Search assessments quashed as mechanical s.153D approvals held invalid, violating substantive safeguard for s.153A proceedings

ITAT Mumbai-AT allowed the assessees' appeals, holding that the approvals under s.153D granted by the Additional CIT were mechanical and without application of mind, thereby vitiating the search assessments framed under s.153A. The Tribunal emphasized that "prior approval" under s.153D is a substantive safeguard requiring the approving authority to peruse the draft orders and underlying material and to exercise independent judgment, not a mere formality. Noting glaring errors in the assessment orders, including references to non-existent assessees and pre-printed approval details in draft orders, ITAT held that such approvals were invalid and consequently quashed all corresponding assessments, rendering all other grounds academic.

---

---

1. ISSUES PRESENTED AND CONSIDERED

(1) Whether the approvals purportedly granted under section 153D of the Income-tax Act, 1961, in respect of the assessments framed under section 153A/144, were valid and in conformity with the statutory requirement of prior approval by the competent authority after due application of mind.

(2) Consequent upon the finding on issue (1), whether the impugned assessments under section 153A/144 survive, and whether any other grounds on legality or quantum required adjudication.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Validity of approvals under section 153D and effect on assessments under section 153A/144

(a) Legal framework as discussed

(i) Section 153D, inserted by the Finance Act, 2007 with effect from 1.6.2007, mandates that no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner in respect of assessment years referred to in section 153A(1)(b) or section 153B(1)(b), except with the prior approval of the Joint Commissioner.

(ii) CBDT Circular dated 12.03.2008 (para 50) explains the object of section 153D, namely, that orders of assessment or reassessment in search cases are to be passed only after previous approval of the Joint Commissioner.

(iii) Reference was made to the Manual of Office Procedure (Volume II - Technical, February 2003), issued by the Directorate of Income Tax under section 119, particularly para 9, which, in the context of section 158BG, lays down that:

- the draft assessment order is to be submitted "well in time" to the Range JCIT/Addl. CIT;

- approval must be in writing and filed in the relevant folder;

- due opportunity of being heard should be given by the supervisory officer at least one month before time barring date; and

- the fact of such approval must be recorded in the assessment order.

(iv) The Tribunal relied on judicial precedents, inter alia:

- High Court decisions in ACIT v. Serajuddin & Co., PCIT v. Subodh Agarwal, and PCIT v. Sidharth Gupta, holding that approval under section 153D is a mandatory, substantive safeguard; it cannot be a mechanical rubber stamp, must reflect application of mind to material and draft orders, and mechanical approval vitiates the assessment order.

(v) The Tribunal noted that under section 2(28C), "Joint Commissioner" includes an Additional Commissioner, and that this inclusive definition has been upheld by High Courts and accepted by the Commissioner (Appeals); competence of the Additional Commissioner as such was not disturbed, but the manner of exercise of approval power under section 153D was examined.

(b) Interpretation and reasoning

(i) The Tribunal accepted the principle that section 153D approval is a mandatory pre-condition and not a mere procedural formality. The approving authority must:

- peruse the draft assessment orders and relevant records;

- apply an independent mind to facts, law and material seized;

- ensure protection of both the interest of revenue and the assessee against arbitrary or erroneous assessments; and

- demonstrate at least some indication, on the face of the approval, of such consideration.

(ii) On facts, the Tribunal examined the AO's request letter dated 26.02.2021 seeking approval under section 153D for multiple assessment years and the corresponding approval letter issued by the Additional Commissioner on the same date. The approval stated only that the draft assessment order "is approved u/s 153D of the Income Tax Act, 1961 based on the perusal of records submitted along with the submissions of the assessee", followed by general, standardised advisory directions (office note, penalty initiation, service of notices, remedial action, etc.).

(iii) Comparing the language and structure of this approval with that considered by the High Court in Serajuddin & Co., the Tribunal found it to be identically worded in substance and suffering from the same defect: there was no specific reference to any draft order being examined, no indication of issues considered, nor any discernible "thought process" or application of mind. The approval was thus characterised as a bare, formulaic endorsement.

(iv) The Tribunal further took into account several factual circumstances, which, taken cumulatively, were held to strongly evidence absence of real application of mind by the approving authority:

- A large number of draft assessment orders (for multiple assessees and years) were sent on 26.02.2021 and approvals were purportedly granted on the same date, or one day preceding the passing of the final orders, in 35 out of 46 cases; in many cases, the order disposing of objections, section 153D approval, and assessment order all bore the same date.

- In some cases (including the lead year), the AO received fresh investigation inputs via email from the Investigation Wing on 26.02.2021 at 5:02 PM, which were referred to in assessment orders passed on the same date; yet approvals under section 153D also bear the same date, implying that approval and assessment finalisation occurred under extreme time pressure, rendering meaningful scrutiny unrealistic.

- In several draft assessment orders, the approval number and date of approval by the Additional CIT were already mentioned in the draft itself, even before the draft was supposedly sent for approval. The Tribunal found no explanation from the Revenue on how a draft could pre-record the details of an approval yet to be granted, treating this as a "clinching" indication that approval was a pre-ordained formality.

- In multiple cases, assessments and approvals were processed in respect of entities that were not in existence or not incorporated for the relevant years (e.g., Helios Exports Ltd. for AYs 2012-13 and 2013-14; Shrivallabh Pittie Industries Ltd. for AY 2014-15), and even where returns were treated by the AO as "non est". Despite such fundamental defects, draft orders were forwarded and approvals granted.

- Numerous glaring legal and factual errors in the draft/assessment orders, which were nevertheless approved, including:

* erroneous invocation of section 115BBE for AY 2012-13 when the provision was not yet in force;

* application of 60% tax rate under section 115BBE for AYs 2013-14 to 2016-17, though, on the Tribunal's reading, only normal rates were applicable for those years;

* reference to incorrect sub-clauses and misapplication of section 115BBE in various years;

* manual tax calculations annexed, showing that the computations pre-dated approval, yet obvious rate-errors remained uncorrected by the approving authority;

* penalty proceedings initiated under incorrect provisions (including non-existent provisions or in years with no additions), without any corrective direction by the Additional CIT;

* additions treated as made under inappropriate sections (e.g., roll-back of depreciation and investment allowance booked as section 69C additions instead of under sections 32/32A), and such mischaracterisation being allowed to pass through approval;

* in at least one year, discussions and findings in the body of the order (e.g., disallowance of bogus capital expenditure under section 69C) were not actually reflected in the final computation of total income, yet this inconsistency escaped the approving authority;

* failure by the AO to consider affidavits retracting earlier statements, and yet the orders reproducing old statements were approved without any indication of scrutiny of this aspect.

(v) The Tribunal noted that none of these specific factual errors and anomalies were controverted or explained by the Revenue; the Departmental Representative did not rebut the charts and instances furnished by the assessee. The Tribunal therefore treated these lapses as admitted and as clear evidence that the approving authority had not applied an independent mind to either the law or facts while granting approval.

(vi) The Tribunal rejected the Revenue's general contention that the approving authority was familiar with the group's issues because of prior involvement (including in Settlement Commission proceedings) or that CBDT instructions and internal procedures were followed in spirit. It held that what is relevant is whether the approval under section 153D itself demonstrates, even minimally, that the draft orders and material were actually examined, and whether obvious errors and jurisdictional defects were considered. In the absence of any such indication, and in view of the uncontroverted factual matrix, mere assertions of awareness or compliance with internal instructions were not accepted.

(vii) Applying the principles from the cited High Court decisions, the Tribunal held that:

- Section 153D approval is a substantive safeguard, mandatory in nature, and is not a curable procedural irregularity;

- Approval must be granted "on the basis of material available on record" and "must reflect the application of mind to the facts of the case";

- The role of the approving authority is dual: to protect the revenue against omissions and to protect the assessee against arbitrary or baseless tax liability;

- Where approval is granted mechanically-without evidencing such scrutiny-the entire assessment under section 153A/153B stands vitiated.

(c) Conclusions

(i) The Tribunal held that, in all the appeals before it, the approvals purporting to be under section 153D were granted mechanically, without application of mind, and in clear disregard of the statutory mandate and binding administrative instructions.

(ii) Consequently, the condition precedent for valid assessments under section 153A/144 in these search-related cases was not satisfied. The impugned assessments were therefore declared invalid and quashed/annulled.

(iii) Ground No. 1 of the assessee's appeal (challenging jurisdiction and approval under section 153D) was allowed in the lead year and, by parity of reasoning, in all 34 appeals filed by the assessee.

Issue (2): Consequential effect on other grounds and on Revenue's appeals

(a) Interpretation and reasoning

(i) Having quashed the assessments themselves for want of valid prior approval under section 153D, the Tribunal found it unnecessary and academic to adjudicate the remaining grounds raised by the assessee in respect of:

- validity of initiation under section 153A;

- treatment of return as "non est";

- non-issuance of notice under section 143(2);

- alleged absence of incriminating material;

- natural justice violations; and

- merits/quantum of additions under section 69C and applicability of section 115BBE.

(ii) Since the entire assessments stood annulled, the Revenue's appeals, which sought enhancement/restoration of additions sustained by the Commissioner (Appeals), were rendered infructuous.

(b) Conclusions

(i) All other grounds and additional grounds raised by the assessees in the 34 appeals were dismissed as not requiring adjudication, in view of the annulment of the assessments on the foundational jurisdictional defect under section 153D.

(ii) All 31 appeals filed by the Revenue were dismissed consequentially, as there remained no surviving assessment orders to support the additions challenged by the Department.

---