltd.

HC upheld ITAT and quashed reassessment proceedings, holding the approval under section 151 lacked independent application of mind by the PCIT. The ... Validity of reopening of assessment - valid approval accorded u/s 151 or not? - non independent application of mind by PCIT - due discharge of the statutory obligations as placed u/s 151 on PCIT - merely appending the phrase “Yes” in approval - HELD THAT:- As relying on Pioneer Town Planners Pvt. Ltd. [2024 (3) TMI 828 - DELHI HIGH COURT] we see no reason to interfere with the findings rendered by the Income Tax Appellate Tribunal, whereby it quashed the reassessment proceedings on the ground that the PCIT had failed to apply its independent mind while granting sanction for issue of notice under Section 148 of the Act. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the prescribed authority under Section 151 of the Income Tax Act, 1961 must record satisfaction in a manner that demonstrates an independent application of mind when granting approval for issuance of notice under Section 148. 2. Whether a mere endorsement such as the word 'Yes' (or equivalent brief stamping) in the proforma amounts to valid satisfaction under Section 151, or whether such endorsement is mechanical/rubber-stamping and therefore vitiates reassessment proceedings. 3. Whether the absence of detailed recorded reasons or contemporaneous discussion between the Assessing Officer and the prescribed authority renders the approval invalid, and whether any curable defects under Section 292B or routing through intermediary officers can cure a mechanical approval. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of recorded satisfaction and independent application of mind under Section 151 Legal framework: Section 151 requires that the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner be 'satisfied', on the reasons recorded by the Assessing Officer (AO), that a case is fit for issuance of notice under Section 148; such satisfaction is a sine qua non for valid approval. Precedent treatment: The Court relied on earlier decisions holding that the prescribed authority must apply its mind and form an opinion; mere formal endorsements without demonstrable reasons have been condemned as ritualistic or mechanical (followed). Interpretation and reasoning: The satisfaction must be discernible from the approval entry; reasons act as the link between material considered and conclusion reached. Brief reasons are permissible, but the entry must reflect genuine consideration rather than substitution of form for substance. The Court emphasized that approval should not be a mere ritualistic token. Ratio vs. Obiter: Ratio - Approval under Section 151 must reflect an application of mind and recorded satisfaction; rubber-stamp or mechanical approvals are invalid. Obiter - The approval need not be elaborate, only sufficiently indicative of satisfaction. Conclusions: The Court upheld the principle that the prescribed authority must record satisfaction in a manner that demonstrates independent application of mind; absence of such discernible satisfaction renders approval invalid. Issue 2 - Validity of a terse endorsement ('Yes') or stamped approval Legal framework: The same statutory standard under Section 151; the form of approval being scrutinized for adequacy of recorded satisfaction. Precedent treatment: The Court followed precedents (including Chhugamal Rajpal and Central India Electric Supply) that have held that mere notation of 'Yes' or a stamped 'Yes' without articulation of reasons amounts to mechanical approval and is impermissible. Decisions where approval expressly stated 'Yes, I am satisfied' were distinguished as containing sufficient indicia of satisfaction. Interpretation and reasoning: The Court observed that the phrase 'Yes' fails to set out any degree of satisfaction and is akin to rubber-stamping. While Section 151 does not mandate lengthy reasons, the approval must disclose the rationale linking the AO's material and the prescribed authority's conclusion; a bare 'Yes' cannot perform that function. Ratio vs. Obiter: Ratio - A mere 'Yes' (or similar stamp) without any discernible reasoning does not satisfy Section 151 and invalidates the approval. Distinguishing precedent - where the approval expressly recorded satisfaction in words and context, those may be valid. Conclusions: The Court concluded that the approval in the instant matter, being limited to 'Yes', did not meet statutory requirements and therefore could not sustain reassessment. Issue 3 - Whether absence of recorded discussion, routing through intermediaries, or curable defects under Section 292B can validate a mechanical approval Legal framework: Section 151 governs the prescribed authority's satisfaction; procedural compliance and recording of reasons bear on validity. Section 292B addresses curable defects in proceedings. Precedent treatment: The Court referenced cases rejecting the sufficiency of mere routing or superficial endorsements; it distinguished decisions where the language used explicitly conveyed satisfaction. It noted reliance by Revenue on decisions where fuller endorsements existed but found them distinguishable. Interpretation and reasoning: The Court held that absence of an express contemporaneous recording by the prescribed authority cannot be compensated for merely by routing through an Additional CIT or by assuming that internal discussions took place. The Income Tax Act does not require verbatim recording of conversations between AO and prescribed authority, but it does require that the authority's satisfaction be demonstrable in the approval entry. Curable defects under Section 292B cannot be used to convert a fundamentally mechanical approval into a legally satisfactory one where the statutory safeguard of independent satisfaction is missing. Ratio vs. Obiter: Ratio - Routing through intermediaries or reliance on presumed discussions does not cure a mechanical or unilluminating approval; the approval itself must reflect satisfaction. Obiter - The Act does not prescribe specific formats for recording discussions, but the functional requirement of demonstrable satisfaction remains. Conclusions: The Court rejected the contention that routing or curable formal defects could validate the rubber-stamped approval; it held that such mechanisms cannot substitute for the required recorded satisfaction under Section 151. Overall Conclusion and Disposition The Court affirmed the Tribunal's quashing of the reassessment proceedings on the ground that the prescribed authority failed to apply independent mind and did not satisfactorily record its concurrence under Section 151. The appeal raised no substantial question of law and was dismissed.