Reopening beyond 4 year-finding in subsequent year’s assessment can be used as tangible material for reopening-Department cannot amend or change the notice or reasons-notice or the assessee should not be prejudiced or be taken by surprise-Assessee needs to disclose only primary facts-Non disclosure of other facts which may be termed as secondary facts is not necessary-Reopening can be initiated under the first proviso to section 147 of the Act only if the revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment.
New Delhi Television Ltd. v. Dy. CIT Civil Appeal No. 1008 of 2020; dated 3rd April, 2020 Supreme Court (AY: 2008-09) www.itatonline.org
In mids of the covid 19 lockdown the Hon Supreme court rendered yet another landmark judgement under Income tax Act. The Supreme court once again reiterate the important legal principles in context to reopening of assessment beyond the period 4 years. The decision also deals with basic principles related to issuance of notice, recording of reasons and opportunity of hearing. Though the decision needs to be read in context of the facts of the case, however the decision will go a long way in understanding the legal-principles in relation to reopening of assessment.
The appellant New Delhi Television Limited is an Indian company engaged in running television channels of various kinds. It has various foreign subsidiaries however for present case we are concerned mainly with the subsidiary based in the United Kingdom (UK) named NDTV Network Plc., U.K. (NNPLC’).
The reassessment proceeding deals with the issue of step-up coupon bonds amounting to US$ 100 million, therefore certain facts revolving around these bonds needs to be known.
These bonds were issued in July, 2007 through the Bank of New York for a period of 5 years. The case of the assessee is that NNPLC issued stepup coupon bonds of US$ 100 million which were arranged by Jeffries International and the funds were received by NNPLC through Bank of NewYork. The assessee had agreed to furnish corporate guarantee for this transaction. These bonds were subscribed to by various entities. These bonds were to be redeemed at a premium of 7.5% after the expiry of the period of 5 years. However, these bonds were redeemed in advance at a discounted price of US $74.2 million in November, 2009.
The ROI for AY: 2008-09 was filed on 29.09.2008 declaring a loss. In the original assessment proceeding the assessing officer held that NNPLC had virtually no financial worth, it had no business of the name and therefore it could not be believed that it could have issued convertible bonds of US$ 100 million, unless the repayment along with interest was secured. This was secured only because of the assessee agreeing to furnish guarantee in this regard. Though the assessee had never actually issued such guarantee, the assessing officer was of the view that the subsidiary of the assessee could not have raised such a huge amount without having this assurance from the assessee. The transaction was of such a nature that the assessee should be required to maintain an arm’s length from its subsidiary, meaning that it should be treated like a guarantee issued by any corporate guarantor in favour of some other corporate entity. The assessing officer did not doubt the validity of the transaction but imposed guarantee fee @ rate of 4.68% by treating it as a business transaction and added Rs. 18.72 crores to the income of the assessee, vide order dated 03.08.2012.
Reopening of Assessment:
On 31/3/2015 (beyond 4 years from end of relevant Assessment years) the department issued notice u/s. 148 of the Act on the ground that net income chargeable to tax for the AY: 2008-09 had escaped assessment. On 4/8/2015 reasons were supplied. The main reason given was that in the following assessment year i.e. AY: 200910, the assessing officer had proposed a substantial addition of ₹ 642 crores to the account of the assessee on account of monies raised by the assessee through its subsidiaries NDTV BV, The Netherlands, and others.
The assessee for AY 2009-10 had raised its objection before the Dispute Resolution Panel (DRP) which came to the conclusion that all these transactions with the subsidiary companies in Netherland were sham and bogus transactions and that these transactions were done with a view to get the undisclosed income, for which tax had not been paid, back to India by this circuitous round tripping.
For issuing the reassessment notice the assessing officer relied upon the order of the DRP holding that there is reason to believe that funds received by NNPLC were actually the funds of the assessee. Therefore, the assessing officer was of the opinion that there
were reasons to believe that the funds received by NNPLC were the funds of the assessee under a sham transaction and that the amount of Rs.405.09 crores introduced into the books of NNPLC during the AY : 200809 through the transaction involving the stepup coupon convertible bonds pertains to the assessee.
