The Supreme Court has upheld the Income Tax Department's decision to reopen assessments against businessmen Chetan Sabharwal and Nitin Sabharwal, sons of former Chief Justice of India (CJI) late YK Sabharwal, over share transactions involving a total consideration of ₹255 crore.

A Bench of Justices JB Pardiwala and K Vinod Chandran dismissed four appeals filed by the brothers challenging a 2019 Delhi High Court judgment that had upheld the reopening of their income-tax assessments.

The Court held that an investigation report indicating alleged overvaluation of shares constituted tangible material for the Assessing Officer (AO) to form a reason to believe that taxable income had escaped assessment.

Interpreting Section 147 of the Income Tax Act, the Bench observed that the expression "reason to believe" requires tangible material having a rational connection or live link with the belief that income has escaped assessment. At the stage of issuing a reassessment notice, the question is whether relevant material existed on which a reasonable person could have formed such a belief. The sufficiency of that material is not open to judicial scrutiny, it added.

The case arose from share purchase agreements executed in October 2007 between the Sabharwal brothers, two other shareholders and GYS Real Estate Private Limited, a Fortis Group company.

Under the agreements, the shareholders sold their equity shares in two companies, Pawan Impex Private Limited and SVIIT Software Private Limited, for ₹195 crore and ₹60 crore, respectively. Chetan and Nitin Sabharwal each held a 25% stake in the entities.

The brothers subsequently claimed deductions under Section 54F of the Income Tax Act after investing the sale proceeds in a Capital Gains Savings Bank Account and purchasing a residential property on Sikandara Road, New Delhi, through a court auction in April 2010. The property was acquired for ₹61 crore.

The Income Tax Department had initially scrutinised the transactions and sought explanations and supporting documents from Chetan Sabharwal. It also issued notices to the two companies and the buyer company to obtain information regarding the share transactions.

While Chetan's return for assessment year 2008-09 was accepted under Section 143(3) of the Act, the brothers' returns for the relevant assessment years were also processed without any adverse findings concerning the transactions.

However, after the original assessments were completed, the Investigation Unit at Noida, functioning under the Director General of Income Tax (Investigation), Lucknow, conducted an enquiry into the valuation of the shares.

The investigation report prima facie concluded that the shares had been substantially overvalued when compared with the cost of the underlying land and buildings. It also traced the source of the brothers' investment in the Sikandara Road property to the proceeds received from the share transactions.

Based on the findings, the Income Tax Department issued notices under Section 148 of the Act on March 31, 2015, seeking to reopen the brothers' assessments for assessment years 2008-09 and 2009-10.

Challenging the notices, Senior Advocate Mukul Rohatgi, appearing for the brothers, argued that the reassessment proceedings were based on a mere change of opinion and that the department had failed to establish any omission or failure on their part to disclose material facts fully and truly.

He further contended that the alleged overvaluation of shares could not, by itself, establish escapement of income in the hands of the sellers. He also pointed out that the transactions had already been examined during the original scrutiny proceedings.

Rejecting these submissions, the Supreme Court observed that the investigation report had brought fresh information to light after the original assessments were completed.

The Bench noted that the report specifically pointed to the alleged overvaluation of the shares in comparison with the cost of the underlying land and buildings and identified the sale proceeds as the major source of investment in the Sikandara Road property.

"This specific information was not available with the AO at the time of the original assessment nor was such information disclosed by the appellant in those proceedings," the Court observed.

The Bench also rejected the argument that the reassessment proceedings amounted to a change of opinion, explaining that such a plea could be raised only where the Assessing Officer had formed an opinion during the original assessment.

In Nitin Sabharwal's case, the returns had merely been processed through an intimation under Section 143(1) of the Act, which does not constitute an assessment order. Consequently, 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 completed under Section 143(3), 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 examined the first proviso to Section 147, which restricts reopening of assessments beyond four years where scrutiny assessments have 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 concerning the transactions had not been fully and truly disclosed during the original assessment proceedings.

Finding that the investigation report constituted tangible material having a rational connection with the belief that income had escaped assessment, the Supreme Court upheld the notices issued under Section 148 of the Income Tax Act and dismissed the appeals.