2025 (4) TMI 403 - AT - Income Tax

Assessment u/s 153A - Mandation for seeking the approval u/s 153D - Addition u/s 56(2)(viia) - difference between the market value purchase value - HELD THAT - For making the assessment or reassessment u/s 153A B the approval/sanction u/s 153D of the approving authority is mandatory and therefore the approval should not be rubber stamping and mere ritual formality and should not suffer from lack of application of mind but the same has to be reasoned based on examination of the relevant material available on record and in the approval there should be some indication of the material examined and the order of approval is not to be mechanically granted but the same should be done having regard to the material on record. It is the bounden duty of the AO to submit the draft assessment order well in advance/time so that approving authority will not face any immense pressure due to paucity of time. Though the statute has not provided any format for granting an approval but the approval must reflect the basis of the material and reasons on which the approval is granted. This Court is of the considered view that in the instant case the approval under consideration in not based on examining of any relevant documents and provisions of the Act in the context of the proposed addition and has been accorded in haste and time constrained pressure and therefore lacks application of mind and hence in cumulative effects the same suffers from perversity and impropriety and consequently is un-sustainable. Thus the approval is declared as invalid in the eyes of law which would entail the assessment order as invalid being void ab-initio. Consequently the assessment order is quashed. Appeal filed by the Assessee stands allowed.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

Whether the provisions of Section 56(2)(viia) of the Income Tax Act, 1961, are applicable to the shares purchased by the Assessee as part of its trading activities.
Whether the approval granted under Section 153D of the Act for the assessment order was valid, considering the alleged mechanical nature and lack of application of mind by the approving authority.
Whether the assessment order dated 27.12.2019 is valid in light of the procedural and substantive issues raised by the Assessee.

ISSUE-WISE DETAILED ANALYSIS

1. Applicability of Section 56(2)(viia)

Legal Framework and Precedents: Section 56(2)(viia) of the Income Tax Act pertains to the taxation of shares acquired at less than fair market value, applicable to companies and firms. The Assessee argued that this section does not apply to shares held as stock-in-trade for trading purposes.
Court's Interpretation and Reasoning: The Court examined whether the shares were held as stock-in-trade or as an investment. The Assessee contended that the shares were purchased for trading, supported by entries in the balance sheet. However, the Court found that the Assessee's financials did not reflect significant trading activity, suggesting the shares were held for investment.
Key Evidence and Findings: The Court noted the lack of trading activity and the fact that the shares were not sold over the years, indicating an investment motive rather than trading.
Application of Law to Facts: The Court concluded that the shares were acquired for investment purposes, making Section 56(2)(viia) applicable.
Treatment of Competing Arguments: The Assessee's reliance on the classification of shares as stock-in-trade in the balance sheet was rejected, as entries in books are not determinative or conclusive.
Conclusions: The Court upheld the application of Section 56(2)(viia) and confirmed the addition made by the AO.

2. Validity of Approval Under Section 153D

Legal Framework and Precedents: Section 153D requires prior approval from a higher authority for assessment orders in search cases. The approval must not be mechanical and should reflect application of mind.
Court's Interpretation and Reasoning: The Court scrutinized the approval process and found it to be mechanical and lacking any substantive reasoning or examination of relevant material.
Key Evidence and Findings: The approval was granted on the same day the draft order was submitted, with no indication of examination of evidence or application of mind.
Application of Law to Facts: The Court found that the approval process did not meet the requirements set by law, as it was granted hastily and without due consideration.
Treatment of Competing Arguments: The Revenue's argument that periodic discussions sufficed was rejected, as the approval lacked any documented reasoning or examination of material.
Conclusions: The approval under Section 153D was declared invalid, rendering the assessment order void ab initio.

SIGNIFICANT HOLDINGS

The Court emphasized that "entries in the books of accounts are not determinative or conclusive" and that the real intent of transactions must be assessed based on substantive evidence.
The requirement for approval under Section 153D is not a mere formality but a substantive safeguard against arbitrary assessments, necessitating a detailed examination of relevant material.
The Court declared the assessment order dated 27.12.2019 as invalid due to the invalidity of the approval process, thus quashing the order.
The judgment reinforced the principle that approvals must be based on a thorough examination of facts and not granted mechanically.

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