Section 151 approval invalid without proper signature makes Section 148 notice and assessment order bad in law

The ITAT Mumbai held that approval under Section 151 for reopening assessment was invalid as it lacked proper signature, making the Section 148 notice and subsequent assessment order bad in law. The tribunal established that digital signature is mandatory for electronically communicated notices per Section 282A, not merely a formality. Regarding income additions, the tribunal ruled that scrap sale income should be assessed as business income rather than unexplained money under Section 69A, allowing estimated additions based on profit percentages. Out-of-books expenses additions were deleted as they were already covered in scrap sale estimations. Salary splitting arrangements between employees and spouses were held legitimate, reversing disallowances. The tribunal upheld partial disallowances for purchases lacking proper documentation but deleted additions based on diary entries where explanations were provided and cash balances were adequately supported by regular books.

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The core legal questions considered in this matter include:

1. Whether the notice issued under section 148 of the Income Tax Act, 1961 ("the Act") was validly issued, particularly with respect to the sanction obtained under section 151 of the Act, including issues concerning the appropriate authority granting sanction, the requirement of signature or digital signature on the sanction, and the presence of a Document Identification Number (DIN) as mandated by CBDT Circulars.

2. Whether the notice under section 148 was required to be issued by a Faceless Assessing Officer (FAO) under section 151A of the Act read with CBDT Notification 18 of 2022, or whether issuance by the Jurisdictional Assessing Officer (JAO) was valid, especially in cases involving search and seizure and centralization of assessment.

3. The correctness and quantum of additions made by the Assessing Officer (AO) and confirmed or modified by the Commissioner of Income Tax (Appeals) [CIT(A)] relating to:

• Unaccounted income from sale of scrap and piling business under section 69A read with section 115BBE of the Act, including the method of estimation of income and whether the entire gross receipts or only net profit should be taxed.
• Out-of-books cash expenses (referred to as "murrum expenses") under section 69C of the Act, including the evidentiary basis for such expenses, their quantification, and whether separate additions are warranted over and above the estimated profit on scrap sales.
• Bogus purchases claimed as business expenditure under section 37(1) of the Act, including the genuineness of the parties, the adequacy of documentary evidence, and the applicability of estimated disallowances.
• Alleged bogus salary and professional fees disallowances, including the issue of salary splitting between employees and spouses and the applicability of disallowance under section 37(1) of the Act.
• Additions related to unexplained money entries in a seized cash diary under section 69A of the Act, including the nature of entries, their explanation, and the extent of additions.
• Disallowance of business promotion expenses and their justification under commercial expediency principles.
• Disallowance of PF/ESIC contributions under section 36(1)(va) of the Act for non-payment within prescribed time.

4. The admissibility and evidentiary value of digital evidence obtained during search and seizure operations, including compliance with section 65B of the Indian Evidence Act and CBDT Digital Evidence Investigation Manual.

Issue-wise detailed analysis:

1. Validity of Notice under Section 148 and Sanction under Section 151

Legal Framework and Precedents: Section 148 requires prior sanction under section 151 before issuance of notice for reassessment. Section 151 specifies the authority competent to grant sanction depending on whether the notice is issued within or beyond three years from the end of the relevant assessment year. Section 282A mandates that notices and documents be signed (manually or digitally) to be valid. CBDT Circular 19 of 2019 requires quoting of DIN in departmental communications to maintain audit trail. Judicial precedents include decisions of various High Courts and the Supreme Court emphasizing strict compliance with these procedural requirements.

Court's Interpretation and Reasoning: The Tribunal observed that for AY 2016-17 and AY 2017-18, the sanction under section 151 was not signed (manually or digitally), rendering the sanction invalid and the notice issued without jurisdiction, thus quashing reassessment proceedings. The Tribunal rejected the Revenue's argument that unsigned electronic approvals without digital signatures are valid under section 282A(2), holding that sub-section (1) requires signing as a mandatory prerequisite. The Tribunal relied on Allahabad High Court decisions holding that signing is mandatory for validity.

