Reassessment Valid if There Is Tangible Material For Reopening

Sonia Gandhi & Oscar Fernandes Vs. ACIT and Rahul Gandhi Vs. PCIT (Delhi High Court)

Facts in brief relating to the topic:

The brief facts in three petitions were that the Indian National Congress (“INC” hereafter, also referred to as “AICC”) had over a period of time advanced `90 crores to Associated Journals Ltd (hereafter “AJL”), publishers of the newspaper “National Herald”, with the condition that the amounts be utilized by the latter to write off its accumulated debts and recommence its newspaper. The books of account of AJL showed that for the period 01.04.2010 to 31.03.2011, the total outstanding debt as on 01.04.2010 was `88,86, 68,976/- and as on 15.12.2010 it was `90,21,68,980/-. In the meanwhile, an application was made for the incorporation of the charitable non-profit company “Young Indian” (“YI” hereafter) on 13.08.2010, and Form 1A with Registrar was filed for availability of the Young Indian name. On 18.11.2010, a license was issued by the appropriate authority to YI which was then incorporated on 23.11.2010; M/s. Suman Dubey and Sam Pitroda were its founder members and founder directors. On 13.12.2010, the first Managing Committee meeting took place; Mr. Rahul Gandhi was appointed as Director (non-shareholder); Mr. Motilal Vora and Mr. Oscar Fernandes were nominated as Ordinary Members; M/s. Suman Dubey and Sam Pitroda subscribed to 550 shares each. On 18.12.2010 by a Deed of Assignment, the `90 crore loan standing in INC‟s books as payable to it, from AJL from 2002 to 2011 was transferred to YI. 3. On 21.12.2010, a Board meeting of AJL calling an EGM of that company was held. Subsequently, on 24.12.2010, a loan to the tune of ` 1 crore was received through a cheque, from M/s Dotex, another company, drawn on ICICI Bank by YI. The formal stamped deed of assignment of ` 90 crore in favour of YI was executed by AICC on 28.12.2010. This event was followed, on 21.01.2011, by an EGM (of AJL) approving fresh issue of 9.021 crore shares to YI. On 22.01.2011, the second managing Committee Meeting of YI was held; Ms. Sonia Gandhi, Mr. ML Vora and Mr. Oscar Fernandes were appointed Directors. The transfer of YI Shares from its existing shareholders, was approved as follows:

A fresh allotment of YI shares was made, in the following manner:

On 14.02.2011, PAN No. (AAACY4625Q) was allotted to YI by letter issued by the Income tax authorities (hereafter “revenue”). A bank account was opened by YI with Citibank the same day, since account opening is possible with a PAN No. The cheque issued by Dotex for ` 1 crore was deposited in YI‟s bank account. YI issued a cheque for ` 50 lakhs subsequently, on 26.02.2011 to AICC (as part consideration for the assignment of the `90 crore debt to it) on 26.02.2011. On the same day, AJL allotted 9,02,16,898 equity shares to YI pursuant to its EGM dated 21.01.2011 and AJL‟s Board meeting (dated 26.02.2011). YI applied for Section 12AA exemption to the revenue on 29.03.2011. The exemption was granted by the Income Tax authorities on 09.05.2011 by a certificate, with effect from FY 2010-11. The income tax returns of the three petitioners before this Court, were dealt with and assessment orders made, on various dates. With these common basic facts, the individual circumstances and facts of the three petitioners are discussed below. W.P.(C) 8293/2018 pertains to Mr. Rahul Gandhi for AY 2011-12. This assessee [hereafter referred to as “Mr. Rahul Gandhi”] filed a return of income declaring `68,12,018/- which included income from house property and from other sources. After some examination and consideration of details, the income returned was accepted by a scrutiny order dated 30.09.2013 by the Assessing Officer (AO) under Section 143(3). In these circumstances, on 31.03.2018, Mr. Rahul Gandhi received an e-mail from the ACIT, i.e. the AO [hereafter “the ACIT”] at 11.25 PM, intimating that notice under Section 148 for the relevant period, i.e. AY 2011- 12 was issued. A copy of the notice was not, however, attached; the assessee received it on 02.04.2018, through speed post. On 11.04.2018, yet another notice – dated 31.03.2018, but this time containing the digital signatures of ACIT were received through e-mail by Mr. Rahul Gandhi. Acting through his Chartered Accountant, Mr. Rahul Gandhi filed a return of income on 01.05.2018 and subsequently e-filed it on 11.05.2018. A request was made to supply “Reasons to Believe” supporting each assessment. On 15.05.2018, the ACIT furnished “Reasons to Believe” alleging that the difference between the “Fair Market Value” of the shares of the Young Indian (YI) and the cost of acquisition of those shares by Mr. Rahul Gandhi was his income. In support of this position, the Revenue relied upon a letter written by its Department of Investigation dated 11.05.2015 and letter dated 08.06.2015 and a tax evasion petition (TEP) addressed to the Finance Minister by Mr. Subramanian Swamy. Mr. Rahul Gandhi requested ACIT for copies of the documents to enable him to articulate appropriate objections. The request dated 26.05.2018 was declined on 04.06.2018. Consequently, a request for inspection of the complete records of assessment for AY 2011-12 was made on 11.06.2018 which was granted on 13.06.2018 only to the limited extent that inspection of “Reasons to Believe” recorded and the approval therefor granted under Section 151 was permitted. The request for inspection of other documents was rejected. Yet, another consequent request for permission to inspect the complete records was made on 14.06.2018 which met with similar fate on 15.06.2018. The further request made on 20.06.2018 and 26.06.2018 for permitting inspection of the entire record was rejected. In these circumstances, the petitioner, Mr. Rahul Gandhi availed of his right to represent against reassessment by a letter/representation dated 26.06.2018. The ACIT by letter dated 26.07.2018 rejected these objections.

