Principles Laid Down By The Supreme Court In New Delhi Television Ltd vs. DCIT Under Sections 147/148 Of The Income-tax Act, 1961

The recent judgement of the Supreme Court in New Delhi Television Ltd vs. DCIT has laid down important principles of law relating to the reopening of assessments under sections 147 and 148 of the Income-tax Act. Rubal Bansal, Advocate and Company Secretary, has studied the judgement in detail and explained its nuances. She has also summarized the core principles of the judgement in a succinct manner

Cause Title:                                      New Delhi Television Limited (“NDTV”) vs.    Deputy Commissioner of Income Tax (“DCIT”)
Decided by:                                      Supreme Court of India
Coram:                                               L. Nageswara Rao, J and Deepak Gupta, J
Decided on:                                      3rd April, 2020.
Relevant Assessment
Year (“AY”):                                      2008-09

I Brief background:

1. NTDV is an Indian company engaged in running television channels of various kinds. NDTV Network Plc., U.K. (“NDTV UK”) is a subsidiary of NDTV in United Kingdom.

2. NDTV filed its return of income for the relevant AY on 29th September, 2008 declaring a loss. The said Return was processed under Section 143 of the Income Tax Act, 1961 (“the Act”).In the relevant AY, in July, 2007, NDTV UK issued step-up coupon bonds of US$ 100 million through the Bank of New York for a period of 5 years. NDTV, being the holding company of NDTV UK, furnished a corporate guarantee for this transaction. These bonds were subscribed to by various entities and were to be redeemed at a premium of 7.5% after the expiry of 5 years at a discounted price of US $74.2 million in November, 2009. These facts were disclosed before the Assessing Officer (“AO”) during the original assessment proceedings by NDTV. The return of income of NDTV was selected for scrutiny and, subsequently, notices under Section 142(1) and 143(2) were issued to NDTV, i.e., the assessee.

II Assessment Order under Section 143(3) of the Act passed on 3rd August, 2012 by the AO:

3. Inter alia the other issues, the issue of step-up coupon bonds amounting to US$100 million was decided by the AO vide this order.

4. AO held –NDTV UK had virtually no financial worth, it had no business of the name 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. This was secured only because NDTV furnished guarantee on its behalf to its subsidiary, i.e., NDTV UK. It further held that the transaction was of such a nature that NDTV should be required to maintain an arm’s length from its subsidiary, i.e., NDTV UK.

5. Thus, the AO treated the said Transaction as a business transaction and imposed a guarantee fee at the rate of 4.68% and added Rs. 18.72 crores to the income of NDTV.

III. Notice dated 31st March, 2015 under Section 148 of the Act sent to NDTV (after a period of four years):

6. It stated that the revenue has reason to believe that the net income chargeable to tax for the AY 2008-09has escaped assessment within the meaning of Section 148 of the Act.

IV. Reasons to believe for re-opening given on 4th August, 2015:

7. Main reason – in the following AY, i.e., AY 2009-10, the AO had proposed an addition of Rs.642 crores on NDTV on account of monies raised by it through its subsidiaries, inter alia, including NDTV UK. NDTV had raised its objection before the Dispute Resolution Panel (“DRP”) which directed against NDTV. The AO relied upon this order of the DRP and held that there is reason to believe that funds received by NDTV UK were actually the funds of the assessee, i.e., NDTV. It was specified that NDTV UK had a capital of only Rs.40 lakhs and it did not have any business activities in the UK except a postal address.

8. Also, NDTV UK placed itself under liquidation and, therefore, the AO was of the opinion that there were reasons to believe that the funds received by NDTV UK were the funds of NDTV under a sham transaction and that the amount of Rs.405.09 crores introduced into the books of NDTV UK through the transaction involving the step-up coupon convertible bonds pertains to NDTV.

9. The said Reasons 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.

V. Objections filed by NDTV against the reasons received by it:

10. The notice under Section 148 of the Act was issued beyond the period of 4 years, and, therefore, the proviso to Section 147 of the Act would apply in favour of NDTV – and, thus, there had been no failure on its part to disclose fully and truly all material facts necessary to make an assessment.

11. The proceedings had been initiated on a mere change of opinion and there was no valid reason to believe.

12. The AO had accepted the genuineness of the transaction wherein NDTV UK had issued convertible bonds which had been subscribed by many entities. Only guarantee fees was levied and the same was added back to the income of NDTV.

VI. Re-assessment order passed under Section 143(3)/147:

13. AO rejected the objections raised by NDTV while holding that there was non-disclosure of material facts by it and the notice under Section 148 would be within limitation (i.e., within 16 years) since NDTV UK was a foreign entity and admittedly a subsidiary of NDTV and the income was being derived through this foreign entity. Hence, the case of the assessee would fall within the 2nd proviso of Section147 of the Act and the extended period of 16 years would be applicable.

VII. Writ petition filed before High Court of Delhi:

14. This was dismissed. Thus, appeal filed before the Supreme Court.

VIII. Issues raised before the Court and the principles laid down by the Court:

Issue no.1:     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?

