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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC, MUMBAI
Before: SHRI NARENDER KUMAR CHOUDHRY
Per : Narender Kumar Choudhry, Judicial Member:
This appeal has been preferred by the Assessee against the order dated 14.06.2024, impugned herein, passed by the Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) u/s 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2017-18.
Brief facts relevant for adjudication of the instant appeal are that the Assessee during the assessment year under consideration being engaged in share trading and investment activities, had declared its income at loss of Rs.(-)11,88,638/- by filing return of income on dated 06.01.2017, which was processed u/s 143(1) of the Act.
Subsequently, on dated 22.03.2018, a search and seizure action u/s 132 of the Act was conducted, in the case of Aachman Group and other related entities by the DDIT (Investigation), Unit-6(1), Mumbai. The case of the Assessee was also covered under such search and seizure operation and consequently notice u/s 153A of the Act dated 06.12.2019 was issued to the Assessee, in response to which the Assessee filed its return of income on dated 10.12.2019 declaring total income at Rs.”Nil”. Thereafter, various statutory notices were issued, in response to which from time to time, the Assessee attended the proceedings and filed the details as called for. On verification of the details filed by the Assessee during the course of assessment proceedings and examining the return of income, it was observed by the Assessing Officer (AO) that following issue emerge:
Addition u/s 56(2)(viia) of the Act.
The AO observed that the Assessee had purchased 73,000 shares of M/s. Utility Supply Pvt. Ltd. at Rs.10/- per share. However, fair market value of the same appears to be more than the face value, on which the shares were purchased and therefore he asked the Assessee to furnish the valuation of shares of such company. The Assessee furnished valuation report, on perusing the same the AO observed that fair market value per share of M/s. Utility Supply Pvt. Ltd. was more than the purchase value per share and therefore, he show caused the Assessee “as to why the provision of section 56(2)(viia) of the Act should not be invoked over the purchase of these shares and differential amount ( between the fair market value and purchase value) should not be added as income in the hands of the Assessee”.
M/s. Navratan Management Private Limited 5. The Assessee before the AO has claimed that it is also carrying on the business of investment and trading in shares and securities and during the year under consideration, has purchased the aforesaid shares by way of account payee cheque of Rs.7,30,000/- for the trading purpose and not as an investment, so as to be categorized as capital assets “property”. While considering the provisions of section 56(2)(viia) of the Act, definition of “property” as defined in the provisions of section 56(2)(vii) of the Act, is required to be taken into consideration. Capital asset is defined in section 2(14) of the Act, which does not include any “stock in trade” [other than the securities referred to in sub clause (b)] and therefore any stock in trade, is not covered within the purview of the provision of section 56(2)(viia) of the Act.
The AO though considered the claim of the Assessee, however, by relying on the website “https://www.zaubacorp.com”, wherein the Assessee was identified being engaged in the business of legal, accounting, book keeping, trading activities, tax consultancy, market research and public opinion, polling business and management consultancy services and also applying the definition of fair market value, as per explanation to section 56(2)(viia) of the Act, as defined in the provision of section 56(2)(vii) of the Act, ultimately applied the provisions of section 56(2)(viia) of the Act to the case of the Assessee and added the amount of Rs.61,45,870/- on account of difference between the {market value – purchase value} to the income of the Assessee u/s 56(2)(viia) of the Act.
