Case Law Details
Khoday Ehshwarsa and Sons Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that approval given under section 153D of the Income Tax Act at the fag end of assessment in a mechanical manner and without application of mind is invalid and bad in law.
Facts- In the present case, the assessment was framed by the AO u/s. 153A r.w.s. 143(3) r.w.s. 153D of the Act vide order dated 31.3.2022 after making various additions to the total income of the assessee. The assessee before CIT-A challenged the validity of the assessment framed by the AO on various grounds. Among other grounds raised by the assessee before the learned CIT-A, one of the grounds was that the approval granted by Additional Commissioner of Income Tax for framing the impugned assessment was without the application of mind and consequently the impugned assessment framed by the AO is bad in law. However, CIT-A rejected the ground raised by the assessee.
Being aggrieved, the assessee has challenged the order of CIT-A on various grounds including the validity of the assessment order being bad in law.
Conclusion- It is a trite law that whenever any statutory obligation is casted upon any statutory authority, such authority is required to discharge its obligation not mechanically, not even formally but after due application of mind.
Hon’ble Delhi HC in the case of PCIT vs. Anuj Bansal has held that approval given u/s 153D has been granted in a mechanical manner and without application of mind and thus it is invalid and bad in law and consequently vitiated the assessment order for want of valid approval u/s 153D of the Act.
Held that the approval was obtained by the AO at the fag end of the assessment from the higher authorities which was subsequently granted in the mechanical manner in a day and without application of mind.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals filed by the assessee are against the orders passed by the ld. CIT(A)-11, Bangalore dated 27/03/2024 in DIN No. ITBA/APL/M/250/2023-24/1063445615(1) for the assessment year 202021 and dated 30/03/2024 in DIN No. ITBA/APL/M/250/2023-24/ 1063684239(1) for the assessment year 2022-23.
First, we take up ITA No. 1079/Bang/2024, an appeal by the assessee for the assessment year 2020-21.
2. In the present case, the assessment was framed by the AO under section 153A r.w.s. 143(3) r.w.s. 153D of the Act vide order dated 31.3.2022 after making various additions to the total income of the assessee. The assessee before the Ld. CIT-A challenged the validity of the assessment framed by the AO on various grounds. Among other grounds raised by the assessee before the learned CIT-A, one of the grounds was that the approval granted by the ld. Additional Commissioner of Income Tax for framing the impugned assessment was without the application of mind and consequently the impugned assessment framed by the AO is bad in law. However, the ld. CIT-A rejected the ground raised by the assessee vide his order dated 27-032024.
3. Being aggrieved, the assessee has challenged the order of the ld. CIT-A before us on various grounds including the validity of the assessment order being bad in law.
4. The ld. AR before us filed a paper book running from pages 1 to 663 and synopsis of the arguments having 15 pages containing various contentions. Among other contentions, it was submitted by the learned AR that the approval of the ld. Additional CIT obtained under the provisions of section 153D of the Act was without the application of mind and therefore the assessment framed is not sustainable. According to the Ld. AR all the draft orders involving 6 assessment years i.e. assessment years 2015-16 to 2020-21, were sent to the ld. additional CIT for approval vide letter dated 30 March 2022 which were approved on the next date i.e. 31.3.2022. The assessment order for the AY 20202021 contained only 62 pages involving complex issues with respect to the business income and capital gains transaction but the same was approved by the ld. Additional Commissioner of Income Tax on the next date which evidence that the approval was granted in mechanical manner. Thus, in the absence of proper approval under section 153D of the Act, the assessment order is bad in law. The ld. AR in support of his contentions has relied on several orders/ judgments.
5. On the other hand, the ld. DR before us filed the written submission dated 02/09/2024 running into 5 pages. It was contended that the ld. additional Commissioner of income tax applied his mind right from the beginning when the appraisal report was received. As such the ld. Additional CIT has approved the draft assessment order after due application of mind.