The main ground on which Mr. Rahul Gandhi had approached Delhi High Court seeking intervention for quashing of reassessment notice was that no income in fact escaped assessment and that all queries which could have been raised given the returns and documents were in fact addressed adequately in the scrutiny assessment and moreover there was no tangible evidence to reassessment. It was urged besides that the alleged depression of the value of YI‟s shares, in the returns filed by Mr. Rahul Gandhi could never be the subject matter of reassessment. The assessee contests that the allegations with respect to transaction value, being contrary to Section 56(2)(vii)(c) (ii) and in terms of Rule 11UA of the Income Tax Rules is plainly erroneous and cannot be the basis of a reassessment. It is also urged that since Mr. Rahul Gandhi was a shareholder of YI – a non-profit and charitable company, he was under no obligation to disclose the value of his shares in the manner that the Revenue alleges. In this regard, it is argued that the said provision, i.e. Section 56(2)(vii) is inapplicable in the issue of fresh shares. The specific ground articulated on behalf of the petitioner Mr. Rahul Gandhi was that second proviso to Section 56(2)(vii) (c) (ii) enacts certain exceptions to the provision one of which is that if any property is received by an individual from any Trust or institution, including an institution registered under Section 12(AA), Section 56(2)(vii) could not apply.

It was also alleged that an order subsequently cancelling the registration granted to YI, on 26.10.2017, with retrospective effect was of no avail in view of decisions of Delhi High Court and the Allahabad High Court. The reliance placed upon the TEP is attacked as vitiated because the revenue has acted on stale grounds. It was also alleged that the AO should have made independent investigations as to whether in fact any obligation to value of underlying assets of YI in the light of the fact that it was a charitable institution was necessary before issuing the reassessment notice. The reassessment notice was thus vitiated on account of non-application of mind.

The ACIT, by an intimation dated 26.07.2018 rejected Mr. Rahul Gandhi‟s objections. In this letter, it was stated that a question with respect to non-furnishing of particulars does not arise. It was stated that Section 148(2) required only reasons to be recorded. Regarding the next issue, i.e. delay, it was stated that there was no delay in the issuance of the notice and that the material relied upon was not stale. Explaining that as far as the legal position on the question of issue of date of service, the revenue contends that Mr. Rahul Gandhi was served; the notice/intimation dated 31.03.2018, through e-mail which was admittedly received at 11.25 PM and also through registered post, both of which satisfied the requirements of Section 282 of the Act. The revenue further stated that the approval given by the third respondent for the reopening of assessment was after due application of mind. It is pointed out that at the stage of reopening and recording of reasons, there was is no question of granting any hearing or opportunity to the assessee in terms of Section 151. As to the issue of valuation of shares, the revenue alleges that the contention is factually incorrect because the assessee is claimed to have acquired assets (i.e. shares of AJL) which were to be valued on the basis of the `90.21 crores asset it had. It was stated that the debt owned by the Associated Journals Ltd. (AJL) to the tune of over `90 crores was assigned to YI for only `50 lakhs. Therefore, according to the ACIT/revenue, the audited accounts of YI disclosed investment in shares in the fourth Schedule of audited balance sheet stating that the assessee was allotted 90216898 shares bearing a face value of `10/-. The Book Value of YI investment in shares was to the tune of `902168980. However, to conceal the quantum of Book Value in the shares of M/s. AJL with the corresponding FV of `90.21 crores was deliberately reduced to NIL in Note 1 of accounts. Since the assessee had urged that the value of investment was reduced to NIL in the balance sheet and book value was disclosed in Note 1 to Seventh Schedule of balance sheet for purposes of computing the Book Value of shares of YI which was held by him, the values of shares of AJL should be taken at NIL, though the book value of ` 902168980 of the company‟s shares were ignored. It is contended that besides the fact that this is factually and legally wrong, this Court ought not examine the issue as that would entail scrutiny on merits which is impermissible since the limited scope of these proceedings is to see whether reopening of assessment was valid.

