Supply of Reasons for Income Escapement After Limitation Period Invalidates Reassessment: Bombay HC

Supplying the basis of escapement after the expiry of limitation is fatal to the reassessment proceedings and proportionate rights issue below market price is not income under section 56(2)(x)

Summary: The Bombay High Court, in Grasim Industries Ltd v DCIT, Writ Petition No. 4298 of 2026, concerning Assessment Year 2020-21, quashed reassessment proceedings initiated under Sections 148A and 148 of the Income-tax Act, 1961, on two distinct grounds involving limitation and the taxability of proportionate rights shares under Section 56(2)(x). Grasim had subscribed to approximately 230.90 crore rights equity shares of Vodafone Idea Limited at ₹12.50 per share during FY 2019-20. The Assessing Officer subsequently alleged that the fair market value on the allotment date was ₹13.925 per share and proposed taxing the difference of ₹1.425 per share, aggregating to approximately ₹329.04 crore, as income from property received for inadequate consideration. Although the show-cause notice under Section 148A(1) was issued on 24 March 2026, before the limitation period expired on 31 March 2026, it merely referred to an amount and transactions with Vodafone Idea Limited without furnishing the underlying basis of escapement. The relevant transaction details, valuation computation and proposed application of Section 56(2)(x) were disclosed only on 27 May 2026. The Court held that the statutory requirement of supplying information with the show-cause notice and the limitation prescribed under Section 149(2)(b) operate together. Furnishing the foundational information after limitation cannot retrospectively validate an otherwise defective notice. Consequently, the order under Section 148A(3) and the notice under Section 148 dated 30 June 2026 were also invalidated. On merits, the Court distinguished the allotment of newly created rights shares from the transfer of existing shares and held that a proportionate rights allotment maintaining the shareholder’s percentage ownership does not automatically confer an economic benefit merely because the subscription price is below market value. Drawing upon Khoday Distilleries, Jigar Jashwantlal Shah, Sudhir Menon HUF and other precedents, the Court considered the anti-abuse purpose of Section 56(2)(x) and rejected mechanical taxation of the price difference. Its substantive finding was expressly confined to the proportionate allotment before it, where no disproportionate benefit was identified. Other challenges raised by Grasim were left open.

Bombay High Court Quashes Grasim Industries Reassessment for AY 2020-21

The Bombay High Court (HC) recently, in a writ petition in case of Grasim Industries Ltd¹ (Grasim), quashed reassessment proceedings for AY 2020-21, initiated within time but without furnishing the supporting information which is a mandatory requirement as per section 148A of the Income-tax Act,1961(Act). As the basis of charge and its calculation was supplied by the assessing officer only after the limitation to issue notice u/s 148A has expired, HC held that 148A notice is time barred and therefore, consequential notice u/s 148 do not have leg to stand on.

With respect to re-opening of an assessment to tax the difference between issue price of the shares and its fair market value as on the date of allotment of right shares by deeming it as benefit, received by shareholder who subscribed it, under section 56(2)(x), the Hon’able HC held that in case of a proportionate right issue where shareholding before and after the right issue remains unaltered, there is no benefit received. Hon’able HC has further observed, taking resort from the memorandum to the finance bill, that section 56(2)(x) is anti-abuse provisions and cannot be invoked in a legitimate commercial transaction without analysing nature and character of the transaction.

Background

In financial year 2019-20, Grasim subscribed to 230.90 crore rights shares of Vodafone Idea Ltd (VIL) at Rs 12.50 each and recorded the investment in its books. For AY 2020-21 Grasim filed its return, revised it and, after the merger of Grasim Premium Fabrics Private Limited with it, filed a physical return on 27 December 2021. The scrutiny assessment ended with the final order of 25 June 2024.

On 24 March 2026, a week before limitation expired, the Assessing Officer (AO) issued a show-cause notice under section 148A(1). It proposed reassessment on three separate grounds involving three separate amounts. One of them concerned Grasim’s subscription to the VIL rights shares. For this ground the annexure only mentioned an amount and “transactions with VIL”. On 27 May 2026, at Grasim’s request, the AO disclosed the basis: the FMV on the allotment date (10 May 2019) was Rs 13.925 per share and the difference of Rs 1.425 per share, about Rs 329.04 crore in all, was alleged to be taxable under section 56(2)(x).

