Supreme Court Upholds Reopening Of Two Brothers’ Tax Assessments After Investigation Report Flagged Their Shares As Overvalued

The assessees and other shareholders agreed to sell shares in two companies under share purchase agreements dated 19 October 2007.

In scrutiny proceedings, Chetan Sabharwal’s return for AY 2008–09 was accepted after the Assessing Officer sought information about the transaction and obtained responses from the companies and buyer; his brother’s returns were accepted by intimation under Section 143(1).

After those proceedings, the Investigation Unit reported that the shares appeared substantially overvalued by reference to the companies’ land and buildings, and that proceeds from the sales were a major source of the assessees’ investment in a Delhi property, for which deductions under Section 54F had been claimed.

On 31 March 2015, the Revenue issued notices under Section 148 to reopen assessments for AYs 2008–09 and 2009–10.

The Delhi High Court upheld the reassessment proceedings; the assessees appealed.

Under Sections 147 and 148 of the Income Tax Act, 1961, as applicable, the Assessing Officer must record reasons supported by relevant material providing a rational connection or live link to the belief that income escaped assessment; the officer need not establish the escapement conclusively at the notice stage, and the court does not examine the sufficiency of the material.

Where an assessment under Section 143(3) has been made, the first proviso to Section 147 bars action after four years from the end of the relevant assessment year unless the escapement resulted from the assessee’s failure to disclose fully and truly all material facts necessary for assessment.

Under *CIT v. Kelvinator of India Ltd.*, (2010) 2 SCC 723, reassessment cannot be used as a review: a mere change of opinion is insufficient, and the doctrine is an in-built safeguard against abuse of the reassessment power.

*Techspan India Private Limited v. ITO*, (2018) 6 SCC 685, explains that a change of opinion presupposes a conscious opinion formed during the original assessment; a non-speaking order or absence of inquiry may make it difficult to attribute such an opinion.

An intimation under Section 143(1) is not an assessment and does not give rise to an opinion capable of being changed: *CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd.*, (2008) 14 SCC 208.

The Court held that the Investigation Unit’s report, received after the original proceedings, was tangible material: it identified apparent overvaluation of the shares and linked the sale proceeds to the assessees’ property investment and Section 54F claims.

Taken together with the recorded reasons concerning the timing of the share agreements, receipt of consideration, capital gains and claimed deductions, that material could support a reasonable belief of escaped income; the Court therefore declined to test its sufficiency or decide whether it would ultimately prove the Revenue’s case.

The Court also found no change of opinion.

In Nitin Sabharwal’s case, the returns had been accepted only by Section 143(1) intimations, so no assessment opinion had been formed.

In Chetan Sabharwal’s case, the scrutiny order did not show an express or implicit opinion on the matters underlying reopening; the Court treated the later investigation report as raising matters not adjudicated in the original assessment.

It found no impermissible change of opinion and upheld the notices for AYs 2008–09 and 2009–10.

The appeals were dismissed, and pending applications were disposed of.