The Assessee, being aggrieved, challenged the said addition and raised various issues by filling first appeal before the Ld. Commissioner, who by impugned order affirmed the aforesaid addition, more or less on the same footing/reasoning as of the AO and by observing and holding that the turnover of the Assessee is insignificant and does not reflect the trading activities in shares, the revenue from the operation is either nil or meager which shows that the Assessee has not carried out any business activities over the years, the shares of M/s. Utility Supply Pvt. Ltd. are not listed, just because in the balance sheet the Assessee has M/s. Navratan Management Private Limited classified/shown the shares as stock in trade, the real intent of the transactions will not alter as entries in the books of accounts are not determinative or conclusive. For brevity and ready reference, the analyzation made and conclusion drawn by the Ld. Commissioner, is reproduced herein below:
“8. GROUND NO 1 AND ADDITIONAL GOUND- A search u/s 132 of the I.T. Act was conducted on 22.03.2018 by DDIT (Inv). Unit-6(1) Mumbai in case of Aachman Group and other related entities including assessee. Consequent to the search, notice u/s 153(A) was issued on 06.12.2019. During the course of assessment proceedings, the A.O noted that the assessee has purchased 73,000/- shares of M/s Utility Supply Pvt. Ltd. at Rs. 10 per share. The A.O found from perusal of the financials of M/s Utility Supply Pvt. Ltd., that fair market value of its share is more than the face value for which the shares were purchased. Therefore, the A.O asked the assessee to furnish the valuation of share of M/s Utility Supply Pvt. Ltd. The assessee furnished the valuation report of share of M/s Utility Supply Pvt. Ltd. The A.O observed that the fair market value is of Rs.94.19 per share, however the assessee has purchased the same at Rs. 10 per share. In the facts of the case the provisions of section 56(2)(viia) are applicable. Hence, the A.O show caused the assessee to explain as to why the provision of section 56(2)(viia) should not be invoked. In response to this, the assessee has furnished its explanation which is reproduced by the A.O in para 6.1 in the assessment order. In the submission, the assessee contended that he is engaged in the business of investment and trading in shares and securities. As the shares purchased are for the trading purpose, and the same are also shown in the balance sheet as stock in trade, the provision of section 56(2)(viia) is not applicable. The assessee also contended that section 56(2)(vila) as an extension of section 56(2)(vii) and hence, it is applicable only to capital asset. The assessee also relied on the decision of ITAT Jaipur in case of ITA No. 392/JP/2019. 8.2 The A.O considered the submission filed by the assessee. The A.O found from the website "https://www.zaubacorp.com" that the assessee is engaged in the business of legal, accounting, book-keeping, and auditing activities, tax consultancy, market research etc. The A.O rejected the contention of the assessee that section 56(2)(viia) is an extension of 56/2) (vii) and is applicable to only capital asset. The A.O held that the assessee's case is related to section 56(2)(viia) which is applicable to company and firm and it is clearly distinct from the applicability of section 56(2)(vii) which is related to individual and HUP The A.O computed the difference of Rs.61,45,870/- between the total value as per the aggregate fair value and total consideration paid by the assessee, has held that an amount of Rs.61,45,870/- is the inadequate consideration paid for purchasing the shares u/s 56(2)(viia) and hence the same is added to the total income M/s. Navratan Management Private Limited 9. During the appeal proceedings, it is contended that the appellant company is in the business of investment and trading in shares and securities. To support its contention, the appellant has submitted a copy of memorandum of association. It is submitted that, the alleged shares were purchased for the purpose of trading and not as an investment. In the Balance sheet also, these shares are shown as stock in trade and not as an investment. The provisions of section 56(2)(viia) are applicable for investment in capital assets and not for the regular business/trading activities. The appellant has further submitted that, on the similar facts in case of related concerns namely Muktamani Distributors Pvt. Ltd and Alishan Distributors Pvt. Ltd, the Ld CIT (A) has allowed the appeal by holding that, the purchase of shares was for the trading purpose.