Issue no.2:     Whether NDTV 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?

Issue no.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 of the Act?

IX. Submissions made by NDTV – NDTV inter alia made by the following submissions:

15. The transaction of step-up coupon bonds was scrutinized in great detail by the AO during original assessment proceedings. Re-opening the assessment on the same ground would amount to mere change of opinion.

16. There is an attempt by the revenue to deliberately mix-up the transactions relating to the Netherlands subsidiary with the UK subsidiary. DRP held that the Netherland’s transaction of Rs.642 crores was a sham. The transaction of issuance of US$ 100 million convertible bonds was not questioned before the DRP. Therefore, there was no fresh and new tangible material before the AO to have reason to believe that the undisclosed income of the assessee had escaped assessment.

17. No income was derived from the foreign entity by it and a loan cannot be termed to be an asset or an income. The notice under Section 148 of the Act cannot be said to have been issued under the second proviso to Section 147 (i.e., within a period of 16 years).

X. Submissions made by Revenue – the Revenue inter alia made the below submissions:

18. At the stage of issue of show cause notice, the Revenue only has to establish a tentative and prima facie view.

19. At this stage, this Court is not expected to go into the merits of the case but can only ascertain whether the revenue has prima facie ground to show that it had reasons to believe that income has escaped assessment. The scope of judicial review in such matters is very limited.

20. Since the Revenue discovered fresh tangible material subsequent to the original assessment order dated 3rd August, 2012, it cannot be said that the AO did not have reasons to believe that income had escaped assessment.

21. It placed reliance on certain complaints made by the minority shareholders – which stated that NDTV was indulging in round tripping of its funds. NDTV is guilty of creating a network of shell companies with a view to transfer its untaxed income in India to entities abroad and then bring it back to India thereby avoiding taxation. (The Supreme Court did not go into this aspect because those complaints have not seen light of the day either before it or the High Court.).

22. NDTV did not disclose the amount subscribed by each of the entities and furthermore their management structure. (The Supreme Court disagreed with this too. It held that it is apparent from the records of the case that the Revenue was aware of the entities which subscribed to the convertible bonds. It has been urged before the Supreme Court that these are bogus companies but the Court was not concerned about it at this stage.).

23. NDTV to avoid detection of the actual source of funds of its subsidiaries did not disclose the details of the subsidiaries in its final accounts, balance sheets, and profit and loss account for the relevant period as was mandatory under the provisions of the Indian Companies Act,1956. (It was not disputed before the Supreme Court that NDTV had obtained an exemption from the competent authority under the Companies Act, 1956 from providing such details in its final accounts, balance sheets, etc. Therefore, the Court held that it cannot be said that NDTV was bound to disclose this to the AO since before finalizing the original assessment, the AO had never asked the assessee to furnish the details.).

24. As per the second proviso to Section 147 of the Act read with Section 149(1) (c) of the Act, the limitation period would be 16 years since NDTV has derived income from a foreign entity.

25. Mere non-naming of the second proviso in the notice does not help NDTV. Even if the source of power to issue notice has been wrongly mentioned, but all relevant facts were mentioned, then the notice can be said to be a notice under the provision which empowers the revenue to issue such notice.

XI. Principles laid down by the Supreme Court – the Court inter alia laid down the below important propositions of law:

(I) Subsequent information which comes to the notice of the AO during the proceedings for the subsequent assessment years can definitely form tangible material to invoke powers vested with the AO under Section 147 of the Act:

26. That the subsequent facts which come to the knowledge of the AO can be taken into account to decide whether the assessment proceedings should be reopened or not. [relied upon Claggett Brachi Co. Ltd., London vs. Commissioner of Income Tax, Andhra Pradesh 1989 Supp(2) SCC 182, M/s Phool Chand Bajrang Lal and Another vs. Income Tax Officer and Another (1993) 4 SCC 77, Ess Kay Engineering Co.(P) Ltd. vs. Commissioner of Income Tax, Amritsar (2001) 10 SCC 189].

(II) At the stage of issuance of notice, the AO is to only form a prima facie view:

27. 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 AO is to only form a prima facie view. The Supreme Court held that the material disclosed in assessment proceedings for subsequent years was sufficient to form such a view. Therefore, there were reasons to believe that income had escaped assessment in this case.

(III) When can the Revenue take the benefit of the extended period of limitation of 6 years for initiating proceedings under the first proviso to Section 147 of the Act?

28. This can only be done if the Revenue can show that the assessee had failed to disclose fully and truly all material facts necessary for its assessment. The Supreme Court held that NDTV had disclosed all the facts it was bound to disclose. If the Revenue wanted to investigate the matter further at that stage it could have easily directed the assessee to furnish more facts. NDTV as mentioned supra made a disclosure about having agreed to stand guarantee for the transaction by NDTV UK and it had also disclosed the fact of the issuance of convertible bonds and their redemption. The income, if any, arose because of the redemption at a discounted price. This was an event which took place subsequent to the relevant AY though it may be income for that AY. The AO knew who were the entities who had subscribed to other convertible bonds and in other proceedings relating to the subsidiaries the same AO had knowledge of addresses and the consideration paid by each of the bondholders as is apparent from assessment orders dated 3rd August, 2012 passed in the cases of M/s. NDTV Labs Ltd. and M/s. NDTV Lifestyle Ltd. Therefore, all the relevant facts were duly within the knowledge of the AO. Hence, there was full and true disclosure of all material facts necessary for its assessment by NDTV.

