Facts of the Case

The petitioners challenged reassessment notices dated 30 March 2021 issued under Section 148 of the Income Tax Act for Assessment Years 2016–17 and 2017–18. The notices were issued on the basis that the petitioners’ transactions were flagged in the Non-Filers Monitoring System (NMS).

It was alleged that the petitioners had made remittances to their head office without deduction of TDS and had not filed returns of income for the relevant assessment years. The revenue further claimed that such receipts were not offered to tax.

Issues Involved

  1. Whether the reassessment notices issued under Section 148 were valid in law.
  2. Whether there existed a valid “reason to believe” that income had escaped assessment under Section 147.
  3. Whether exemption claims on dividend income and capital gains could be examined at the stage of reassessment notice.

Petitioner’s Arguments

  • The impugned notices and orders were without jurisdiction and based on mere bald assertions.
  • The requirements of Section 147 were not satisfied as there was no tangible material indicating escapement of income.
  • Dividend income was exempt under Section 10(34).
  • Long-term capital gains on sale of listed shares (e.g., Just Dial Ltd.) were exempt under Section 10(38).
  • Long-term capital loss was not chargeable to tax.

Respondent’s Arguments

  • The income in question was chargeable to tax and the petitioner had merely claimed exemptions.
  • The correctness of such claims could only be examined during reassessment proceedings.
  • At the stage of issuing notice under Section 148, only a prima facie belief is required.

Court’s Findings / Order

  • The Court held that the notices were issued within four years and no prior scrutiny assessment had taken place.
  • The applicable test was whether there existed a “reason to believe” that income had escaped assessment.
  • Relying on Raymond Woollen Mills Ltd. vs ITO, the Court reiterated that at the notice stage, only prima facie material is required and sufficiency cannot be examined.
  • The Court found that the threshold of “reason to believe” was satisfied. .

Important Clarifications

  • At the stage of Section 148 notice, courts do not evaluate sufficiency or correctness of material.
  • Even where exemptions are claimed, the issue can still be examined during reassessment.
  • The concept of “reason to believe” requires only prima facie material, not conclusive proof.
  • Assessees retain the right to challenge factual assumptions during reassessment proceedings.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1112-DB/MMH23032022CW46502022_165444.pdf

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