The Supreme Court has permitted the income-tax department to resume reassessment proceedings against Chetan and Nitin Sabharwal, sons of former Chief Justice of India (CJI) YK Sabharwal, over share transactions worth ₹255 crore that preceded their purchase of a prime residential property on Delhi's Sikandra Road in 2010.
A bench of Justices JB Pardiwala and K Vinod Chandran dismissed four appeals filed by the brothers, upholding the validity of reassessment notices issued by the assessing officer in March 2015 for the financial years 2007-08 and 2008-09, corresponding to assessment years 2008-09 and 2009-10.
The proceedings had remained suspended for seven years after the Supreme Court stayed them in August and September 2019, while considering the brothers' appeals against a Delhi High Court ruling that had allowed the tax department to proceed with the reassessment.
The October 28 judgment, delivered in the case of Chetan Sabharwal versus Assistant Commissioner of Income Tax, holds that fresh investigative material can justify reopening an assessment if it provides a rational basis to believe that taxable income may have escaped assessment.
Justice Pardiwala authored the judgment. Justice YK Sabharwal served as a Supreme Court judge between 2000 and 2007 and was the country's 36th Chief Justice from November 2005 to January 2007.
Why the Supreme Court upheld the reassessment
The central question before the court was whether the income-tax department had sufficient grounds to reopen the brothers' assessments under Sections 147 and 148 of the Income Tax Act, 1961, or whether it was merely attempting to revisit matters that had already been examined.
The brothers argued that the reopening amounted to a change of opinion and that the share transactions had already been disclosed to the tax authorities, with the capital gains duly offered for taxation in the relevant assessment years.
The bench rejected their challenge, observing that reassessment powers cannot be equated with the power to review an earlier assessment. It held that the expression 'reason to believe' under Section 147 means cause or justification and requires tangible material having a rational connection or a live link with the belief that income has escaped assessment.
The assessing officer need not conclusively establish the alleged tax evasion through legal evidence at the stage of issuing a reopening notice, the court said. However, the belief must be based on relevant material and reasonable grounds rather than suspicion, gossip or rumour.
In this case, an investigation report prepared by the director general after the original assessments provided fresh material for examining the share transactions, their valuation and the subsequent utilisation of the proceeds.
The court also clarified that the adequacy or sufficiency of the material cannot ordinarily be examined at the threshold stage, provided the recorded reasons have a relevant connection with the alleged escapement of income.
Share transactions worth ₹255 crore under scrutiny
The dispute originated in two share purchase agreements executed on October 19, 2007, through which Chetan and Nitin Sabharwal, along with two other shareholders, sold their stakes in Pawan Impex Pvt Ltd and SVIIT Software Pvt Ltd to GYS Real Estate Pvt Ltd.
The combined consideration for the transactions was ₹255 crore, comprising ₹195 crore for Pawan Impex and ₹60 crore for SVIIT Software. The four shareholders were each entitled to one-fourth of the consideration.
The income-tax department subsequently investigated the transactions and questioned whether the prices at which the shares were sold were justified by the underlying value of the companies' land and buildings.
The investigation raised concerns that the share valuations were substantially higher than what could be supported by the cost of the underlying properties. The report identified alleged overvaluation of approximately ₹109.8 crore in one transaction and ₹40.4 crore in the other.
The department also examined the flow of money from the transactions, including the timing of payments and the brothers' subsequent investment in the Sikandra Road property.
According to the department's recorded reasons for reopening the assessments, the possibility that amounts substantially exceeding the actual value of the shares had been received under the guise of sale consideration warranted further investigation.
How the Sikandra Road property figured in the tax dispute
A substantial portion of the proceeds from the share transactions was subsequently channelled into the purchase of a residential property on Sikandra Road in April 2010.
Chetan and Nitin Sabharwal jointly acquired an undivided and undefined half share in the property for ₹61 crore. The purchase took place within two years of the share transactions and became the basis of their claim for exemption from capital gains tax under Section 54F of the Income Tax Act.
The tax department questioned whether the proceeds from the share sales had been used to acquire capital assets at values substantially exceeding the actual worth of the shares, with the intention of claiming tax benefits.
The brothers maintained that the share sales were genuine and that the consideration had been disclosed to the authorities. They also argued that alleged overvaluation, by itself, could not establish that taxable income had escaped assessment in their hands, particularly when the genuineness of the transactions had not been disputed.
The Supreme Court rejected the argument at the stage of examining the validity of the reopening notices. It said the department's reasons were not confined to the alleged overvaluation but also covered the timing of the agreements, the receipt of consideration in subsequent years and the claim for deductions under Section 54F.
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 legitimate matter for examination in reassessment proceedings, the bench held.
Court distinguishes between the brothers' original assessments
The Supreme Court also examined the nature of the original tax assessments of the two brothers and found an important distinction between their cases.
While Chetan Sabharwal's returns had undergone scrutiny under Section 143(3) of the Income Tax Act, Nitin Sabharwal's returns had been accepted through intimations issued under Section 143(1).
In Nitin's case, the court said, no formal assessment or opinion had been formed by the assessing officer. Consequently, his argument that the department was reopening the matter on the basis of a change of opinion could not be sustained.
In Chetan's case, the assessing officer had examined certain aspects of the share transactions during the original scrutiny. However, the assessment orders did not demonstrate any conscious application of mind to the specific issues now being investigated, including the valuation of the shares, the investment of the proceeds in the Sikandra Road property and the claim for exemption under Section 54F.
The subsequent investigation had brought these issues to the department's attention, the court noted. Therefore, the reopening could not be treated as a mere change of opinion.
The judgment also reiterated the distinction between a case in which an assessing officer has consciously formed an opinion after examining an issue and one in which an assessment order does not reflect any such consideration.
Property purchase had triggered controversy in 2010
The Sikandra Road property transaction had attracted considerable attention in 2010, when the Sabharwal brothers, along with real estate developer Kabul Chawla, were reported to have acquired the prime residential property in Lutyens' Delhi for approximately ₹122 crore.
The deal came under scrutiny because the three eventual buyers had not participated in the original court-supervised auction conducted in 2006.
During that auction, Triveni Infrastructure emerged as the highest bidder with an offer of ₹117 crore, while Prime Commercial Ltd had submitted the second-highest bid of ₹115 crore.
Subsequent orders of the Delhi High Court allowed extensions and changes to the payment arrangements, eventually enabling the Sabharwal brothers and Chawla to step in and complete the acquisition.
Prime Commercial challenged the transaction, alleging that concessions granted to the original successful bidder and the subsequent substitution of buyers had deprived it of its rights as the second-highest bidder. The Delhi High Court's division bench dismissed the challenge in July 2016.
Earlier conflict-of-interest allegations against former CJI
The property deal also revived allegations concerning the business interests of the former CJI's sons during his tenure in the Supreme Court.
Justice YK Sabharwal had headed the bench overseeing the court's drive to seal commercial establishments operating from residential areas in Delhi, including the February 2006 order that set the process in motion.
Critics, including senior advocates associated with the Campaign for Judicial Accountability, alleged that his sons' links with real estate and shopping mall developers raised questions about a possible conflict of interest, as the sealing drive could benefit commercial complexes in which they had business interests.
Justice Sabharwal denied the allegations, describing them as baseless.
With the Supreme Court now dismissing all four appeals, the income-tax department can proceed with reassessing the brothers' returns for the two assessment years. The judgment does not determine the final tax liability or establish that the alleged income escapement occurred; it upholds the department's authority to investigate the transactions through reassessment proceedings.