Issue on hand

By an order under section 148A(3) dated 30 June 2026 the AO dropped the other two grounds, kept the rights share ground and issued a notice under section 148 the same day. Grasim’s writ petition raised two questions:

Was the show-cause notice under section 148A(1) issued within time when the information that had to accompany it was supplied only after the time limit for issuing it had expired?

Does section 56(2)(x) tax the gap between the issue price and the FMV of shares allotted in a proportionate rights issue?

Relevant Provision

Section 148A(1): the show-cause notice must be accompanied by the information suggesting that income has escaped assessment. Under section 149(2)(b), where the escaped income is Rs 50 lakh or more, the notice may be issued within five years from the end of the AY. For AY 2020-21 that period ended on 31 March 2026.

Section 56(2)(x): where a person receives property, including shares, from any person for less than its FMV and the shortfall exceeds Rs 50,000, the shortfall is taxed as income.

Section 55(2)(aa) and section 49(4): section 55(2)(aa) specifically provides for cost of acquisition of rights shares, bonus shares and shares acquired through renounced rights. For rights shares the cost is the amount actually paid. Section 49(4) provides that where the value of property has been taxed under section 56(2)(x), that value becomes its cost.

Relevant Judicial Precedent

Union of India v Rajeev Bansal² (Supreme Court (SC)) and Anurag Gupta v ITO³ (Bombay HC): a show-cause notice is effective only when the information and material behind it are supplied, so that the taxpayer has a real chance to reply. In Anurag Gupta the HC allowed Revenue to restart only if limitation still permitted.

Khoday Distilleries Ltd v CIT⁴ (SC): an allotment creates shares out of the unappropriated capital of a company. It is not a transfer of shares that already exist.

PCIT v Jigar Jashwantlal Shah⁵ (Gujarat HC): rights shares are property created on allotment and receiving them is not a transfer. Section 56(2)(vii)(c), the earlier version of section 56(2)(x), therefore does not apply to the allottee.

Sudhir Menon HUF v ACIT⁶ (Income-tax Appellate Tribunal (ITAT), Mumbai): on a pro rata allotment the value of the existing holding is only spread over more shares, so no property is received. The ITAT added that if a shareholder is allotted more than its proportionate share, the provision can apply only to the extra shares and only after allowing for the fall in value of its existing shares.

ACIT v Subodh Menon⁷ (ITAT, Mumbai): shares issued to existing shareholders to meet a genuine business need (a bank loan covenant) could not be taxed under section 56(2)(vii).

K P Varghese v ITO⁸ and CIT v J H Gotla⁹ (SC): a taxing provision is read in its context and in the light of its object, so as to avoid an absurd or unintended result.

The court’s view

1. Limitation

Two requirements operate together

On a conjoint reading of sections 148A(1) and 149(2)(b), “two requirements clearly emerge”: the notice must be issued within the time limit and it “must be accompanied by the information suggesting that income chargeable to tax has escaped assessment”.

These requirements “operate together and cannot be read in isolation”. Hence “merely issuing a notice within the prescribed period would not, by itself, constitute compliance with the statutory scheme if the essential information required to accompany such notice has not been furnished” (para 33).

Information must go with the notice

Mentioning an amount is not enough. “The information furnished must, at the very least, disclose the nature of the transaction giving rise to the alleged escapement, the basis on which, such escapement is alleged and sufficient particulars to enable the Assessee to effectively respond to the show-cause notice. Otherwise, the opportunity of hearing contemplated under Section 148A(1) would be reduced to an empty formality” (para 34).

The HC drew “a fundamental distinction between informing an Assessee that a particular amount has escaped assessment and furnishing the information on the basis of which such an allegation is made”. If an amount alone were enough, the requirement of supplying information “would be rendered redundant and otiose” (para 36).

For the rights share ground, the annexure “did not disclose the nature of the transaction, the basis of computation or the manner in which income was said to have escaped assessment”. Nor did it disclose that section 56(2)(x) was to be invoked on the price difference (para 35). These were “disclosed only on 27th May 2026” (para 38).

Late information cannot save the notice.

The HC held it could not: “Where the show cause notice does not disclose the transaction or the basis of the alleged escapement, supplying that information after the statutory period has expired cannot retrospectively convert it into a valid notice issued within time”.

The HC observed that “at the highest”, the notice “could be said to be validly issued only on 27th May 2026”, by which time it was time barred under section 149(2)(b) (para 46).

A preliminary stage is no excuse for non-furnishing of information.

