Reassessment u/s 147 - Whether Revenue is on sound legal footing if it denies to share 2G Spectrum Investigation Report on ground of confidentiality - YES: Delhi HC

THE issues before the Bench are - Whether the issuance of a notice and the communication and furnishing of reasons thereof, go hand-in-hand; Whether two notices or proceedings can remain pending against the same assessee in respect of the same AY at the same time; Whether non disclosure of the internal date on which the reasons were prepared by the Revenue can vitiate the reassessment proceedings; Whether the mere fact that a letter conveying the decision taken in the order sheet was entered before the reasons recorded for the fresh notice, this mode prejudices the assessee or violates any procedural mandate u/s 147 and Whether the Revenue

has power to keep the 2G Spectrum Report from the assessee on the ground of confidentiality. And the verdict goes in favour of Revenue.

Facts of the case

The assessee is a company, incorporated under the Companies Act, 1956. It filed its return of income on 6.10.2010, declaring nil income for AY 2009-2010, which was processed u/s 143(1), without any notice u/s 143(2). Subsequently, assessee was served with a notice dated 5.7.2011 u/s 148 for reassessment of the AY 2009-2010. Assessee requested a copy of the reasons that led to opening of the reassessment proceedings. No such reasons were provided; however a questionnaire was sent, to which the assessee duly responded. Thereafter, reasons to believe that income had escaped assessment were provided to the petitioner. In response, assessee contended that since the reasons to believe were provided after a considerable gap of time and was highly belated. Assessee requested a copy of the report prepared by the DIT (Inv.) in respect of the 2G spectrum cases. The DIT responded by a letter indicating that materials relied upon the Revenue, including the report on the 2G spectrum cases, was confidential and cannot be disclosed. By a letter, the Revenue asked the assessee to file its objections to the reasons recorded, and supplied to it. Assessee filed objections by a letter which was disposed off by the Revenue by an order. The proceedings were challenged before HC in W.P.(C) No. 2155/2012. Assessee then contended that the notice u/s 147 was bad in law, as the AO could have initiated proceedings u/s 143(2). The HC rejected this submission and held that i t was not possible to accept the broad universal affirmative submission of the assessee that notice u/s 147/148 cannot be issued when the AO could have (sic) issue a notice u/s 143(2). It was also observed that the respondents had agreed to and will be bound by the statement to withdraw notice u/s 147/148 dated 5th July, 2011, but will have liberty and right to issue fresh notice u/s 147/148, after recording reasons to believe. The said notice will not be barred because the respondents had not initiated proceedings by issue of notice u/s 143(2) or they had earlier issued notice u/s 147/48 dated 5th July. 2011. With the aforesaid findings and observations writ petition was disposed off.

Accordingly, by a letter, Revenue informed the assessee that in pursuance of the order of HC, previous proceedings u/s 147/148 had been dropped, and a fresh notice was issued. Assessee had filed detailed objections to this notice, which were dismissed by the Revenue. Accordingly, the assessee had approached HC under Article 226 impugning this notice u/s 147/148. Before HC, the assessee's counsel argued that the reasons for initiation of the present reassessment proceedings were recorded on 17.7.2012, which was during the pendency of the proceedings initiated by the previous notice issued u/s 148. It was argued that the plea of the Revenue that the proceedings were dropped on 18.6.2012 was an afterthought which was not supported by any material on record, and was, in fact, contrary to the communication dated 19.7.2012, wherein the Revenue had admitted that the proceedings were dropped only subsequently, on 19.7.2012. This justifies the setting-aside of the fresh notice u/s 147/148. It was further argued that the earlier proceedings were stated to be based upon a letter of the DIT (I). However, despite the identical facts before the Revenue, the first proceedings alleged that the income had not shown up under the head STCG arising on transfer of equity shares, while the present proceedings indicate that income had escaped assessment u/s 28(iv). These contrary opinions formed on the basis of the same facts, counsel urged, was arbitrary and such a change in opinion is in itself a ground to quash the proceedings initiated u/s 147/148.

