SITTING ON THE FENCE- CAN THE JOINT COMMISSIONER REMAIN NON-COMMITTAL WHILE GRANTING APPROVAL UNDER SECTION 153D OF THE INCOME TAX ACT?
Executive Summary
The supervisory power mandated under section 153D of the Income tax Act, 1961 (the Act) in case of search assessment is not merely an official formality but requires proper application of administrative and judicial mind by the Joint Commissioner (JCIT in short) who is the Approving Authority and this exercise should be discernible from the order of approval under section 153D of the Act. The legislative intent behind section 153D is the need for framing a balanced assessment- protecting the interest of revenue by strengthening the internal monitoring and review system of the Department at the same time providing a check on the multiplicity of assessments and high pitched assessments. Undoubtedly, absence of approval will render the assessment order passed under s.153A of the Act as bad in law at the threshold. But even in cases where there are approvals but such approvals are half-hearted and lacks due application of mind, the courts have not hesitated in holding the assessments as void ab initio. In this article, an attempt is made to discuss, through various case studies, how an important provision of law to protect the interest of revenue has itself become a cause of its destruction and so what are the ways to come out of this paradox.
INTRODUCTION-
One comes across innumerable decisions of the courts quashing the assessment orders, in search & seizure cases, by declaring them as null and void solely on the basis of lack of valid approval under section 153D of the Income tax Act, 1961 (in short the Act). A careful reading of these orders clearly show that Courts are unequivocal that section 153D casts a very heavy responsibility on the Joint/Additional Commissioners (JCIT/Addl.CIT in short) and they must see to it that the approval envisaged in the section is not turned into an empty ritual.
For the sake of brevity, the relevant extract provisions of Section 153D of the act are reproduced herein below:-
“No order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner in respect of each assessment year referred to in clause (b) of section 153A or the assessment year referred to in clause (b) of sub-section (1) of section 153B, except with the prior approval of the Joint Commissioner. Provided that nothing contained in this section shall apply where the assessment or reassessment order, as the case maybe, is required to be passed by the Assessing Officer with the prior approval of the Commissioner under sub-section (12) of section 144BA.”
The Legislative intent can be gathered from the CBDT Circular No. 3 of 2008, dated 12.3.2008 which read as under:
“50. Assessment of search cases Orders of assessment and reassessment to be approved by the Joint Commissioner.
50.1 The existing provisions of making assessment and reassessment in cases where search has been conducted under section 132 or requisition is made under section 132A does not provide for any approval for such assessment.
50.2 A new section 153D has been inserted to provide that no order of assessment or reassessment shall be passed by an Assessing Officer below the rank of Joint Commissioner except with the previous approval of the Joint Commissioner. Such provision has been made applicable to orders of assessment or reassessment passed under clause (b) of section 153A in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A. The provision has also been made applicable to orders of assessment passed under clause (b) of section 153B in respect of the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A.
50.3 Applicability-These amendments will take effect from the 1st day of June, 2007.”
The above provisions u/s. 153 D have been laid down under the heading “prior approval necessary for assessment in cases of search or requisition”. This heading itself suggests that obtaining prior approval the assessment in cases of search or requisition is necessary. We further note that the provisions u/s. 153D start with a negative wording “no order of assessment or re-assessment” supported by the further wording “shall” makes the intention of the Legislature clear that compliance of Sec. 153D requirement is mandatory.
This requirement of mandatory approval has been stretched or widened, by the courts/tribunals, to include the following-
1. The Approval should not be mechanical
2. The Approval should demonstrate application of mind by the JCIT as to whether the matter that is required to be approved satisfies all the requirements of Law or procedure to which it may be subjected.
3. The approval should not be a mere discretion or formality, it should be based on reasoning.
Given below are some of the instances/cases of approvals given by JCIT/Addl.CIT, under section 153D, which were out rightly rejected by the Courts as mechanical, invalid and thus making the entire search assessment null & void.
In all the above cases, the hard work and the painstaking efforts put in by the Assessing Officers (in short AO), could not be taken to its logical end due to the approvals of the JCIT being either too brazen or too self-serving, poorly drafted (or as one CIT(A) held“literary gaffe”), and all held by court as “bad in law”. This regretful state of affair, compelled one of the Ld Accountant Members of the ITAT to comment as under-
“Before parting with this order, one cannot help note the irony of the situation, i.e., a measure adopted by law to protect the interest of the Revenue in critical cases should itself become the reason for the destruction thereof, an extremely unfortunate incident. This Court, however, cannot do anything beyond expressing its anguish at the sorry state of affairs with regard to the management of work as well as the commitment thereto of the officers concerned, and hope that the Revenue, so keen and anxious to improve the quality of the assessments and avoid unnecessary litigation, takes steps to prevent a recurrence, which has an opposite effect – being detrimental to the cause of the Revenue as well as the morale of its officers. Where, one wonders, was the scope for hearing the assessee and his counsel by the Jt. CIT in the sec. 153D proceedings? One cannot also help mentioning here the hard work and the painstaking efforts put in by the AO, which is commendable indeed, particularly considering the difficult circumstances he was placed in at the time.”
