Bombay High Court: In a writ petition challenging reassessment proceedings initiated under Sections 148-A and 148, Income-tax Act, 1961 (IT Act), arising from subscription to rights equity shares at a price lower than the alleged fair market value, the Division Bench of B.P. Colabawalla and Farhan P. Dubash*, JJ., held that the reassessment proceedings were both barred by limitation and founded on an erroneous application of Section 56(2)(x), IT Act. The Court observed that foundational information necessary under Section 148-A(1), IT Act had not been furnished within the limitation period and further held that a proportionate rights allotment could not be taxed under Section 56(2)(x), IT Act merely on the basis of the difference between subscription price and fair market value.
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Background
The dispute arose from the subscription by the petitioner (assessee) of 2, 30,90,26,052 rights equity shares of Vodafone Idea Limited (VIL) during Financial Year 2019—2020 at ₹12.50 per share. The investment was disclosed in the assessee’s books of account and its details were furnished during regular scrutiny assessment proceedings culminating in a final assessment order dated 25 June 2024. Subsequently, a notice under Section 148-A(1), IT Act, was issued on 24 March 2026 proposing reassessment on three grounds, one of which related to the rights share subscription. Upon seeking particulars, the assessee was informed that the Revenue had determined the fair market value of the shares at ₹13.925 per share on the date of allotment and proposed to tax the differential amount of ₹3,29,03,62,124 under Section 56(2)(x) as income escaping assessment. Thereafter, objections were filed disputing both the jurisdictional basis and the applicability of Section 56(2)(x). The petitioner also raised an objection regarding non-compliance with the scheme framed under Section 151-A, IT Act. The objections concerning the rights equity shares were rejected by an order dated 30 June 2026 passed under Section 148-A(3) and a consequential notice under Section 148, IT Act was issued on the same date.
The assessee contended that the reassessment proceedings were barred by limitation because the notice dated 24 March 2026 did not disclose the information forming the basis of the allegation concerning the VIL rights equity shares. According to the assessee, the foundational facts, nature of transaction, method of computation and reliance on Section 56(2)(x) were disclosed only on 27 May 2026, after expiry of the limitation period under Section 149(2)(b). The assessee further argued that Section 56(2)(x), IT Act had no application to the proportionate allotment of rights equity shares by a company to its existing shareholders and that the Revenue has erroneously treated the difference between the subscription price and the fair market price computed as on the date of allotment, as income chargeable to tax under that provision. It was submitted that treating the difference between market value and issue price as taxable income would produce unintended consequences, render portions of Section 55(2)(aa), IT Act redundant, and ignore the true nature and effect of the rights issue. Additional grounds relating to inadequate consideration, reassessment scheme, borrowed satisfaction, and approval under Section 151, IT Act were also urged.
The Revenue, on the other hand, submitted that the assessing officer possessed information suggesting escapement of income because the shares had been allotted at a consideration substantially below their fair market value. It argued that proceedings under Section 148-A are merely preliminary and that the assessing officer is only required to possess information suggesting escapement of income, not establish it conclusively. The Revenue maintained that the applicability of Section 56(2)(x), IT Act, valuation issues, and taxability of the differential amount were matters to be examined during reassessment proceedings and did not warrant interference at the threshold stage. It denied allegations of absence of jurisdiction, lack of material, non-application of mind, and violation of natural justice.
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Analysis
The Court first examined whether the impugned notice dated 24 March 2026 was issued within the period of limitation prescribed under Section 149, IT Act thereof. The Court noted that Section 148-A(1) expressly requires that a show-cause notice be accompanied by the information which suggests that income chargeable to tax has escaped assessment. The Court observed that Section 149(2)(b) separately prescribes the limitation period for issuance of a notice under Section 148-A and that both provisions must be read together. According to the Court, compliance is not achieved merely by issuing a notice within limitation; the notice must also be accompanied by the requisite information within that period.
The Court highlighted that the expression “information which suggests that income chargeable to tax has escaped assessment” requires disclosure of the nature of the transaction, the basis of the allegation, and sufficient particulars enabling the assessee to effectively respond to the show-cause notice. The Court opined that merely specifying an amount alleged to have escaped assessment does not satisfy the statutory requirement. The Court noted that the impugned notice dated 24 March 2026 only referred to a monetary figure and transactions with VIL but did not disclose the manner of computation, the transaction relied upon, or the proposed invocation of Section 56(2)(x), IT Act. The Court emphasised that there is a fundamental distinction between informing an assessee that income has escaped assessment and furnishing the information on which such allegation rests. Section 148-A(1), IT Act is not satisfied with only the former but expressly requires the latter. If the mere disclosure of an amount were to be regarded as sufficient compliance, the requirement of furnishing the information accompanying the notice would be rendered redundant and otiose.
The Court noted that the foundational particulars were supplied only on 27 May 2026, when the Revenue disclosed that the fair market value had been computed at ₹13.925 per share, that the issue price was ₹12.50 per share, and that the differential amount was proposed to be taxed under Section 56(2)(x), IT Act. The Court observed that the case related to Assessment Year 2020—2021 and the limitation period of 5 years prescribed under Section 149(2)(b), IT Act, therefore, expired on 31 March 2026. Therefore, although the notice itself had been issued on 24 March 2026, the information mandatorily required to accompany the notice had been supplied only after expiry of limitation. The Court held that subsequent disclosure could not retrospectively validate a defective notice because such an interpretation would defeat both Section 148-A(1) and the limitation prescribed under Section 149(2)(b), IT Act.