It was further contended that the notice merely made a roving and fishing enquiry without any tangible material on record, which was impermissible under the strict standards of Section 147/148. Further, it was argued that the concept adopted by the Revenue was baseless, as even if the shares were transferred at a rate less than the rate at which shares were subscribed in the eight telecom companies by the Singapore entity, that fact by itself cannot be made the basis of the allegation that the assessee had received a benefit in the course of business, which was the requirement u/s 28(iv). Rather, it was argued - as was clear from the record, and the audited balance sheet of the assessee submitted along with the return u/s 143(1) - that an aggregate consideration Rs. 4.63 crores was made for the purchase of 45550000 equity shares of the eight telecom companies from M/s Unitech Limited. The entire purchase consideration, it was urged, was paid out of borrowings raised from Prakausali Investment India (P) Ltd. and by issuing unsecured debentures to M/s Unitech Holding Ltd., which means that the income so-called was not chargeable to tax u/s 28(iv), being outside the course of business. Counsel had also submitted that as a condition precedent for invoking Section 28(iv), a benefit must arise from business or exercise of a profession. Thus, before the aforesaid provision could be invoked, there had to be a nexus between the business of the assessee and the purported benefit arising in the course of business, in terms of the judgment in CIT v. Jindal Equipments Leasing and Consultancy Services Ltd, 2010 (325) ITR 87 (Del) , which was clearly absent in this case.

It was submitted that assessee merely invested in shares of the telecom companies for the purpose of investment only and had so reflected this fact in its annual balance sheet. It was urged that no benefit or gain accrued to the assessee, and the mere fact that there was a difference in the share price does not logically lead to the conclusion that a profit was made without disclosing the same. It was further argued that as the funds for the investment were provided by the company who had sold the shares in the first place, the entire economic benefit remained with the said company, and thus, there was no tangible and relevant material to conclude that there was a reason to believe that Section 28(iv) was applicable to this case. It was argued that merely because the petitioner had purchased shares, the market value of which was allegedly higher, does not lead to the conclusion that income escaped assessment. It was further argued that the reasons provided by the Revenue were patently false as there was no comparison between the shares purchased by the petitioner, and the Singapore entity, as the shares purchased by the petitioner were encumbered property (having been pledged by M/s Unitech Ltd. with various banks to obtain loans), whereas the fresh shares allotted to the Singapore entity were free property. Thus, it was argued that in terms of the nature of the shares, the management control, the transfer restrictions, business risks etc., the two transactions were not comparable and thus, the reasons provided by the Revenue cannot sustain reassessment proceedings. It was further argued that the report of the DCIT (I) which forms the basis of the Section 147/148 notice in this case had not been provided to the petitioner, despite a specific request to that effect, thus denying the petitioner the opportunity to present complete objections. Such failure to provide the evidence along with the reasons to believe was, in the argument of the counsel, fatal to the proceedings as the petitioner has the right to be supplied the information on the basis of which such proceedings were sought to be imitated. It was argued that while the documents may be confidential, they cannot remain as such during Section 147/148 proceedings as the assessee must be given an opportunity to answer the allegations put to it.

On the other hand, the Revenue's counsel had highlighted that the assessee cannot question the legality of the notice proposing reassessment in this case, because in the previous judgment of HC, the option of issuing such notice was expressly kept open. It was argued that having regard to the nature and magnitude of the transaction and the material which the revenue secured subsequently, this was the clearest case where reassessment was warranted in respect of income escaping assessment; there could be no reason to question the notice as not disclosing any fresh material or tangible reasons warranting exercise. Once this option to reopen the assessment was conceded, the Court should not exercise its discretion in examining the merits of the transaction to consider whether it was taxable.

Held that,

++ the Court notices the observations in W.P.(C) 2155/2012, whereby the first round of reassessment proceedings were withdrawn. The Court disposed off the writ petition with the clear finding that the fresh notice “will not be barred because the respondents had earlier issued notice under Sections 147/48 dated 5 July. 2011.” The plea taken by the petitioner presently is that the proceedings initiated by the order dated 5.7.2011 came to be withdrawn only on 19.7.2012, after recording reasons for the fresh notice under Section 147/148 (dated 19.7.2012) on 17.7.2012. However, consequent to the decision of this Court in W.P.(C) 2155/2012, the DCIT dropped the previous proceedings initiated u/s 147/148 by an order sheet entry dated 18.6.2012, proceeding subsequently to record fresh reasons for reassessment. This, however, is countered by the petitioner as an order sheet entry does not by itself end the proceedings, without the necessary intimation to the assessee that such withdrawal has taken place. In this case, the issuance of a fresh notice under Section 147/148 (and the reasons recorded for that purpose) has to be judged in the context of the previous decision of HC. The fresh notice served upon the assessee was consequent to and within the framework of the earlier order of this Court. While the first round of reassessment proceedings was not withdrawn qua the petitioner by way of intimation; the fresh reassessment proceedings equally cannot be said to have begun until the notice u/s 147/148 was issued, i.e. on 19.7.2012. The fact that the reasons recorded bore the date 17.7.2012 does not vitiate these proceedings in any way, as the order sheet entries - which are at the very least relevant for this purpose - clear demonstrate that the order of this Court in the earlier writ petition was complied with methodically. The fact that the reasons recorded were prepared (which necessarily precedes the issuance of the notice) before 19.7.2012 is only logical. There is no nexus between the withdrawal of the first reassessment notice issued and the recording of reasons in order to prepare for a subsequent notice, as long as two notices/proceedings are not pending against the same assessee in respect of the same AY at the same time. That, quite clearly, is not the case in the present circumstances;

