Mechanical approval u/s 153D, invalid 153A search, ignored 153C mandate make 143(3) additions unsustainable against assessee

ITAT (Chandigarh) allowed the assessee's appeal and dismissed the Revenue's grounds. It held that approval u/s 153D was granted in a mechanical manner by the Addl. CIT/JCIT, making the assessments unsustainable. Further, in absence of any executed warrant or panchnama, no search was conducted on the assessee; hence assessment u/s 153A was invalid. Documents seized from a third party could not be used in a regular assessment u/s 143(3) without following the mandatory procedure u/s 153C, rendering the additions bad in law. On merits also, the Tribunal found no specific incriminating material or credible statement implicating the assessee, and upheld the deletion of additions by CIT(A).

---

---

1. ISSUES PRESENTED AND CONSIDERED

(1) Whether the delay in filing the cross objections by the assessee could be condoned under section 253(5) and whether, in any event, the assessee could rely on Rule 27 of the Income-tax (Appellate Tribunal) Rules to support the orders appealed against.

(2) Whether the approvals granted under section 153D for search assessments in specified years were valid or were mechanical and vitiated the assessments.

(3) Whether, in absence of an executed search and panchnama in the name of the assessee and at its premises, the assessments framed under section 153A for certain years were without jurisdiction and void ab initio.

(4) For the year assessed under section 143(3), whether material/documents and digital data seized from third parties in a separate search could be used directly against the assessee without following the mandatory procedure under section 153C.

(5) On merits in the section 143(3) year, whether additions on account of alleged "on-money"/cash receipts from sale of units in a commercial project, based primarily on statements of employees and excel sheets retrieved from their laptops, were sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Condonation of delay in cross objections and applicability of Rule 27

Interpretation and reasoning

(a) The Tribunal noted that under section 253(5) it may admit cross objections filed beyond time if "sufficient cause" is shown. It relied on judicial pronouncements interpreting this expression liberally, emphasising that limitation rules are not meant to destroy rights where delay is bona fide and not mala fide or part of a dilatory strategy.

(b) The assessee explained that its earlier tax consultant advised that since substantial relief had already been granted by the first appellate authority, there was no need to further litigate jurisdictional issues. Only after Revenue appealed to the Tribunal and a fresh consultant was engaged did the assessee decide to press those issues. The Tribunal accepted this as a bona fide explanation, with no element of malice or delay strategy.

(c) Independently, Rule 27 of the Appellate Tribunal Rules was invoked. The Tribunal held that Rule 27 permits a respondent to support the order appealed against on any ground decided against him, even without filing a cross objection. Since the assessee's grounds were pure questions of law going to the root of jurisdiction, they could have been raised under Rule 27 in any case.

Conclusions

(i) Delay in filing all cross objections was condoned as "sufficient cause" was established.

(ii) Grounds raised in the cross objections were admitted for consideration on merits, also being independently supportable under Rule 27.

Issue 2 - Validity of approvals under section 153D

Legal framework discussed

(a) Section 153D mandates that no assessment order in search/requisition cases by an Assessing Officer below the rank of Joint Commissioner shall be passed without prior approval of the Joint/Additional Commissioner.

(b) The Tribunal, following earlier coordinate bench decisions and High Court jurisprudence (including decisions later affirmed by the Supreme Court), treated the function of granting approval under section 153D as a quasi-judicial exercise requiring independent application of mind to the assessment records and relevant seized material, and not a mere administrative formality.

Interpretation and reasoning

(c) The assessee produced correspondence showing that on 29.09.2021, the Assessing Officer forwarded draft assessment orders in the assessee's group as well as for multiple other assessees, aggregating to more than 100 assessment orders covering several years, for approval under section 153D. Approvals were granted on 29/30.09.2021.

(d) The Tribunal noted that the assessment orders in the present assessee's case alone ran into substantial pages for multiple years, and numerous other voluminous assessments of different assessees and groups were also forwarded simultaneously.

(e) On these facts, the Tribunal found it was not humanly possible for the approving authority, within a day or so, to peruse all draft orders, underlying records and seized material and apply an independent judicial mind to each case.

(f) The Revenue's contention that the Additional Commissioner, being Range Head, had been associated with and monitoring the assessments from inception was rejected as legally irrelevant. Relying on prior Tribunal decisions (particularly one elaborately examining the scheme of sections 153A and 153D) and High Court approvals of that reasoning, the Tribunal reiterated that:

- The Assessing Officer alone is statutorily vested with the quasi-judicial function of framing the assessment.

- Section 153D creates a separate, independent obligation on the Joint/Additional Commissioner to scrutinise the draft assessment orders and seized material and grant or refuse approval after due application of mind.

- Any notion that the Range Head's ongoing supervisory role substitutes for this statutory duty is contrary to the scheme of the Act.

(g) The Tribunal applied the principle that where the volume and timing of approvals make conscious scrutiny humanly improbable, and there is no indication of case-specific examination, the approval must be taken as mechanical and invalid.