For AY 2018-19, the issue was whether sanction by Principal Commissioner of Income Tax (PCIT) was valid when more than three years had elapsed, requiring sanction by Principal Chief Commissioner (PCCIT) under section 151(ii). The Tribunal followed the Bombay High Court decision in Vodafone India Ltd. v. DCIT holding that sanction by PCIT beyond three years is invalid, quashing reassessment. The Tribunal rejected Revenue's contention that proviso to section 151 (inserted by Finance Act 2023) is retrospective, holding it prospective as per Bombay High Court ruling.

For AY 2019-20 to AY 2022-23, similar issues arose regarding sanction authority and validity of sanction without DIN. The Tribunal held that absence of DIN on sanction letter under section 151 is an irregularity but not fatal, as sanction letters are internal communications not required to have DIN under CBDT Circular 19/2019 unless communicated to assessee. The sanction letters were signed and hence valid. The Tribunal rejected Assessee's contention that absence of income escaping assessment in sanction invalidates it. The Tribunal also rejected the contention that sanction was mechanical without application of mind.

Key Evidence and Findings: Copies of sanction letters, notices, and search records were examined. Statements of authorized officers, judicial precedents, and CBDT circulars were considered. The Tribunal noted that notices under section 148 bore valid DIN, and sanction letters were signed, though DIN was absent.

Application of Law to Facts: The Tribunal applied statutory provisions and judicial precedents strictly to the facts of each assessment year, distinguishing between procedural irregularities and jurisdictional defects. It quashed notices where sanction was unsigned or given by wrong authority, and upheld notices where sanction was signed and authority was competent, notwithstanding absence of DIN.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's broad interpretation of section 282A(1) that electronic documents need not be signed if name and designation are printed, emphasizing mandatory signing. It also rejected Assessee's reliance on single-judge bench decisions where contrary division bench rulings existed. On the issue of sanction authority, the Tribunal followed binding jurisdictional High Court decisions and rejected retrospective application of proviso to section 151.

Conclusions: Notices issued without proper sanction under section 151 are invalid and quashed. Sanction must be signed (manually or digitally) and granted by appropriate authority depending on time elapsed. Absence of DIN on sanction letter is irregular but not fatal if sanction is signed and internal. Notices issued by JAO instead of FAO in search cases centralized with Central Charges are valid.

2. Validity of Notice Issuance by JAO vs. FAO under Section 151A and CBDT Notification 18/2022

Legal Framework and Precedents: Section 151A read with CBDT Notification 18/2022 mandates faceless issuance of notices under section 148 in general, but excludes cases assigned to Central Charges or involving search and seizure from faceless regime.

Court's Interpretation and Reasoning: The Tribunal held that notices issued by JAO in cases involving search and seizure and centralized assessment are valid. It distinguished the decisions of Bombay High Court in Hexaware Technologies Ltd. and Ganesh Nivrutti Jagtap, which related to non-search cases, and relied on subsequent decisions of Bombay, Delhi, Madras, and Gujarat High Courts, and CBDT orders excluding Central Charges from faceless regime. The Tribunal observed that the Supreme Court had stayed proceedings in Hexaware, making it non-binding. The Tribunal thus dismissed Assessee's challenge to notice issuance by JAO.

Key Evidence and Findings: CBDT orders, judicial pronouncements, and facts of search and seizure with centralization of assessment were considered.

Application of Law to Facts: The Tribunal applied statutory and administrative provisions to the facts of search and seizure and centralization, concluding that JAO had jurisdiction to issue notices.

Treatment of Competing Arguments: The Tribunal rejected Assessee's reliance on Hexaware and Ganesh Jagtap due to stay and non-applicability to search cases, and upheld Revenue's reliance on other High Court rulings and CBDT orders.

Conclusions: Notices issued by JAO in search and seizure cases centralized with Central Charges are valid, notwithstanding general faceless assessment scheme.

3. Additions on Sale of Scrap and Piling Business under Section 69A r.w.s. 115BBE

Legal Framework and Precedents: Section 69A applies to unexplained money or income not recorded in books of account. Section 115BBE imposes tax on income deemed to be income of the previous year. Judicial precedents emphasize that only real income (net profit) should be taxed, not gross receipts, unless expenses are not incurred or accounted for.

