The Bombay High Court has held that a rights-issue discount alone does not establish taxable income, and a timely reassessment notice cannot substitute for timely disclosure of its foundation. The Court clarified that Section 56(2)(x) could not be invoked merely on the difference between the subscription price and fair market value of Grasim’s proportionately allotted rights shares. Its percentage shareholding remained unchanged, and no disproportionate benefit was identified.
The Court said that a consequential reassessment notice cannot independently survive merely because it falls within the separate limitation period under Section 149(1), when the mandatory requirements of Section 148A have not been met. The Court expressly confined its Section 56(2)(x) finding to the proportionate allotment before it. It also clarified that cost-of-acquisition provisions do not themselves create an exemption, and the provision’s anti-abuse purpose does not exempt every transaction described as commercial.
Briefly, Grasim Industries Limited challenged reassessment proceedings for Assessment Year 2020–21 concerning its subscription to Vodafone Idea Limited’s rights equity shares at Rs. 12.50 per share. The Revenue valued the shares at Rs. 13.925 per share and sought to tax the difference of Rs. 329.03 crores under Section 56(2)(x) of the Income-tax Act. Although the show-cause notice was issued on 24 March 2026, the particulars explaining the transaction, valuation and proposed tax treatment were supplied only on 27 May 2026. The Assessing Officer subsequently passed an order under Section 148A(3) and issued a reassessment notice under Section 148 on 30 June 2026.
Also read Murud Beach Drowning Case: Bombay High Court Quashes FIR Against College Trustees, Teachers
The Division Bench comprising Justice B. P. Colabawalla and Justice Farhan P. Dubash observed that a notice under Section 148A(1) must disclose more than an amount allegedly escaping assessment. It must explain the nature of the transaction, the basis of the allegation and sufficient particulars for the taxpayer to respond effectively. Here, the foundational information was supplied after the applicable limitation period expired on 31 March 2026. Supplying that information later could not retrospectively validate the earlier defective notice, and the separate, longer limitation period for a Section 148 notice could not save proceedings lacking a valid Section 148A foundation.
On taxability, the Court observed that a proportionate rights allotment cannot be assessed merely by comparing the subscription price with the market value. Fresh shares come into existence upon allotment, and the effect on the shareholder’s existing interest must also be considered. Grasim’s percentage shareholding remained unchanged, and the Revenue identified neither an acquisition of pre-existing shares from another person nor any disproportionate benefit. The Court clarified that the cost-of-acquisition provisions and the anti-abuse purpose of Section 56(2)(x) do not create a blanket exemption for every commercial transaction.
The Court explained that a Section 148A(1) show-cause notice must be accompanied by the foundational information suggesting escapement of income within the applicable limitation period. An otherwise deficient notice cannot be saved by supplying that information after limitation expires. Independently, Section 56(2)(x) could not be invoked merely to tax the price difference in the proportionate rights allotment before the Court, where Grasim’s percentage shareholding remained unchanged and no disproportionate benefit was identified.