Conclusions

(i) In the years where assessments were framed under section 153A, the approvals granted under section 153D were held to be mechanical and without proper application of mind.

(ii) Consequently, the search assessments for assessment years 2016-17, 2017-18 and 2019-20, which depended on such invalid approvals, were quashed as unsustainable in law.

(iii) For assessment year 2020-21, the assessment was framed under section 143(3) and did not require approval under section 153D; the related ground was therefore rejected for that year.

Issue 3 - Jurisdiction to frame assessments under section 153A in absence of an executed search and panchnama in the assessee's name

Legal framework discussed

(a) The Tribunal examined sections 153A and 153B together. It noted that:

- Section 153A applies where a search is "initiated" under section 132 or requisition is made under section 132A.

- Under section 153B(1)(a), the limitation for completing assessments under section 153A is computed from the end of the financial year in which the last of the authorisations for search or requisition was "executed".

(b) The Tribunal, invoking the statutory scheme, held that for section 153A to apply, there must be actual execution of a search warrant and drawing of a panchnama evidencing conclusion of such search in relation to the person concerned. Mere issuance of a warrant, without execution and panchnama in that person's name, does not amount to a "search" for purposes of sections 153A and 153B.

Interpretation and reasoning

(c) The factual matrix, as tabulated in the first appellate order and not disputed, showed:

- Survey under section 133A was conducted at the assessee's registered office.

- A search under section 132 was conducted at the residential premises of the directors and at the premises of another company (site office), with warrants and panchnamas in the names of those parties only.

- No panchnama was drawn in the name of the assessee company at any premises.

- The Assessing Officer himself admitted that no warrant of authorisation existed in the assessee's name for its registered office or the project site; panchnamas there were drawn in the name of the other company or the directors.

(d) In response to directions from the Bench, the Revenue produced a warrant of authorisation in Form No. 45, where the assessee's name appeared among four "persons" in narrative paragraphs, but the place authorised for search was the residential address of the directors, and the panchnama for that search was drawn only in the directors' names.

(e) The assessee consistently objected before the Assessing Officer and the first appellate authority that no search was conducted on it and no panchnama existed in its name. These objections were neither effectively dealt with by the Assessing Officer nor adjudicated by the first appellate authority.

(f) Applying the statutory scheme and relying on jurisprudence which holds that section 153A can only be invoked where a valid search is actually conducted and executed against the assessee (and not merely because a warrant exists or a search is conducted on connected persons), the Tribunal held that:

- The residential search at the directors' premises, with no panchnama in the assessee's name, did not constitute a search "on" the assessee.

- The survey at the assessee's registered office under section 133A could not be treated as a search for purposes of section 153A.

- In absence of an executed warrant and panchnama in the assessee's name, there was, in law, no search upon the assessee and thus no jurisdiction to invoke section 153A.

Conclusions

(i) For assessment years 2016-17, 2017-18 and 2019-20, initiation and completion of assessments under section 153A were void ab initio, as there was no executed search and panchnama in the assessee's name.

(ii) On this independent jurisdictional ground also, apart from the invalidity under section 153D, the assessments for these years were quashed.

Issue 4 - Use of seized material from third party search in an assessment under section 143(3) without recourse to section 153C (A.Y. 2020-21)

Legal framework discussed

(a) Section 153C begins with a non obstante clause and provides that where, in a search or requisition, seized assets or documents "belong to" or "pertain to" or "relate to" a person other than the person searched, the Assessing Officer of the searched person must record satisfaction, hand over the material to the Assessing Officer of such other person, and that Assessing Officer must then proceed in accordance with section 153A after recording his own satisfaction.

(b) The Tribunal, referring to High Court and Supreme Court authority construing section 153C (and the parallel provision under the earlier block assessment regime), reiterated that:

- Detection of incriminating material belonging to/pertaining to a third person during a valid search is the sine qua non for invoking section 153C.

- Recording of satisfaction by the Assessing Officer of the searched person, followed by independent satisfaction by the Assessing Officer of the "other person", is mandatory.

- Only thereafter can such seized material be used against the other person; it cannot be used directly in a regular assessment under section 143(3) bypassing section 153C.

Interpretation and reasoning

(c) For assessment year 2020-21, the assessee's case was a regular scrutiny under section 143(3) and no assessment was purportedly made under sections 153A/153C in that year.

(d) The Assessing Officer's primary basis for addition was material allegedly retrieved from laptops and documents seized during search at the premises of another company (and residences of its erstwhile employees), not from any search on the assessee. The Tribunal recorded that:

- The relevant annexures and digital data (including excel sheets) were seized at the search of the third party and its employees, not from any premises of the assessee.

- There was no material to show that the Assessing Officer of the searched person had recorded satisfaction that such documents pertained to the assessee and represented its undisclosed income.

- There was no satisfaction recorded by the Assessing Officer having jurisdiction over the assessee under section 153C, nor was any notice issued or assessment framed under that provision.

(e) The Tribunal applied the consistent line of authority that where material used against an assessee is seized in the course of a search on a different person, the only lawful route is via section 153C. Resort to section 143(3) to utilise such material, without complying with section 153C, is impermissible.

Conclusions

(i) The seized material from the third party search could not be validly used in the assessee's regular assessment for assessment year 2020-21 without following the mandatory procedure under section 153C.

(ii) On this jurisdictional infirmity alone, the entire addition in the regular assessment for assessment year 2020-21 was held unsustainable.

Issue 5 - Merits of addition for alleged "on-money" in project CP-67 (A.Y. 2020-21)

Interpretation and reasoning

(a) The addition of Rs. 5,86,03,526/- was made on the footing that the assessee received unaccounted cash ("on-money") over and above recorded consideration for bookings in the commercial project CP-67, based on:

- Statements of two employees (erstwhile employees of the third party, later employed by the assessee); and

- Certain excel sheets/data retrieved from laptops seized from those employees and from the premises of the other company.

(b) The first appellate authority, whose detailed reasoning was endorsed by the Tribunal, analysed the evidence as follows:

- The assessee and the other company were distinct and independent legal entities in different projects (residential vs. commercial), with no common directors; facts of one could not be mechanically imported into the other.

- Employees whose statements were relied upon joined the assessee only during the year; alleged historical "on-money" practices were attributed by them to a predecessor employee, without that predecessor's statement being available. Such derivative assertions, without corroboration, were held unreliable.

- Statements were general and largely in context of the residential project of the other company; there was no specific, credible linkage shown to individual commercial units of the assessee.

- No incriminating primary documents (receipts, agreements, allotment letters) indicating cash over and above recorded consideration were found from the assessee's premises or in its name.

- No unaccounted cash, unexplained assets, or evidence of unaccounted expenditure was found in the search/survey relatable to the assessee; if large "on-money" receipts had in fact accrued, some reflection on the application side would be expected.

(c) The appellate authority examined the key excel sheet relied upon (Annexure A-3) in detail and found it internally inconsistent and unreliable, for example:

- Multiple entries showed impossible negative "agreement price" and negative "total price", and situations where "discount" exceeded the basic sale price.

- Figures of cheques received, TDS and tax components in the excel sheet did not tally with the assessee's ledger accounts and books (e.g., the sheet showed much higher cheque receipts and no TDS/ST/GST, while books showed lower cheque receipts with proper TDS and indirect taxes reflected).

- Some entries showed significant negative balances allegedly payable to customers despite positive receipts, which was commercially illogical.

(d) The appellate authority also compared, unit-wise, the rates at which allegedly "understated" units were booked/ sold with other comparable units in the same project whose bookings/sale prices had been accepted by the Assessing Officer. It found that:

- Identical or similar units (in terms of floor, area, project and period) were booked at or around the same per square foot rates; yet additions were selectively made in respect of only some units, without rational basis.

- For certain shops on the ground floor, if the alleged "discount" were treated as "on-money" and added to the basic rate, the resulting per square foot rate would more than double the accepted rate, an implausible outcome for a project still in its early stage.

(e) It was further noted that a number of units forming part of the impugned analysis had later been cancelled and amounts (recorded as received) returned; even on the assumption of some unrecorded cash, such refunds would undermine the premise of net undisclosed income remaining with the assessee.

(f) On the evidentiary status of employee statements, the Tribunal agreed with the appellate authority that uncorroborated statements of lower-level staff, especially when recorded with reference to third-party data and not confronted to the assessee's directors, cannot by themselves justify substantial additions without supporting material and without reconciling contradictions and improbabilities in the seized data.

Conclusions

(i) On independent appraisal of the material, the Tribunal held that no reliable, cogent evidence existed to establish that the assessee received unaccounted cash "on-money" in respect of units in project CP-67 during assessment year 2020-21.

(ii) The addition of Rs. 5,86,03,526/- was unsustainable on facts and law and was rightly deleted by the first appellate authority; the Revenue's challenge on merits was rejected.

Overall outcome

(a) Cross objections were admitted after condonation of delay; jurisdictional grounds were entertained and decided.

(b) For assessment years 2016-17, 2017-18 and 2019-20, assessments under section 153A were quashed as invalid both due to mechanical approval under section 153D and, independently, due to absence of a validly executed search and panchnama in the assessee's name.

(c) For assessment year 2020-21, the ground regarding section 153D was rejected as inapplicable; however, the use of third-party search material without following section 153C was held impermissible, and on merits, the on-money addition under section 143(3) was deleted and that deletion was sustained.

(d) Revenue's appeals were dismissed; the assessee's cross objections were allowed for assessment years 2016-17, 2017-18 and 2019-20 and partly allowed for assessment year 2020-21.

---