Mechanical Approval Under Section 153D Vitiates Search Assessments: Orissa High Court Ruling

Overview of the Judgment

The Orissa High Court, in ACIT Vs Serajuddin & Co., delivered a significant ruling affirming the position that prior approval granted under Section 153D of the Income Tax Act, 1961 cannot be a mere formality or rubber-stamp exercise. The Court dismissed the Revenue's appeals and upheld the order of the Income Tax Appellate Tribunal (ITAT), Cuttack Bench, which had set aside assessment orders passed under Sections 143(3)/144/153A of the Income Tax Act, 1961 on the ground that the mandatory approval required under Section 153D was granted mechanically, without any genuine application of mind by the approving authority.

This judgment carries far-reaching implications for search and seizure assessments and reinforces the principle that statutory safeguards built into assessment procedures must be given meaningful effect.

Background and Factual Matrix

A search and seizure operation was conducted on 28th May 2008 under Section 132 of the Income Tax Act, 1961 in the case of the assessee and various associated entities. Following the search, a notice under Section 153A was issued on 11th March 2010, along with notices under Section 142(1) and subsequent reminders.

The Assessing Officer (AO), being the ACIT Circle-1(2), Bhubaneswar, completed the assessments on 30th December 2010 under Sections 143(3)/144/153A of the Act for Assessment Years 2003-04 to 2009-10, making several additions and disallowances.

The assessee challenged these assessments before the Commissioner of Income Tax (Appeals) [CIT(A)], Bhubaneswar, raising — among other grounds — the contention that the prior approval mandated under Section 153D had not been obtained in a lawful and meaningful manner. The CIT(A) rejected this ground, observing that a consolidated approval dated 30th December 2010 had been granted by the Additional CIT for all the relevant assessment years and that there was no requirement for the assessment order itself to mention the fact of such approval.

Proceedings Before the ITAT

Aggrieved by the CIT(A)'s order, the assessee preferred further appeals before the ITAT. The core contention was twofold:

  • The CBDT Circular No. 3 of 2008 dated 12th March 2008, which provides detailed guidelines on the approval process under Section 153D, had not been adhered to.
  • The approval granted by the Additional CIT was purely mechanical, devoid of any genuine scrutiny of the draft assessment orders.

The assessee drew attention to the letter dated 29th December 2010 from the AO seeking approval and the response letter dated 30th December 2010 from the Additional CIT communicating the approval — both of which left no room for inference that any meaningful examination of the draft orders had taken place.

The ITAT, placing reliance on the Bombay High Court's ruling in Akil Gulamali Somji and several other decisions, concluded that the approving authority had failed to apply his mind to the assessment records or draft orders. Consequently, the ITAT set aside the assessment orders. The Revenue's cross-appeals were rendered infructuous and disposed of accordingly.

Revenue's Submissions Before the High Court

The Revenue, represented by its learned Senior Standing Counsel, advanced the following arguments:

  1. Approval was duly obtained: The AO had indeed secured prior approval from the Additional CIT before passing the assessment orders, and no legal infirmity existed in this respect.

  2. Non-justiciability of approval: The approval granted by a superior officer is an administrative act and does not partake the character of a quasi-judicial order, rendering it immune from judicial scrutiny.

  3. Only absence of sanction is fatal: Relying on the ITAT Mumbai decision in Pratibha Pipes & Structural Ltd. v. DCIT – ITA No. 3874/Mum/2015, it was argued that only a complete absence of sanction can invalidate an assessment — an irregular grant of sanction cannot.

  4. No hearing required: There is no mandatory obligation on the supervisory officer to provide the assessee a hearing before granting approval, even though Clause 9 of the Manual of Office Procedure contemplates it. Reliance was placed on decisions of the Karnataka High Court in Gopal S. Pandit v. CIT – 96 taxmann.com 233 and Rishab Chand Bhansali v. DCIT – 267 ITR 577, and the Madras High Court in Sakthivel Bankers v. ACIT – 255 ITR 144, all arising in the context of Section 158BG.