Supreme Court quashes IT notice to NDTV for alleged round-tripping of funds and non-disclosure of income

The Supreme Court today quashed an income tax notice issued to New Delhi Television Limited (NDTV) for allegedly not disclosing its complete income for the assessment year 2008-09 [New Delhi Television Limited v. Deputy Commissioner of Income Tax]..The revenue had accused NDTV of indulging in round-tripping its funds to its foreign entities in order to avoid taxation. .The order was passed today by a Division Bench of Justice L Nageswara Rao and Deepak Gutpa..Th assessee, NDTV Network PLC (NNPLC), a foreign subsidiary of New Delhi Television Limited, had in July 2007 issued stepup coupon bonds worth USD 100 million through the Bank of New York for a period of 5 years. .The Assessing Officer held that since NNPLC had virtually no financial worth or business, it could not have issued convertible bonds of US$ 100 million without having any assurance from the assessee..Without doubting the validity of the transaction, the Assessing Officer imposed a guarantee fee at the rate of 4.68% by treating it as a business transaction and added Rs. 18.72 crore to the income of the assessee with respect to the financial year 2007-08 i.e. assessment year 2008-09. .In March 2015, the revenue sent a notice to the assessee stating that it had reason to believe that net the income chargeable to tax for the assessment year 2008-09 had escaped assessment.This notice did not give any reasons. When asked for reasons, the revenue stated that in the following assessment year of 2009-10, the Assessing Officer had proposed a substantial addition of Rs. 642 crore to the account of the assessee on account of monies raised by it through its subsidiaries NDTV BV, The Netherlands; NDTV Networks BV, The Netherlands (NNBV); NDTV Networks International Holdings BV, The Netherlands (NNIH); and NNPLC..The assessee raised its objection before the Dispute Resolution Panel (DRP) which concluded that these transactions with the subsidiary companies in Netherlands were sham and bogus. It was also opined that the same were done with a view to getting the undisclosed income, for which tax had not been paid, back to India by a circuitous round tripping..NDTV then filed reply to the notice , and claimed that there had been no failure on its part to disclose all material facts necessary to make an assessment. However, the Assessing Officer did not accept these objections.This prompted NDTV to approach the Delhi High Court, which dismissed its plea in 2017. Thus, the channel approached the Supreme Court in appeal..Before beginning to record its opinion in the case, the Court clarified that it was not going into the merits of the allegations of round tripping made against the assessee. .“We would like to make it clear that we are not going into the merits of the allegations made against the assessee. At this stage, we are only required to decide whether the revenue has sufficient reasons to believe that undisclosed income of the asseessee has escaped assessment and therefore there are grounds to issue notice. Obviously, during the assessment proceedings the assessee will have the right to place material on record to show that the transaction in question was a genuine transaction.”Supreme Court.The Court thereafter proceeded to deal with the issues before it. .Whether the Revenue had a valid reason to believe that undisclosed income had escaped assessment?The assessee argued that there was no fresh material before the Assessing Officer to have "reason to believe" that its undisclosed income had escaped assessment at the relevant time. .It was submitted that the DRP order only pertained to the transactions with the Netherlands subsidiary and that the issuance of USD 100 million convertible bonds was not questioned. Thus, there was an attempt to deliberately mix up the transactions relating to the Netherlands subsidiary with those of its UK subsidiary..The revenue argued that at this stage, the Court was not expected to go into the merits of the case but could only ascertain whether the revenue had prima facie ground to show that it had reasons to believe that income has escaped assessment. It was claimed that the revenue had discovered "fresh tangible material", which included complaints made by the minority shareholders of the Assessee, after the 2012 assessment order was passed. .While stating that "mere change of opinion of the assessing officer" was not sufficient to meet the standard of ‘reason to believe’, the Court observed that discovery of subsequent facts/information could lead to re-opening of a case under Section 147 of the Act..The Court thus opined, ."At the stage of issuance of notice, the assessing officer is to only form a prima facie view. In our opinion the material disclosed in assessment proceedings for subsequent years was sufficient to form such a view. We accordingly hold that there were reasons to believe that income had escaped assessment in this case."Supreme Court.Whether the Assessee did not disclose fully and truly all material facts during the course of original assessment which led to the finalisation of the assessment order and undisclosed income escaping detection?Relying on the complaint by the assessee's minority shareholders, the revenue asserted that the Aassessee indulged in round tripping of its funds..It was alleged that the assessee was 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 Court, however, refused to consider this aspect on the ground that "those complaints have not seen light of the day either before the High Court or this Court". The Court opined that any reliance on those complaints would be unfair to the assessee, which is yet to be confronted with these documents. .It further held that the assessee had disclosed all the facts that it was bound to disclose and if the revenue wanted to investigate the matter further at that stage, it could have easily directed the assessee to furnish more facts..“The fact that stepup coupon bonds for US$ 100 million were issued by NNPLC 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 finalised. This transaction was accepted by the assessing officer and it was clearly held that the assessee was only liable to receive a guarantee fees on the same which was added to its income. Without saying anything further on merits of the transaction we are of the view that it cannot be said that the assessee had withheld any material information from the revenue.”Supreme Court.The Court also recorded that in the appeal before it, the revenue strenuously argued that the assessee was guilty of non-disclosure of material facts. However, the case of the revenue before the High Court was just opposite.."...in our opinion the revenue cannot now turn around and urge that the assessee is guilty of nondisclosure of facts. We are also of the view that the revenue could not be permitted to blow hot and cold at the same time."Supreme Court.Given the conclusion that the assessee had fully and truly disclosed all material facts necessary for its assessment, the Court further held that the revenue could not be given the benefit of the extended period of limitation under the first proviso to Section 147 of the Act..Whether the 2015 notice could be termed to be a notice invoking the second proviso to Section 147 of the Act on income in relation to any foreign asset. The Court observed that it was an uncontroverted fact that the notice had no mention of any foreign entity. .It said, "There is only mention of the Section 148. Even after the Assessee specifically asked for reasons, the revenue only relied upon facts to show that there was reason to believe that income has escaped assessment and this escapement was due to the nondisclosure of material facts. There is nothing in the reasons to indicate that the revenue was intending to apply the extended period of 16 years. 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 Court opined that the procedure adopted by the revenue was not fair or proper and that the assessee should have been informed that the revenue was relying upon the second proviso.. In view of the above, the Court held that although the notice issued to the assessee showed sufficient "reasons to believe", the revenue failed to show non-disclosure of facts. Thus, the notice having been issued after a period of four years, was required to be quashed..Withr respect to the application of the second proviso to Section 147, the Court clarified, ."...we make it clear that we have not expressed any opinion 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. We make it clear that both the parties shall be at liberty to raise all contentions with regard to the validity of such notice."Supreme Court.The appeal was accordingly disposed of. .NDTV was represented by Senior Advocate Arvind P Datar, briefed by DMD Advocates..The revenue was represented Solicitor General Tushar Mehta and Advocate Zoheb Hossain..Read the Judgment: