Facts of the Case

A search and seizure operation under section 132(1) of the Income-tax Act, 1961 was conducted on 03.02.2011 in the Ramji Vaish Group, which included M/s Subhash Stone Product (P.) Ltd., Sonebhadra. Pursuant to the search, assessments for Assessment Years 2005-06 to 2011-12 were framed under section 153A read with section 143(3).

Approval under section 153D was obtained from the Joint Commissioner of Income Tax on 26.03.2013, and all assessment orders were passed on 30.03.2013. The Assessing Officer made multiple additions, including estimation of net profit by applying an arbitrary rate, additions based on diaries and loose papers seized during search, and additions for alleged unexplained investments and cash deposits. The Commissioner of Income Tax (Appeals) partly sustained and partly deleted the additions. Aggrieved, the assessee preferred appeals before the Tribunal.

Issues Involved

  1. Whether approval granted under section 153D in a mechanical manner vitiates search assessments framed under section 153A.
  2. Whether completed assessments can be disturbed under section 153A in the absence of incriminating material found during search.
  3. Whether additions based on seized diaries and loose papers, alleged to be dumb documents, are legally sustainable.
  4. Whether estimation of net profit by applying an ad-hoc rate is justified when books of account are maintained and audited and no defects are pointed out.

Petitioner’s (Assessee’s) Arguments

The assessee contended that approval under section 153D was granted mechanically on a single day for numerous group cases, without due application of mind or examination of seized material, rendering the assessments void ab initio.

It was further argued that for several assessment years, the original assessments had attained finality and no incriminating material was found during search; therefore, no additions could be made under section 153A. The assessee submitted that the diaries and loose papers relied upon by the Assessing Officer were rough notings, uncorroborated, and constituted dumb documents with no evidentiary value.

Regarding profit estimation, it was submitted that the assessee maintained regular books of account which were audited, no defects were pointed out, and therefore application of an arbitrary net profit rate was unjustified.

Respondent’s (Revenue’s) Arguments

The Revenue supported the assessment orders and contended that the seized material, including diaries and loose papers, revealed undisclosed income. It was argued that approval under section 153D was valid and that estimation of profits and other additions were justified based on the material available on record.

Court Order / Findings

The Tribunal held that approval under section 153D is a mandatory jurisdictional requirement and must reflect due application of mind. Grant of approval for a large number of assessments on a single day, without examination of seized material or draft assessment orders, was held to be mechanical and invalid in law.

The Tribunal further held that in respect of completed assessments, additions under section 153A cannot be sustained in the absence of incriminating material found during the search. The diaries and loose papers relied upon by the Assessing Officer were held to be dumb documents, as they were uncorroborated and unsupported by independent evidence.

With respect to estimation of net profit, the Tribunal observed that where books of account are maintained and audited and no defects are pointed out, arbitrary estimation of profit by applying ad-hoc rates is not permissible. Accordingly, substantial additions made and sustained by the lower authorities were deleted or set aside, and the appeals of the assessee were allowed to the extent indicated.

Important Clarification

The Tribunal clarified that statutory safeguards such as approval under section 153D are not empty formalities and mechanical approval strikes at the root of jurisdiction. Further, rough diaries or loose papers found during search, without corroborative evidence, cannot by themselves justify additions under section 153A, and estimation of income without rejecting books of account is impermissible in law.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770633154_MSSUBHASHSTBSBnp3E5CMBqG8triLEPi5m6ViwpBnADRAVS.ASSTT.COMMISSIONEROFINCOMETAXCENTRALCIRCLEALLAHABAD.pdf

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