Objections Raised by Assessee:
The assessee filed its objection to the notice and reasons given, and claimed that
There had been no failure on the part of the assesse to disclose fully and truly material facts necessary to make an assessment;
that the proceedings had been initiated on a mere change of opinion and there was no reason to believe that the transaction of stepup bonds was a legal and valid transaction.
In addition, it was claimed that the assessing officer had no valid reasons to believe that the income of the assesse had escaped assessment.
According to the assessee the assessment officer had accepted the genuineness of the transaction by levying guarantee fees and adding it back to the income of the assessee.
In the alternative, it was submitted that the notice had been issued beyond the period of limitation of 4 years. According to the assessee it had not withheld any material facts and therefore, limitation of 6 years as applicable to the first proviso to Section 147 would not apply.
Rejection of Objection :
The claim of the assessee was disposed of by the assessing officer vide order dated 23.11.2015 wherein the assessing officer held that there was nondisclosure of material facts by the assessee and the notice would be within limitation since NNPLC was a foreign entity and admittedly a subsidiary of the assessee and the income was being derived through a foreign entity. Hence, the case of the assessee would fall within the 2nd proviso of Sec. 147 of the Act and the extended period of 16 years would be applicable. The objections were accordingly rejected.
The assessee’s writ petition was dismissed by the High Court on 10.08.2017. Against the said order the assessee filed the present Appeal before Supreme Court.
The court repeatedly observed that it will not go in to the merits of the allegations made by the department against the assessee. At this stage court will only decide whether the revenue has sufficient reasons to believe that undisclosed income of the assessee has escaped assessment and therefore there are grounds to issue notice.
Whether the facts which came to the knowledge of the assessing officer after the assessment proceedings for the relevant year were completed, could be taken into consideration for coming to the conclusion that there were reasons to believe that income had escaped assessment .
On behalf of the assessee it has been urged that once the transaction of stepup coupon bonds has been accepted to be correct, then the revenue cannot reopen the same and doubt the genuineness of the transaction based on the subsequent order of the DRP for the assessment year 200910. According to the assessee there is an attempt on behalf of the revenue to deliberately mixup the transactions relating to the Netherlands subsidiary with the U.K. subsidiary.
According to the revenue Tax Evasion Petitions were filed by the minority shareholders of the assessee company on various dates, which complaints describe in detail the communication between the assessee and the subsidiaries and also allegedly showed evidence of round tripping of the assessee’s undisclosed income through a layer of subsidiaries which led to the issuance of the notice in question.
The Hon. court relied on the decisions in case of Claggett Brachi Co. Ltd., London v. CIT, (1989) 177 ITR 409 (SC), 1989 Supp(2) SCC 182; M/s. Phool Chand Bajrang Lal and Another v. ITO and Another (1993) 203 ITR 456 (SC); (1993) 4 SCC 77 and Ess Kay Engineering Co.(P) Ltd. v. CIT, (2001) 247 ITR 818 (SC); (2001) 10 SCC 189, for the proposition that subsequent facts which come to the knowledge of the assessing officer can be taken into account to decide whether the assessment proceedings should be reopened or not. Information which comes to the notice of the assessing officer during proceedings for subsequent assessment years can definitely form tangible material to invoke powers vested with the assessing officer u/s. 147 of the Act.
Therefore the court disagreed with the submission of the assessee and observed that since the revenue discovered fresh tangible material subsequent to the assessment order of 03.08.2012, it cannot be said that the assessing officer did not have reasons to believe that income had escaped assessment. At the stage of issuance of notice, the assessing officer is to only form a prima facie view. Thus the court held that the material disclosed in assessment proceedings for subsequent years was sufficient to form such a view and that there were reasons to believe that income had escaped assessment in this case.
Coming to the second question as to whether there was failure on the part of the assessee to make a full and true disclosure of all the relevant facts.
