The Delhi High Court in Gaurav Dalmia Vs Deputy Director of Income Tax Investigation Unit 2 (3) Delhi & Ors. considered whether a Look Out Circular (LOC) could continue after completion of income-tax proceedings when no tax demand remained outstanding. A search was conducted in March 2021, following which the Income Tax Department issued an LOC without prior notice. The petitioners cooperated during the investigation, and assessment orders for AY 2017–18 to AY 2020–21 were passed under Section 143(3). Appeals before the Commissioner of Income Tax (Appeals) were partly allowed and the Income Tax Appellate Tribunal subsequently quashed the assessments between July 2025 and January 2026, leaving no pending proceedings or tax demand. Despite this, the LOC remained in force due to pending information requests to foreign jurisdictions through FT&TRD under DTAA. The Court held that indefinite continuation of the LOC was arbitrary and violated Articles 14, 19(1)(g), and 21 of the Constitution. It set aside the LOC but directed the petitioners to file an undertaking regarding overseas assets, ensuring safeguards for the department while protecting the right to travel abroad.
Core Issue: Whether the continuation of a Look Out Circular (LOC) after conclusion of income-tax proceedings and absence of outstanding demand amounts to an unreasonable restriction on fundamental rights, particularly when it restricts the assessee’s international travel for an indefinite period.
Brief Facts:-A search under the Income Tax Act was conducted at the petitioners’ residence and business premises on 17.03.2021. Subsequently, the Income Tax Department issued a Look Out Circular (LOC) in April/May 2021 without prior intimation to the petitioners.
Petitioners made a representation seeking withdrawal of LOC, which was rejected by the department on 10.06.2021.
The petitioners consistently cooperated with the department during investigation.
Assessment orders for AY 2017-18 to AY 2020-21 were passed between 27.03.2023 and 19.05.2023 under Section 143(3) of the Income Tax Act, 1961.
Appeals were filed before the CIT(A), who partly allowed the appeals in July 2024.
The decisions were subsequently affirmed by the Income Tax Appellate Tribunal (ITAT) which quashed the assessments between 23.07.2025 and 29.01.2026.
Consequently: No proceedings were pending. No tax demand remained outstanding.
Despite this, the LOC remained in force, requiring the petitioners to seek permission before travelling abroad.
Department’s Argument
The Income Tax Department argued:
The LOC was validly issued due to apprehension that the petitioners might leave India.
Although domestic proceedings had concluded, the department had initiated references to foreign jurisdictions through the Foreign Tax and Tax Research Division (FT&TRD) under the Double Taxation Avoidance Agreement (DTAA) mechanism.
Since information from foreign countries was still awaited, the LOC should continue.
Legal Issue before the Court:-
Whether the continuation of LOC merely because foreign information requests are pending is justified when: Assessments have concluded, and no demand is outstanding.
Court’s Observations:
The Court made the following important observations:
1. Completion of tax proceedings
The Court noted that:
Income-tax proceedings had already culminated, and no tax liability or demand remained against the petitioners.
Hence, there was no immediate statutory proceeding requiring restraint on travel.
2. Indefinite restriction on travel impermissible
The Court held that:
Investigation through FT&TRD references had remained pending for nearly five years.
If foreign authorities have not supplied information, the citizens’ rights cannot remain suspended indefinitely.
Thus, continuation of LOC without time limit becomes arbitrary.
3. Violation of fundamental rights
The Court held that the LOC violated:
Article 14 – protection against arbitrary state action
Article 19(1)(g) – freedom to carry on trade and business
Article 21 – right to personal liberty including the right to travel abroad
Indefinite travel restraint without ongoing proceedings was unconstitutional.
Court’s Decision:-The Court ordered:
The Look Out Circular be set aside, subject to certain safeguards.
The petitioners were required to:
Furnish an undertaking that they will not alienate, transfer, or create third-party rights in their overseas assets, and
If they intend to do so, they will inform the Income Tax Department at least 30 days in advance.
The undertaking was to be filed before the Court by 15.03.2026.
Safeguard Provided to the Department
The Court clarified that:
If the petitioners violate the undertaking, the department may initiate:
legal action, or contempt proceedings before the Court.
Important Clarification by the Court
The undertaking does not restrict the petitioners from dealing with their assets.
It merely requires prior intimation to the department.
Key Legal Principles Emerging from the Judgment
1. LOC cannot continue indefinitely: A Look Out Circular must have a reasonable nexus with ongoing proceedings. Once proceedings conclude, continuation becomes arbitrary.
2. Fundamental right to travel abroad protected: Travel restrictions through LOC must satisfy the test of reasonableness under Articles 14 and 21.
3. Pending international information requests insufficient. Mere pendency of FT&TRD / DTAA information exchange cannot justify indefinite restraint on personal liberty.
4. Conditional safeguards preferable to travel restraint Courts may balance interests by: Lifting LOC, and imposing undertakings or safeguards.
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