10. I have considered the assessment order, submission of appellant and report received from the A.O. The appellant contended that the alleged shares have been purchased for trading activity and for the same it has relied on entries made in the balance sheet showing the same as stock in trade. Thus, the sole contention of the appellant is that the shares were purchased as a part of regular trading activity of the appellant and hence the provision of section 56(2)(vila) are not applicable. The appellant has also submitted that the Id. CIT(A) on the same fact in the appellant sister concerns namely Muktamani Distributors Pvt. Ltd and Alishan Distributors Pvt Ltd has held that the purchase of shares are for trading purpose and hence provision of section 56(2)(vila) are not applicable. The appellant has also furnished the copies of the CIT(A) orders. 10.2 Now it is to be determined from the facts whether the appellant has purchased these alleged shares for the purpose of trading. On verification of the financials for the appellant, it is seen that the appellant has purchased the shares of the various related entities. The details are as under: - Sr. No. Name of the No. of shares Purchase Company Value AY 2013-14 Chaplin Securities 20500 205000 Pvt. Ltd. AY 2017-18 Utility Supplies Pvt. 73000 730000 Ltd. AY 2018-19 Astra Dealcom Pvt. 60000 600000 Ltd. 10.3 From the perusal of financials for A.Y 2023-24, it is observed that till 31.03.2023, except the shares of Astra Dealcom Pvt Ltd, all these shares are appearing in the balance sheet as a stock in trade. From this, it is evident that appellant has not sold these shares till 31.03.2023. 10.4 Further from the perusal of profit and loss account of the appellant from the A.Y 2013-14 onwards it is seen that the turn-over of the appellant is insignificant and does not reflect the trading activity in shares. The details of return income filed are as under: -
Sr. No. A.Y. Returned of Income 1. 2013-14 NIL 2. 2017-18 NIL 3. 2018-19 NIL 4. 2023-24 NIL The revenue from the operation is either Nit or meager. These facts show that the appellant has not carried out any business activities over the years. 10.5 The details of balance sheet as on 31.03.2023 are as under:- 1. Share capital - Rs.15,85,000 2. Reserve & Surplus Rs 1.39.14159 3. Current and nen current liabilities Rs 66.565 TAY N 4. Noncurrent investment Rs 1,31,44-650 5. Inventories 9,35,000. It is seen that the reserve and surplus is mainly on account of receipt of security premium. In the profit and loss account the total receipts are shown as NIL. From the above, it can be seen that the appellant itself is a paper company not carrying out any business activity. 10.6 The details of M/s Utility Supply Pvt. Ltd have been discussed in the order passed by me for the A.Y 2017-18. It is held that M/S Utility Supply Pvt. Ltd is a paper company not carrying out any business activity. The shares of this company are not listed and hence are not available for trading on public platform. All these companies are related concerns of the appellant and are closely held companies. 10.7 From the above discussion, it is evident that the appellant and the concerned company are related entities which are closely held. The shares of M/s Utility Supply Pvt. Ltd are not available for the trading purpose. From the financials of the same it is evident that, that M/s Utility Supply Pvt. ltd is a paper companies and not doing any business activities. In the backdrop of these facts, the contention of the appellant that the purchase of the shares is for the trading purpose, is contradictory to the facts on record. It is also evident that no such trading activity has been carried out by the appellant. These shares are still held by the appellant. 10.8 Thus the whole facts demonstrate that, the acquisition of shares of the paper company by the appellant is not for the purpose of business but for the purpose of acquiring stakes in the same. Thus, the purchase is for investment purpose and not for the trading purpose. Just because, in the balance sheet the appellant has classified/shown the same as stock in trade, the real intent of the transactions will not alter. Entries in the books of accounts are not determinative or conclusive. 10.8.2 The Honble Supreme Court in case of Kedarnath Jute Mfg com. Vs CIT(82 ITR 363) has held as under-(SC "Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not of the view M/s. Navratan Management Private Limited which the assessee might taken of its right nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the amount of sales tax which, it was liable under the law to pay during the relevant accounting year. The liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. The appeal was consequently allowed and the judgment of the High Court was set aside. 10.8.3 The Honble Supreme Court in case of Taparia Tools Ltd Vs JCIT (55 taxmann.com 361) has held as under- "19......merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditures a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act (See - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 333 (SC):; Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC): Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC)." 10.8.4 Hon'ble Supreme Court in the case of Taparia Tools held that merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the Assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act. 10.9 In view of the above discussion, it is evident that the real intent to purchase the shares is not trading but to acquire the stakes in the related concerns. I have also perused the orders of Ld. CIT(A) submitted by the appellant, however I defer with the decision of my predecessor Ld. CIT(A). The appellant has not contested the valuation of shares (FMV). Accordingly, the addition made by the A.O of Rs.61,45,870/- is confirmed. The appeal on this ground no 1 and additional ground is thus DISMISSED.”
The Assessee, being aggrieved, has challenged the decision of the Ld. Commissioner in affirming the aforesaid addition and by filling a petition has also raised the following legal grounds: “1. The Id. CIT(A) has erred in law and in facts in not appreciating that the assessment order passed u/s 153A r.w.s. 143(3) of the Act is bad and invalid in the eyes of law. 2. The Ld. CIT(A) has erred in law and in facts in not appreciating that the assessment order dated 27.12.2019 is issued without quoting mandatory M/s. Navratan Management Private Limited Document Identification Number on the assessment order and hence the assessment order is invalid and nullity in the eyes of law.
