Invalid Section 153D approval leads to assessment order being declared void ab initio

ITAT Raipur quashed an assessment order after finding the approval under section 153D invalid due to non-application of mind by the sanctioning authority. The tribunal held that the JCIT granted approval without ensuring complete assessment records were reviewed, particularly failing to verify that the assessee was given opportunity to respond to the valuer's report. The approval was deemed mechanical and violated principles of natural justice, as the assessee was not confronted with the valuer's objections before assessment completion. Consequently, the assessment following such invalid approval was declared void ab initio and the assessee's appeal was allowed.

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The core legal questions considered by the Tribunal in these cross appeals arising from search and seizure proceedings under the Income Tax Act, 1961, for Assessment Year 2018-19, include:

1. Whether the additions made by the Assessing Officer (AO) on account of excess stock of finished goods and raw materials, as determined by the Departmental Valuation Officer (DVO) on a sampling and volumetric basis without actual weighment, are justified and sustainable.

2. Whether the additions on account of unexplained expenditure based on handwritten loose papers and pocket diaries seized during search are justified in absence of documentary evidence and reconciliation with books of account.

3. Whether the profit on shortage of stock estimated by applying gross profit percentage on alleged shortage is justified.

4. Whether the approval granted under section 153D of the Income Tax Act for the search assessment was valid, having regard to the procedural requirements and application of mind by the sanctioning authority.

5. Whether the provisions of section 115BBE are applicable in the case of income determined under section 69.

6. Whether the assessment order passed under section 143(3) read with section 153A is valid in light of the validity or otherwise of the approval under section 153D.

Issue 1: Validity of Additions on Account of Excess Stock (Finished Goods and Raw Materials)

The legal framework involves provisions under the Income Tax Act relating to search assessments (sections 132, 153A, 153D), valuation of stock, and principles of estimation of income. The AO relied on the valuation report of the DVO, who adopted a volumetric sampling method to estimate stock quantities. The assessee challenged the additions on grounds that no actual weighment was conducted, the method was presumptive, and the books of account were not rejected, thereby rendering the additions unjustified.

The Tribunal considered precedents including decisions of the Orissa High Court and ITAT Indore which held that additions based on sampling without actual weighment or corroborative material are not sustainable. The Tribunal noted the assessee's contention that the DVO's valuation was arbitrary and that the valuation report of the valuer appointed by the assessee (M/s RVCPL), which was based on actual weighment and prevailing market rates, was more reliable.

Upon detailed examination, the Tribunal found that the AO had accepted the rates proposed by the assessee's valuer but had not accepted the density calculations crucial for converting volume to weight, which was a key factor in determining actual stock. The Tribunal observed that the density figures calculated by the assessee's valuer were based on actual weighment of sample containers and were more accurate than the DVO's estimates.

Applying the legal principle that additions must be based on reliable evidence and correct methodology, the Tribunal confirmed additions only to the extent supported by the revised valuation using the density figures furnished by the assessee's valuer. The Tribunal held that the AO's adoption of the DVO's valuation without considering the density issue fully was improper. Consequently, the Tribunal partly allowed the appeal by reducing the additions on excess stock substantially.

The Tribunal also noted that no incriminating material was found during the search to support the claim of suppressed production or unaccounted purchases, and the books of account were not rejected, which militated against making large presumptive additions.

Issue 2: Additions on Account of Unexplained Expenditure Based on Loose Papers and Diaries

The AO made an addition of 15% on the amount of handwritten non-accounted cash transactions found in loose papers and diaries seized during the search, treating the same as unexplained expenditure under section 69C. The assessee contended that these were mere rough jottings and budgetary estimates with no financial impact, and that no documentary evidence supported the AO's conclusion.

The Tribunal examined the evidence and found that the assessee failed to provide documentary evidence or reconcile these amounts with books of account. However, the CIT(A) deleted the addition on the basis of judicial precedents that ad hoc additions without proper basis are not sustainable.

Respecting the principle that estimation must be reasonable and supported by material, the Tribunal upheld the deletion of the addition on unexplained expenditure, observing that the AO's addition was ad hoc and not justified in absence of corroborative evidence.

Issue 3: Addition on Account of Profit on Shortage of Stock

The AO estimated profit on the shortage of stock of Ash Char and Coal by applying an average gross profit percentage of 5.5%, based on the last three years' average. The assessee challenged this addition on the ground that no actual weighment was done and the DVO report was arbitrary.

The Tribunal noted that the assessee failed to produce any evidence to show irregularity in the measurement of shortage stock. The Tribunal observed that the AO's method of estimating profit on shortage was reasonable and in line with accepted accounting principles.

Accordingly, the Tribunal confirmed the addition on profit on shortage of stock.

Issue 4: Validity of Approval under Section 153D

The assessee challenged the validity of the approval granted by the Joint Commissioner of Income Tax (JCIT) under section 153D, contending that:

• The approval was granted mechanically without application of mind.
• The JCIT was not furnished with complete records, including the communication from the DVO disposing of objections raised by the assessee on valuation, which was not confronted to the assessee.
• The approval was a common approval for multiple assessment years and assessees, violating the requirement of separate approval for each.
• The approval was invalid as it was granted without proper satisfaction and was thus null and void ab initio.

The Tribunal examined the procedural history and found that the draft assessment order was forwarded for approval on 26/28 December 2019, and the approval was granted on 30 December 2019. A communication from the DVO dated 28 December 2019, which disposed of the objections raised by the assessee, was placed before the JCIT but was not confronted to the assessee.

The Tribunal observed that since the assessee was not given an opportunity to respond to the DVO's communication, the JCIT could not have been satisfied that the assessee was afforded proper opportunity of hearing. The Tribunal found that the approval was granted without perusal of complete records or without application of mind, amounting to a mechanical approval.

Relying on judicial precedents, the Tribunal held that such approval is illegal and non-est, vitiating the assessment order passed thereunder. The Tribunal quashed the assessment order passed under section 153A read with section 143(3) for AY 2018-19 on this ground.

Issue 5: Applicability of Section 115BBE

The department contended that the income determined under section 69 attracts tax under section 115BBE. The CIT(A) held that section 115BBE is not applicable in the present case. However, since the assessment order was quashed on the ground of invalid approval under section 153D, the issue became infructuous and was not decided on merits by the Tribunal.

Issue 6: Validity of Assessment Order under Section 143(3) read with 153A

Since the approval under section 153D was held invalid, the assessment order passed under section 143(3) read with 153A was rendered bad in law and was quashed by the Tribunal. Consequently, the department's appeal against the CIT(A)'s order granting partial relief became infructuous and was dismissed.

Significant Holdings:

"The approval granted by the Joint Commissioner of Income Tax under section 153D without application of mind and without placing complete records before the sanctioning authority is illegal and non-est and vitiates the assessment order passed thereunder."

"Additions on account of excess stock based on volumetric sampling method without actual weighment and corroborative material are not sustainable. The valuation report based on actual weighment and correct density calculation is to be preferred."

"Ad hoc additions on unexplained expenditure without documentary evidence or reconciliation with books of account are not justified."

"Estimation of profit on shortage of stock by applying average gross profit percentage based on past years is reasonable and sustainable."

"Assessment orders passed under section 143(3) read with 153A without valid approval under section 153D are bad in law and liable to be quashed."

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