2026 (3) TMI 182 - HC - Income Tax

Freedom of Movement: Lookout circulars cannot be maintained indefinitely after domestic tax proceedings end; conditional vacation required.

Where domestic income-tax proceedings have finally concluded and no demand remains outstanding, the note clarifies that maintaining lookout circulars ... Continuation of lookout circular after conclusion of proceedings - violation of fundamental rights by indefinite travel restraint - conditioned lifting of lookout circular upon undertaking - continued operation of the lookout circular against the petitioners after completion of the assessment and in absence of any outstanding demand is unlawful and violative of their fundamental rights HELD THAT: - So far as the proceedings under the Act of 1961 are concerned, they have been culminated and as of today, not even a demand is outstanding against the petitioners. Search was conducted on 17.03.2021 and the respondents if have made any reference under FT&TRD, the proceedings are lying pending for about five years. 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. In case the petitioners furnish 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. In case such undertaking is furnished, their lookout circular deserves to be set aside. The lookout circulars issued in relation to petitioners are hereby set aside. Both the petitioners shall furnish an undertaking to the above effect to this Court on or before 15.03.2026 after providing a copy thereof to Mr. Gaurav Gupta, learned Senior Standing Counsel. In case, the petitioners violate the undertaking so furnished, the respondent-Department shall be free to initiate any action as per law including to prefer proceedings of contempt of Court in accordance with law. Final Conclusion: The petitions were allowed - Court held that continuing the lookout circular after culmination of assessment proceedings and without an outstanding demand infringed the petitioners' fundamental rights, and directed the lookout circulars to be set aside subject to the petitioners furnishing a specific undertaking to safeguard the Department's interest; failure to comply permits appropriate action by the Department. Issues: Whether the continued issuance and maintenance of lookout circulars against the petitioners after completion of income-tax proceedings and in absence of any outstanding demand or pending proceeding violates the petitioners' fundamental rights and whether such lookout circulars should be set aside.Analysis: The petitioners were subjected to search on 17.03.2021 and a lookout circular was issued in April/May 2021. Assessment orders for relevant assessment years were passed and appealed; the appellate orders were partly allowed and subsequently affirmed by the Income Tax Appellate Tribunal which quashed the assessments under Section 143(3) of the Income-tax Act, 1961. As of the date of this order no demand remains outstanding and no proceedings under the Act of 1961 are pending. The respondents contend that foreign reference under the Foreign Tax and Tax Research Division (FT&TRD) under the DTAA is pending to elicit overseas information, and therefore the lookout circular should be maintained. The Court found that where domestic tax proceedings have culminated and no demand is outstanding, maintaining a lookout circular for an indefinite period while foreign information is being sought results in an open-ended suspension of the petitioners' freedom to travel. The petitioners have cooperated with authorities and there has been no notice requiring their presence since June 2021. The Court balanced the department's investigatory interest with the petitioners' constitutional protections under Articles 14, 19(1)(g) and 21 of the Constitution of India and concluded that indefinite restraint without a proximate or concrete basis is impermissible. The Court conditioned lifting of the lookout circulars on the furnishing of an undertaking by the petitioners not to alienate or create third-party rights in assets outside India and to inform the Income Tax Department thirty days prior to any intended alienation.Conclusion: The continued lookout circulars against the petitioners are set aside. The petitioners shall furnish an undertaking that they will not alienate, transfer or otherwise create third party rights in respect of assets held outside India and will give the Income Tax Department thirty days' advance notice if they intend to do so; upon such undertaking being filed by 15.03.2026 the lookout circulars shall stand vacated. The petitions are allowed and pending application disposed of.Ratio Decidendi: Where domestic tax proceedings have been finally concluded and no demand remains outstanding, an administrative restraint such as a lookout circular cannot be maintained indefinitely in the absence of a proximate, concrete basis; indefinite suspension of the fundamental right of freedom of movement is impermissible unless proportionate measures and safeguards are in place.