The Court observed that the opportunity of hearing contemplated by Section 148-A(1) is not an empty formality and that meaningful disclosure is integral to statutory compliance. The Court opined that subsequent furnishing of such material cannot cure the defect arising from its non-disclosure at the stage of issuance of the show-cause notice. The Court therefore concluded that the impugned notice dated 24 March 2026 could, at the highest, be regarded as validly issued only on 27 May 2026, by which date it was already barred by limitation. Consequently, the order dated 30 June 2026 and the consequential notice under Section 148 were unsustainable. The Court relied on Union of India v. Rajeev Bansal, (2024) 469 ITR 46 to support the requirement that the information and material relied upon must accompany the show-cause process.
Rejecting the Revenue’s submission that proceedings under Section 148A are preliminary, the Court held that a preliminary examination must still comply with the statutory conditions for its initiation, and that a reply to information furnished after the limitation period could not retrospectively validate the initial notice. It further held that the consequential notice under Section 148, though issued within the period under Section 149(1), could not independently survive where the foundation under Section 148A(1) was defective.
The Court then proceeded to examine the applicability of Section 56(2)(x). The Court noted that the provision taxes receipt of property from another person for inadequate consideration but observed that the inquiry cannot be confined merely to comparing the issue price and alleged market value. The Court opined that the legal nature and effect of the allotment must also be considered. Fresh shares come into existence upon allotment. An allotment is therefore distinct from the acquisition of an existing shareholder’s shares, and a proportionate rights issue must be examined in the context of the shareholder’s existing interest in the company.
The Court referred to Sections 55(2)(aa)(iii), (iii-a), (iv) and 49(4) and opined that these provisions indicate that the IT Act recognises the issuance of rights shares, the allotment of bonus shares and the acquisition of shares pursuant to renunciation of rights as distinct transactions for the purposes of determining their cost of acquisition. They must, therefore, be read harmoniously with Section 56(2)(x), IT Act. The Court clarified that these provisions reinforced the need to assess the true legal character of a rights allotment rather than mechanically treating every price differential as taxable income.
The Court referred to Khoday Distilleries Ltd. v. CIT, (2009) 1 SCC 256, and CIT v. Jigar Jashwantlal Shah, (2024) 460 ITR 628, noting that allotment results in creation of shares and is distinct from transfer of shares already in existence. The Court also referred to tribunal decisions which, according to the Court, reinforced the need to examine what a shareholder actually receives through the allotment.
The Court further observed that where rights shares are allotted in proportion to pre-existing shareholding and the percentage ownership remains unchanged, then merely because the subscription price was lower than the prevailing average market price, it cannot automatically be inferred that the petitioner received a corresponding economic benefit. The Court highlighted that the issuance of additional shares also has a bearing upon the value of the existing shares. Therefore, the difference between the subscription price and the market price cannot, without examining the nature and effect of the rights issue, be regarded as income arising from the receipt of property for inadequate consideration. The Court found that the Revenue had neither identified any acquisition of pre-existing shares from another person nor demonstrated any disproportionate benefit accruing to the petitioner.
The Court also referred to the Memoranda explaining the Finance Bills introducing and extending the relevant provisions and noted that they were described as anti-abuse measures. While observing that such materials do not create an exemption for every transaction described as commercial, the Court opined that they assist in construing the provision in its proper setting. The Court found that the Revenue relied solely on a price differential arising from a proportionate rights allotment and had failed to identify the kind of abuse or disproportionate benefit contemplated by the provision.
The Court relied on K.P. Varghese v. CIT, (1981) 4 SCC 173, and CIT v. J.H. Gotla, (1985) 4 SCC 343, wherein it was observed that the statutory language must be read in its context and in the light of the object sought to be achieved, avoiding an unintended or absurd result where the language permits a rational construction. Thus, these decisions support examining the character and effect of the present rights allotment before concluding that the price difference represents the receipt of property for inadequate consideration.
The Court also rejected Revenue’s submission that the question of applicability of Section 56(2)(x), IT Act ought to be left open for examination during reassessment proceedings. The Court opined that where the statutory provision itself cannot be invoked based on the admitted transaction, Revenue cannot justify initiation of reassessment proceedings merely by contending that taxability would be examined at a subsequent stage.
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Decision
Accordingly, allowing the petition, the Court held that Section 56(2)(x), IT Act could not be invoked merely to tax the difference between the subscription price and the fair market value of rights equity shares proportionately allotted to an existing shareholder whose percentage shareholding remained unchanged and, in whose favour, no disproportionate benefit had been identified. The Court concluded that the basis of reassessment was unsustainable.
The Court observed that the proceedings were not validly initiated within limitation and that Section 56(2)(x) was erroneously applied. It clarified that its finding was confined to the allotment before it, in which the petitioner’s percentage shareholding was stated to have remained unchanged and no disproportionate benefit had been identified. The Rule was made absolute, the notice dated 24 March 2026, the order dated 30 June 2026 and the consequential notice under Section 148 were set aside, all other contentions were left open, and there was no order as to costs.
[Grasim Industries Ltd. v. CIT, 2026 SCC OnLine Bom 17400, decided on 22-10-2026]
Advocates who appeared in this case:
For the Petitioner: J. D. Mistri, Senior Advocate with Madhur Agrawal, Punit Shah i/b Atul K. Jasani, Advocate.
For the Respondents: Akhileshwar Sharma, Advocate.
