Supreme Court upholds tax reassessment of shares sold by Sabharwal brothers in 2007

A Bench of Justices JB Pardiwala and K Vinod Chandran dismissed four appeals filed by the Sabharwal brothers against a 2019 Delhi High Court judgment that upheld the Income Tax Department’s decision to reopen their assessments.

The Court ruled that an investigation report indicating the alleged overvaluation of shares provided tangible material for the Assessing Officer to form a belief that income had escaped assessment.

The case originated from share purchase agreements in October 2007, where the Sabharwal brothers, along with two other shareholders, sold equity shares in two companies for a total of ₹195 crore and ₹60 crore, respectively.

The brothers later claimed deductions under Section 54F of the IT Act after investing the proceeds into a Capital Gains Savings Bank Account and purchasing a property in New Delhi through a court auction in April 2010.

The IT Department initially scrutinized the transactions and issued notices seeking information. Chetan Sabharwal’s return for the assessment year 2008-09 was accepted under Section 143(3), and the brothers’ returns were accepted without adverse inference.

However, an investigation into the share valuation, conducted by the Investigation Unit at Noida under the Director General of Income Tax (Investigation), Lucknow, found that the shares were substantially overvalued compared to the cost of the underlying land and buildings. The report also linked the brothers’ investment in the property at Sikandara Road to the proceeds from the share sales.

The IT Department issued notices under Section 148 in March 2015 to reopen assessments for the years 2008-09 and 2009-10. The Court rejected the brothers’ argument that the department acted on a mere change of opinion without establishing any failure to disclose material facts.

The Court explained that a plea of 'change of opinion' requires an actual formation of opinion in the first instance. In Nitin Sabharwal’s case, the returns were processed merely by way of an intimation under Section 143(1), which does not constitute an assessment order. Therefore, there was no occasion for the assessing officer to form an opinion in the first place.

In Chetan Sabharwal’s case, although scrutiny assessments had been conducted under Section 143(3), the Court found that the assessment orders did not reflect any opinion, either expressly or by necessary implication, on the valuation of the shares or the issues forming the basis of the reassessment.

The Court also considered the requirement under the first proviso to Section 147 of the Act, which restricts reopening an assessment beyond four years where a scrutiny assessment has been completed, unless the escapement of income is attributable to the assessee’s failure to disclose fully and truly all material facts necessary for the assessment.

It held that the investigation report provided prima facie grounds to believe that material facts relating to the transactions had not been fully and truly disclosed during the original assessment proceedings.