Bombay HC quashes income-tax reassessment of Grasim Industries over Vodafone Idea rights shares

The Bombay High Court quashed a notice reopening Grasim Industries Limited's income-tax assessment for 2020-21 over its subscription to over 230 crore rights equity shares of Vodafone Idea Limited at Rs. 12.50 per share. The tax department had treated the difference between that price and a computed fair market value of Rs. 13.925 per share, about Rs. 329 crore, as income escaping assessment under Section 56(2)(x) of the Income-tax Act, 1961, and issued a show-cause notice under Section 148A(1), followed by an order under Section 148A(3) and a notice under Section 148 to reopen the assessment. A Division Bench of Justices B.P. Colabawalla and Farhan P. Dubash held, first, that the show-cause notice itself must be accompanied by the information suggesting escapement and must be issued within the limitation period that Section 149(2)(b) separately prescribes for show-cause notices; issuing the reassessment notice within time cannot cure a defective show-cause notice.

Second, on merits, the Court held that Section 56(2)(x), which taxes receipt of property for inadequate consideration, could not be invoked merely because rights shares were allotted below a computed fair value, where the petitioner's percentage shareholding stayed unchanged and no disproportionate benefit to it was shown. Both findings led the Court to set aside the reassessment notices.