Supreme Court gives nod for Income Tax probe against former CJI's sons

The Supreme Court has cleared the path for reassessment of income tax of the two entrepreneurial sons of former Chief Justice of India (CJI) Y.K. Sabharwal. This matter is linked to share transactions used for purchasing a prime property on Sikandra Road in Delhi in 2010. A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran dismissed four appeals filed by Chetan and Nitin Sabharwal and upheld the reassessment notices issued by the Income Tax department for the assessment years 2008-09 and 2009-10.

Speaking jurisprudentially, Justice Sabharwal has served as the 36th Chief Justice of India. He held this office from 1 November 2005 to 14 January 2007. He has had a long judicial career, which includes the Delhi High Court, Bombay High Court and the Supreme Court.

The Supreme Court stated in its verdict delivered on 28 October that the notice issued by the Income Tax department on 31 March 2015 was based on "reasons to believe" valid under Section 147 and 148 of the Income Tax Act, 1961. The court clarified that the investigation report provided by the Director General supplied solid material for the Assessing Officer to form a reasonable belief that income chargeable to tax had escaped assessment.

The court further explained that "reasons to believe" means cause or justification, and the officer is not required to conclusively prove that income has escaped. The court also rejected the argument that overvaluation of shares cannot lead to escaped income. The court said that courts cannot weigh the sufficiency of the reasons.

The bench noted in the verdict, "The escaping of income in the hands of the seller of shares, whose income was later utilized for purchasing capital assets so as to claim deduction, could be a diversion of income. This income could be taxable under the head of sale consideration, which is relevant in this case since the sale consideration was much higher than the actual value of the shares."

The bench further added, "The present case is not one where it can be said that the Assessing Officer had a mere vague feeling on the basis of which he recorded that a proper inquiry was required. We are of the view that concluding that the truthfulness of the alleged transactions needed to be examined does not amount to having 'reasons to believe' to issue a notice after inquiry."

According to the background of this case, in October 2007, the Sabharwal brothers and two other shareholders agreed to sell shares of Pavan Impex (P) Limited and SVIIT Software (P) Limited to GYS Real Estate Private Limited. The price fixed for this transaction was ₹195 crore and ₹60 crore, with each seller entitled to a one-fourth share. Chetan Sabharwal's assessment for 2008-09 was completed in December 2010 and his declared income was accepted.

However, subsequent investigations conducted by the Income Tax department raised doubts regarding the valuation of these shares. The department prima facie observed that the sale consideration was significantly higher than the value of the land and buildings underlying the shares. The department further discovered that a substantial portion of this amount was utilized in April 2010 to purchase a property on Sikandra Road. On this investment, the brothers claimed exemption from capital gains tax under Section 54F of the Income Tax Act.