Continuing Look Out Circular After Tax Proceedings Conclude Violates Fundamental Rights: Delhi High Court

The Delhi High Court has held that failure of tax authorities to obtain information about an assessee's assets in foreign jurisdictions cannot be used to keep a Look Out Circular (LOC) alive indefinitely, particularly when income tax proceedings have already concluded and no demand is outstanding against the assessee.

A Division Bench of Justices Dinesh Mehta and Vinod Kumar thus allowed writ petitions filed by the assessees and observed,

“If for one reason or the other, the respondents are not in a position to gather or elicit information from the foreign countries, the petitioners' rights cannot be kept suspended for an indefinite period. We are, therefore, of the view that the respondents' action of continuing with the lookout circular is violative of petitioners' fundamental rights.”

For context, Petitioners were subjected to search proceedings on March 17, 2021 under the Income Tax Act. Subsequently, assessment proceedings were completed and, as on date, no tax demand remained outstanding against them.

Despite the culmination of proceedings, the Respondents continued to enforce the LOC on the ground that a reference had been made under the Foreign Tax & Tax Research (FT&TRD) framework, and that information from foreign jurisdictions was still awaited.

Notably, the FT&TRD reference had remained pending for nearly five years.

Aggrieved by the prolonged travel restriction, the petitioners approached the High Court.

The High Court noted that, in the present factual backdrop, all proceedings under the Income Tax Act had attained finality, and there was no subsisting demand against the petitioners. In such circumstances, the Court held that the continuation of LOC could not be justified merely because information from foreign tax authorities had not been received.

It thus set aside the LOC subject to Petitioners furnishing an undertaking that they will not alienate, transfer or otherwise create third party rights qua the assets they possess and own outside India and if so choose to, they will intimate the Income Tax Department at least thirty days in advance.

For Petitioner: Advocates Siddhant Kumar and Shagun Chopra

For Respondent: Gaurav Gupta, SSC, Shivendra Singh and Yojit Pareek, JSCs and Advocate Surya Jindal