2021 (4) TMI 533 - AT - Income Tax

Legality of approval granted by the designated superior authority u/s 153D - approval granted by the superior authority in mechanical manner or not? - contention on behalf of the assessee that approval granted u/s 153D does not meet the requirement of law and hence assessment orders passed in consequence of such non-est approval is a nullity in law - HELD THAT - The approval granted under section 153D of the Act should necessarily reflect due application of mind and if the same is subjected to judicial scrutiny, it should stand for itself and should be self-defending. There are long line of judicial precedents which provides guidance in applying the law in this regard. At the cost of repetition, it may be reiterated that in the instant case, approving authority did not mention anything in the approval memo towards his/ her process of deriving satisfaction so as to exhibit his/her due application of mind. From the said approval, it can be easily inferred that the said order was approved, solely relying upon the implied undertaking obtained from the Assessing Officer in the form of draft assessment order that AO has taken due care while framing respective draft assessment orders and that all the observations made in the appraisal report relating to examination / investigation of seized material and issues unearthed during search have been statedly considered by the AO seeking approval. Thus, the sanctioning authority has, in effect, abdicated his/ her statutory functions and delightfully relegated his/her statutory duty to the subordinate AO, whose action the Additional CIT, was supposed to supervise. The addl. CIT in short appears to have adopted a short cut in the matter and an undertaking from AO was considered adequate by him/ her to accord approval in all assessments involved. Manifestly, the Additional CIT, without any consideration of merits in proposed adjustments with reference to appraisal report, incriminating material collected in search etc. has proceeded to grant a simplicitor approval. This approach of the Additional CIT, Central has rendered the Approval to be a mere formality and can not be countenanced in law. Very recently, the co-ordinate bench in Sanjay Duggal ors 2021 (1) TMI 909 - ITAT DELHI has echoed the view after a detailed analysis of similar facts and also expressed a discordant note on such mechanical exercise of responsibility placed on designated authority under section 153D of the Act. Hence we find considerable force in the plea raised by the Assessee against maintainability of hollow approval under S. 153D totally devoid of any application of mind. The approval so granted under the shelter of section 153D, does not, in our view, pass the test of legitimacy. The Assessment orders of various assessment years as a consequence of such inexplicable approval lacks legitimacy. Consequently, the impugned assessments relatable to search in captioned appeals are non est and a nullity and hence quashed. In view of prima facie merits found in the legal objections, We do not consider it expedient to look into the aspects on merits of additions/ disallowance. Estimation of income - Bogus purchases - HELD THAT - In parity, the findings of the co-ordinate bench in assessees own case in earlier would apply mutatis mutandis in the present cross appeals. Accordingly, the AO is directed to restrict the disallowance/ addition to 4% of the alleged bogus purchases similar to Assessment Year 2010-11.

Summary

Issues Involved:
1. Legitimacy of approval under Section 153D of the Income Tax Act.
2. Admissibility of additional grounds of appeal.
3. Validity of search assessments.
4. Disallowance of alleged non-genuine purchases.

Issue-wise Detailed Analysis:

1. Legitimacy of Approval under Section 153D:
- The primary legal issue in all the appeals and cross objections was the legitimacy of the approval granted under Section 153D of the Income Tax Act. The assessee contended that the approval was granted in a mechanical manner without proper application of mind by the designated authority.
- The Tribunal noted that the Assessing Officer (AO) forwarded the draft assessment orders for multiple years to the Additional Commissioner of Income Tax (Addl. CIT) at the last moment, and the approval was granted promptly without any detailed examination of the records or seized materials.
- It was highlighted that the approval memo did not mention any specific issues or materials considered, indicating a lack of due diligence and application of mind. The Tribunal emphasized that the approval under Section 153D should not be a mere formality but should reflect a thorough and objective evaluation.
- The Tribunal referred to several judicial precedents, including the decisions of the Bombay High Court in Pr. CIT vs. Smt. Shreelekha Damani and the ITAT Mumbai in Shreelekha Damani vs. DCIT, which disapproved of mechanical approvals under Section 153D.
- Based on the facts and the legal principles, the Tribunal concluded that the approval granted under Section 153D in this case was invalid, rendering the subsequent assessment orders void and bad in law.

2. Admissibility of Additional Grounds of Appeal:
- The assessee raised additional grounds of appeal challenging the legality of the approval under Section 153D. The Revenue opposed the admission of these additional grounds, arguing that they were raised belatedly and that the relevant records were misplaced.
- The Tribunal rejected the Revenue's objections, stating that legal objections can be raised at any stage if the relevant facts are available on record. The Tribunal emphasized that income tax proceedings are not strictly adversarial and that a fundamental error of law can be pointed out at any stage.
- The Tribunal admitted the additional grounds of appeal for adjudication, recognizing the importance of addressing the legal issue raised by the assessee.

3. Validity of Search Assessments:
- The Tribunal examined the validity of the search assessments conducted under Section 153A/143(3) of the Income Tax Act. The assessments were based on the approval granted under Section 153D, which was found to be mechanical and lacking application of mind.
- The Tribunal observed that the AO had forwarded the draft assessment orders to the Addl. CIT without any detailed reference to the seized materials or specific issues. The approval was granted promptly without any substantive examination, indicating a perfunctory exercise.
- The Tribunal concluded that the search assessments were invalid due to the flawed approval process under Section 153D. Consequently, the assessment orders for the relevant years were quashed.

4. Disallowance of Alleged Non-Genuine Purchases:
- In the case of the assessee for the Assessment Year 2011-12, the AO made disallowances of the entire amount of purchases from certain parties, alleging them to be non-genuine. The CIT(A) revisited the disallowances and estimated them at 12.5% of the purchases.
- Both the assessee and the Revenue challenged the CIT(A)'s decision. The assessee sought further relief, while the Revenue contested the partial relief granted.
- The Tribunal referred to its earlier decision in the assessee's own case for the Assessment Year 2010-11, where the disallowance was restricted to 4% of the alleged unsupported purchases. The Tribunal directed the AO to restrict the disallowance to 4% for the Assessment Year 2011-12 as well, in line with the earlier decision.

Conclusion:
- The Tribunal allowed the appeals of the assessee and quashed the assessment orders for the relevant years due to the invalid approval under Section 153D. The additional grounds of appeal were admitted, and the legal objections were upheld.
- In the case of disallowance of non-genuine purchases for the Assessment Year 2011-12, the Tribunal directed the AO to restrict the disallowance to 4%, consistent with the decision in the earlier year.
- The cross objections raised by the assessee were rendered infructuous due to the quashing of the assessment orders on legal grounds. The appeals of the Revenue were dismissed.