5.1 The ld. AR also filed a rejoinder running from pages 1 to 6 vide letter dated 6 September 2024 and submitted that the application of mind by the ld. additional Commissioner of income tax under the provisions of section 153D of the Act has no relevance with the appraisal report submitted by the investigation wing. The ld. AR in support of his contention relied on the order of Delhi Tribunal in the case of Shri Shiv Kumar Nayyar versus ACIT in ITA No. 1282/DEL/202 vide order dated 26 July 2023. It was accordingly submitted that there was no application of mind while granting the approval by the ld. Additional AAIT under section 153D of the Act.
6. We have heard the rival contentions of both the parties and perused the materials available on record. The provisions of section 153D of the Act in the Search Assessment regime mandate that prior approval is necessary for a valid assessment under section 153A of the Act by AO below the rank of JCIT. For the sake of brevity, the relevant provisions of Section 153D of the Act are reproduced herein below:
“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 clause (b) of section 153A or the assessment year referred to in clause (b) of sub-section (1) of section 153B, except with the prior approval of the Joint Commissioner.”
6.1 The Legislative intent of the provisions of Section 153D can be gathered from the CBDT Circular No. 3 of 2008, dated 12-3-2008 which read as under:
“50. Assessment of search cases Orders of assessment and reassessment to be approved by the Joint Commissioner.
50.1 The existing provisions of making assessment and reassessment in cases where search has been conducted under section 132 or requisition is made under section 132A does not provide for any approval for such assessment. 50.2 A new section 153D has been inserted to provide that no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner except with the previous approval of the Joint Commissioner. Such provision has been made applicable to orders of assessment or reassessment passed under clause (b) of section 153A in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A. The provision has also been made applicable to orders of assessment passed under clause (b) of section 153B in respect of the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A.
50.3 Applicability-These amendments will take effect from the 1st day of June, 2007.”
6.2 From the perusal of the section 153D of the Act read with the CBDT Circular No. 3 of 2008, dated 12-3-2008, the legislative intent can be gathered so far as that the legislature in its highest wisdom made it compulsory that the assessments of search cases should be made with the prior approval of superior authority. As such, the higher authority should apply their mind on the materials gathered during search and other relevant circumstances based on which the officer is making the assessment. Furthermore, the AO should frame the assessment after due application of mind after evaluating the seized materials. Thus, the superior authority has to approve the Assessment order. The object of entrusting the duty of Approval of assessment in search cases is that the Joint CIT, with his experience and maturity of understanding should scrutinize the seized documents and any other material forming the foundation of Assessment. It is a trite law that whenever any statutory obligation is casted upon any statutory authority, such authority is required to discharge its obligation not mechanically, not even formally but after due application of mind.
6.3 Thus, the obligation of granting Approval by the superior authority to high tax quantum assessment orders in search and seizure assessments acts as an inbuilt protection to the taxpayer against arbitrary or unjust exercise of discretion by the AO.
6.4 The Hon’ble Delhi High Court in the case of PCIT Vs. Anuj Bansal reported in 165 taxmann.com 2 has observed as under:
13. In another words, it was emphasised that the approval was granted without examining the assessment record or the search material. The relevant observations made in this behalf by the Tribunal in the impugned order are extracted hereafter:
“17.1 However, in the present case, we have no hesitation in stating that there is complete non-application of mind by the Learned Addl. CIT before granting the approval. Had there been application of mind, he would not have approved the draft assessment order, where the returned income of Rs. 87,20,580/-. Similarly, when the total assessed income as per the AO comes to Rs. 16,69,42,560/-, the Addl. CIT could not have approved the assessed income at Rs. 1,65,07,560/- had he applied his mind. The addition of Rs. 15,04,35,000/- made by the AO in the instant case is completely out of the scene in the final assessed income shows volumes.