++ assessee's plea that the proceedings would have been justified had intimation of the withdrawal of the earlier notice been given prior to 17.7.2012, as opposed to 19.9.2012, is unpersuasive as it attempts to draw a distinction where none exists. There is complete transparency in the manner in which the reasons were recorded, and the fresh proceedings instituted. Acorus failed to demonstrate how the mere fact that a letter conveying the decision taken in the order sheet entry dated 18.6.2012 before the reasons recorded for the fresh notice would save the proceedings in this case, and importantly, how the present course of action prejudices the petitioner or violates any procedural mandate u/s 147/148 or any other provision. To the contrary, in this case the reasons were supplied and thus intimated to the petitioner along with the notice on 19.9.2012, and thus, the internal date on which the reasons were prepared cannot vitiate the proceedings, as the relevant date is that on which it is communicated to the petitioner (and not prepared within the Revenue). As a Division Bench of this Court held in Haryana Acrylic Manufacturing Company v. CIT, (2008-TIOL-555-HC-DEL-IT) , “the issuance of the notice and the communication and furnishing of reasons go hand-in-hand.” The reasons recorded on 17.7.2012 are necessarily to be read with the fresh notice dated 19.7.2012, when both documents were communicated afresh to the petitioner, and the previous proceedings were dropped;

++ indeed, the date on which the reasons were prepared may - in some cases - render the action of the Revenue arbitrary given the chronology of events, but that inference does not present itself in this case. The order sheet entries demonstrate a clear and chronological compliance with the earlier order of this Court. In any case, the previous order of this Court expressly bars any objections by the petitioner to the fresh notice on the ground that the Revenue “had earlier issued notice under Sections 147/48 dated 5 July, 2011.” In principle, the petitioner's present argument is that the proceedings are vitiated because the reasons in this case were recorded before the earlier notice was dropped. This plea, in other words, seeks to bar the present notice on the ground that an earlier was issued and not revoked at the time the impugned action took place. This argument - attempting to play the legality of the second notice against the existence of the first notice - was one that the previous order of this Court foresaw and specifically barred in terms of the order dated 28.5.2012, which is now final and binding upon both parties. Indeed, holding that the present notice is to be set aside would set to nought the direction of this Court in the earlier writ petition. Accordingly, this ground argued by the petitioner is rejected;

++ first, assessee argues here that the Revenue's failure to disclose the 2G Spectrum Report, on the basis of which it initiated proceedings under Section 147/148, renders the proceedings void. The Revenue in the present case claims that the 2G Spectrum Report is confidential, and thus has not disclosed the document. Before addressing this question, it is important to restate an accepted, but often neglected, principle, that in its writ jurisdiction, the scope of proceedings before the Court while considering a notice under Section 147/148 is limited. The Court cannot enter into the merits of the subjective satisfaction of the AO, or judge the sufficiency of the reasons recorded, but rather, determine whether such opinion is based on tangible, concrete and new information that is capable of supporting such a conclusion. This was recognized by the Supreme Court in M/s. Phool Chand Bajrang Lal v. Income Tax Officer and Anr (2002-TIOL-794-SC-IT) . In this case, the AO has supplied reasons to believe that income has escaped assessment. This records the alleged undervaluation of shares in the sale/purchase agreement with Unitech Ltd., as compared to the transaction with Telenor, the nature of the transaction, the charging section under the Act such income would fall under, the precise monetary differential on a comparison of the two transactions etc. The notice thus provides details of the precise transaction sought to be reassessed, the reasons for why income has escaped assessment, and the information supporting such a belief. Far from being vague and irrelevant material, these facts constitute new and tangible information supporting the Section 147/148 notice in this case. Importantly, the petitioner in this case has not denied the correctness of these facts either - that such shares were bought at the nominal price of Rs. 10/-, while the shares were sold to Telenor at a substantial premium. The petitioner, however, seeks to urge that the inferences drawn by the AO - in terms of the tax effect of these transactions - are incorrect. At this juncture, it is important to remember the words of the Supreme Court in Calcutta Discount Company Ltd. v. ITO, Companies District, I and Anr. (2002-TIOL-550-SC-IT-CB) , where the Court noted that whether on disclosure by the assesses, or discovered by him on the basis of the facts disclosed, or otherwise - the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable;