Court's Interpretation and Reasoning: The Tribunal found that Assessee admitted to unaccounted cash receipts from sale of scrap and piling business. However, it accepted the CIT(A)'s approach of taxing only estimated net profit on such receipts, not gross receipts, applying a profit before tax (PBT) percentage derived from regular books of account. The Tribunal rejected Revenue's contention that entire gross receipts should be added as income under section 69A, noting that incidental expenses related to scrap sale were already booked and that out-of-books expenses were incurred from cash generated by scrap sale. The Tribunal held that taxing gross receipts would amount to taxing source and application of funds, contrary to principles laid down in Poona Electric Supply Co. Ltd. and other cases.

Key Evidence and Findings: Statements recorded under section 132(4), digital evidence including excel sheets, diaries, WhatsApp chats, and trial balances found during search corroborated unaccounted scrap sales and piling income. The Assessee's books showed expenses related to scrap sale and admitted cash expenses out of scrap sale proceeds.

Application of Law to Facts: The Tribunal applied the "real income" principle, estimating net profit by applying PBT percentage to gross receipts of scrap sale and piling income. It rejected the estimate based on average PBT over seven years and instead applied year-wise PBT percentages for more accurate estimation.

Treatment of Competing Arguments: The Tribunal rejected Assessee's arguments that digital evidence was inadmissible for lack of compliance with section 65B of Indian Evidence Act, holding that voluminous corroborative evidence rendered the digital evidence admissible. It also rejected Revenue's argument for taxing gross receipts and held that CIT(A)'s estimation was reasonable.

Conclusions: Additions on unaccounted scrap sale and piling income are to be made by estimating net profit applying year-wise PBT percentages, treating the income as business income and not unexplained money under section 69A.

4. Additions on Out-of-Books Cash Expenses ("Murrum Expenses") under Section 69C

Legal Framework and Precedents: Section 69C deals with unexplained expenditure. Judicial precedents require strict proof of expenditure and its source. Additions on estimated basis require rational and bona fide basis.

Court's Interpretation and Reasoning: The Tribunal found overwhelming evidence from search and seizure showing out-of-books cash expenses coded as "murrum" incurred by the Assessee. These included digital trial balances, WhatsApp chats, loose papers, and statements of employees and promoters. The Tribunal accepted that "murrum" was a code word for out-of-books cash expenses. However, it noted that the entire amount shown under "murrum" in trial balances could not be treated as out-of-books expenses in entirety, as some part could be material expenses. The Tribunal rejected CIT(A)'s approach of confirming addition @5% of the total "murrum" expenses, holding it contradictory to the finding that entire "murrum" expenses are not out-of-books cash expenses. The Tribunal further held that since the source of out-of-books expenses was the unaccounted scrap sale, which was already taxed on estimated profit, no separate addition on "murrum" expenses was warranted to avoid double taxation.

Key Evidence and Findings: Extensive digital evidence, including month-wise and site-wise trial balances, WhatsApp chats seeking approval for "murrum" expenses, petty cash vouchers, and statements recorded under section 132(4) corroborated the existence of out-of-books cash expenses. The Assessee admitted incurring such expenses.

Application of Law to Facts: The Tribunal applied principles of double taxation avoidance and evidentiary standards to hold that only one addition on net profit from scrap sale is appropriate, and separate addition on out-of-books expenses is not justified.

Treatment of Competing Arguments: The Tribunal rejected Assessee's contention that "murrum" expenses were material expenses, holding that evidence showed it was used as code for cash expenses. It rejected Revenue's plea to confirm addition on entire "murrum" expenses or on estimated basis. It also rejected Assessee's challenge to digital evidence admissibility in view of corroborative material.

Conclusions: The entire addition on out-of-books cash expenses ("murrum") is deleted, as these expenses are sourced from unaccounted scrap sale income already taxed on estimated profit basis.

5. Additions on Bogus Purchases under Section 37(1)

Legal Framework and Precedents: Section 37(1) allows deduction of business expenditure if wholly and exclusively incurred for business. Bogus purchases are disallowed. Judicial precedents require proof of non-genuineness and allow estimated disallowances where appropriate.