17.2 Even the factual situation is much worse than the facts decided by the Tribunal in the case of Sanjay Duggal (supra). In that case, at least the assessment folders were sent whereas in the instant case, as appears from the letter of the Assessing Officer seeking approval, he has sent only the draft assessment order without any assessment records what to say about the search material. As mentioned earlier, there are infirmities in the figures of original return of income as well as total assessed income and the Addl. CIT while giving his approval has not applied his mind to the figures mentioned by the AO. Therefore, approval given in the instant case by the Addl. CIT, in our opinion, is not valid in the eyes of law. We, therefore, hold that approval given u/s 153D has been granted in a mechanical manner and without application of mind and thus it is invalid and bad in law and consequently vitiated the assessment order for want of valid approval u/s 153D of the Act.
In view of the above discussion, we hold that the order passed u/s 153A r.w.s. 43(3) has to be quashed, thus ordered accordingly. The ground raised by the Assessee is accordingly allowed”.
14. In this appeal, we are required to examine whether any substantial question of law arises for our consideration.
15. Having regard to the findings returned by the Tribunal, which are findings of fact, in our view, no substantial question of law arises for our consideration. The Tribunal was right that there was absence of application of mind by the ACIT in granting approval under Section 153D. It is not an exercise dealing with a immaterial matter which could be corrected by taking recourse to Section 292B of the Act.
16. We are not inclined to interdict the order of the Tribunal.
17. Accordingly, the appeal is closed.
6.5 The above view taken by the Hon’ble Delhi High Court in the case of PCIT Vs. Anuj Bansal reported in 165 taxmann.com 2 has been affirmed by the Hon’ble Apex Court reported in 165 taxmann.com 3 in the SLP filed by the Revenue.
6.6 In the light of the above stated discussion, there remains no ambiguity to the fact that there has to be an application of mind of the higher authority in granting the approval under the provisions of section 153D of the Act for the assessment in the search proceedings.
6.7 Now coming to the facts of the case on hand, we find important at the threshold, necessary to refer the observations made by the ld. CIT-A in his order as detailed below:
i. There is no manner prescribed under the Act for granting the approval under section 153D of the Act by the Range head.
ii. There is no format prescribed under the Act or the rules for taking the approval from the range head.
iii. The provisions of section 153D only requires that the AO before framing the assessment will take the approval from the range head which is nothing but an administrative job to be performed.
iv. There is no requirement under the provisions of law for granting any opportunity to the assessee before approving the assessment order framed by the AO.
v. The letter written by the AO for getting the approval from the range head, was supported along with detailed checklist indicating the statements, seized materials and submissions filed by the assessee. Thus, the additional CIT while granting approval under section 153D of the Act has examined the draft order, written submission, seized material, sworn statement etc.
6.8 Admittedly, there is no form, or the manner specified under the Act in which the approval needs to be obtained by the AO from the ld. Joint Commissioner which has been specified, but the approval cannot be treated as mere administrative approval as observed by the learned CIT-A as evident in the light of the case laws cited above. The application of mind of the joint Commissioner is sine qua non while granting the approval under the provisions of section 153D of the Act.
6.9 Now the controversy arises whether the ld. Additional Commissioner applied his mind while granting the approval under section 153D of the Act. At the threshold, it can be inferred from the finding of the ld. CIT-A, discussed above, that there was no application of mind. On the contrary, according to the ld. CIT-A, the application of mind was not necessary while granting the approval under the provisions of section 153D of the Act.
6.10 Our view is further fortified about the nonapplication of mind by the ld. additional Commissioner of income tax while granting the approval under section 153D of the Act by the fact that the AO in the letter dated 30-03-2024 while taking the approval have enclosed the draft assessment orders and the checklist. On perusal of the letter of the AO dated 30 March 2022, it is mentioned that “Addition made in 143(3) orders dated 29.12.2017” whereas the assessment has been made by the AO vide order dated 31-03-2022 and that too under section 153A r.w.s. 143(3) r.w.s. 153D of the Act.