3. The Ld. CIT(A) has erred in law and in facts in not appreciating that the approval taken u/s 153D of the Act is invalid and bad in the eyes of law.
4. The Ld. CIT(A) has erred in law and in facts in not appreciating that the assessment order is passed in violation of principles of natural justice and hence the same is invalid and bad in the eyes of law.”
As the additional grounds raised by the Assessee are legal in nature and emanates from the assessment proceedings and even otherwise goes to the root of the case and adjudication of the same does not require any independent material, except already available on record and, hence the same were admitted for adjudication and are being disposed of first, before proceeding to the merits of the case.
Coming to the additional Ground no. 3 raised by the Assessee, this Court observe that the Assessee has challenged the sanction/approval dated 27.12.2019 u/s 153D of the Act, for initiating the proceedings and/or making the assessment or re-assessment u/s 153A and 153B of the Act. The Assessee has claimed that draft assessment orders of the Assessee for three assessment years, along with covering letter dated 27.12.2019 were submitted to the office of the Additional Commissioner of Income Tax, Central, range-8, Mumbai (in short “the Ld. Add. Commissioner”) for approval u/s 153D of the Act. The Ld. Add. Commissioner approved the same, on the very same day/date i.e. 27.12.2019 and thereafter assessment orders including in the instant case, was made on the very same date i.e. 27.12.2019 itself. The Assessee further submitted that the Ld. Additional Commissioner on the very same date i.e. 27.12.2019 also granted various approvals u/s 153D of the Act in more or less 13 cases pertaining to the Assesse, M/s. Utility Supply Pvt. Ltd., M/s. Muktamani Distributors Pvt. Ltd. and M/s. Aalishan Distributor Pvt. Ltd. In all 13 cases, the respective Assessing Officers, also passed the assessment orders, on the very same date (27-12-2019) of the approval granted. The details of the approvals granted u/s 153D of the Act are as under:
Sr. Name of entity A.Y. Date of submission Date of Designation of No. of draft approval Approving authority Assessment orders u/s 153D
1 M/s. Navratan 2013-14 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Management Pvt. Mumbai Ltd. 2 M/s. Navratan 2017-18 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Management Pvt. Mumbai Ltd. 3 M/s. Navratan 2018-19 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Management Pvt. Mumbai Ltd. 4 M/s. Utility Supply 2012-13 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
5 M/s. Utility Supply 2013-14 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
6 M/s. Utility Supply 2014-15 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
7 M/s. Utility Supply 2015-16 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
8 M/s. Utility Supply 2016-17 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
9 M/s. Utility Supply 2017-18 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
10 M/s. Utility Supply 2018-19 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Private Limited, Mumbai
11 Muktamani 2013-14 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Distributors P Ltd. Mumbai 12 Muktamani 2017-18 27-12-2019 27-12-2019 Addl. CIT (CR)-8 Distributors P Ltd. Mumbai
13 Alishan Distributors 2017-18 27-12-2019 27-12-2019 Addl. CIT (CR)-8 P Ltd. Mumbai
The Assessee further submitted that the Ld. Addl. Commissioner has given approval in a mechanical manner and without application of mind. Even otherwise the approval granted by the Ld. Commissioner was not substantive or final approval but the same was conditional, as the Ld. Addl. Commissioner in the approval has given certain directions to the AO to follow up and/or accorded the approval in following format and conditions mentioned therein:
The Assessee thus, has further claimed that such approval is invalid and bad in law, specifically in view of the judgment passed by the Hon’ble Tribunal in the case of Rishab Build Well Pvt. Ltd. vs. DCIT & ors. (ITA No.2122/Del/2018 decided on 04.07.2019), wherein the approval granted u/s 153D of the Act, was subjected to fulfillment of similar conditions, like ensuring comments in the approval and final M/s. Navratan Management Private Limited assessment order was required to be sent to the file of the JCIT and therefore the Hon’ble Tribunal held such approval as conditional and invalid.
