The High Court of Bombay has held that a re-assessment notice which was issued to examine the Share Premium received by a Taxpayer was not valid in law. The Revenue’s contention that it was entitled to examine if the premium received was justified and corresponds to the intrinsic value of the shares of the Taxpayer company was not accepted by the Court. The ruling was rendered in the case of Khubchandani Health Parks.

The Revenue had also made a rather sweeping assertion that since the Taxpayer’s case was not subjected earlier to an assessment (audit) process, it was entitled to issue the notice and it was not necessary that the notice should be supported by reasons. The Revenue sought to rely on the ruling of Supreme Court in the case of Zuari Estate Development [DCIT Vs Zuari Estate Development and Investment Co. Ltd. (373 ITR 661)] .The Bombay High Court instead relied on observation in an earlier ruling of the Supreme Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers P Ltd. (291 ITR 500) wherein the Apex court had observed that a re-assessment proceeding has to be in accordance with law and supported by valid reasons [ Interestingly though, in the aforesaid case, the issuance of the re-assessment notice was upheld as valid].

The Bombay High Court also relied on its earlier ruling in the case of Vodafone [Vodafone India Service Ltd Vs CIT 368 ITR 1] wherein it was held that Share Premium was a capital receipt and did not constitute income of an assessee, to decide the petition in favor of the Taxpayer. Attempts by the counsel for the Revenue to differentiate the issue involved in the instant case was not appreciated by the Court.