29. The fact that step-up coupon bonds for US$ 100 million were issued by NDTV UK was disclosed; who were the entities which subscribed to the bonds was disclosed; and the fact that the bonds were discounted at a lower rate was also disclosed before the assessment was finalized. This transaction was accepted by the AO and it was clearly held that NDTV was only liable to receive a guarantee fees on the same which was added to its income. Thus, the Supreme Court rightly held that it cannot be said that NDTV had withheld any material information from the revenue.

30. Therefore, the Revenue, in this case, could not show that there was a failure on the part of NDTV to fully and truly disclose all material facts before the AO. And, thus, the question of taking a benefit of a period of 6 years does not arise – since the condition under the proviso to Section 147 remains unfulfilled.

(IV) What is the duty of an assessee while making a disclosure before the AO? – it is the duty of the assessee to disclose full and truly all material facts which it termed as “primary facts”:

31. While relying on the landmark judgment in the case of Calcutta Discount Co. Ltd. vs. Income Tax Officer (1961) 41 ITR 191, it held that it is the duty of the assessee to disclose full and truly all material and “primary facts”. Non-disclosure of other facts which may be termed as “secondary facts” is not necessary.

32. In this case, NDTV disclosed all the primary facts necessary for assessment of its case to the AO. What the Revenue urged is that the assessee did not make a full and true disclosure of certain other facts. The Supreme Court rightly held that NDTV had disclosed all primary facts before the AO and it was not required to give any further assistance to the AO by disclosure of other facts. It was for the AO at this stage to decide what inference should be drawn from the facts of the case. In the present case, the AO on the basis of the facts disclosed to him did not doubt the genuineness of the transaction set up by NDTV.This the AO could have done even at that stage on the basis of the facts which he already knew. However, that cannot lead to the conclusion that there is nondisclosure of true and material facts by the assessee.

33. One interesting fact noted by the Supreme Court – The revenue strenuously urged before it that NDTV is guilty of non-disclosure of material facts, however, before the High Court the case of the Revenue was just opposite. The Revenue in its counter affidavit (relevant portion extracted in the judgment) before the High Court said that did not rely upon the non-disclosure of facts by NDTV could not have been permitted to orally urge the same. This is a completely contradictory stand and, therefore, the Supreme Court rightly rejected the same and held that NDTV had fully and truly disclosed all material facts necessary for its assessment and, therefore, the revenue cannot take benefit of the extended period of limitation of 6 years (as explained supra).

34. Therefore, the duty of an assessee is limited and restricted to disclosing all the “primary facts” before the AO. And the same may be treated as a “full and true disclosure” made by an assessee.

(V) Re-opening of assessment cannot go beyond the notice issued under Section 148 of the Act AND the reasons recorded for re-opening – no addition cannot be made subsequently:

35. This proposition is again rightfully reiterated by the Supreme Court in this case. In this case, the notice is conspicuously silent with regard to the second proviso to Section 147. It does not rely upon the second proviso and basically relies on the provision of Section 148 of the Act. The reasons communicated to NDTV mention ‘reason to believe’ and non-disclosure of material facts by it. The reasons are also silent on the same. It is only while rejecting the objections of NDTV that reference has been made to the second proviso in the order of disposal of objections dated23rd November, 2015.

36. The uncontroverted fact is that in the notice under Section 148 of the Act there is no mention of any foreign entity. There is only mention of the Section 148. There is nothing in the reasons to indicate that the revenue was intending to apply the extended period of 16years. It is only after the assessee filed its reply to the reasons given, that in the order of rejection for the first time reference was made to the second proviso by the revenue. The Supreme Court held that the assessee must be put to notice of all the provisions on which the Revenue relies upon. The notice and reasons given thereafter do not conform to the principles of natural justice and NDTV did not get a proper and adequate opportunity to reply to the allegations which are now being relied upon by the revenue. If the revenue is to rely upon the second proviso and wanted to urge that the limitation of 16 years would apply, then in our opinion in the notice or at least in the reasons in support of the notice, the assessee should have been put to notice that the revenue relies upon the second proviso. 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.

(VI) Conclusion:

37. Appeal allowed.

38. Notice issued under Section 148 of the Act to NDTV shows sufficient reasons to believe on the part of the AO to reopen the assessment but since the Revenue has failed to show non-disclosure of facts – the notice having been issued after a period of 4 years is required to be quashed.

39. No opinion expressed on whether on facts of this case the Revenue could take benefit of the second proviso or not. Therefore, the Revenue may issue fresh notice taking benefit of the second proviso if otherwise permissible under law.

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