SC Upholds Reopening of YK Sabharwal Sons’ Tax Assessments Over Rs 255 Crore Share Sale

What were the transactions in question?

In 2007, the brothers and two other shareholders signed share purchase agreements with GYS Real Estate Pvt Ltd, wherein they agreed to sell their shares in Pawan Impex and SVIIT Software Pvt Ltd for Rs 255 crore.

Each of the four sellers was entitled to a quarter of the consideration. The final payments were lower after the buyer deducted the company’s outstanding loans and other costs.

When Chetan filed for his income tax return in 2008-09, he declared a loss of Rs 90.37 lakh. The return also showed around Rs 37.64 crore received from the buyer under “sundry credit,” an accounting entry that included amounts payable by the buyer under the share sale transaction. The department examined the transaction and completed Chetan’s scrutiny assessment under Section 143(3) of the Income-tax Act, accepting his declared income.

Nitin’s returns, however, were only processed under Section 143(1), which is a routine processing of returns that involves checks and certain permitted adjustments. It is not the same as a detailed scrutiny assessment of the taxpayer’s claims and transactions under Section 143(3).

The brothers used proceeds from the share sales for purchasing a residential property on Sikander Road. Chetan had also claimed exemption from long-term capital gains tax if the proceeds from the sale of certain assets were invested in a residential house.

The issue resurfaced after an I-T Department investigation raised questions about whether the shares had been sold at values substantially higher than the underlying land and buildings. In 2015, the assessing officer issued notices under Section 148 to reopen the brothers’ assessments, saying that a “substantial amount has escaped assessment during assessment years 2008-09 and 2009-10.”

The brothers challenged the notices, saying that the department was seeking to revisit already examined issues. The dispute before the SC was about whether the department had a legally valid basis to reopen the assessment.

When can a taxpayer’s assessment be reopened?

The I-T Department cannot reopen a taxpayer’s assessment simply because it wants another look at it. Section 147 of the I-T Act, 1961, allows an assessing officer to do so only when he “has reason to believe that any income chargeable to tax has escaped assessment for any assessment year.”

The law sets a time limit on this power. If an assessment has already been completed after scrutiny under Section 143 (3), the department generally cannot reopen it after four years from the end of the relevant assessment year. But it can do so if the income escaped assessment because the taxpayer failed to make a return or “to disclose fully and truly all material facts necessary for his assessment.”

The law also requires the officer to record the reasons for reopening an assessment before issuing a notice under Section 148, to ensure that the decision is based on reason rather than vague suspicion.

An important safeguard is the rule against the Assessment Officer’s “change of opinion” in the case. In CIT v Kelvinator of India Ltd (2010), the SC said that without this check, “In the garb of reopening the assessment review would take place.” In ITO v Techspan India (2018), it said that Section 147 gives the department the “power to reassess and not the power to review.”

The distinction matters, as under Section 143(1), a return is only processed, and an intimation is sent to the taxpayer. That doesn’t mean that the department has examined every transaction or claim in the return. Under Section 143(3), the assessing officer examines the return, calls for information, and completes an assessment after scrutiny.

What the SC held

In the latest case, the court explained what the law means by an officer having “reason to believe” that income has escaped assessment. It said that when the officer does not have to prove at the time of issuing a notice that tax has definitely been evaded, the officer must have some material to support the belief that income may have escaped assessment.

The bench said “reason” means “cause or justification.” At the notice stage, the question is whether “there was relevant material on which a reasonable person could have formed the requisite belief.” The officer can only rely on direct and/or circumstantial evidence.

It said, “It is not any and every material, however vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of income. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the AO could not have reason to believe that income had escaped assessment.”

The brothers argued that the alleged overvaluation of shares could not by itself mean that income had escaped assessment. They also objected to the department relying on the treatment of capital gains in later years. The SC rejected this, saying that the recorded reasons covered not just the share valuation but also the gains being “adjusted in future years” and the exemption claimed.

The bench said that the transactions could involve “a diversion of income, assessable to tax under the guise of sale proceeds,” especially since the sale price was above the actual value of sale.

The brothers also argued that the department was revisiting matters it had already examined. The SC said that change of opinion arises only when the officer has applied their mind to an issue and formed a view during the original assessment. Merely accepting a return does not mean every transaction or claim in it was examined.

Both the brothers’ cases were treated differently. On Nitin’s returns being processed under Section 143(1), the court held that “the question of change of opinion, does not arise.” On Chetan’s return, which had to be scrutinised under Section 143(3), the court said the assessment order is “a bare acceptance of the returned income as it is.”

It found no indication that the officer had examined the share valuation, the purchase of property, or the treatment of capital gains. The assessment order from 2009-10 also contained no discussion of the long-term capital gains.

The court also noted that the information about the alleged undervaluation had emerged from a subsequent investigation and was not available to the officer during the original assessment and therefore held that reopening of assessments did not amount to a change of opinion.