The case of the assessee was that it had disclosed all facts which were required to be disclosed. The revenue has placed reliance on certain complaints made by the minority shareholders and it is alleged that those complaints reveal that the assessee was indulging in round tripping of its funds.
According to the revenue the material disclosed in these complaints clearly shows that the assessee is guilty of creating a network of shell companies with a view to transfer its untaxed income in India to entities abroad and then bring it back to India thereby avoiding taxation.
The court refused to go into the above aspect of the matter because these complaints have not seen light of the day either before the High Court or before Supreme Court. The case of the revenue is that the assessee did not disclose the amount subscribed by each of the entities and furthermore the management structure of these companies.
The court observed that even before the assessment order was passed on 03.08.2012, the assessing officer was aware of the entities which had subscribed to the convertible bonds. The court observed that it was apparent from the records of the case that the revenue was aware of the entities which subscribed to the convertible bonds.
The fact that stepup coupon bonds for US$ 100 millionwere issued by NNPLC was disclosed; who were the entities which subscribed to the bonds was disclosed; and the fact that the bonds were discounted at a lower rate was also disclosed before the assessment was finalised. This transaction was accepted by the assessing officer and it was clearly held that the assessee was only liable to receive a guarantee fees on the same which was added to its income. The court held that it cannot be said that the assessee had withheld any material information from the revenue.
The court further observed that the revenue can take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso section 147 of the Act only if the revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment. According to the court the assessee, had disclosed all the facts it was bound to disclose. If the revenue wanted to investigate the matter further at that stage it could have easily directed the assessee to furnish more facts.
Whether the assessee had disclosed all the primary facts necessary for assessment of its case to the assessing officer ?
On the argument of the revenue that the assessee to avoid detection of the actual source of funds of its subsidiaries did not disclose the details of the subsidiaries in its final accounts, balance sheets, and profit and loss account for the relevant period as was mandatory under the provisions of the Indian Companies Act, 1956. The court observed that it was not disputed that the assessee had obtained an exemption from the competent authority under the Companies Act, 1956 from providing such details in its final accounts, balance sheets, etc. As such it cannot be said that the assessee was bound to disclose this to the Assessing Officer. The Assessing Officer before finalising the assessment of 03.08.2012 had never asked the assessee to furnish the details.
The revenue also came up with the plea that certain documents were not supplied but according to court all these documents cannot be said to be documents which the assesse was bound to disclose at the time of assessment. The court noted the fact that there was material on record to show that the assessee had not only disclosed the names of all the bond holders but also their addresses; number of bonds along with the total consideration received. This forms part of the assessment orders dated 03.08.2012 in the case of M/s. NDTV Labs Ltd. and M/s. NDTV Lifestyle Ltd which were passed by the same officer who had passed the assessment order in the case of the assessee on the same date itself. Therefore the entire material was available with the revenue. The court held that, all relevant facts were duly within the knowledge of the assessing officer. Therefore, there was full and true disclosure of all material facts necessary for its assessment by the assessee.
The court held that the assessee had disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts. It was for the assessing officer at this stage to decide what inference should be drawn from the facts of the case.
The Hon. court relied on the decision in case of Calcutta Discount Co. Ltd. v. ITO, Companies District I, Calcutta and Anr. (1961) 41 ITR 191 (SC); AIR 1961 SC 372, wherein it was held that non disclosure of other facts which may be termed as secondary facts is not necessary.
The court therefore held that the assessee disclosed all the primary facts necessary for assessment of its case to the assessing officer.
The Court also noted the fact that revenue in its counter affidavit before the High Court had stated that it was not relying upon the nondisclosure of facts by the assessee, therefore before Supreme court the revenue had taken a contrary stand and therefore could not have been permitted to orally urge the same. Even otherwise court held that the assessee had fully and truly disclosed all material facts necessary for its assessment and, therefore, the revenue cannot take benefit of the extended period of limitation of 6 years.
