Assessments quashed under s.153A for lack of incriminating material; improper s.153D approval, s.153C wrongly ignored
ITAT Delhi allowed the assessee's appeals and quashed the assessments framed u/s 153A. It held that the additions were made de hors any incriminating material found during the search, being based solely on a third-party statement, which is impermissible for concluded assessments in search proceedings. The Tribunal further held that, even assuming the statement could be relied on, the proper provision would be s.153C and not s.153A. Additionally, the approval u/s 153D was found to be ritualistic and non-speaking, covering multiple years and assessees in a single sanction without evidence of due application of mind, thereby vitiating the assessments.
1. ISSUES PRESENTED AND CONSIDERED
1.1 Whether assessments framed under section 153A read with section 143(3) could validly sustain additions in the absence of incriminating material found and seized during the search in the case of the assessee, where the additions were based essentially on the statement of a third party.
1.2 Whether, on the facts, any additions based solely on material or statements pertaining to a third person could be brought to tax under section 153A, instead of by following the procedure prescribed under section 153C.
1.3 Whether the approval granted under section 153D, by issuing a single, same-day and consolidated approval for multiple assessment years and two different assessees without recording application of mind, was valid and legally sustainable.
1.4 Consequentially, whether the assessment orders for the relevant assessment years stood vitiated, and whether the Revenue's appeal for the corresponding year became infructuous.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1 & 2: Validity of additions under section 153A without incriminating material and based on third-party material, and necessity of section 153C
Legal framework (as discussed)
2.1 The Tribunal referred to section 153A governing assessments pursuant to search under section 132, and to the law laid down by the Supreme Court in Principal Commissioner of Income Tax v. Abhisar Buildwell (P) Ltd., holding that in respect of completed/unabated assessment years, additions under section 153A must be based on incriminating material unearthed during search in the case of the person searched; in the absence of such incriminating material, no addition can be made under section 153A.
2.2 The Tribunal also discussed section 153C, as interpreted by various High Courts and coordinate benches, holding that where incriminating material or information pertains to a person other than the person searched, the proper course is to follow section 153C, after recording satisfaction and transferring such material, and then to frame assessments under section 153A read with section 153C in the case of such "other person."
Interpretation and reasoning
2.3 The Tribunal found, on perusal of the assessment orders and the record, that the additions in the assessee's case were made de hors incriminating material seized from the assessee during the search. The Revenue failed to point out any specific seized document or material from the assessee that formed the basis of the additions.
2.4 The Tribunal recorded that the only substantive basis for the additions was the statement on oath of one third party, namely, Mr. Raj Kumar Modi. No supporting incriminating document found from the assessee's premises in the search was cited by the Revenue.
2.5 Applying the ratio of Abhisar Buildwell, the Tribunal held that assessments under section 153A for completed/unabated years cannot sustain additions when no incriminating material pertaining to the assessee is found during search. Therefore, additions solely on the basis of such third-party statement, without seized incriminating material from the assessee, were contrary to the settled law.
2.6 The Tribunal further accepted the assessee's contention, fortified by the coordinate bench decision in Gulshan Investment Pvt. Ltd. (arising from the same search on PMC group and based on the same statement of Mr. Raj Kumar Modi), that even assuming such statement could be relied upon, any assessment based on material or statements pertaining to a third party should have been routed through the mechanism of section 153C and not under section 153A simpliciter.
2.7 The Tribunal noted the reasoning in Gulshan Investment Pvt. Ltd. and other decisions (including those in Trilok Chand Chaudhary and Om Prakash Tantia) that incriminating material or statements found in the case of another person cannot be used to make additions under section 153A in the hands of the assessee searched; the proper recourse is to section 153C, after compliance with the conditions prescribed therein, including recording of satisfaction and handing over of material.
2.8 In the present case, the Tribunal observed that no proceedings under section 153C were initiated in the assessee's case, and yet the entire foundation of the additions was a third-party statement, not incriminating material seized from the assessee.
Conclusions
2.9 The Tribunal held that the assessments were framed under section 153A de hors any incriminating material seized from the assessee during the search. Hence, in view of Abhisar Buildwell, the additions so made could not be sustained.
2.10 The Tribunal further held that, to the extent the Revenue sought to rely on the statement of a third party and material pertaining to such third party, the proper statutory route was section 153C, which was not followed. Consequently, framing assessments under section 153A on that basis was legally impermissible.
2.11 On this combined reasoning, the Tribunal allowed Ground No. 3 of the assessee's appeals and held that the assessment orders, as sustained by the first appellate authority, were liable to be set aside on this ground.
Issue 3: Validity of approval under section 153D - mechanical, consolidated, and same-day approval
Legal framework (as discussed)
3.1 The Tribunal examined section 153D, which mandates that no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in section 153A(1)(b) except with the prior approval of the Joint Commissioner.