The HC accepted that the AO need not conclusively establish escapement at the show-cause stage. Even so, “A preliminary examination must still comply with the statutory conditions for its initiation.” “The question is not merely whether the Petitioner eventually had an opportunity to answer the information. It is whether the mandatory requirements were fulfilled within the period prescribed by Section 149(2)(b)” (para 44).

Fate if section 148 notice depends on validity of 148A(1) notice.

Section 149(1)(b) allows a notice under section 148 up to five years and three months from the end of the AY, so the notice of 30 June 2026 was within that period. But that does not save Revenue as section 148 itself is subject to section 148A.

Where “the very foundation of the reassessment proceedings”, a valid show-cause notice issued in time with its information, is missing, the order under section 148A(3) and the notice under section 148 “cannot independently survive merely because they were issued within the separate period prescribed under Section 149(1)” (para 45).

2. Section 56(2)(x) and the rights issue

Issuance of rights shares at a discount to FMV does not by itself result in a benefit.

The question “cannot be answered by comparing the two prices alone”.

“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”(para 50).

In Khoday Distilleries, decided under the Gift-tax Act, the SC held that “an allotment represents the creation of shares by appropriation out of the unappropriated share capital of a company”. That principle is relevant “for appreciating the legal nature” of the present transaction (para 54).

The reasoning in Jigar Jashwantlal Shah on section 56(2)(vii)(c) applies to section 56(2)(x) because the language on receipt of property is the same (para 55).

No benefit in a proportionate issue.

“In the present case, the rights equity shares were issued to existing shareholders in proportion to their shareholding. The Petitioner has specifically asserted that its percentage shareholding remained unchanged even after the rights issue. This position is not disputed by the Revenue. In such a situation, 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 issuance of additional shares also has a bearing upon the value of the existing shares. (para 57).

Revenue missed the distinction.

“The Revenue has fundamentally failed to appreciate the aforesaid distinction.” It relied solely on the price difference and “has not identified any acquisition of pre-existing shares from another person or any disproportionate benefit accruing to the Petitioner by reason of the rights allotment” (para 58).

HC observed that provisions of section 55 (2) reinforce the necessity of examining the true legal character of a rights allotment rather than mechanically treating every difference between the subscription price and the market price, as taxable income” (para 53).

The anti-abuse object helps in reading the provision.

The Memoranda to the Finance Bills of 2010 and 2017 described these provisions “as anti-abuse measures”. “These materials do not create a general exemption for every transaction described as commercial. They do, however, assist in construing the provision in its setting.”

K P Varghese and J H Gotla 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” (para 60).

Not left to reassessment.

The nature of the transaction was admitted. “Where the statutory provision itself cannot be invoked on the basis of such a transaction, the Revenue cannot justify initiation of reassessment proceedings merely by contending that taxability would be examined at a subsequent stage” (para 61).

A narrow finding.

“Our finding is confined to the allotment before us, in which the Petitioner’s percentage shareholding is stated to have remained unchanged and no disproportionate benefit has been identified” (para 62). Grasim’s other grounds were left open (para 64).

Key Takeaway

The HC’s finding does not cover a shareholder whose holding goes up, for example by taking up rights renounced by others or shares that other shareholders did not subscribe. For that situation Sudhir Menon HUF suggests that the provision may apply only to the extra shares and only after allowing for the fall in value of the shareholder’s existing shares.

In reopening matters, test limitation against the date on which the AO first supplied the information behind the notice, not merely the date of the notice.

Notes:

¹ ↩ Grasim Industries Ltd v DCIT, Writ Petition No. 4298 of 2026, [2026] 191 taxmann.com 663 (Bom).

² ↩ Union of India v Rajeev Bansal (2024) 469 ITR 46 (SC).

³ ↩ Anurag Gupta v ITO (2023) 454 ITR 326 (Bom).

⁴ ↩ Khoday Distilleries Ltd v CIT (2008) 307 ITR 312 (SC).

⁵ ↩ PCIT v Jigar Jashwantlal Shah, (2024) 460 ITR 628 (Gujarat High Court); Tax Appeal Nos. 80 and 96 of 2023; decided on 28.08.2023

⁶ ↩ Sudhir Menon HUF v ACIT (2014) 148 ITD 260 (Mum Trib).

⁷ ↩ ACIT v Subodh Menon [2019] 103 taxmann.com 15 (Mum Trib).

⁸ ↩ K P Varghese v ITO, (1981) 131 ITR 597 (Supreme Court)

⁹ ↩ CIT v J H Gotla (1985) 156 ITR 323 (SC).