The next arguments urged before the Court by the revenue was that in terms of second proviso to section 147 of the Act r.w.s 149(1)(c) of the Act, the limitation period would be 16 years since the assessee has derived income from a foreign entity. The second proviso and explanation 2(d) reads as follows:
Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:
xxx xxx xxx
Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—
xxx xxx xxx
(d) where a person is found to have any asset(including financial interest in any entity) located out side India.
xxx xxx xxx
The assessee contented that no income was derived from the foreign entity and a loan cannot be termed to be an asset or an income and it is submitted that the notice cannot be said to have been issued under the second proviso.
The court noted that the notice dated 31.03.2015 is conspicuously silent with regard to the second proviso. It does not rely upon the second proviso and basically relies on the provision of Section 148 of the Act. The reasons communicated to the assessee on 04.08.2015 mention‘ reason to believe’ and non disclosure of material facts by the assessee. There is no case set up in relation to the second proviso either in the notice or even in the reasons supplied on 04.08.2015 with regard to the notice. It was only while rejecting the objections of the assessee that reference has been made to the second proviso in the order of disposal of objections dated 23.11.2015.
The High Court relied upon the judgment in Mohinder Singh Gill & Anr. vs. The Chief Election Commissioner, New Delhi & Ors. (1978) 2 SCR 272 / AIR 1978 SC 851 and came to the conclusion that the revenue cannot rely upon the second proviso because the notice was silent in this regard. However, the High Court held that the assessee was guilty of non disclosure of material facts and upheld the reopening.
The Supreme court observed that it had already held that the assessee was not guilty of non disclosure of material facts and the revenue has not challenged the judgment of the High Court in so far as the findings against it is concerned. However the court permitted the revenue to defend the petition even on a ground which may have been decided against it by the High Court.
On behalf of the revenue it was urged that mere non naming of the second proviso in the notice does not help the assessee.
The court held that, the noticee or the assessee should not be prejudiced or be taken by surprise. The uncontroverted fact is that in the notice dated 31.03.2015 there is no mention of any foreign entity. There is only mention of the Section 148. Even after the assessee specifically asked for reasons, the revenue only relied upon facts to show that there was reason to believe that income has escaped assessment and this escapement was due to the nondisclosure of material facts. There is nothing in the reasons to indicate that the revenue was intending to apply the extended period of 16 years. It is only after the assessee filed its reply to the reasons given, that in the order of rejection for the first time reference was made to the second proviso by the revenue.
According to the court this was not a fair or proper procedure. The assessee must be put to notice of all the provisions on which the revenue relies upon.
The notice and reasons given thereafter do not conform to the principles of natural justice and the assessee did not get a proper and adequate opportunity to reply to the allegations which was being relied upon by the revenue. If the revenue is to rely upon the second proviso and wanted to urge that the limitation of 16 years would apply, then in the notice or at least in the reasons in support of the notice, the assessee should have been put to notice that the revenue relies upon the second proviso. The assessee could not be taken by surprise at the stage of rejection of its objections or at the stage of proceedings before the High Court that the notice is to be treated as a notice invoking provisions of the second proviso of Section 147 of the Act.
The Hon. Court allowed the appeal of the assessee by holding that the notice issued to the assessee shows sufficient reasons to believe on the part of the assessing officer to reopen the assessment but since the revenue has failed to show nondisclosure of facts the notice having been issued after a period of 4 years is required to be quashed.
As obiter the Hon court also stated that they have not expressed any opinion on whether on facts of this case the revenue could take benefit of the second proviso to S 147 read with S 149(1)(c).or not. Therefore, the revenue may issue fresh notice taking benefit of the second proviso if otherwise permissible under law.
Issue left open :
Thus a major issue in context to applicability of second proviso to sec 147 of the Act i.e. asset or financial interest in foreign country, is left open. As per second proviso to section 147 of the Act. inserted by the Finance Act 2012 w.e.f. 1.7.2012, provides that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India chargeable to tax has escaped assessment in any assessment year. According to the second proviso the condition of first proviso to sec 147 will not be required to be fulfilled i.e disclosure of fully and truly all material facts. Thus if a notice u/s. 147/148 is issued relying on the second proviso, the dept need not satisfy the requirement of first proviso, i.e even if an assessee has disclosed fully and truly all material facts for assessment, the Dept can reopen the assessment.
