2025 (12) TMI 693 - AT - Income Tax

Assessment quashed as 153D approval invalid for ignoring CBDT Digital Evidence Manual in electronic data-based case

The ITAT Delhi (AT) allowed the assessee's appeal, holding the approval granted u/s 153D invalid for non-application of mind. The authority had relied on ... Validity of approval granted u/s 153D - whether granted in mechanical and arbitrary manner without application of mind? - HELD THAT:- Where electronic evidences are to relied the Digital Evidence Investigation Manual, 2014 (hereinafter called ‘the Manual’) of the Central Board of Direct Taxes needs to be adhered to and if same is not then the approval granted u/s.153D of the Act would reflect non application of mind. We are inclined to sustain ground as raised by the assessee and hold the approval granted u/s. 153D of the Act to be not in accordance with law. The appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the approval granted under section 153D of the Income-tax Act, 1961, for the assessment framed under section 153C/143(3), was mechanical and without application of mind, thereby vitiating the assessment. 1.2 Whether the reliance on electronic/digital evidence, without proper verification and without adherence to the CBDT Digital Evidence Investigation Manual, impacted the legality and validity of the approval under section 153D. 1.3 Consequentially, whether the impugned assessment order and the additions made therein, including the addition towards alleged unrecorded investment in land, could stand in law. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity and nature of approval under section 153D Legal framework 2.1 The Tribunal noted that the assessment for the relevant year was framed under section 153C/143(3) pursuant to search action, and that prior approval under section 153D from the Range Head (Additional Commissioner of Income Tax) was mandatory. The first appellate authority treated such approval as an administrative act which did not adjudicate upon the rights and obligations of the assessee, relying on a High Court decision rendered in the context of section 158BG. Interpretation and reasoning 2.2 The Tribunal examined the approval letter dated 04.03.2021 which covered multiple assessment years (AY 2012-13 to AY 2018-19) and contained the expression that approval was granted to draft assessment orders 'as amended'. It found that this phrase was ambiguous, and there was nothing on record to show any communication or process indicating when or how such amendments were made or examined by the approving authority. 2.3 The Tribunal noted that the approval letter also recorded that the Assessing Officer had certified having perused and verified data seized in electronic format and working copies having certified hash values, and that the approving authority had accepted this certification without any indication of independent verification or scrutiny. 2.4 Referring to a coordinate bench decision in a similar factual situation, the Tribunal adopted the reasoning that the use of the term 'as amended' without explanation, coupled with absence of material indicating independent consideration of the draft orders, showed that the approval lacked demonstrable application of mind. 2.5 The Tribunal further referred to judicial precedents which held that: (i) approval under section 153D is mandatory for each assessment year separately; (ii) such approval, although internal, cannot be a mere formality; (iii) the approving authority must apply an independent mind to the material for 'each assessment year' and 'each assessee'; and (iv) mechanical approval vitiates the assessment. 2.6 The Tribunal clarified that the decision relied upon by the first appellate authority, which characterized such approval as administrative, was in the context of the requirement of granting hearing before approval, and did not dispense with the requirement of real and demonstrable application of mind by the approving authority under section 153D. Conclusions 2.7 The Tribunal held that the approval granted under section 153D in the present case was not in accordance with law, as it was accorded in a mechanical manner without adequate indication of independent examination or thought process by the approving authority. Consequently, ground no. 2 of the assessee was sustained. Issue 2: Reliance on electronic/digital evidence and adherence to CBDT Digital Evidence Investigation Manual Legal framework 2.8 The Tribunal drew upon a coordinate bench decision which had elaborated on the necessity to comply with the CBDT Digital Evidence Investigation Manual, 2014, particularly when assessments are substantially based on electronic/digital evidences seized during search. 2.9 It noted that the Manual contained directions regarding handling, verification, and annexing of digital evidence to assessment orders, and that such directions, though debated as to whether they strictly fall under section 119, could not be ignored by the Assessing Officer or by the approving authority when granting approval under section 153D. Interpretation and reasoning 2.10 The Tribunal observed that in cases involving multiple electronic evidences from multiple digital devices, the approving authority, before granting approval, must ensure that search and post-search procedures and the assessment process comply with the Board's directions in the Manual. 2.11 In the present matter, the approval letter explicitly relied on the Assessing Officer's certification regarding electronic data and hash values and did not state that the approving authority had itself examined the electronic evidence or tested its relevancy and admissibility in accordance with law and the Manual. 2.12 Relying on earlier judicial pronouncements, the Tribunal emphasized that mere acceptance of the Assessing Officer's certification, without independent verification or recording of any thought process about the handling and legal sufficiency of digital evidence, leads to the conclusion that the approval was mechanical. Conclusions 2.13 The Tribunal held that the excessive and uncritical reliance by the approving authority on the Assessing Officer's certification regarding electronic evidence, without demonstrable adherence to the CBDT Digital Evidence Investigation Manual or independent scrutiny, further corroborated that the approval under section 153D suffered from non-application of mind. Issue 3: Effect of invalid approval under section 153D on assessment and additions Interpretation and reasoning 2.14 The Tribunal, following higher judicial authority and coordinate bench decisions, reiterated that compliance with section 153D is not a mere procedural formality and that mechanical or invalid approval vitiates the assessment order itself. 2.15 Since the approval under section 153D was found to be not in accordance with law, the foundation of the assessment under section 153C/143(3) stood invalidated. As a result, the additions made, including the disputed addition relating to alleged unrecorded investment in land, could not survive. Conclusions 2.16 The Tribunal allowed the assessee's appeal by holding the assessment to be bad in law due to invalid approval under section 153D and, as a corollary, dismissed the Revenue's appeal on the additions made in the impugned assessment.