6.11 Likewise, the letter written by the AO for the approval under section 153D of the Act dated 30 March 2022 does not refer to any seized materials, statements, written submissions of the assessee except the checklist and draft assessment order whereas the ld. CIT-A in his order had made reference that all these documents have been duly verified by the Additional Commissioner of income tax while granting the approval under section 153D of the Act. The relevant observation of the ld. CIT-A to this effect reads as under:
“5.1.4 It is apparent from the above that due procedure laid down under Section 153D of the Act has been followed by the AO as well as the Addl.CIT and therefore as discussed in the preceding paragraphs the conditions for giving approval ifs 153D have been met. Even otherwise it is evident from the above letter of the AO that a draft order for AY 2020-21 was submitted along with a detailed checklist which indicates that statements, seized materials and submissions filed by the appellant have been considered while preparing the draft order and same are sent for approval, made by the appellant along with a checklist. The Addl.C11` granted his approval u/s 153D of the Act, after examining the draft order, written submission of the appellant, seized material, sworn statement along with the detailed checklist submitted by the AO. Thus, there is enough indication of application of mind by the very fact that the Addl.CIT has given approval after going through the draft order, written submission of the appellant, seized material, sworn statement and the detailed checklist. The fact that the approval_ granted u/s 153D by the Addl.CIT does not mention the seized material and statements recorded does not imply that there has been no application of mind by the Addl.CIT. Hence the contention of the appellant. that the Addl.CIT has passed the order in a mechanical manner without application of mind is without basis and deserves to be rejected.”
6.12 The above observation of the ld. CIT-A does not consonance with the letter written by the AO dated 30 March 2022 for taking the approval from the ld. Additional Commissioner of Income Tax under the provisions of section 153D of the Act. As such, the above finding of the ld. CIT-A does not match with the letter written by the AO for seeking the approval under section 153D of the Act. All these details in fact strongly indicate that there was no application of mind by the ld. additional Commissioner of income tax while granting the approval under section 153D of the Act in the given facts and circumstances.
6.13 Besides the above, we note that the checklist enclosed along with the letter of the AO suffers from graving errors as highlighted below:
i. The assessee filed original return of income dated 15 February 2021 whereas the checklist says the original return was filed under section 139(1)/139(4) of the Act dated 9th of January 2021.
ii. As per the checklist, the assessee has declared return income of ₹ 7,00,24,760.00 whereas the assessee has declared business loss of ₹ 3,52,59,770.00 only.
iii. In the checklist, the reference was made to the provisions of section 153C of the Act regarding the warrant of the search person and recording of satisfaction by the AO of the search person and satisfaction recorded by the AO of the other person, satisfaction was recorded with reference to the seized material. Likewise, whether the return of income was filed for the year under consideration in response to the notice issued under section 153C of the Act.
6.14 Upon cumulative analysis of the facts stated above, it is transpired that the checklist was prepared considering the assessee on hand as the person other than search person and the proceedings were initiated under the provisions of section 153C of the Act. However, all these information containing in the checklist are far from the reality for the reasons as discussed above. All these facts clearly establish that the approval was obtained by the AO at the fag end of the assessment from the higher authorities which was subsequently granted in the mechanical manner in a day and without application of mind.
6.15 Regarding the contention of the ld. DR that the matter of valid approval under section 153D should not be taken up for hearing on the ground that the assessee has also raised issue of validity of assessment in the absence of DIN on 153D approval and the issue relating to the DIN is pending before the Hon’ble Supreme Court. As such, the Hon’ble Supreme Court stayed finding of Hon’ble Delhi High Court in the case of CIT v. BrandixMauritiusHoldingsLtd. [2023] 149 taxmann.com 238/293 Taxman 385/456 ITR 34 dated 20-3-2023 in ITA 163 of 2023, wherein the Division Bench of the Delhi High Court has held that in the absence of DIN any communication, order should be treated invalid. In this regard it is important to note that all other issues raised by the assessee including DIN are open and we are not going to decide any of it at this stage as the assessee has succeeded on of the ground challenging the validity of the assessment on account of mechanical approval under section 153D of the Act which we have allowed in assessee’s favour. In doing so we draw support and guidance from the judgment of Hon’ble Kerala High Court in the case of Kishore Thanaji Hasbe vs. ACIT reported in 162 taxmann.com 436. In the said case issue raised before the Hon’ble Kerala High Court includes the validity of assessment on account of absence of DIN. The Hon’ble Bench of Kerala High Court left the issue of DIN open in view of stay by the Hon’ble Supreme court as discussed above but decided the other relevant issue. With this observation, the impugned ground of appeal raised by the assessee challenging the validity of the assessment order on account of non-application of mind/mechanical approval by the ld. additional Commissioner of income tax while granting the approval under section 153D of the Act is thereby allowed. Hence ground of appeal of the assessee is allowed.
