Question of Law framed:
(i) Whether in the facts and circumstances of the case, it can be said that the revenue had a valid reason to believe that undisclosed income had escaped assessment?
(ii) Whether the assessee did not disclose fully and truly all material facts during the course of original assessment which led to the finalization of the assessment order and undisclosed income escaping detection?
(iii) Whether the notice dated 31.03.2015 along with reasons communicated on 04.08.2015 could be termed to be a notice invoking the provisions of the second proviso to Section 147 of the Act?
- Assessee company’s subsidiary based in the UK, namely NDTV Network Plc. (NNPLC) issued step-up coupon bonds amounting to 100 Million USD in July 2007 through bank in New York. 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 $74.2 million in November 2009.
- Return for AY 2008-09 was filed on 29.09.2008 declaring loss and assessment was framed u/s 143(3) dated 03.08.2012 wherein, the AO held that NNPLC had virtually no financial worth, it had no business and therefore it could not be believed that it could have issued convertible bonds of US$ 100 million, unless the repayment along with interest was secured. 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 accordingly 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.
- On 31.03.2015, a notice u/s 148 was sent and reasons were supplied on 04.08.2015. The main reason given was that subsequently in AY 200910, the assessing officer had proposed a substantial addition of Rs. 642 crores on account of monies raised by the assessee through its subsidiaries NDTV BV, The Netherlands, NDTV Networks BV, The Netherlands (NNBV), NDTV Networks International Holdings BV, The Netherlands (NNIH) and NNPLC. The Dispute Resolution Panel (DRP) concluded that all these transactions with subsidiary companies in Netherlands were sham transactions and 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. AO relied upon DRP order to contend that funds invested in the subsidiary belonged to the assessee company as the subsidiary did not have much capital and no prudent person would invest 100 Million USD in a virtually nonfunctioning company and thereafter only get 72% of the investment back. AO also gave reasons by placing reliance on certain tax evasion petition filed by the minority shareholders. Thus, according to the assessing officer “The natural inference could be that it was NDTV’s own funds introduced in NNPLC in the grab of the impugned bonds.” NNPLC was placed under liquidation on 28.03.2011.
Reasons: (last para)
“7. In view of the above facts and circumstances of the case and considering the findings of the DRP holding the funds received by NNPLC as the funds of the assessee New Delhi Television Limited under sham transactions, there is a reason to believe that the funds amounting to Rs.405.09 crores introduced into the books of NNPLC during the FY 200708 in the form of Step Up Coupon Bonds pertain to the assessee New Delhi Television Limited only. I have therefore reason to believe that the income of the assessee New Delhi Television Limited for AY 200809 amounting to at least Rs.405.09 crores has escaped assessment. It is also recorded that the escapement is due to failure on the part of the assessee to disclose fully and truly all facts material for assessment.”
- Assessee filed objections against reopening for on the ground that there was no failure on part of assessee to disclose fully and truly all material facts, proceedings based merely on a ‘change of opinion’ and there is no valid reason to believe. AO rejected the objections vide order dated 23.11.2015, holding that there was non-disclosure of material facts on part of the assessee and the notice was within limitation since NNPLC was a foreign entity and admittedly as subsidiary of the assessee from which the assessee was deriving income, which makes the case fall under the second proviso and the limitation period of 16 years would be applicable.
- Against this, the assessee filed a writ, which was dismissed on 10.08.2017, Thereafter, the civil appeal was filed before the Supreme Court.
- Whether there was ‘reason to believe’ that income had escaped assessment – Held Yes.
Contention of the Assessee:
Transaction of zero-coupon bonds was scrutinized in detail during the original assessment proceedings. There was an attempt by the revenue to deliberately mix-up transactions relating to the Netherlands Subsidiary with the UK Subsidiary. Assessee further contended that DRP held the Netherlands transaction of 642 Crores to be a sham but the genuineness of the issuance of zero-coupon bonds was not questioned. Thus, there was no fresh material with the AO.
Contention of the Revenue:
At the stage of forming reasons to believe, the AO only has to form a ‘prima facie’ opinion. There was fresh tangible material subsequent to the assessment order dated 03.08.2012 in the form of DRP order dated 31.12.2013 for the subsequent year wherein doubts were raised with regard to corporate structure of assessee and its subsidiaries. Secondly, Tax Evasion Petitions were filed by the minority shareholders of the assessee company on various dates, i.e., 11.03.2014, 25.07.2014, 13.10.2014 and 11.03.2015 which complaints describe in detail the communication between the assessee and the subsidiaries and also allegedly showed evidence of round tripping of assessee’s undisclosed income through a layer of subsidiaries.
