Facts of the Case

A search operation under Section 132 of the Income Tax Act, 1961 was conducted in the group cases of the assessees connected with the Jai Bharat Group. Pursuant to the search, the Assessing Officer passed assessment orders under Section 143(3) read with Section 153A(1)(b) for several assessment years.

The Assessing Officer made additions by invoking Section 56(2)(vii)(c) in relation to shares allotted to the assessee. The shares were allotted at ₹40 per share, whereas the Assessing Officer determined the Fair Market Value (FMV) at ₹44 per share. The difference of ₹4 per share was treated as income from other sources.

Before passing the assessment orders, approval was obtained from the Additional Commissioner of Income Tax under Section 153D.

The assessee challenged the validity of the assessment orders on the ground that the approval granted under Section 153D was mechanical and without application of mind, thereby vitiating the assessment proceedings.

Issues Involved

  1. Whether the approval granted under Section 153D by the Additional Commissioner of Income Tax was merely mechanical and without application of mind.
  2. Whether such mechanical approval would invalidate the assessment order passed under Section 143(3) read with Section 153A.
  3. Whether additions made under Section 56(2)(vii)(c) on the difference between share allotment price and FMV were sustainable.

Petitioner’s Arguments (Assessee)

The assessee contended that the approval granted under Section 153D was perfunctory and mechanical, demonstrating complete non-application of mind by the approving authority.

  • The approval letter merely stated that the draft assessment order was approved without discussing any issue involved in the case.
  • Identically worded approvals were granted for several assessees and multiple assessment years simultaneously.
  • The order sheet of the assessment records did not record any interaction or directions from the approving authority.
  • There was no indication that the draft assessment orders were examined before granting approval.
  • The statutory requirement of Section 153D is a safeguard against arbitrary assessment, and such mechanical approval defeats the legislative intent.

The assessee relied on various judicial precedents including:

  • ACIT vs Serajuddin & Co. (Orissa High Court)
  • Shreelekha Damani vs DCIT (Bombay High Court)
  • M3M India Holdings vs DCIT
  • Vrushali Sanjay Shinde vs DCIT
  • PCIT vs Anuj Bansal
  • PCIT vs Shiv Kumar Nayyar
  • PCIT vs Subhash Dabas
  • Daze Construction Pvt. Ltd. vs ACIT
  • Veena Singh vs ACIT
  • PCIT vs Tirupati Buildings & Offices Pvt. Ltd.

It was submitted that courts have consistently held that mechanical approval under Section 153D renders the assessment order invalid.

Respondent’s Arguments (Revenue)

The Revenue argued that the approval granted under Section 153D was valid and legally sufficient.

It was contended that:

  • The approving authority is not required to record elaborate reasons while granting approval.
  • Once approval is granted by the competent authority, it implies due application of mind.
  • Therefore, the assessment order cannot be invalidated merely on the ground that detailed reasons were not recorded in the approval.

Court Findings

The Tribunal carefully examined the communication exchanged between the Assessing Officer and the Additional Commissioner of Income Tax.

The Tribunal observed that:

  • The approval letter simply stated that the draft assessment order was approved.
  • There was no reference to the issues involved or the additions proposed in the draft order.
  • The approval was granted in a routine and stereotyped manner without any indication that the approving authority had examined the draft assessment orders.
  • The order sheet of the assessment proceedings did not show any interaction, direction, or involvement of the approving authority during the assessment process.

The Tribunal referred to the judgment of the Orissa High Court in ACIT vs Serajuddin & Co., which held that approval under Section 153D must reflect at least minimal application of mind and cannot be granted mechanically.

The High Court had clarified that mere rubber-stamping of approval does not satisfy the statutory requirement.

Court Order

The Tribunal held that the approval granted under Section 153D was mechanical and perfunctory, showing no application of mind by the approving authority.

Accordingly:

  • The approval failed to satisfy the statutory requirement of Section 153D.
  • The assessment orders passed on the basis of such approval were vitiated in law.

Therefore, the Tribunal quashed the assessment order.

Since the appeal was allowed on the preliminary legal ground, the Tribunal did not adjudicate the other issues raised by the assessee.

All connected appeals were allowed accordingly.

Important Clarification

The Tribunal reiterated an important legal principle that:

  • Approval under Section 153D is a mandatory safeguard in search assessments.
  • The approving authority must demonstrate application of mind to the draft assessment order.
  • Mechanical or ritualistic approval without examination of the issues invalidates the entire assessment order.

This decision further reinforces judicial precedents that statutory approval provisions are not mere formalities but substantive safeguards against arbitrary assessments.

  Link to download the order - https://itat.gov.in/public/files/upload/1735624828-XUC64H-1-TO.pdf

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