7. In the result, the appeal filed by the assessee is partly allowed.
Coming to ITA No. 1080/Bang/2024, an appeal by the assessee.
8. In the present case, the appeal was filed by the assessee against the intimation generated u/s 143(1) of the Act dated 4/11/2022 before the ld. CIT(A) with the delay of 395 days which was not condoned by the ld. CIT(A). Thus, the appeal filed by the assessee was dismissed by the ld. CIT(A) as non-maintainable.
9. Being aggrieved by the order of ld. CIT(A), the assessee filed an appeal before us. The ld. AR before us submitted that the assessee was subject to a search under section 132 of the Act dated 9/2/2024 and, therefore, the assessments for the asst. years 2015-16 to 2020-21 were completed u/s 153A r.w.s. 153(3) of the Act. As such, the assessee was under the impression that the year in dispute should be picked up under scrutiny as per the Central Circle norms but the same did not happen.
10. Furthermore, there was no addition made to the total income of the assessee in the intimation generated u/s 143(1) of the Act. However, there was certain income offered to tax by the assessee in the year under consideration but the same was added to the total income of the assessee in the assessment year 2020-21 which is under challenge. Thus, the appeal was filed against the intimation generated u/s 143(1) of the Act to avoid the double addition if the action of the AO for the assessment year 2020-21 is upheld. Thus, the ld. AR prayed that it is a fit case where the delay in filing the appeal deserves to be condoned so as to avoid double addition of income, which is also undesirable under the provisions of law.
11. Besides the above, the ld. AR also submitted that the Consultant was busy in filing the GST return of the assessee group along with the preparation of tax audit report, which has resulted in delay in filing the impugned against the intimation generated u/s 143(1) of the Act.
12. It was further submitted that the Managing Partner of the group Shri KL Swamy was also pre-occupied with various critical, time sensitive, legal, and administrative responsibilities, including arbitration and court proceedings, which were going on before various forums and the same has also attributed to the delay. In view of the above, the ld. AR prayed to set aside the issue to the ld. CIT(A) with the direction to condone the delay in filing the appeal by the assessee and adjudicate the issue on merit.
13. On the other hand, the ld. DR did not raise any serious objection if the direction given to the ld. CIT(A) for the condonation of the delay and adjudication of the case on merit.
14. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, there was no addition made to the total income of the assessee in the intimation generated u/s 143(1) of the Act. As such, there was no grievance to the assessee for the year in dispute. But what we find is this that the assessee has preferred an appeal to keep the proceedings pending in view of the fact that if any addition is sustained in the assessment order 2020-21 relating to joint development agreement, then it will certainly lead to the double addition which is not desirable under the provisions of the Act. Thus, we find force in the argument of the ld. Counsel for the assessee that it is a fit case where the delay in filing the appeal by the assessee deserved to be condoned. Accordingly, we condone the delay occurred in filing the appeal by the assessee before the ld. CIT(A) and set aside the issue to the file of the ld. CIT(A) for fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
15. In the result, the appeal filed by the assessee is hereby allowed for statistical purposes.
16. In the combined result, the appeal filed by the assessee in ITA No. 1079/Bang/2024 is hereby partly allowed and ITA No. 1080/Bang/2024 is hereby allowed for statistical purposes.
Order pronounced in court on 20th day of September, 2024
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