So what is it that is expected of the JCIT as per section 153D? Is there a format, statutorily approved, to give such approval? How is the JCIT going to demonstrate that he/she has indeed applied her mind? Is the JCIT required to give a hearing to the assessee before giving approval u/s 153D? These are difficult questions and even, the courts have not answered all of them.
But of course, the courts have held that in the cases of search, assessment orders whether framed under section 153A or 153C, the JCIT [Approving Authority] is required to see that whether the additions have been made in the hands of assessee are based properly on incriminating material found during the course of search, observations in the appraisal report, the seized materials and further enquiries made by the AO during the course of assessment proceedings. Therefore, necessarily at the time of grant of approval of the assessment made by the AO, the JCIT is required to verify the above issues, apply his/her mind that whether they have been properly appreciated by the AO while framing the assessment orders or not. The JCIT is also required to verify whether the given procedure have been followed by the AO or not at the time of framing of the assessments. The obligation of the approval of the Approving Authority is of two folds; on one hand, to apply his/her mind to secure interest of revenue against any omission or negligence by the AO in taxing right income in the hands of right person and in right assessment year and on the other hand, JCIT is also responsible and duty bound to do justice with the tax payer [Assessee] by granting protection against arbitrary or unjust or unsustainable exercise and decision by the AO. As per the courts all the above steps taken by the JCIT need to be shown to have been done. But how? What the JCIT need to do to demonstrate to the court that he/she has indeed applied his/her mind and not acted mechanically? Of course, there are no clear or easy answers.
Well, the least the JCIT can do, while giving approval under section 153D of the Act is to NOT DO the following(s) -
1. Not to give approval in a cryptic manner within no time of receiving the draft assessment orders. [CASE-1]
2. A natural prequel to this, is to ensure that the AO does not sit over the draft orders till the eleventh hour. [This always helps the assessee to argue in the court that JCIT had no time/ not gone through the assessment orders].
2. Not to write in the approval letter that the AO has given certificate/undertaking and hence I, as JCIT, is approving the draft assessment orders based on AOs certificate. The JCIT cannot substitute his mind with that of the AO. [CASE-3 & 4]
3. Not to write in the approval letter, that approval is given technically due to paucity of time/ overload of work( it is not going to save the JCIT in any case, only demonstrates his non-satisfaction and help the assessees case) [CASE-2]. Assessment order is as much the AOs baby as it is of the JCITs and this kind of approval would throw out the baby with the bathwater.
Therefore, what the JCIT MUST DO-
The approval letter(s) under 153D must demonstrate that the assessment order is passed after due application of mind of the AO and more so of the JCIT [a recording of the dates of correspondence(s) between the JCIT and the AO, both to and fro, from time to time in the approval letter may help the cause].
Maintaining reasonable gap between receipt of draft assessment orders and approval of JCIT would help demonstrate that there was sufficient time available with the JCIT to go through the orders and apply his mind. If required the JCIT can point out a few changes and the AO can reply that he has incorporated those changes in the final order.
By checking from the records, before giving approval, lines of investigation in consonance with appraisal report/ seized materials and opportunity of being heard is adhered to by the AO and mentioning them in the approval letter.
A sample draft of approval under section 153D is prepared hereunder for guidance, subject to changes/improvements.
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To conclude, of course there are no statutory formats for such approval nor is there any obligation to give hearing to the assessee by the JCIT. But the approval should be clear and absolute not conditional and hasty. The courts have held that the approving authority (JCIT) has to give approval for “each” assessment year after applying independent mind to the material on record to see whether the cases are un-abated or abated assessments.
As the adage goes it is of fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done. The approval must demonstrate application of mind and justice cause “Approval implies knowledge and, the exercise or discretion after knowledge.”
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Acknowledgements/References
Sahara India (Firm) v. CIT & Anr. (2008) 216 CTR (SC) 303 : (2008) 7 DTR (SC) 27 : (2008) 300 ITR 403 (SC)
State vs., Duckett 133 SC 85 [SC 1925], 130 SE 340, decided on 05.11.1925 (Supreme Court of South Carolina)
Smt. Sarika Mittal & Ors.IT(SS)A Nos.12 to 14/JAB/2014 & Ors }[date of pronouncement-04/03/2021]
Sanjay Duggal versus ACIT (1813/Del/2019,ITAT Delhi)(date of order 19.01.2021)
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