Delhi High Court Rules Revenue Department Cannot Introduce New Grounds In Reassessment Under Section 148A(d)

Delhi High Court Rules Revenue Department Cannot Introduce New Grounds In Reassessment Under Section 148A(d)

The Delhi High Court has quashed the reopening proceedings initiated under Section 148A of the Income Tax Act, finding a major flaw in the Revenue Department's premise that the investment made by the taxpayer in shares amounted to "income,” which had escaped assessment.

The Court observed that only foundational material is relevant for evaluating whether reassessment powers were justifiably invoked. It clarified that the Revenue Department cannot introduce new grounds while passing an order under Section 148A(d).

According to Section 148A of the Income Tax Act, if an income tax officer believes a taxpayer attempted to avoid paying taxes for any assessment year, the officer may notify the taxpayer of a forthcoming reassessment.

The Division Bench of Justices Yashwant Varma and Ravinder Dudeja noted, “The basis of the order passed under Section 148A(d) is the alleged discrepancy noticed between the share prices as provided by the petitioner and the exchange rate (NSE). Undoubtedly, this aspect of the matter was never taken up with the petitioner in the notice issued under Section 148A(b). The noticee or the assessee should not be prejudiced or be taken by surprise.”

The petitioner/assessee, a fund managed by Tosca Fund Asset Management, LLP, received inward remittances in India to subscribe to securities and conducted transactions on a recognized stock exchange in India. The petitioner had not earned income of any nature accruing or arising in India or taxable in India and had only used the remitted funds for securities subscription and made outward remittance of the excess funds. The Assessing Officer (AO) issued a notice under Section 148A(a) to initiate reassessment, citing information flagged by the Risk Management Strategy, alleging unexplained income sources due to the absence of a return of income.

The Bench found that the proceedings under Section 148A pertained to investments made in shares by the petitioner, an FPI, which had received remittances in India for securities subscription. The Court observed that such a subscription of share capital is a “Capital Account Transaction.”

Since the funds remitted were used for securities subscription, no income was earned in AY 2019-20, and therefore, the petitioner was not required to file a return of income in India. The Court referenced the case of Banyan Real Estate Fund Mauritius v. Assistant Commissioner of India Tax Circle International Tax, reiterating that the validity of proceedings initiated upon a notice under Section 148 must be judged based on the reasons that formed the opinion regarding income escapement. This opinion cannot be based on changing grounds or additional reasoning or verification.

The High Court allowed the petitioner’s petition and concluded that the reasons recorded for issuing the notice under Section 148 could not be sustained.