2025 (4) TMI 1132 - AT - Income Tax

JCIT approval under s.153D/153C held mechanical, lacking application of mind, quashed; assessment therefore invalid, appeal allowed

ITAT (DELHI - AT) held that JCIT's approval under s.153D/153C was mechanical and lacked application of mind, rendering it invalid and liable to be ... Validity of Assessment u/s 153A/153C - As alleged approval u/s.153D by the JCIT is mechanical and without application of mind - HELD THAT:- The approval of JCIT should reflect application of mind, which is missing in the instant case. The requirement of approval cannot be treated as mere formality and the mandate of the Act is that the approving authority has to act in a judicious manner by due application of mind in a manner of a quasi-judicial authority. It is settled law that if the approval has been granted by the approving authority in a mechanical manner, the very purpose of obtaining approval u/s. 153D of the Act and the mandate of the enactment by the legislature will be defeated. However, JCIT without any consideration of merits in proposed additions with reference to the incriminating material collected in search etc. has proceeded to grant a simplicitor approval. This approach of the JCIT has rendered approval to be a mere formality and cannot be countenanced in law. In view of the peculiar facts and circumstances of the case, we are of the considered view that approval by JCIT is not valid, hence, deserves to be quashed. In view of above, it is clear that Jt. Commissioner of Income Tax has given approval which is purely mechanical and without application of mind. Appeal of assessee allowed. The core legal issues considered by the Tribunal in this appeal revolve primarily around the validity and legality of the assessment order passed under the Income Tax Act, particularly focusing on the procedural compliance with sections 153C, 153A, 153D, and related provisions. The key legal questions include:1. Whether the assessment order passed by the Assessing Officer (AO) was valid in light of the procedural requirements under Section 153C and whether the AO complied with these provisions.2. Whether the assessment order was barred by limitation and without jurisdiction.3. Whether a valid notice under Section 143(2) was issued to the assessee before the assessment.4. Whether the addition of Rs. 1,20,04,096/- on account of disallowance of interest was within the scope of Sections 153C read with 153A.5. Whether the books of accounts rejection by the AO was justified.6. Whether the assessment order was in conformity with the mandatory requirement of prior approval under Section 153D of the Act.7. Whether the approval granted by the Joint Commissioner of Income Tax (JCIT) under Section 153D was valid, reflecting due application of mind, or was merely a mechanical formality.Issue-wise Detailed Analysis:Validity and Jurisdiction of Assessment Order under Section 153C:The assessment was initiated following a search and seizure operation under Section 132. The AO issued notices under Sections 153C and 143(2) and completed the assessment making several additions. The assessee challenged the validity of the assessment order on grounds of non-compliance with Section 153C and limitation.The Tribunal noted that the procedural steps like issuance of notices under Section 153C and 143(2) were taken, and the assessment was framed under Section 153C read with Section 144. The Tribunal did not find merit in the contention that the assessment was barred by limitation or without jurisdiction. The AO's actions in issuing notices and completing assessment were in line with the statutory framework.Validity of Notice under Section 143(2):The assessee contended that no valid notice under Section 143(2) was issued. The Tribunal observed that the AO had issued the notice on 02.09.2016, and there was no substantial evidence to show non-issuance or invalidity. Hence, this ground was not accepted.Addition on Account of Disallowance of Interest:The AO made an addition of Rs. 1,20,04,096/- on account of interest disallowance, alleging diversion of funds. The assessee challenged this addition as beyond the scope of Sections 153C read with 153A. The Tribunal, however, did not elaborate on this ground in the impugned order since the appeal was allowed on other legal grounds relating to approval under Section 153D.Rejection of Books of Accounts:The AO rejected the books of accounts, which was challenged. The Tribunal did not specifically adjudicate this ground as the appeal was decided on the validity of approval under Section 153D.Validity of Approval under Section 153D of the Act:This issue formed the crux of the appeal. Section 153D mandates that no assessment or reassessment order under Sections 153A or 153C shall be passed without prior approval of the JCIT for each assessment year. The assessee contended that the approval granted by the JCIT was mechanical, without application of mind, and hence invalid.The Tribunal extensively analyzed the statutory provisions, relevant precedents, and facts of the case to examine this issue.Relevant Legal Framework and Precedents:Section 153D requires prior approval of the JCIT before passing assessment orders under Sections 153A/153C. The approval must be given separately for each assessment year and must reflect an independent application of mind. The approval is a quasi-judicial function designed to act as a safeguard against arbitrary or unjust exercise of power by the AO.Several judicial precedents were relied upon, including decisions from the Allahabad High Court, Orissa High Court, Delhi High Court, and various ITAT benches, as well as the Apex Court. Key principles established in these precedents include:Approval under Section 153D cannot be a mere formality or mechanical exercise but requires judicious application of mind.The approving authority must peruse the draft assessment orders, seized materials, appraisal reports, and other relevant records before granting