Reopening Of Tax Assessments And The NDTV Case

(This article was first published on taxsutra.com)

The recent Supreme Court judgment in New Delhi Television Limited v. CIT [TS-197-SC-2020], rendered a few weeks ago, set aside the notice for reopening the assessment on the ground that there was no failure to disclose all material facts fully and truly. In other words, the Supreme Court held that the first proviso to section 147 did not apply. Consequently, the decision of the Delhi High Court was also reversed. While this was indeed a correct ruling, the most important issue in this case was not considered either by the Delhi High Court or the Supreme Court.

Section 147 enables an Assessing Officer (AO) to reopen an assessment if he has reason to believe that there was "any income chargeable to tax that has escaped assessment". In other words, it is fundamental that there must be an amount or income that should have been taxed in the assessment initially but such income had escaped assessment. It is only then that the four year period will apply. The larger period of six years can be invoked if the escapement of income was due to non-disclosure of all material facts as mentioned in the second proviso to section 147. Therefore, the first question that has to be asked is: "Whether the amount that "escaped assessment" is actually income that was chargeable to tax?"

It is therefore necessary to briefly narrate the facts that arose before the Delhi High Court and the Supreme Court.

NDTV had a UK subsidiary that had issued coupon bonds for USD 100 million which were to be redeemed after five years. The bond issue was managed by a well-known American bank and some of the subscribers were also well-known companies/entities. Due to the financial crisis in 2008, the bond-holders wanted premature redemption of bonds, which was agreed to at a discounted price of USD 72 million. The net gain of USD 28 million was included as the income of the UK subsidiary in its assessment proceedings. Thus, a sum of money had been borrowed by a subsidiary which was then repaid.

In the assessment proceedings of NDTV, the parent company, it was argued in the transfer pricing proceedings that no one would have lent money to the subsidiary unless there was an implied guarantee by the parent company. (The loan agreement did have a clause for a corporate guarantee to be provided if required by the lenders but, on facts, no such guarantee was called for.)

However, the TPO made an addition of 4% on the basis of implied guarantee and this was confirmed by the DRP. The addition was Rs18.75 crores. As on date, the matter is still pending before the Tribunal. In a nutshell, in the original assessment proceedings for AY 2008-09, NDTV is the deemed guarantor of the loan and the addition of this guarantee commission is now pending before the ITAT for AY 2008-09. No doubts were raised about the genuineness of the loan; indeed, in the assessment proceedings against the UK subsidiary under the Indian Income-tax Act, 1961, the loans were accepted as genuine.

On the last date of the six year period, on March 31, 2015, the assessment was suddenly reopened on the ground that the loan of USD 100 million was a sham transaction and represented the money of NDTV. Most important, the notice did not indicate any material fact had not been disclosed fully and truly.

In this background, the primary question that should have been asked by the Delhi High Court and the Supreme Court was: whether a genuine loan taken by a subsidiary and repaid, can be treated as the income of the holding company? For example, if a person takes a loan for purchasing of a flat and his father had stood guarantee, the repayment of the loan by the son brings an end to the transaction. Thereafter, after six years, it will be absurd to reopen the assessment of the father and assess the repaid loan as his income. This is precisely what was sought to be done in the NDTV case.

It was also on this primary ground that the SLP had been initially admitted by the Supreme Court. Without going into the question of whether facts were disclosed or not, the courts should have asked the question whether a repaid loan, which now sought to be included in the assessment proceedings, by any stretch of imagination represent the income of the assessee? Could a genuine loan in 2008-09 become a sham transaction after six years?

The other interesting question was whether, for the same assessment year, the assessee could be the guarantor of a loan, but in the reassessment, be treated as the owner of the loan amount by merely alleging that the loan was a sham transaction. The word "sham transaction" was used without examining as to how the bonds could have been issued and repaid and subjected to tax in UK and yet be treated as a sham in India. Sadly, re-assessments are often made on untenable grounds and the courts would do well to ask, at the threshold, the fundamental question as to whether the reopening is with regard to amounts that can be called income?

(Arvind Datar is a Senior Counsel practicing in Supreme Court of India.)

Disclaimer: The author had appeared for the assessee before the Supreme Court. The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.