2025 (9) TMI 1718 - AT - Income Tax

Mechanical, non-speaking s.153D approval held invalid, entire assessment and consequential actions quashed in assessee's favour

ITAT Delhi - AT allowed the assessee's appeal, holding the assessment framed pursuant to approval under s.153D invalid due to mechanical and non-speaking ... Validity of approval given u/s 153D - allegation of non-application of mind to the contents of draft assessment order - responsibility of approving authority u/s 153D HELD THAT:- We are of the considered view that it is not a case where a single issues was involved or same set of incriminating evidence, being some physical evidences, was relied by the AO. The incriminating evidences were multiple electronic evidences found form multiple digital devices thus in regard to same the approving authority should have made sure, before granting of approval, that at time of search and thereafter the investigation wing authorities and so also the AO has duly followed the instructions of the Board as laid in the Manual. The aforesaid directions of the Manual, requiring as to what all material should be annexed to the assessment order in case the assessment is outcome of electronic or digital evidences seems to be completely ignored by the AO. Even if for sake of arguments it is accepted that they are not instructions u/s 119 of the Act, but then that does not lead to inference that the instructions of Board could be neglected by AO and while granting approval u/s 153D of the Act, too, the same can be left out of consideration by the competent authority on assumption that it is merely an administrative function. Rather, as discussed here above the approving authority casually records that veracity of electronic evidences have been accepted as certified by the AO. Same only leads to one conclusion that approval was mechanical. As decided in Serajuddin & Co. [2023 (3) TMI 785 - ORISSA HIGH COURT] ranging observations towards the manner and legality of approval under s. 153D of the Act by observing that the approval under s. 153D of the Act being mandatory, while elaborate reasons need not be given, there has to be some indication that approving authority has examined draft orders and finds that it meets the requirement of law. The approving authority is expected to indicate his thought process while granting approval, held that it is not correct on the part of the Revenue to contend that the approval itself is not justifiable. Where the Court finds that the approval is granted mechanically, it would vitiate the assessment order itself. The approval letter simply grants approval. Even the bare minimum requirement of approving authority having to indicate what thought process involved leading to the aforementioned approval has not been provided - mere repeating of words of the Statue or mere rubber stamping of the communication seeking sanction by using similar words like 'approval' will not, by itself, meet the requirement of law. Thus whole assessment proceedings and consequential orders vitiated. Assessee appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the approval granted under section 153D of the Income Tax Act, 1961, to the draft assessment order was mechanical and without application of mind, thereby vitiating the assessment. 1.2 Whether, in a search-based assessment founded predominantly on electronic/digital evidence, the approving authority under section 153D was required to ensure compliance with the legal framework and CBDT guidelines governing digital evidence, and whether failure to do so rendered the approval invalid. 1.3 Consequentially, whether the assessment order passed under section 153A/143(3), and the appellate order sustaining the additions in part, could stand in law once the approval under section 153D was held to be invalid. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of approval under section 153D - mechanical / without application of mind Legal framework 2.1 The Tribunal examined section 153D of the Act, which mandates that no order of assessment or reassessment in cases covered by section 153A/153B shall be passed by an Assessing Officer below the rank of Joint Commissioner except with the prior approval of the Joint Commissioner, for each assessment year. The Tribunal referred to judicial precedents including the decisions of the jurisdictional High Court and other High Courts holding that such approval must reflect application of mind and cannot be a mere mechanical or ritualistic exercise. Interpretation and reasoning 2.2 The Tribunal noted that separate approval letters under section 153D were issued for multiple assessment years, all in a verbatim identical format, and granted on the same date. This uniformity in language and structure across years indicated a consolidated, template-based approach rather than a year-wise, issue-specific consideration as envisaged by section 153D. 2.3 The Tribunal specifically considered the use of the phrase 'as amended' in the approval letter, noting that (i) the Assessing Officer's letter dated 28.03.2022 merely stated that cases for specified assessment years were being put up for approval, (ii) there was no indication in that letter of any prior communication, modification, or amendment to the draft assessment orders, and (iii) there was no material showing any further interaction or direction by the approving authority between 28.03.2022 and 30.03.2022. In absence of any explanation from the Revenue for the use of the expression 'as amended', the Tribunal held that the said phrase was ambiguous and unsupported by the record, thereby undermining the claim of a real and informed scrutiny of the draft orders. 2.4 The Tribunal observed that the approving authority, in the approval letter, effectively accepted the Assessing Officer's own certification that electronic data had been properly perused and verified, without any indication of independent verification of such evidence or any scrutiny of the assessment methodology. The approval letter did not record that the approving authority had examined the draft assessment orders, the underlying material, or the legal compliance in any meaningful manner. 2.5 The Tribunal also referred to the fact that one of the substantial additions (unexplained expenditure of Rs. 2,69,06,780/-) was itself not comprehensible from the assessment order; the first appellate authority had to call for a remand report, and even then the Assessing Officer did not supply any working or rational basis of computation. The year-wise table of unexplained expenditure in the assessment order had no accompanying detailed working or bifurcation, and the Assessing Officer failed to clarify the basis despite specific requisitions. The Tribunal considered this as indicative that serious and apparent defects in the draft assessment had escaped the notice of the approving authority, which could not have happened if there had been a genuine application of mind at the approval stage. 2.6 In construing section 153D, the Tribunal relied upon the principles laid down by the jurisdictional High Court and other High Courts that: (i) approval under section 153D has to be for 'each assessment year' separately; (ii) the approving authority must apply an independent mind to the material and issues in relation to each assessee and each assessment year; (iii) approval cannot be a mechanical or rubber-stamp exercise; and (iv) where approval is shown to be mechanical, the very assessment stands vitiated. The Tribunal noted that the Supreme Court had dismissed the Revenue's challenge to a High Court decision holding such mechanical approval invalid, thereby reinforcing this legal position. Conclusions 2.7 The Tribunal concluded that the approval under section 153D in the present case was mechanical and lacked independent application of mind. The ambiguous reference to draft assessment orders 'as amended', the verbatim and uniform approvals across years, the uncritical acceptance of the Assessing Officer's certification regarding electronic evidence, and the failure to detect manifest infirmities in the computation of additions, cumulatively established non-compliance with the mandatory requirements of section 153D. 2.8 The Tribunal held that such mechanical approval could not be treated as a valid discharge of the statutory duty under section 153D, and that non-compliance with section 153D is not a mere procedural irregularity but goes to the root of the assessment, rendering it invalid. Issue 2: Role of digital/electronic evidence and CBDT's Digital Evidence Investigation Manual in evaluating approval under section 153D Legal framework 2.9 The Tribunal noted that the assessment in question was predominantly based on electronic/digital evidence: Excel files and other data from pen-drives, laptop, mobile phone, and other devices seized or imaged during search and related proceedings, along with statements recorded under section 132(4). It referred to the CBDT's Digital Evidence Investigation Manual, 2014, which elaborates the statutory framework under the Information Technology Act, the Evidence Act (including sections 65A and 65B), and the Income-tax Act, and lays down detailed procedures for collection, preservation, analysis, and presentation of digital evidence, including maintenance of the chain of custody and requirements for incorporating digital evidence analysis in assessment orders. 2.10 In particular, the Tribunal extracted portions of the Manual emphasizing: (i) recognition of electronic records as 'documents' and 'electronic records' under the Income-tax Act and Information Technology Act; (ii) the importance of sections 65A and 65B of the Evidence Act and the need to handle digital evidence in consonance with these provisions; (iii) detailed guidance in paras 9.1 and 9.6 on how digital evidence and its chain of custody are to be reported and annexed in assessment orders, including Digital Evidence Collection Forms, digital forensic reports, hash values, mahazar/chain-of-custody documents, and linkage with physical evidence and statements. Interpretation and reasoning 2.11 The Tribunal observed that the assessment order relied heavily and almost exclusively on multiple sets of digital/electronic evidence obtained from different devices and locations, but did not adhere to the structured reporting and documentation requirements described in the CBDT Manual. There was no systematic presentation of chain of custody, forensic reports, hash values, or proper linkage between different electronic records and physical evidence as prescribed. 2.12 The Tribunal held that, given the complexity and multiplicity of digital evidences, the approving authority, before granting approval under section 153D, was expected to satisfy itself that the investigation and assessment had followed the prescribed safeguards and procedures in the Manual, especially in view of the interplay of the Income-tax Act, the Information Technology Act, and the Evidence Act. Instead, the approving authority merely recorded that the Assessing Officer had certified perusal and verification of data seized in electronic format with matching hash values, and accepted this at face value without any indication of independent scrutiny. 2.13 The Tribunal clarified that even if the Manual is not treated as an 'instruction' under section 119, its contents are a conscious and detailed codification by the CBDT of the law and procedure relating to digital evidence, and cannot be ignored by Assessing Officers or by the approving authority under section 153D in a case where the assessment is substantially or wholly based on such evidence. The approving authority's failure to examine whether the Manual's directions had been followed was a further indicator of a perfunctory, mechanical approval. Conclusions 2.14 The Tribunal held that, in a digital-evidence driven assessment, the approving authority's statutory role under section 153D necessarily includes, at minimum, a conscious verification that the legal provisions and CBDT guidelines relating to collection, custody, analysis, and use of digital evidence have been followed. The approval in the present case showed no such application of mind, reinforcing the conclusion that the approval was mechanical and invalid. Issue 3: Effect of invalid approval under section 153D on the assessment and appeals Interpretation and reasoning 2.15 Having held the approval under section 153D to be mechanically granted and devoid of application of mind, the Tribunal applied the settled law that failure to obtain a valid prior approval under section 153D is a substantive illegality that vitiates the entire assessment. It relied on High Court authority, affirmed by the Supreme Court, to the effect that such non-compliance is not a curable or merely procedural defect. Conclusions 2.16 The Tribunal allowed the assessee's ground challenging the validity of the approval under section 153D, held that the assessment proceedings and the resultant assessment order under section 153A/143(3) stood vitiated, and consequently quashed the impugned assessment order. 2.17 In view of the quashing of the assessment order, the Tribunal held that the Revenue's appeal on merits of the additions did not survive, and it was accordingly dismissed.