Court's Interpretation and Reasoning: The Tribunal examined the genuineness of various parties from whom purchases were disallowed. It found that for certain parties (Mahaveer Steel, Kavita Enterprises, Vijay Steel Traders, BIUM Industries Ltd., and others), no incriminating material or evidence was found during search, and the parties were found to be carrying on genuine business. The Tribunal noted that statements relied upon by AO were not furnished to Assessee nor was cross-examination allowed, making such reliance improper. It distinguished prior ITAT decisions where SOP non-compliance alone was held insufficient to disallow purchases. The Tribunal deleted 100% disallowance of purchases from Mahaveer Steel and Kavita Enterprises, and entire disallowance from Vijay Steel Traders and BIUM Industries Ltd. The Tribunal confirmed estimated disallowance @12.5% for other parties where AO had basis for suspicion. The Tribunal also reduced disallowance in some cases further based on evidence and submissions.

Key Evidence and Findings: Search reports, statements recorded, documentary evidence of purchases (invoices, e-way bills, payment proofs), and absence of adverse material against parties were considered. The Tribunal noted the absence of cross-examination opportunity on statements relied upon by AO.

Application of Law to Facts: The Tribunal applied the principle that disallowance must be based on cogent evidence and that failure to follow SOPs alone does not justify disallowance. It emphasized the need for opportunity to cross-examine witnesses whose statements are relied upon.

Treatment of Competing Arguments: The Tribunal rejected Revenue's reliance on statements not furnished for cross-examination and distinguished Supreme Court precedents where facts were different. It accepted Assessee's documentary evidence and search findings showing existence and genuineness of parties.

Conclusions: Disallowance of bogus purchases is deleted or reduced significantly for parties where no incriminating evidence was found and parties were genuine. Estimated disallowance @12.5% is upheld only where AO had reasonable basis.

6. Additions on Bogus Salary and Professional Fees

Legal Framework and Precedents: Section 37(1) disallows expenses not wholly and exclusively incurred for business. Judicial precedents recognize that salary splitting between employee and spouse may be a commercial expediency and not necessarily disallowable.

Court's Interpretation and Reasoning: The Tribunal found that salary splitting was limited to few key employees as a retention strategy. The Assessee did not claim excess salary or bogus expenses. The Tribunal held that since services were rendered by employees, and salary was split with spouses who disclosed income and paid tax, no disallowance was warranted. The Tribunal reversed AO's disallowance and CIT(A)'s partial confirmation, allowing entire salary and professional fees claimed.

Key Evidence and Findings: Statements of employees and spouses, salary records, tax returns filed by spouses, and commercial rationale were considered.

Application of Law to Facts: The Tribunal applied the test of commercial expediency and business purpose, emphasizing that Revenue cannot substitute its judgment for that of prudent businessman.

Treatment of Competing Arguments: The Tribunal rejected Revenue's argument that no services were rendered by spouses and that disallowance under section 37(1) was justified.

Conclusions: Disallowance of salary and professional fees paid to spouses is deleted in entirety.

7. Additions on Unexplained Money Entries in Cash Diary under Section 69A

Legal Framework and Precedents: Section 69A applies to unexplained money not recorded in books. Judicial precedents require that only unexplained cash receipts be added after considering explanations and corroborative evidence.

Court's Interpretation and Reasoning: The Tribunal examined the seized black Luxor diary containing cash receipts and payments recorded by promoter and family members. The Tribunal accepted Assessee's explanation that many entries represented balances carried forward ('O' and 'N'), and internal cash movements between head office and residences ('HO', 'NG', 'KG', '3 No.'), supported by cash book and FIR filed for theft at office premises. The Tribunal upheld CIT(A)'s relief given on these explanations. The Tribunal deleted additions in respect of entries without narration, holding them to be rough or dumb notes. Additions were confirmed only for few unexplained entries where no valid explanation was given. The Tribunal rejected Revenue's contention that entire diary entries should be added as unexplained money.

Key Evidence and Findings: Statements of promoters, cash books, FIR for theft, diary pages, and corroborative evidence were considered.

Application of Law to Facts: The Tribunal applied principles of explanation and corroboration, holding that unexplained money additions must be based on failure to satisfactorily explain entries.

Treatment of Competing Arguments:

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