Deputy Commissioner of Income Tax v. Rakesh Ramamlal Shah [SLP (C) Diary No. 16518/2025]
Background:
The Assessee (Rakesh Ramanlal Shah) filed his return of income for the A.Y. 2014-15 on 26.07.2014, declaring a total income of Rs. 39,61,071/-. The case was selected for scrutiny, and the Assessing Officer (AO) conducted an examination under Section 143(3) of the Income Tax Act, 1961. As part of the scrutiny, the AO had specifically looked into the Long-Term Capital Gain (LTCG) transactions concerning the shares of Monarch Health Services Ltd. (later renamed Looks Health Services Ltd.). The Assessee had furnished all documents, including the IPO allotment details, DEMAT statements, contract notes, and bank statements. Post examination, the AO accepted the Assessee’s claim and made no additions in the final order dated 18.11.2016. Subsequently, on 30.03.2021, the AO issued a notice under Section 148 of the Act, seeking to reopen the assessment. This was based on information received from the DDIT (Investigation), New Delhi, which indicated that Looks Health Services Ltd. was a penny stock company used for laundering money through bogus LTCG claims.
Department’s Contentions:
The department relied on the report of the Investigation Wing, which alleged large-scale manipulation in the trading of shares of Looks Health Services Ltd. It was stated that a group of beneficiaries had created fictitious LTCG by manipulating trades and prices to launder money and avoid taxation. The report claimed that the price of the scrip was artificially inflated through coordinated trade matching and order placement. On this basis, the AO recorded “reasons to believe” that the income chargeable to tax had escaped assessment. The entire sale consideration of ₹2.27 crores from the sale of shares was proposed to be treated as unexplained income, alleging that the assessee had indulged in a sham transaction. The AO therefore issued a reassessment notice under Section 148, asserting that this was not a case of change of opinion but a matter of fresh material information justifying reopening.
Decision of the High Court
The Gujarat High Court quashed the reassessment notice. The Court noted that the assessee had made full and true disclosure during the original scrutiny assessment and that the AO had examined the issue of LTCG in detail. The assessee had acquired the shares through a legitimate Initial Public Offering (IPO), held them in a dematerialized form, and sold them on a recognized stock exchange through a registered broker. The Court held that the reopening was merely based on borrowed satisfaction, a mechanical adoption of third-party information from the investigation wing without any independent application of mind or tangible material to directly link the assessee with the alleged tax evasion.
Decision of the Supreme Court
The IT Department filed a Special Leave Petition (SLP) before the Supreme Court of India, challenging the Gujarat High Court’s order. However, the Supreme Court, after hearing the Additional Solicitor General, dismissed the SLP. The Court found no grounds for interference under Article 136 of the Constitution and upheld the High Court’s decision, thereby giving finality to the matter in favor of the assessee.
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