Assessment order liable to set aside, if JCIT approval is without application of mind

Brief of the case

In the case of Smt. Shreelekha Damani, vs. The DCIT (OSD-1)CR-7 ITAT has held that In our considered opinion, the power vested in the Joint Commissioner/Addl Commissioner to grant or not to grant approval is coupled with a duty. The Addl Commissioner/Joint Commissioner is required to apply his mind to the proposals put up to him for approval in the light of the material relied upon by the AO. The said power cannot be exercised casually and in a routine manner. Hence, assessment order passed after taking so called approval is liable to be set a side.

Facts of the case

The case are that a search and seizure action u/s. 132 of the Act was carried out on 16.10.2008 and on subsequent dates on Simplex Group of Companies and its Associates. The Office/residential premises of the company and its Directors/connected persons were also covered. Simplex Group is engaged in the business of Reality, paper, Textile and Finance. On the basis of the incriminating documents/books of account found during the course of search and seizure operation, assessment was made u/s. 143(3) of the Act r.w. Sec. 153A and as per the endorsement on page-11 of the assessment order this order is passed with the prior approval of the Addl. Commissioner of Income Tax, Central Range-7, Mumbai.

The assessee has filed an appeal before ITAT

Issue

1. On the facts and in the circumstance of the case and in law the CIT(A) ought to have held that the AO had not complied with the provisions of Sec. 153D of the Act and hence the assessment under section 153A of the Act is bad in law.

2. On the facts and in the circumstance of the case and in law the CIT(A) ought to have held the assessment order u/s. 153A is non est and not in accordance with law and ought to have set aside the assessment.

Main ground, which is additional ground, is against this endorsement in the assessment order as the claim is that the Assessing Officer has not complied with the provisions of Sec. 153D and hence the assessment made u/s. 153A of the Act is bad in law.

Assessee’s contention

1. That the so called approval brought on record cannot be considered as an approval within the frame work of the provisions of Sec. 153D of the Act.

2. That the approval granted by the Addl CIT is devoid of application of mind and by any stretch of imagination the order made u/s. 143(3) r.w. Sec. 153A of the Act cannot be said to be made after receiving the approval as per the provisions of Sec. 153D of the Act. The entire arguments/submissions of Ld. Shri Mistry revolved around this approval letter dated 31.12.2010.

Revenue’s Contention

1. That the AO has made the assessment order after getting the approval from the Range Addl. CIT and therefore the mandate of Sec. 153D of the Act has been fulfilled and there is no error in law and the assessment is to be upheld. It is the say of the Ld. DR that the issues raised vide additional ground require interpretation and therefore the Tribunal should not take any interpretation which would defeat the provisions of the law.
2. The ld. Departmental Representative has strongly relied upon the decision of the Tribunal Mumbai Bench in the case of Rafique Abdul Hamid Kokani Vs DCIT 113 Taxman 37, Hon’ble High Court of Karnataka in the case of Rishabchand Bhansali Vs DCIT 136 Taxman 579 and Hon’ble High Court of Madras in the case of Sakthivel Bankers Vs Asstt. Commissioner 124 Taxman 227.

Tribunal decision / observations

1. The contents of this approval are “res ipsa Loquiter” in as much as the language is speaking for itself. The Addl CIT says that the draft order was placed before him on 31.12.2010. He further says that there was no much time left to analyze the issue of draft order on merit, therefore, the said order is approved as it is. The approval is also dated 31.12.2010.

2. The issue which we have to decide is can this approval be treated as fulfilling the mandate of the provisions of Sec. 153D of the Act vis-àvis the legislative intent of inserting the said section in the statute. Sec. 153D read as under:

“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.

Provided that nothing contained in this section shall apply where the assessment or reassessment order, as the case may be, is required to be passed by the Assessing Officer with the prior approval of the Commissioner under sub-section (12) of section 144BA.”

3. The Legislative intent 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.

4. The Legislative intent is clear inasmuch as prior to the insertion of Sec.153D, there was no provision for taking approval in cases of assessment and reassessment in cases where search has been conducted. Thus, the legislature wanted the assessments/reassessments of search and seizure cases should be made with the prior approval of superior authorities which also means that the superior authorities should apply their minds on the materials on the basis of which the officer is making the assessment and after due application of mind and on the basis of seized materials, the superior authorities have to approve the assessment order.
5. As per the provision Sec. 142(2A) also the AO may direct the assessee to get the accounts audited by an Accountant with the previous approval of the Principal Chief Commissioner or Chief Commissioner. This provision has been elaborately considered by the Hon’ble Supreme Court in the case of Sahara India Vs CIT 169 Taxman 328 wherein at para-6, the Hon’ble Supreme Court observed as under:

 “A bare perusal of the provisions of sub-section (2A) of the Act would show that the opinion of the Assessing Officer that it is necessary to get the accounts of assessee audited by an Accountant has to be formed only by having regard to: (i) the nature and complexity of the accounts of the assessee; and (ii) the interests of the revenue. The word “and” signifies conjunction and not disjunction. In other words, the twin conditions of “nature and complexity of the accounts” and “the interests of the revenue” are the prerequisites for exercise of power under section 142(2A) of the Act. Undoubtedly, the object behind enacting the said provision is to assist the Assessing Officer in framing a correct and proper assessment based on the accounts maintained by the assessee and when he finds the accounts of the assessee to be complex, in order to protect the interests of the revenue, recourse to the said provision can be had. The word “complexity” used in section 142(2A) is not defined or explained in the Act. As observed in Swadeshi Cotton Mills Co. Ltd. v. CIT [1988] 171 ITR 634 1 (All.), it is a nebulous word. Its dictionary meaning is: “The state or quality of being intricate or complex or that is difficult to understand. However, all that is difficult to understand should not be regarded as complex. What is complex to one may be simple to another. It depends upon one’s level of understanding or comprehension. Sometimes, what appears to be complex on the face of it, may not be really so if one tries to understand it carefully.” Thus, before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the Assessing Officer to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. But opinion required to be formed by the Assessing Officer opinion required to be formed by the Assessing Officer for exercise of power under the said provision must be based on objective criteria and not on the basis of subjective satisfaction. There is no gainsaying that recourse to the said provision cannot be had by the Assessing Officer merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor. Similarly, the requirement of previous approval of the Chief Commissioner or the Commissioner in terms of the said provision being an inbuilt protection against any arbitrary or unjust exercise of power by the Assessing Officer, casts a very heavy duty on the said high ranking authority to see to it that the requirement of the previous approval, envisaged in the section is not turned into an empty ritual. Needless to emphasise that before granting approval, the Chief Commissioner or the Commissioner, as the case may be, must have before him the material on the basis whereof anopinion in this behalf has been formed by the Assessing Officer. The approval must reflect the application of mind to the facts of the case.”

Thus, even the Hon’ble Supreme Court has clearly laid down that the approval must reflect the application of mind to the facts of the case.

6. Similarly, the Hon’ble High Court of Calcutta in the case of Peerless General Finance & Investment Co. Ltd. Vs DCIT 236 ITR 671 has made the following observations which are pertinent to the facts of the case in hand before us.

An argument has been advanced to the effect that by making such a nomination, approval will be deemed to have been granted. The answer to the said contention must be rendered in the negative. The Chief Commissioner of Incometax before granting such approval must have before him the materials on the basis whereof an opinion had been formed. A prior approval can be granted only when the materials for appointment of the extraordinary procedure is required to be taken by the Assessing Officer. The Assessing Officer, therefore, was required to place all materials before the Commissioner of Income-tax or the Chief Commissioner of Income- tax, as the case may be, to show that he intends to take recourse to the said provision having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue. No such materials had been placed before the Chief Commissioner of Income-tax.

It further appears that even no previous approval was sought for but merely a proposal was placed for perusal of the Chief Commissioner of Income-tax and for appointment of a special auditor. The Chief Commissioner of Income-tax, therefore, did not apply his mind at all as regards the prerequisite for grant of previous approval and mechanically appointed Sri G. P. Agarwal, as a special auditor. The said order depicts a total non-application of mind on the part of the Assessing Officer as also the Chief Commissioner of Income-tax.”

7. We have carefully perused the decisions placed on record by the Ld. Dr. We find that all the decisions relied upon by the Ld. DR are misplaced inasmuch as all these decisions relate to the issue whether the Joint CIT/CIT has to give an opportunity of being heard to the assessee before granting the approval. This is not the issue before us as the Ld. Counsel has never argued that the assessee was not given any opportunity of being heard. These decisions therefore would not do any good to the Revenue.
8. Similarly, decision given by Tribunal Madras Bench in the case of Kirtilal Kalidas & Co. Vs DCIT 67 ITD 573, Allahabad Bench of the Tribunal in the case of Verma Roadways Vs ACIT 75 ITD 183, Tribunal, Mumbai Bench in the case of Shri Amarlal Bajaj in ITA No. 611/M/2004 and Hon’ble High Court of Delhi Bench in the case of United Electrical Co. 258 ITR 317 were considered.
9. In the instant case the Addl. Commissioner has showed his inability to analyze the issues of draft order on merit clearly stating that no much time is left, inasmuch as the draft order was placed before him on 31.12.2010 and the approval was granted on the very same day. Considering the factual matrix of the approval letter, we have no hesitation to hold that the approval granted by the Addl. Commissioner is devoid of any application of mind, is mechanical and without considering the materials on record.
10. In our considered opinion, the power vested in the Joint Commissioner/Addl Commissioner to grant or not to grant approval is coupled with a duty. The Addl Commissioner/Joint Commissioner is required to apply his mind to the proposals put up to him for approval in the light of the material relied upon by the AO. The said power cannot be exercised casually and in a routine manner. We are constrained to observe that in the present case, there has been no application of mind by the Addl. Commissioner before granting the approval. Therefore, we have no hesitation to hold that the assessment order made u/s. 143(3) of the Act r.w. Sec. 153A of the Act is bad in law and deserves to be annulled.