The Ld. Counsel Mr. Dhaval Shah, also raised various issues such as that in the instant case, the draft assessment order was submitted by the AO, to the Ld. Addl. Commissioner at the fag end of the assessment proceedings, on 27-12-2019 being a Friday, whereas the time barring date was 31.12.2019, which goes to show that 28.12.2019 and 29.12.2019 were Saturday and Sunday and therefore the approving authority was having only two working days in his hand i.e. 27.12.2019 and 30.12.2019 for granting the approval, in order to enable the AO to pass the final assessment order on 31.12.2019 and therefore there was no reasonable or sufficient time was available with the Ld. Additional Commissioner to apply his mind on the issues involved. And therefore the instant case is also covered by the Hon’ble Orissa High Court in the case of ACIT vs. Serajuddin & Co. (150 taxmann.com 146), wherein the Hon’ble High Court has held as under:
“That there are three mandatory conditions for an approval to be valid and in the absence of any reason in the approval to show that the draft orders are correct and merely using the words “seen” “approved” will not satisfy the condition of law. In that particular case the approval was sought only two days prior to the dead line like in the instant case and therefore the approval involved in the instant case is liable to be declared as invalid and not in accordance with law”.
The Ld. Counsel further claimed that moreover, the Ld. Additional Commissioner on the very same date i.e. 27-12-2019 as mentioned above has also granted approval in the cases of other entities by composite approval, which shows that the approving authority did not have sufficient time to go through and apply his mind to each of the draft assessment orders separately, while granting the requisite approvals. Even otherwise the Ld. Addl. Commissioner has granted common approval for three assessment years, instead of separate approval for each year as M/s. Navratan Management Private Limited mandated in law and as clarified by the Hon’ble High Court of Allahabad in the case of PCIT vs. Sapna Gupta 147 taxmann.com 288 by holding that the approval for each assessment year is required to be given separately.
The Ld. Counsel further claimed that most importantly, from the approval, it is clear that there is no reference or discussion of any documents found during search, statements recorded of various persons, submissions filed by the Assessee during search and post search proceedings etc. and therefore, in absence of any such discussion, it cannot be said that the approving authority has applied its mind to the facts of the case before according approval. There is not even bare minimum whisper or mentioning of any reasons, as to how the draft orders put before him were correct and legally valid. Mere mentioning that the draft orders have been perused and approved without even briefly stating how they are correct, cannot satisfy the conditions of law.
The Ld. Counsel further claimed that the Hon’ble Madhya Pradesh High Court as well in the case of CIT Vs. S. Goyanka Lime and Chemicals Ltd. (56 taxmann.com 390) also dealt with the situation, wherein the Ld. Commissioner accorded the approval by using the words “Yes, I am satisfied” without making any remarks as to how he was satisfied. Thus, the Hon'ble High Court held such approval as a mere mechanical approval. The Ld. Counsel further submitted that such order of the Hon'ble High Court has stands affirmed by the Hon'ble Apex Court in the case of S. Goyanka Lime and Chemical Ltd. 64 taxmann.com 313.
The Ld. Counsel further claimed that most of instruction given in the approval dated 27.12.2019 by the Ld. Additional Commissioner, is not even remotely related to the case in hand and approving authority nowhere discussed the contents and the quality of the draft assessment order and the correctness of the proposed additions in the assessment order.
The Ld. Counsel further claimed that the Hon’ble Pune Tribunal in the case of SMW Saspat Pvt. Ltd. Vs. ACIT (163 taxmann.com 119)
M/s. Navratan Management Private Limited also dealt with the similar provisional approval, like in the present case giving instructions to prepare proper office note, reference to 153C proceedings, penalty proceedings etc. The Hon’ble Tribunal therefore considering the fact that there was no indication qua examination of the relevant material in that detail while granting approval and the approval was given in one day’s time in respect of many assessment orders, most importantly in the copy of approval there was no reference whatsoever of the approving authority, which would indicate examination of any evidence, documents, statements of various persons etc. Therefore, the approval was held as mechanical in nature and without application of mind and bad in law.
The Ld. Counsel Mr. Shah, further submitted that before making final assessment orders, prior approval u/s 153D of the Act, was introduced by the legislature, so that in search and seizure cases, a higher authority should apply his mind on the facts of the case or additions sought to be made and only thereafter assessment order must be passed. However, in the instant case, such action from the approving authority, is completely missing. Therefore, on the aforesaid facts, it is clearly suggested that the action of granting the approval has only been an empty ritual on mechanical exercise.
