In NDTV Decision, Delhi High Court Leaves Wider Scope Of Reassessment

Delhi High Court widens the scope of reassessment – issues inquired into earlier could also be subjected to re-examination on the basis of subsequent years' assessments and complaints.

Assessment is a flagship proceeding for the Income Tax Department. It is judicial in nature, involving submissions and evidence to determine the income of a taxpayer. The resultant assessment order is a conclusive order, except for the provision of reassessment, appeal or revision. As a policy measure, reassessment is to be done sparingly. The Income Tax Act, 1961 provides for reassessment to be done only when certain income has escaped assessment.

The aspect of ‘income escaping assessment' is interesting and calls often for disputes between the taxpayer and the tax authorities.

The taxpayer always asserts that all evidence and information related to his income had been duly provided at the time of assessment. On the other hand, tax authorities contend that there is some new fact that they now possess, and that has a bearing on the taxpayer's income. The authorities hence argue that because of this new fact not being in their possession earlier, income escaped assessment originally.

The law, as settled in the case of reassessments, is as follows. Reassessment could be done if there is new ‘tangible material' related to the income of the taxpayer found by a tax authority. On the basis of such material, the authority should form a ‘reason to believe' that certain ‘income has escaped assessment'. If the income pertains to a period older than four years, reassessment could be done only if there has been a failure on the part of the taxpayer to disclose fully and truly all material facts. The Delhi High Court, in a recent decision in the case of New Delhi Television Ltd., has tweaked and widened the law on reassessments, urging legal points worth a discussion.

Facts In Brief

NDTV had several subsidiaries located in foreign jurisdictions. One of the subsidiaries, NNPLC, was a U.K. company which issued step-up coupon bonds to certain investors for $100 million in the financial year 2007-08. NDTV undertook to guarantee such investment. In FY11, the bonds were prematurely redeemed for $72 million, resulting in a loss of $28 million for the investors, and a corresponding gain for NDTV's subsidiary. This aspect was inquired into by the tax authority during original assessment proceedings of NDTV – questions were asked and submissions were made. Although there was an addition to NDTV's income made, the transaction of investment through bonds was treated as genuine.

Subsequently, during the assessment of FY09, the Dispute Resolution Panel (‘DRP') (which is another income tax authority which looks into transfer pricing issues) concluded that the corporate veil between NDTV and its subsidiaries should be lifted. It held that the complex structure of subsidiaries that NDTV has created, is entirely sham and bogus.

Later, the tax department was also in receipt of certain complaints (called ‘tax evasion petitions') from minority shareholders of NDTV claiming that the monies invested into NDTV's foreign subsidiaries have ultimately reached NDTV through a series of transactions and corporate restructuring exercises. It was complained that the investments into subsidiaries were actually from NDTV's undisclosed income itself.

On the basis of the DRP's order, and the complaints, a notice was issued to NDTV for reassessment of its case for FY08. Also, a provisional attachment was done of the assets and properties of NDTV. The Delhi High Court was moved by NDTV challenging the notice and provisional attachment. It was argued that the issue of investment through bonds into NNPLC had already been examined in detail and thus there could be no reassessment. The Department of Revenue, on the other hand, argued that the DRP's order and the complaints were new material on the basis of which reassessment was sought to be done.

The Judgement And Analysis

The court held in favour of the Revenue Department. It concluded that information obtained from DRP's order and the tax evasion petitions were the new ‘tangible material' which formed the basis of reassessment. It held that there was indeed a ‘reasonable belief' formed by the tax authority that ‘income had escaped assessment'. The elements legally required for a valid reassessment were, therefore, present. The court concluded that the complex and circuitous structure of subsidiaries and the investments in them were closely connected. Since the structure was bogus as concluded by the DRP, the investments ought to be re-examined.

The court also held that there was a failure on the part of the taxpayer to fully and truly disclose all material facts, and hence the case could be reassessed even though it related to a period older than four years. It observed that since the transactions were later (in the course of DRP proceedings) found to be sham and bogus, a mere disclosure during original assessment proceedings wouldn't protect the taxpayer from reassessment. The court also approved the provisional attachment to protect the interests of the Revenue Department, finding no infirmity in the order.

The court's order might at first appear to be intensive on facts, but it throws up several legal thoughts.

• Firstly, it is unusual for a finalised assessment to be reopened on the basis of observations made in a subsequent year's assessment. Here, the DRP's findings for a later year, that the structure of subsidiaries was bogus, have been relied upon to reassess the taxpayer's income.
• Secondly, it is not the structure here, rather the investments made, which are questioned. Tell me, if a corporate structure is set up with an ulterior motive and is actually bogus, would every transaction it undertakes or every party which deals with it, be looked at with a suspicious eye? I don't think so. Here, the bonds had been issued to unrelated investors and the arguments seem to have missed out the aspect of the identity and creditworthiness of the investors and genuineness of the transactions.
• Thirdly, the taxpayers have to keep in mind that their burden doesn't stand discharged merely because their transactions are showed in the tax return or the tax audit report. They should prove the transactions to the satisfaction of the assessing officer during the original assessment proceedings failing which they run the risk of facing reassessment since the transaction has not been fully verified.
• Lastly, complaints or tax evasion petitions from insiders are given much weight by the court. Here, the complaints were made by shareholders who were earlier well-versed with the affairs of the company. The way facts turn out to the decision of the court, the tax authorities, as well as the court, seems to place much reliance on, and that too apparently without verification of the facts contained in, the complaints. Going forward, this could set a bad precedent wherein reassessments could be initiated on the basis of mere complaints.

In conclusion, it is noteworthy that the current order of the court only has the effect of validating the reassessment notice, while the reassessment proceedings are yet to be completed by the department. However, the observations of the court would go a long way in affecting the reassessment proceedings. With such conclusions by the High Court, one may well predict that in the reassessment proceedings, the entire amount of investments would be treated as NDTV's income. Reassessment is certainly fraught with problems – more so when the court upholds its validity.

Amar Gahlot is a tax consultant at Lakshmikumaran & Sridharan Attorneys and a former Indian Revenue Service officer.

The views expressed here are those of the author's and do not necessarily represent the views of BloombergQuint or its editorial team.