++ therefore, primary facts in this case - that lead to the AO's satisfaction - have been spelt-out in this case in the reasons recorded by the AO. These facts are, at the very least, capable of supporting the inference that the sale of shares to the petitioner in this case from Unitech Ltd. was undervalued, and that such undervaluation (compared to the Telenor transaction) was not disclosed by the assessee. Indeed, this is where the Court's inquiry terminates. The adequacy of the reasons provided by the AO fall outside the Court's review powers, and within the domain of the AO, at this stage of the proceedings where only a preliminary finding under Section 147/148 has been made. Assessee advanced arguments as to the incorrectness of the AO's views. Here, various aspects of this transaction have been canvassed before the Court, i.e. the lack of comparability between the Unitech- Telenor transaction and the present case, the difference between the nature of the shares itself in the two cases, the inapplicability of Section 28 given that the purchase of shares was in the nature of an investment and not a business, the lack of accrual of any benefit to the petitioner etc. The Court, however, cannot enter the merits of the satisfaction recorded by the AO. These issues may indeed be raised, but before the AO in the first instance, and subsequently within the appellate regime provided by the Act itself, as opposed to a disguised merits review under Article 226 at such an early stage of the proceedings. At the time of a Section 147/148 notice, the inquiry is at a preliminary stage, and thus, conclusive legal or factual determinations are neither called for nor provided. As the SC noted in Sri Krishna Pvt. Ltd. Etc. v. ITO, Calcutta and Ors., (2002-TIOL-873-SC-IT) that it is necessary to reiterate that we are now at the stage of the validity of the notice under Section 148/147. The enquiry at this stage is only to see whether there are reasonable grounds for the Income Tax Officer to believe and not whether the omission/failure and the escapement of income is established. It is necessary to keep this distinction in mind;

++ in this context, the Court will now turn to the question of whether the disclosure of the 2G Spectrum Report is mandatory, and whether the failure to supply it is fatal to the present proceedings. The law only requires that the information or material on which the AO records his or her satisfaction is communicated to the asseseee, without mandating the disclosure of any specific document. While the 2G Spectrum Report has not been supplied in this case on grounds of confidentiality, the reasons recorded have been communicated and do provide - independent of the 2G Report - details of the new and tangible information that support the AO's opinion. These facts are capable of justifying the satisfaction recorded on their own terms, as discussed above. In this context, there is no legal proposition that mandates the disclosure of any additional document. This is not the say that the AO may in all cases refuse to disclose documents relied upon by him on account of confidentiality, but rather, that fact must be judged on the basis of whether other tangible and specific information is available so as to justify the conclusion irrespective of the contents of the document sought to be kept confidential. In cases such as the present, however, where the information and facts communicated by the AO are themselves in accordance with the minimum requirement under Section 147/148, the petitioner cannot compel the disclosure of other documents that the assessee may have also relied upon. In this case, the Revenue contended - without disclosing the satisfaction note or the supporting documents - that “after discreet enquiries, the action has been taken and … there is material on record which supports it.” After compelling disclosure of the satisfaction note file - as no other information/material was brought on record by the Revenue - the Court noted that it “does not show any date, time or place of any such discreet enquiry or even does not name the person with whom it was made”. Accordingly, the proceedings were set aside for failure to disclose any specific and relevant information. Only when the privilege is claimed as regards the reasons recorded (i.e. the satisfaction note), or when no material is provided in addition to the mere assertion of the subjective satisfaction of the AO, may the principle denying privilege or confidentiality operate. Even then, the claim for privilege may still prevail in that the Court may consider the manner in which the documents are to be inspected, but such questions does not arise in cases such as the present, where concrete and specific details - which support the belief under Section 147/148 - are communicated to the assessee independent of the document sought to be disclosed. Thus, the non-disclosure of the 2G Spectrum Report does not affect the impugned notice in this case. For the above reasons, this writ petition has to fail; it is dismissed. In the circumstances, the writ petitioner shall bear the costs of the proceedings, quantified at Rs. 50,000/-.