S. 147 Disclosure of 2G Spectrum Report not mandatory, if AO Furnished material on which he recorded his satisfaction

CA Sandeep Kanoi

Recently Delhi High Court has in the case of Acorus Unitech Wireless Pvt. Ltd vs. ACIT held that 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.

Issue- Whether the Revenue is within its right to keep the 2G Spectrum Report from the assessee on the ground of confidentiality, or whether the failure to supply the report vitiates the reopening  proceedings?

Contention of the Appellant

First, Acorus 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., [1993] 203 ITR 456 (SC):

“27. Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non- specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief.”

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 `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., [1961] 41 ITR 191 (SC), where the Court noted:

“From the primary facts in his possession, 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.

Acorus 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 of the Act 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 1476/148 notice, the inquiry is at a preliminary stage, and thus, conclusive legal or factual determinations are neither called for nor provided. As the Supreme Court noted in Sri Krishna Pvt. Ltd. Etc. v. ITO, Calcutta and Ors., [1996] 221 ITR 538 (SC):

“8. It is necessary to reiterate that we are now at the stage of the validity of the notice under Section 148/14 7. 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.”

Held :- 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.