Mrs. Sonia Gandhi was the petitioner in W.P. (C) 8482/2018. She too, like Mr. Rahul Gandhi impugned the reassessment notice; the grounds urged were similar. She acquired shares in Young Indian (YI), in 2011. Her return disclosed `17,92,092/-, consisting of income from other sources; the return of income was accepted under Section 143(1) of the Act by the AO/ACIT. Alleging that income had escaped assessment, the ACIT issued reassessment notice under Section 148- again on 31.03.2018 at 11:28 PM through email. A notice was received on 02.04.2018, through speed post; a third intimation, with scanned copy of the notice, was received electronically, with digital signature of the ACIT, on 11.04.2018. Return of income was filed on behalf of Ms. Sonia Gandhi on 11.05.2015 by e-return procedure. The copy of “reasons to believe” was furnished to the Petitioner, at her request, on 11.05.2015. The ACIT alleged that, the difference between the „fair market value‟ of the shares of YI and the cost of acquisition of the Young Indian‟s shares by Ms. Gandhi was her income in terms of Section 56(2)(vii)(c)(ii) of the Act. The “Reasons to Believe” relied on the TEP as in Mr. Rahul Gandhi‟s case, the report of DIT (Investigation) dated 11.05.2015, as well as letter dated 08.06.2015. Upon repeated requests, the revenue refused to give copies or allow inspection into the materials which resulted in the reassessment notice, impugned; however, it granted inspection of the note recording reasons. Ms. Sonia Gandhi represented against the reassessment notice; that was rejected by the ACIT on 31.07.2018. 10. In support of the petition, Ms. Sonia Gandhi stated that the re-assessment notice is vitiated because the notice issued under Section 148 of the Act was barred by limitation prescribed under section 149 of the Act; likewise, sanction under section 151 of the Act accorded was a mechanical one treated as an empty formality. It is alleged, like in Rahul Gandhi‟s writ petition, the impugned notice issued is vitiated on account of violation of principles of natural justice; that notice issued under section 148 of the Act is barred by limitation prescribed under section 149 of the Act; Sanction under section 151 of the Act accorded as an empty formality; provisions of section 56(2)(vii) are not applicable to the present case; that as a matter of fact, no income which has escaped assessment; that the revenue has taken contradictory stands in the case of the Petitioner as against their stands in the case of „Young Indian‟; that there was no independent application of mind by and further, that there is no tangible material; that reassessment has been initiated on factually incorrect premise; there was no failure on her part in disclosing all material facts; the reassessment proceedings had been initiated with a premeditated mindset and a mala fide intention.

Mr. Oscar Fernandes, the petitioner in W.P.(C) 8483/2018 too, had filed his return for AY 2011-12, for ` 8,33,730/-, consisting of income from house property and income from other sources; the return of income was accepted under section 143(1) of the Act. On 31.03.2018, like in the case of the other petitioners, he received intimation stating that he would be reassessed under Section 147/148 of the Act by an email at 11:22 PM. He received a notice by speed post, which contained a scanned copy of the earlier notice on 02.04.2018; Mr. Fernandes filed his return on 17.04.2018 and requested for a copy of the “reasons to believe”, which was provided to him. Thereafter, like Mr. Rahul Gandhi and Ms. Sonia Gandhi, he sought inspection of the record which was partly granted. He preferred objections to reassessment notice which was rejected on 03.08.. The grounds urged by Mr. Fernandes were similar to that in Ms. Sonia Gandhi‟s petition; i.e. that the reassessment notice was illegal as it was barred by limitation prescribed under section 149 of the Act; the sanction under section 151 of the Act was mechanical; that the impugned notice was in of violation of principles of natural justice; provisions of section 56(2)(vii) are not applicable to the present case; that as a matter of fact, no income which has escaped assessment; that the revenue has taken contradictory stands in the case of the Petitioner as against their stands in the case of „Young Indian‟; that there was no independent application of mind by the and further, that there is no tangible material; that reassessment has been initiated on factually incorrect premise; there was no failure on Mr. Fernandes’ part in disclosing all material facts; the reassessment proceedings were initiated with a premeditated mind set and a mala fide intention.

Decision in brief relating to the topic:

The Delhi High Court held that the entire premise of the reassessment notices in this case is that the nondisclosure of the taxing event, i.e. allotment of shares (and the absence of any declaration as to value) deprived the AO of the opportunity to look into the records. In the case of Mr. Rahul Gandhi, no doubt, the assessment originally completed, was under Section 143 (3). Had he disclosed in his returns or any related documents about the event (share acquisition) the primary fact would have been on the record; the AO’s subsequent action in pursuing that aspect or letting go of it, after inquiry might well have justified the charge of a second and impermissible opinion on the same subject. However, that is not the case. The TEP and investigation reports – of subsequent vintage (after completion of Mr. Gandhi‟s assessment), therefore, constituted tangible material which in terms of the ruling in CIT vs. Kelvinator of India Ltd 320 ITR 561 (SC) justified reassessment. In the case of the other two assessees (Ms. Sonia Gandhi and Mr. Oscar Fernandes) the returns filed by them were processed under Section 143 (1). Such instances were not treated as “assessments”. DCIT vs. Zuari Estate Development & Investment Co Ltd (2015 (15) SCC 248) is an authority on the subject. W.P.(C) 8293/2018; W.P.(C) 8482/2018 and W.P.(C) 8483/2018 were dismissed, however, it was clarified that the observations with regard to the parties‟ contentions is not conclusive and is recorded for the purpose of disposing of these petitions; the assessees’ rights to urge them are reserved in the income tax proceedings.