However one should note that if at the time when the order which was subject matter of appeal or revision was passed, the time-limit for issuance of notice u/s. 148 had already expired, prior to insertion of second proviso then the time limit of extended period of 16 years will not apply.
The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to litigant for indefinite period on future unforeseen events. Proceedings, which have attained finality under existing law due to bar of limitation cannot be held to be open for revival unless the amended provision is clearly given retrospective operation so as to allow upsetting of proceedings, which had already been concluded and attained finality. The amendment to subsection (1) of section 150 is not expressed to be retrospective and, therefore, has to be held as only prospective. The amendment made to sub-section (1) of section 150 which intends to lift embargo of period of limitation under section 149 to enable authorities to reopen assessments not only on the basis of orders passed in proceedings under the Act but also on order of a Court in any proceedings under any law, has to be applied prospectively on or after 1.4.1989 when the said amendment was introduced to sub-section (1). The provision in sub-section (1), therefore, can have only prospective operation to assessments, which have not become final due to expiry of period of limitation prescribed for assessment under section 149.
Summary of ratios laid down by the Supreme Court.
In a challenge to reopening proceeding the court should not go in to the merits of the allegations made by the dept against the assessee (in present case Tax Evasion Petitions filed by minority shareholders). At this stage court will only decide whether the revenue has sufficient reasons to believe that undisclosed income of the assessee has escaped assessment and whether there are grounds to issue notice.
At the stage of issuance of notice, the assessing officer is to only form a prima facie view.
The material disclosed in assessment proceedings for subsequent years are sufficient to form a view that there were reasons to believe that income had escaped assessment in a case.
Information which comes to the notice of the assessing officer during proceedings for subsequent assessment years can definitely form tangible material to invoke powers vested with the assessing officer u/s. 147 of the Act.
Revenue can take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso section 147 of the Act only if the revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment.
Mere change of opinion of the assessing officer is not a sufficient to meet the standard of ‘reason to believe’.
The requirement of law is that the assessee must disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts.
It was for the assessing officer to decide what inference should be drawn from the primary facts disclosed. Non disclosure of other facts which may be termed as secondary facts is not necessary.
The revenue cannot be permitted to take a contrary stand and therefore could not be permitted to orally urge the same before the court.
The assessee must be put to notice of all the provisions on which the revenue relies upon. The assessee could not be taken by surprise at the stage of rejection of its objections or at the stage of proceedings before the Court that the notice is to be treated as a notice invoking a particular provision of the Act.
The notice and reasons given should confirm to the principles of natural justice and the assessee must get a proper and adequate opportunity to reply to the allegations which was being relied upon by the revenue. The court held that, the noticee or the assessee should not be prejudiced or be taken by surprise.
There is no bar in issuing second reopening notice if notice satisfy the other condition.
By virtue of Article 141 of the Constitution of India, the judgments pronounced by the Supreme Court have the force of law and are binding on all the Courts in India.
Thus in the ongoing reassessment proceedings and upcoming one’s, the ratio of the above decision will be helpful. However the ratio of the above decision has to be read in context of the fact before it as held in CIT vs. Sun Engineering Works (p.) Ltd. (1992) 198 ITR 297 (SC). One needs to note the above key legal principles while dealing with reassessment proceedings and raise appropriate contentions while filing reply/objections to the reasons recorded for reopening of assessment. It is settled position in law now that department cannot improve the reasons recorded and the courts shall not rely on any new explanation from department either in form of affidavit or orally submitted in court nor from the order rejecting the assessee’s objection. Further one should note that there is no bar in law in issuance of second notice u/s. 147 /148 of the Act subject to other conditions are satisfied.
One can also make reference to the detail article on reopening: