A bench comprising Justices JB Pardiwala and K Vinod Chandran dismissed four appeals by businessmen Chetan and Nitin Sabharwal in a judgment delivered on October 28. It upheld notices issued on March 31, 2015, concerning assessment years 2008-09 and 2009-10.
The ruling allows tax officials to examine whether income escaped assessment through transactions involving shares in two companies, and whether proceeds subsequently invested in a residential property on Sikandra Road qualified for the capital gains exemption claimed by the brothers.
The judges did not determine that tax evasion had occurred or that the share sales were fictitious. Their decision addresses the legality of reopening assessments, leaving the disputed transactions and any resulting tax liability to be examined through the statutory process.
The dispute arose from agreements signed in October 2007 under which the brothers and two other shareholders agreed to sell holdings in Pawan Impex Private Limited and SVIIT Software Private Limited to GYS Real Estate Private Limited. The agreed consideration was Rs 195 crore for the first company and Rs 60 crore for the second.
Each of the four sellers was entitled to one-quarter of the consideration. Investigators subsequently questioned whether the prices reflected the value of the companies’ underlying land and buildings, suggesting that the shares had been substantially overvalued.
The investigation also established that the brothers acquired an undivided half share in a residential property on Sikandra Road through a court auction in April 2010. The purchase price was Rs 61 crore, and the department linked much of the funding to the earlier share transactions.
The brothers sought exemption under Section 54F of the Income Tax Act, which provides relief on qualifying capital gains invested in residential property, subject to statutory conditions. The department considered the claimed exemption relevant to its examination of the source and treatment of the money.
Justice Pardiwala, writing for the bench, held that an investigation report prepared after the original assessment supplied tangible material supporting the assessing officer’s belief that taxable income might have escaped assessment.
The judgment distinguished a legally sufficient reason to reopen a case from proof that an assessment was incorrect. At the notice stage, officials must demonstrate a rational connection between fresh information and suspected escaped income, rather than conclusively establish the department’s allegations.
The brothers argued that their share transactions had been disclosed and the relevant capital gains offered for taxation. They maintained that the department was attempting to revisit matters already considered, amounting to an impermissible change of opinion.
They also disputed the proposition that an allegedly inflated sale price necessarily meant taxable income had escaped assessment in the sellers’ hands, particularly when the department had not established that the underlying sales were fabricated.
The court rejected those objections as grounds for invalidating the notices. It found that the department’s concerns extended beyond valuation alone, encompassing the timing of agreements, subsequent payments and the use of proceeds to acquire property while claiming tax relief.
The judges separately examined how the original returns had been handled. Chetan’s assessment had undergone scrutiny under Section 143(3), whereas Nitin’s returns had been processed through intimations under Section 143(1), without a comparable assessment or determination of disputed issues.
For Nitin, the bench found that no earlier opinion had been formed that could subsequently be changed. Regarding Chetan, it held that the original assessment orders did not demonstrate conscious consideration of the particular valuation concerns and property investment identified by investigators.
The court therefore concluded that reopening the assessments was not equivalent to reviewing an earlier decision without new grounds. It upheld the Delhi High Court’s August 2019 judgment, which had rejected the brothers’ challenge to the department’s notices.
The Supreme Court had stayed the reassessment proceedings in August and September 2019 while the appeals remained pending. Those restraints no longer prevent the department from pursuing its examination of the two assessment years.
The investigation underpinning the notices was conducted by the Noida investigation unit under the Directorate General of Income Tax Investigation, Lucknow. Its findings followed the original assessment completed in Chetan’s case in December 2010, when his declared income was accepted.
