The court said investigators had provided material warranting further examination of the transactions and the use of their proceeds.
The Supreme Court has cleared the way for the income-tax department to reopen assessments of the two sons of former Chief Justice of India (CJI) YK Sabharwal over share transactions that funded their purchase of a prime property on Delhi’s Sikandra Road in 2010, rejecting their challenge to the tax proceedings that had remained stalled for seven years.
A bench of Justices JB Pardiwala and K Vinod Chandran dismissed four appeals filed by Chetan and Nitin Sabharwal, upholding the validity of notices issued by the assessing officer (AO) in March 2015 to reopen their assessments for the financial years 2007-08 and 2008-09, corresponding to assessment years 2008-09 and 2009-10. The proceedings had been stayed by the Supreme Court in August and September 2019, pending consideration of their appeals against a Delhi high court judgment that had allowed the reassessment to proceed.
Justice Sabharwal was a Supreme Court judge for seven years between 2000 and 2007, during which he served as the 36th CJI from November 2005 to January 2007.
The dispute centres on the brothers’ sale of shares in two companies, Pawan Impex Pvt Ltd and SVIIT Software Pvt Ltd, to GYS Real Estate Pvt Ltd under agreements executed in October 2007. The aggregate consideration for the two transactions was ₹255 crore — ₹195 crore for Pawan Impex and ₹60 crore for SVIIT Software. The brothers, who were among four shareholders selling their stakes, were each entitled to a quarter of the consideration.
The tax department’s investigation subsequently raised questions about the valuation of these shares, concluding prima facie that their sale prices were substantially higher than what could be justified by the cost of the underlying land and buildings. The department also found that a substantial part of the proceeds had been channelled into the purchase of a property on Sikandra Road in April 2010, with the brothers claiming exemption from capital gains tax under Section 54F of the Income Tax Act.
The two brothers jointly purchased an undivided and undefined half share in the residential property for ₹61 crore. The acquisition was made within two years of the share transactions and formed the basis of their claim for the tax exemption.
The Supreme Court, in its October 28 judgment, held that the investigation report by the director general, which came after the original assessments, provided tangible material for the AO to form a reasonable belief that income chargeable to tax had escaped assessment. It rejected the brothers’ argument that the reopening was based on a mere change of opinion, emphasising that the power to reassess cannot be confused with the power to review an earlier assessment.
“The expression ‘reason to believe’ in Section 147 of the Act means cause or justification,” Justice Pardiwala, who authored the judgment, said, explaining that the AO must have tangible material with a rational connection or live link to the belief that income had escaped assessment. The officer need not, at the stage of issuing a notice, have conclusively established the alleged escapement of income through legal evidence.
The court also made an important distinction between the two brothers’ original assessments. While Chetan’s returns had undergone scrutiny under Section 143(3) of the Act, Nitin’s returns had merely been accepted through intimations under Section 143(1). In the latter case, the court said, no assessment or opinion had been formed in the first place, making the plea of a change of opinion untenable.
As regards Chetan, the bench noted that although the assessing officer had examined aspects of the share transactions during the original scrutiny, the assessment orders did not reflect any conscious application of mind to the specific questions of share valuation, the investment of the proceeds in the Sikandra Road property or the claim under Section 54F. The subsequent investigation had brought these aspects to light, the court said, and therefore the reassessment could not be characterised as a mere change of opinion.
The brothers had argued that the share transactions had been disclosed to the tax authorities and that the capital gains had been duly offered for taxation in the relevant assessment year. They also contended that an alleged overvaluation of shares could not, by itself, establish escapement of income in the hands of the sellers, particularly when the genuineness of the sale itself had not been questioned.
Rejecting this line of argument at the threshold stage, the bench said the recorded reasons for reopening did not rest solely on the alleged overvaluation. They also referred to the timing of the share purchase agreements, the receipt of consideration in subsequent years and the brothers’ claim of deductions under Section 54F after investing the proceeds in the Sikandra Road property.
The court said the possibility that proceeds substantially exceeding the actual value of the shares had been used to acquire capital assets under the guise of sale consideration was a matter that could legitimately be examined in reassessment proceedings.
All about the Sikandra Road acquisition
The Sikandra Road acquisition had attracted considerable controversy in 2010, when the brothers, along with real estate developer Kabul Chawla, were reported to have acquired the prime property in Lutyens’ Delhi for around ₹122 crore. The transaction came under scrutiny because the three buyers had not participated in the original 2006 court-supervised auction, in which Triveni Infrastructure had emerged as the highest bidder at ₹117 crore, ahead of Prime Commercial Ltd, which had offered ₹115 crore.