Hon’ble Apex Court held that the material disclosed in the assessment proceedings for the subsequent years as well as the material placed on record by the minority shareholders form the basis for taking action under Section 147 of the Act. At the stage of issuance of notice, the assessing officer is to only form a prima facie view. Reliance was placed on:
- Claggett Brachi Co. Ltd., London vs. CIT, Andhra Pradesh, 1989 Supp(2) SCC 182
- Phool Chand Bajrang vs. ITO, (1993) 4 SCC 77
- Ess Kay Engineering Co. (P) Ltd. vs. CIT, Amritsar, (2001) 10 SCC 189.
2. Whether there was Non-Disclosure on part of the Assessee – Held, No
Case of the assessee was that there was no failure on part of the assessee to disclose all material facts. Whereas revenue contended that It cannot be said that the assessee made ‘true and full disclosure’. And merely because the transaction of convertible bonds was disclosed at the time of original assessment does not mean that there is true and full disclosure of facts. The assessee to avoid detection did not disclose the details of the subsidiaries in its final accounts.
Hon’ble court observed that It is apparent from the records that all facts regarding the transaction were disclosed and revenue was aware of the entities which subscribed to convertible bonds and in the other proceedings relating to the subsidiaries, the same assessing officer had knowledge of addresses and the consideration paid by each of the bondholders as is apparent from replies during assessment proceeding case of bondholders and forms part of assessment orders dated 03.08.2012 passed in cases of bondholders passed by same assessing officer.
With regard to revenue’s contention that assessee did not disclose details of subsidiaries in final accounts, Hon’ble Court observed that it is not disputed that the assessee obtained exemption from competent authority from filing such details and therefore, it cannot be said that assessee was bound to disclose this to assessing officer. Further assessing officer never asked the details in original assessment proceedings.
Accordingly, it was concluded that assessee 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.
Hon’ble court also observed based on counter affidavit filed by revenue before High court that the case of revenue before high court was just opposite and therefore, revenue cannot be permitted to blow hot and cold at the same time.
3. Whether the notice dated 31.03.2015 along with reasons communicated on 04.08.2015 could be termed to be a notice invoking the provisions of the second proviso to Section 147 for escapement of income and extending the limitation to 16 years – Held No.
Case of the assessee was that no income was derived from the foreign entity and a loan cannot be termed as an asset or an income and no notice could be issued on this basis under the second proviso. Further notice dated 31.03.2015 was silent on the same and reasons recorded did not rely on the second proviso. It is only while rejecting the objections, a reference to the second proviso was made. Revenue contented that non-naming of the second proviso in the notice does not help the assessee’s case and since all relevant facts were mentioned, notice can be said to be in accordance with law.
- At the outset Hon’ble Court observed that revenue did not challenge the finding of the High court in respect of this issue where the High court held that revenue cannot rely on second proviso because the notice was silent in this regard. But revenue is entitled to defend the petition even on a ground decided against it by the high court.
- Hon’ble court further held that we are clearly of the view that 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 are now being relied upon by the revenue. 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.
- Accordingly, it was held that the notice issued to the assessee and the supporting reasons did not invoke provisions of the second proviso of Section 147 of the Act and therefore at this stage the revenue cannot be permitted to take benefit of the second proviso. However, the court noted that the revenue may issue fresh notice taking the benefit of the second proviso if permissible under law.
- It may also be noted that the Tax Evasion petitions were never placed before court or confronted to assessee so they can’t be relied upon.
- One may have a view that Supreme Court did not dwell elaborately on the issue that the new facts that the money found its way circuitous lead to the assessee, the UK subsidiary was a shell company, complaints et cetera tantamounted to the failure on the part of the assessee to disclose full facts knowing fully well that these inherent facts that it was privy to could prima facie lead to the inference that all was not well.
- Belated introduction of new ground to support present Sec 148 vis-à-vis second proviso to Section 147, highlighting requirement to come fully through reasons /notice concluded said belated ground taken flouts natural justice to assessee thus can’t be countenanced. Thus, vindicated reasons cannot be improved in later portion as revenue has to speak its mind through notice & reasons.