approval.Approval must be granted separately for each assessment year and cannot be given as a blanket or combined approval for multiple years.Approval granted without proper examination of materials or merely on the basis of an undertaking from the AO is invalid.Mechanical or rubber-stamp approvals vitiate the assessment proceedings and render them void ab initio.Court's Interpretation and Reasoning:The Tribunal found that in the present case, the JCIT granted approval on 11.01.2018 for seven assessment years through a combined approval, which was contrary to the statutory requirement of separate approval for each year. Further, the approval was granted the day after the AO sent the draft assessment orders, making it practically impossible for the JCIT to have applied independent mind or examined the seized material and appraisal reports.The approval letter did not mention any perusal or consideration of the seized material, assessment records, or draft orders. It was based solely on the AO's certificate that the appraisal report and seized material had been examined. The JCIT did not indicate any independent verification or application of mind.The Tribunal referred to multiple precedents where similar approvals were held to be mechanical and invalid. It emphasized that the approval process is a mandatory safeguard and must not be reduced to a mere rubber-stamping exercise.The Tribunal further noted that the JCIT's approval was not final and included directions to the AO regarding penalty proceedings, demonstrating lack of finality and independent satisfaction.Application of Law to Facts:Applying the legal framework and precedents to the facts, the Tribunal concluded that the approval granted by the JCIT was a mechanical exercise without due application of mind. The consolidated approval for multiple assessment years, the rapid grant of approval without proper examination, and the absence of any indication of independent scrutiny led to the finding that the approval did not meet the statutory requirements.Since the approval under Section 153D is a mandatory precondition for passing assessment orders under Sections 153A and 153C, the absence of valid approval rendered the assessment order void ab initio.Treatment of Competing Arguments:The Revenue argued that the JCIT was involved throughout the assessment proceedings and that the approval was an administrative exercise. It contended that mere existence of approval on the date of passing the assessment order was sufficient.The Tribunal rejected this argument, holding that involvement in the proceedings does not substitute for the statutory requirement of independent application of mind at the time of granting approval. The approval must be a quasi-judicial act based on examination of material and cannot be a mere formality or administrative rubber stamp.The Tribunal also noted that the consolidated approval for multiple years was inconsistent with the statutory mandate and judicial precedents.Conclusions:The Tribunal concluded that the approval under Section 153D granted by the JCIT was invalid as it was mechanical and without application of mind. Consequently, the assessment order passed by the AO pursuant to such approval was also invalid and liable to be quashed.Since the assessment order was quashed on this ground, other grounds raised by the assessee became academic and were not adjudicated upon.Significant Holdings:The Tribunal's key legal reasoning is preserved verbatim as follows:'Whenever any statutory obligation is cast upon any authority, such authority is legally required to discharge the obligation by application of mind. The approval of JCIT should reflect application of mind, which is missing in the instant case. The requirement of approval cannot be treated as mere formality and the mandate of the Act is that the approving authority has to act in a judicious manner by due application of mind in a manner of a quasi-judicial authority. Moreover, it is settled law that if the approval has been granted by the approving authority in a mechanical manner, the very purpose of obtaining approval u/s. 153D of the Act and the mandate of the enactment by the legislature will be defeated.''The approval of draft assessment order being an in-built protection against any arbitrary or unjust exercise of power by the Assessing Officer, cannot be said to be a mechanical exercise, without application of independent mind by the Approving Authority on the material placed before it and the reasoning given in the assessment order.''The approval granted under section 153D of the Act should necessarily reflect due application of mind and if the same is subjected to judicial scrutiny, it should stand for itself and should be self-defending.''The approval granted by the JCIT in the instant case before us is mechanical and without due application of mind, thereby making the approval proceedings by a high ranking authority, an empty ritual.'Core Principles Established:Prior approval under Section 153D of the Income Tax Act is mandatory and must be granted separately for each assessment year.The approving authority must apply independent, judicious mind to the draft assessment orders, seized material, and appraisal reports before granting approval.Mechanical or blanket approvals without examination of material are invalid and vitiate the assessment proceedings.The approval process serves as a safeguard against arbitrary or unjust taxation and must not be reduced to a mere formality.Failure to comply with these requirements renders the assessment order void ab initio.Final Determination:The Tribunal allowed the appeal filed by the assessee, quashed the assessment order passed under Section 153C read with Section 144 of the Income Tax Act for the Assessment Year 2015-16, and held that the approval granted under Section 153D was invalid due to lack of application of mind and procedural non-compliance. Consequently, the assessment order was declared void ab initio.