The Ld. Counsel further submitted that in an identical case titled as Nilesh Shamji Bharani vs. DCIT, Mumbai & ors. decided on 06.12.2024, the AO had sought for approval for many cases, in a single day and the approving authority also approved/accorded approval u/s 153D of the Act in various cases on a single day, by way of single approval letter and therefore the Hon’ble Tribunal quashed the approval, by holding the same as invalid.
The Ld. Counsel Mr. Dhaval Shah, further submitted that Hon’ble Jurisdictional Bombay High Court in the case of PCIT vs. Shrilekha Damani {ITA no. 668 of 2016, decision dated 27/11/2018} has also considered the identical situation, wherein the approval was granted on the last date, when there was no enough time left to analyze the issues of M/s. Navratan Management Private Limited draft order on merits and therefore the Hon’ble High Court has held the approval granted, as a mere mechanical exercise and not valid in the eyes of law.
22. On the contrary, the Ld. D.R. refuted the claim of the Assessee by submitting that approval was duly accorded by the concerned Addl. Commissioner. The procedure normally followed in such cases is that after centralization of the case, periodic discussions are held between the Range Head and the AO, where the appraisal report and the relevant seized material are duly discussed. And therefore in the approval, there is no need to mention the details of reasoning and documents examined. The Ld. D.R. further submitted that the decisions relied upon by the Assessee are distinguishable from the facts of the present case.
Having heard the parties and perusing the material available on record and giving thoughtful consideration to the rival claims of the parties on the additional ground no. 3 raised by the Assessee, challenging the approval dated 27.12.2019 accorded by the Ld. Addl. Commissioner, it transpires that the draft assessment order was placed/submitted before the Ld. Addl. Commissioner on dated 27-12-2019 and on the very same day i.e. 27-12-2019, the approval u/s 153D of the Act was granted and eventually on the very same day of granting the approval on 27.12.2019 and the assessment order under consideration was passed by the AO.
It is also a fact that the Addl. Commissioner/Approving Authority, has also granted the same approval u/s 153D of the Act, on the very same day, in 12 other cases. Admittedly, from the approval, it is nowhere appearing that what evidence/document/ statement/ material/ proposed addition(s) etc. were examined by the Approving Authority before granting the approval. It is also not clear, whether the approving authority has applied its mind and on what basis or material the approval was accorded. The aforesaid facts create the suspicion about the validity of the approval and therefore, this court will test the approval, in view of dictum laid down by various courts.
M/s. Navratan Management Private Limited 25. Coming to the first decision by the Hon’ble Orissa High Court in the case of ACIT vs. Serajuddin & Co. (supra), which is paramount for adjudication of the instant issue, the Hon’ble High Court has dealt with almost identical situation/issue, wherein the approving authority has granted the approval in many cases but by a single approval and at the fag end of the time period prescribed for completion of the assessment proceedings. The Hon’ble High Court therefore considering the submissions made by the Assessee and the Revenue Department, ultimately held that there are three or four requirements {including first: the AO should submit the draft order “well in time”} that are mandated for seeking the approval u/s 153D of the Act. For brevity and ready reference, the relevant part of the judgment is reproduced herein below:
As rightly pointed out by learned counsel for the Assessee there is not even a token mention of the draft orders having been perused by the Additional CIT. The letter simply grants an approval. In other words, even the bare minimum requirement of the approving authority having to indicate what the thought process involved was is missing in the aforementioned approval order. While elaborate reasons need not be given, there has to be some indication that the approving authority has examined the draft orders and finds that it meets the requirement of the law. As explained in the above cases, the mere repeating of the words of the statute, or mere "rubber stamping" of the letter seeking sanction by using similar words like 'see' or 'approved' will not satisfy the requirement of the law. This is where the Technical Manual of Office Procedure becomes important. Although, it was in the context of Section 158BG of the Act, it would equally apply to Section 153D of the Act. There are three or four requirements that are mandated therein: (i) the AO should submit the draft assessment order "well in time". Here it was submitted just two days prior to the deadline thereby putting the approving authority under great pressure and not giving him sufficient time to apply his mind; (ii) the final approval must be in writing; (iii) The fact that approval has been obtained, should be mentioned in the body of the assessment order. 23.…………………………………………………………………………………… ………………………………………………………………………………………… ……………………………………………………………. 24..…………………………………………………………………………………… ………………………………………………………………………………………… …………………………………………………………….
