Aahan Trading Company Vs ITO (ITAT Rajkot)
Sanction After Notice Is Permission After the Act—Post-Facto Approval Cannot Rescue Reopening u/s 148
The Rajkot Bench of the ITAT has held that the statutory approval contemplated u/s 151 must be obtained before issuance of notice u/s 148. Where the AO issued the reopening notice on 29.03.2016 but the competent authority granted approval only on 30.03.2016, the jurisdictional requirement remained unfulfilled and the reassessment was void. A subsequent sanction cannot retrospectively validate a notice that was invalid when issued.
The Tribunal also observed that a sanction consisting merely of the word “Yes”, without reflecting independent consideration of the recorded reasons, was mechanical and incapable of curing the jurisdictional defect.
The assessee, Aahan Trading Company, was engaged in the business of transportation and earning commission income. The dispute before the Tribunal concerned reassessments for AYs 2009-10 & 2010-11, both completed u/s 143(3) r.w.s. 147.
For AY 2009-10, the assessment was reopened after the expiry of four years from the end of the relevant assessment year. In response to the notice u/s 148, the assessee filed its return declaring total income of ₹6,912.
The reopening was based upon information received from the Investigation Wing suggesting that the assessee had deposited cash of ₹16,82,880 in various bank accounts. During reassessment, the assessee explained that the deposits were properly recorded in its books and represented receipts from transportation business and commission activities. Supporting documents were also stated to have been furnished.
The AO rejected the explanation and made an addition u/s 69A. A striking discrepancy arose in the amount added: while the Investigation Wing’s information referred to cash deposits of ₹16.83 lakh, the AO made an addition of ₹1,67,55,880. The assessee challenged both the nature of the addition and the unexplained escalation in its amount. The CIT(A), however, sustained the assessment.
Before the ITAT, the assessee primarily challenged the very validity of the reopening. It produced the relevant records demonstrating that the notice u/s 148 had been issued on 29.03.2016, whereas the approval of the Principal CIT u/s 151 was obtained only on 30.03.2016.
Since the reopening was initiated beyond four years, the satisfaction of the specified authority was a mandatory condition to be fulfilled before the AO could issue the notice. The assessee argued that sanction obtained one day after the notice was no sanction in the eyes of law.
Reliance was placed upon the Supreme Court’s decision in ITO v. Tia Enterprises Pvt. Ltd., 167 taxmann.com 56, supporting the proposition that failure to obtain mandatory prior approval vitiates the notice and all consequential proceedings.
The Department supported the orders of the lower authorities but could not dispute the crucial chronology: notice first, approval later.
The ITAT held that s.151, as applicable to the relevant years, required the specified authority to examine the reasons recorded by the AO and record its satisfaction before issuance of notice u/s 148. Such approval was not a procedural formality capable of being completed after the event. It was a condition precedent to the AO’s assumption of jurisdiction.
On 29.03.2016, when the notice was issued, no approval existed. Therefore, the notice was invalid at its inception. Approval granted on the following day could not travel backwards and validate an act for which the AO lacked authority when it was performed.
The Tribunal also accepted the assessee’s alternative challenge to the quality of the sanction. The approval recorded by the Principal CIT merely stated “Yes” and did not reveal any independent consideration of the reasons recorded by the AO.
The ITAT emphasised that approval u/s 151 is intended to provide a meaningful supervisory safeguard against arbitrary reopening. The sanctioning authority must consider the AO’s reasons and reach the required satisfaction. A bare endorsement that does not demonstrate such application of mind reduces the statutory safeguard to an empty formality.
Thus, the approval suffered from two defects. It was chronologically late, having been granted after issuance of notice, and it was mechanical in substance, since it recorded no discernible consideration of the reasons.
Following the Supreme Court’s decision in Tia Enterprises, the Tribunal declared the notice u/s 148 invalid and quashed the reassessment for AY 2009-10. Since the assumption of jurisdiction itself failed, the ITAT found it unnecessary to adjudicate the merits of the addition u/s 69A.
The facts and jurisdictional issue for AY 2010-11 were stated to be identical. The Tribunal therefore applied its findings mutatis mutandis, set aside that reassessment as well and quashed all consequential proceedings. Both appeals were allowed.
Author’s Comments
The ruling highlights the difference between prior authorisation and subsequent ratification. Section 151 does not merely require that an approval should exist somewhere in the assessment file. It requires the approval to exist before the AO exercises the power to issue notice u/s 148.
The sequence is jurisdictionally decisive:
Reasons recorded → application of mind by the specified authority → approval u/s 151 → notice u/s 148.
Reversing the last two stages defeats the statutory safeguard. A post-facto approval cannot cure the absence of jurisdiction on the date of notice, irrespective of whether the delay is one day or several months.
The Tribunal’s comments concerning the one-word approval are also important, though the prior-approval defect was sufficient by itself to invalidate the proceedings. A bare “Yes” is not necessarily invalid in every imaginable case if the surrounding records convincingly establish due consideration. However, where the approval form and assessment records reveal no meaningful scrutiny, such an endorsement supports the inference of mechanical sanction.
The cash-deposit addition was not deleted after examining its source. The Tribunal did not decide whether the deposits represented recorded business receipts, whether s.69A was applicable, or why the AO’s addition substantially exceeded the information received. The assessments were quashed solely because the foundational notices were invalid.
For practitioners, the approval sheet and notice chronology should always be obtained and compared. The relevant enquiry is not only who granted sanction, but also when it was granted and whether the record reflects application of mind.
The enduring principle is uncompromising: permission to reopen must precede reopening. Once the jurisdictional arrow has been fired, a sanction signed the next day cannot be tied to it retrospectively.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
