The Supreme Court has upheld the reopening of income tax assessments for assessment years 2008-09 and 2009-10, holding that a subsequent investigation report provided tangible material for the Assessing Officer to believe that income had escaped assessment.

A Bench of Justices J.B. Pardiwala and K. Vinod Chandran dismissed the appeals filed by Chetan Sabharwal and Nitin Sabharwal, sons of former Chief Justice of India Y.K. Sabharwal, affirming the Delhi High Court’s decision sustaining the reassessment proceedings.

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The Court held that the notice dated March 31, 2015, issued under Section 148 of the Income Tax Act, 1961, was supported by duly recorded reasons and fresh investigation material. 

The dispute arose from two share purchase agreements entered into by the brothers and two other shareholders with GYS Real Estate Pvt. Ltd.

The transactions concerned shares in Pawan Impex (P) Ltd. and SVIIT Software (P) Ltd., with agreed consideration of ₹195 crore and ₹60 crore, respectively. Each selling shareholder was entitled to one-fourth of the total consideration.

After the original assessment proceedings, the Income Tax Department’s Investigation Unit at Noida examined the value of the shares. Its report prima facie suggested that the shares were overvalued when compared with the cost of the companies’ land and buildings.

The investigation also revealed that the brothers had purchased a half share in a property on Sikandara Road, Delhi, through a court auction in April 2010. The major source of funds for this investment was traced to the share sale proceeds.

Based on the investigation report, the Assessing Officer issued the March 2015 reassessment notice.

The taxpayers argued that alleged overvaluation of shares could not, by itself, establish escaped income in the hands of the sellers. They maintained that the share transfers were completed in the later assessment year and that the resulting long-term capital gains had been disclosed.

They also relied on the enquiries conducted during the original scrutiny proceedings, contending that reopening the assessments amounted to a mere change of opinion.

Another objection concerned the initiation of proceedings beyond four years. The taxpayers argued that the statutory requirement concerning failure to disclose fully and truly all material facts had not been satisfied. 

The Supreme Court found that the subsequent investigation report supplied a valid basis for initiating reassessment.

The report’s findings concerning the valuation of shares, together with the circumstances surrounding the use of the sale proceeds, had a rational connection and a live link with the Assessing Officer’s belief that income had escaped assessment.

The Court explained that, at the stage of issuing a reassessment notice, the officer need not conclusively establish the eventual escapement of income. However, the belief must rest on relevant material rather than suspicion or an unsupported desire to investigate further.

The Bench accordingly rejected the argument that the reopening lacked a lawful foundation. 

The Court reiterated that the power to reassess cannot be used to review an earlier decision merely because the Assessing Officer subsequently prefers a different interpretation of the same facts.

A change of opinion presupposes that an opinion was formed during the original assessment. Courts must therefore examine whether the earlier proceedings reflected conscious consideration of the specific issue, either expressly or by necessary implication.

Where the original assessment did not form an opinion on the relevant aspect, subsequent tangible information suggesting escaped income can justify reopening. Applying this distinction, the Bench found no sustainable change-of-opinion objection in the present case.

The Supreme Court dismissed the appeals and upheld the validity of the reassessment notice, leaving the Delhi High Court’s decision undisturbed.

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