M/s. Navratan Management Private Limited 25. For all of the aforementioned reasons, the Court finds that the ITAT has correctly set out the legal position while holding that the requirement of prior approval of the superior officer before an order of assessment or reassessment is passed pursuant to a search operation is a mandatory requirement of Section 153D of the Act and that such approval is not meant to be given mechanically. The Court also concurs with the finding of the ITAT that in the present cases such approval was granted mechanically without application of mind by the Additional CIT resulting in vitiating the assessment orders themselves”.
In Serajuddin & Co. case (supra), the draft assessment orders were produced before the approving authority only on 29.12.2010, with the indication that the cases will be barred by limitation on 31.12.2010 and therefore the approving authority vide consolidated approval dated 30.12.2010 granted the approval. As in the instant case as well, the approval was sought for by the AO only on 27.12.2019 and the last date for completing the Assessment was 31-12-2019. Admittedly 28.12.2019 and 29.12.2019 were Saturday and Sunday and therefore the approving authority had no sufficient time except two working days {27-12-2019 and 30-12-2019) and thus, inference can be drawn that the approving authority in the constrained circumstances and immense pressure, accorded the approval on the very same day of submitting of draft order or within 12 hours itself, in haste manner and without applying its mind due to paucity of reasonable time and therefore approval would entail as invalid and bad in the eyes of law.
The Hon’ble Jurisdictional High Court in the case of PCIT vs. Shrilekha Damani in of 2016 decided on 27.11.2018, has also dealt with the issue, wherein the draft order for approval u/s 153D of the Act was submitted on 31.12.2010 and hence there was no enough time left to analyse the issue of draft order on merit. Thus, the draft order was approved without application of mind and therefore the same was declared as invalid approval in the eyes of law by the Tribunal.
The Hon’ble High Court, thus considering the aforesaid facts and circumstances affirmed the decision of Tribunal by holding that the Addl. CIT for want of time could not examine the issues arising out of the draft order. His action of granting the approval was thus a mere mechanical M/s. Navratan Management Private Limited exercise accepting the draft order as it is, without any independent application of mind. The Tribunal is therefore justified in coming to the conclusion that the approval was invalid in the eyes of law.
The Hon’ble Jurisdictional High Court, also laid down the following dictum: “That the approval whenever required under the law must be preceded by application of mind and consideration of relevant factors, before the same can be granted. The approval should not be an empty ritual and must be based on consideration of relevant material on record”.
Coming to the contention of the Ld. D.R. that facts of the aforesaid case, are dissimilar to the facts of the instant case, as in the aforesaid case, the approval was sought only on 31.12.2010, whereas in the instant case approval was sought on 27.12.2019 and the time barring date was 4 days away. This Court observe that the Hon’ble Madhya Pradesh High Court in the case of Commissioner of Income Tax, Jabalpur Vs. S. Goenka Lime and Chemical Ltd. {(2015) 56 taxmann.com 390 (MP)} , has also dealt with an identical situation/issue, wherein exercise for according the approval for reopening of the block assessments and issuing the notice u/s 148 of the Act, was shown to have been performed in less than 12 hours of time and in a mechanical manner and therefore such approval was held as invalid in law by observing that the same goes to indicate that the approving authority did not apply its mind at all, while granting sanction. The satisfaction has to be with objectivity, on objective material.
The said judgement in S. Goenka Lime and Chemical Ltd. case (supra) subsequently got affirmed by the Hon’ble Apex Court in the case of Commissioner of Income Tax, Jabalpur (MP) vs. S. Goyanka Lime and Chemical Ltd. (2015) 64 taxmann.com 313/Special Leave Appeal (c) No.11916 of 2015 decided on 08.06.2015.