3.2 The Tribunal relied extensively on the judgments of the jurisdictional High Court and other High Courts, particularly:
- Principal Commissioner of Income Tax v. Shiv Kumar Nayyar;
- Principal Commissioner of Income Tax v. Sapna Gupta;
- Assistant Commissioner of Income Tax v. Serajuddin & Co.;
- Principal Commissioner of Income Tax v. Anuj Bansal;
- Principal Commissioner of Income Tax v. Subhash Dabas;
wherein it was held in substance that:
(a) approval under section 153D must be granted for "each assessment year" and "each assessee" separately;
(b) such approval cannot be mechanical or a mere formality/rubber stamping; it must reflect at least a minimal indication of application of mind to the draft assessment order and material on record;
(c) the approving authority is required to verify whether the Assessing Officer has followed the required procedure and whether the draft assessment order meets the requirement of law;
(d) mechanical or perfunctory approval vitiates the assessment itself and is not a mere procedural irregularity; and
(e) in Serajuddin & Co., the High Court explicitly held that the absence of any indication of application of mind by the approving authority and mere formal approval does not satisfy the statutory mandate under section 153D; the SLP against that judgment was dismissed by the Supreme Court.
Interpretation and reasoning
3.3 The Tribunal perused the approval letter dated 30/09/2021 issued by the Additional Commissioner of Income Tax, Central Range, Meerut to the Joint Commissioner of Income Tax (OSD), Central Circle-1, Noida. On its face, the approval was granted on the same day on which it was sought, and the assessments were also passed on the same day.
3.4 The Tribunal noted that the approval letter did not contain any discussion or even a brief reference to:
- the nature or quantum of proposed additions;
- the issues involved in the draft assessment orders;
- the material or seized documents relied upon; or
- any indication that the case records or draft orders had been perused.
3.5 The Tribunal found that a single consolidated approval had been accorded covering 14 assessment years and two different assessees, without separate and specific treatment for each assessment year and each assessee.
3.6 Having regard to the reasoning in Shiv Kumar Nayyar and Sapna Gupta, the Tribunal held that section 153D requires the approving authority to apply its mind for each assessment year in respect of each assessee separately, and that a blanket or consolidated approval without any indication of independent examination does not satisfy this statutory requirement.
3.7 The Tribunal rejected the Revenue's contention that section 153D only requires existence of an approval and not application of mind, observing that the consistent judicial interpretation of section 153D, including by the jurisdictional High Court, has read into the provision the requirement of meaningful and not mechanical approval, and such interpretation is binding.
3.8 The Tribunal also rejected the argument that the challenge to approval under section 153D was belated or merely technical, in view of the judicial pronouncements treating non-compliance with section 153D as a defect going to the root of the assessment and vitiating it.
3.9 It further observed that there was no material on record indicating any prior or contemporaneous communication detailing the involvement of the approving authority in examining the seized material, draft assessments or issues in each year. In the absence of any such evidence, and in light of the same-day and consolidated nature of the approval, the Tribunal inferred that the approval bore the hallmark of "performa" approval and was mechanical and ritualistic.
Conclusions
3.10 The Tribunal concluded that:
- the approval granted under section 153D was a single, consolidated approval for multiple assessment years and two assessees;
- it was accorded on the very same day on which it was sought and on which assessments were passed; and
- it contained no indication of application of mind or perusal of draft assessment orders and records.
3.11 Applying the binding precedents of the jurisdictional High Court and other High Courts, the Tribunal held that such mechanical and perfunctory approval does not meet the statutory requirement of section 153D, and consequently, the assessments based on such approval are vitiated in law.
3.12 On this ground, the Tribunal allowed Ground No. 5 of the assessee's appeals and held that the impugned assessment orders were liable to be quashed.
Issue 4: Consequences for the assessments and the Revenue's appeal
Interpretation and reasoning
4.1 Having held that:
- the assessments under section 153A were invalidly framed de hors incriminating material and in disregard of the requirements of sections 153A and 153C; and
- the mandatory approval under section 153D was invalid as being mechanical and consolidated, thereby vitiating the assessments,
the Tribunal considered the effect of these findings on all years under appeal.
4.2 The Tribunal observed that once the assessment orders themselves are quashed on foundational legal grounds, it is unnecessary to adjudicate on the remaining grounds (including those relating to limitation, jurisdiction, merits of additions under sections 69A, 69C, treatment of share purchase consideration, etc.), as such adjudication would be purely academic.
Conclusions
4.3 The Tribunal quashed the assessment orders for Assessment Years 2013-14, 2015-16 and 2016-17. Consequently, the assessee's appeals for these years were allowed.
4.4 As the assessment order for Assessment Year 2015-16 stood quashed, the Tribunal held that the Revenue's appeal for that year, challenging relief granted by the first appellate authority, had become infructuous and accordingly dismissed the Revenue's appeal.
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