Commissioner According Sanction U/S 151 Income Tax Act For Issuing Reassessment Notice Must Give Reasons, Merely Saying “I am Satisfied” Not Sufficient: Delhi HC

A division bench of Justices Ravinder Dudeja and Yashwant Varma observed,

“Mere repeating of the words of the statute, mere rubber stamping of the letter seeking sanction…mere use of expression “Yes, I am satisfied” cannot be considered to be a valid approval as the same does not reflect an independent application of mind. The grant of approval in such manner is thus flawed in law.”

Section 151(1) of the Act categorically provides that no notice for reassessment shall be issued under Section 148 by the Assessing Officer (AO), after expiry of four years from the end of the relevant AY, unless the Commissioner is satisfied on the reasons recorded by the AO that it is a fit case for the issue of such notice.

In the case at hand, the Petitioner-company was issued reassessment notice in 2017 for AY 2010-11. A proforma seeking necessary approval of the Principal Commissioner Income Tax (PCIT) were provided to the petitioner.

As per the AO, the Petitioner-company had taken bogus accommodation entries aggregating to Rs. 55 lakhs during the AY 2010-11 through three “papers companies”.

Petitioner challenged the sanction order, contending that PCIT granted sanction without application of mind. It submitted that PCIT approved issuance of impugned reassessment notice by merely endorsing his signatures on the file in a routine manner, by simply writing “I am satisfied”.

Revenue on the other hand submitted that order granting approval need not contain the reasons as the same is based on prima facie finding arrived at from the record, on the reasons recorded by the AO. It submitted that PCIT had examined the elaborate reasons accorded by the AO to form the belief that Petitioner's income had escaped assessment.

Findings

At the outset, the High Court held that the satisfaction arrived at by the Commissioner (in this case PCIT), should be discernible from the sanction order passed under Section 151 of the Act.

However, in the present case, the Court noted that the approval order was “bereft of any reason”.

Court noted that the request for approval of the Commissioner under Section 151 of the Act was placed before the Additional Commissioner Income Tax (ACIT) in a printed format, who after according his satisfaction, placed the same before the PCIT.

PCIT then granted approval on the same day.

In this backdrop the High Court said, “Even the bare minimum requirement of the approving authority having to indicate what the thought process was, is missing in the aforementioned approval order. While elaborate reasons may not have been given, at least there has to be some indication that the approving authority has examined the material prior to granting approval.”

It added, “Mere appending the expression “Yes I am satisfied” says nothing. The entire exercise appears to have been ritualistic and formal rather than meaningful, which should be the rationale for the safeguard of an approval by a high ranking official.”

The Court referred to SBC Minerals Pvt. Ltd. vs. Assistant Commissioner of Income Tax Circle (2023) where the Delhi High Court had held that the competent authority under Section 151 of the Income Tax Act must be “satisfied” on the reasons recorded by AO. It was also held that the authority must apply its mind “independently”, on the basis of material placed before it, before granting sanction.

Similarly, in Yum! Restaurants Asia Pte. Ltd v. Deputy Director of Income Tax (2017), the High Court had held that Section 151 puts a “supervisory check” over reopening of assessment by the AO. “The law expects the AO to exercise the power under Section 147 of the Act to reopen an assessment only after due application of mind. If for some reason, there is an error that creeps into this exercise by the AO, then the law expects the superior officer to be able to correct that error,” it was held.

Interestingly, in Principal Commissioner of Income Tax-6 Vs. Meenakshi Overseas Pvt. Ltd., the Delhi High Court had held that the words “Yes, I am satisfied” satisfy the mandate of Section 151(1) of the Act for approval of Commissioner.

However, the division bench pointed that such a finding was arrived at by the Court in light of the fact that the ACIT there had addressed a letter to the Income Tax Officer- “clearly reveal(ing) that the sanction was accorded after due application of mind and on considering the reasons narrated by the Assessing Officer.”

In the present case however, the Court said, “there is no such material to come to the conclusion that PCIT granted approval after considering the reasons assigned by the Assessing Officer. The decision rendered in Meenakshi Overseas Pvt. Ltd. (supra), is therefore not applicable to the facts and circumstances of the present case.”

To further strengthen its stance, the High Court cited CIT Jabalpur vs. S. Goyanka Lime & Chemicals Ltd., where while dealing with an identical challenge to the authority merely recording “Yes I am satisfied”, the Madhya Pradesh High Court had held that the mechanical way of recording satisfaction by the Joint Commissioner to accord sanction is “unsustainable”.

The SLP challenging the Madhya Pradesh High Court decision was dismissed by the Supreme Court in 2015.

Accordingly, the Delhi High Court allowed the writ petition and set aside the approval granted by PCIT for issuance of reassessment notice to Petitioner under Section 148 of IT Act, by simply writing “I am satisfied”.

Appearance: Advocates P. Roychaudhuri and Gagan Gupta; Senior Standing Counsel Gaurav Gupta with Advocates Shivendra Singh, Yojit Pareek and Namit Gupta

Case title: Capital Broadways Pvt. Ltd. v. Income Tax Officer Ward 5(3) Delhi & Anr.

Case no.: W.P.(C) 4303/2017

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