In the instant case as well, the AO has submitted the draft order for approval u/s 153D of the Act on dated 27-12-2019, however, it is a fact that 31.12.2019 was the last date for making the assessment order and M/s. Navratan Management Private Limited leaving aside 28th & 29th December 2019 being Saturday & Sunday, the approving authority was having just two days only i.e. 27th & 30th December 2019. Somehow, the Approving authority accorded the approval on the very same date or less than 12 hours and therefore the instant case is squarely covered by aforesaid judgment in the case of Commissioner of Income Tax, Jabalpur Vs. S. Goyanka Lime and Chemical Ltd. {supra}, as well.
The Co-ordinate Bench of the Tribunal in the case of Nilesh Shamji Bharani vs. DCIT, Mumbai & ors. decided on 06.12.2024, has also dealt with the identical situation/issue, wherein approvals in 21 cases were accorded vide composite approval dated 27.12.2019, whereas the last date for completing the assessments was 31.12.2019. Coincidentally, in the instant case as well, the dates i.e. 27-12-2019 and 31-12-2019 are the same. The co-ordinate Bench found that there is no whisper of any seized material sent by the AO along with proposal requesting for approval u/s 153D of the Act. Even the approval does not refer to any seized material/assessment records or any other documents, which could suggest that the approving authority has duly applied his mind before granting approval. The Hon’ble Co-ordinate Bench while relying on the judgment in Serajuddin & Co. case (supra), ultimately held the approval granted on the very date of seeking approval on dated 27.12.2019, is invalid, being not only mechanical but against the ratio laid down by the Hon’ble High Courts.
The Assessing Officer is an independent quasi-judicial officer and therefore he is required to act or to pass the assessment order independently and without being influenced by any interference/indulgence of/by higher Authority. May be the higher authority was involved in process of investigation or enquiry etc. but could not interfered in deciding the issue(s) and/or passing the assessment order by the AO, except granting or rejecting the approval u/s 153D of the Act. The Approving Authority after submitting the draft order and relevant material, is required to assess the proposed assessment order independently in the context of material available on record and to give M/s. Navratan Management Private Limited reasons for granting the approval. Admittedly in this case, approval dated 27.12.2019, does not reflect any such relevant material/findings/ reasoning, which can substantiate the validity of such approval. And therefore the contention of the Ld. DR to the effects “that the procedure normally followed in such cases is that after centralization of the case, periodic discussions are held between the Range Head and the AO, where the appraisal report and the relevant seized material are duly discussed. And therefore there is no need to mention the details of reasoning and documents examined”, is untenable.
This Court is also of the considered view that the provisions of section 153D of the Act were introduced and made applicable from 01.06.2007 onwards, in order to avoid arbitrary, unwanted and whimsical assessments or reassessment under clauses (A) and (B) of section 153A of the Act. The CBDT vide circular no.3 of 2008 dated 12.03.2008, also illustrated the origin of the provisions of section 153D of the Act.
From the aforesaid analyzations, it is clear that for making the assessment or reassessment u/s 153 A & B of the Act, the approval/sanction u/s 153D of the Act 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.
Coming to the instant case, finally this Court reiterate and order as under:
M/s. Navratan Management Private Limited That in the instant case, the approving authority on the very same date of submitting the draft order on 27-12-2019, granted the approval and it is a fact that 28th & 29th of December 2019 were holidays being Saturday and Sunday and 31st December 2019 was the last date for making the assessment order and therefore the approving authority has left with, only two working days i.e. 27th & 30th December 2019. However, the approving authority accorded the approval on the very same day (27- 12-2019) of submitting the draft order and in less than 12 hours, which goes to show that the Approving Authority due to paucity of time could not examine relevant evidence or material etc. and therefore failed to apply his mind and granted the approval in mechanical and haste manner. It is also a fact that the AO on the very same day of getting the approval, completed the assessment proceedings and passed the assessment order dated 27.12.2019, which also creates suspicion.
Thus, on the aforesaid analyzations, this Court is of the considered view that in the instant case, the approval dated 27.12.2019 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 dated 27.12.2019 as invalid being void ab-initio. Consequently, the assessment order is quashed.
M/s. Navratan Management Private Limited 38. Though the parties have argued the case on various other aspects including on merit, however as this Court has quashed the assessment order itself on legal ground and therefore no useful purpose would be served by adjudicating the other issues, thus this Court is inclined not to dwell into other aspects/issues.
In the result, the appeal filed by the Assessee stands allowed.
Order pronounced in the open court on 04.04.2025.