Delhi HC: Failure to get assessee’s info can’t be grounds to continue LOC

The Delhi High Court ruled that tax authorities can't indefinitely continue a Look Out Circular against individuals when tax proceedings have concluded.

The Delhi High Court has held that the failure of tax authorities to obtain information about an assessee’s overseas assets cannot be a ground to continue a Look Out Circular (LOC) indefinitely, particularly when income tax proceedings have concluded, and no demand remains outstanding.

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A bench of justices Dinesh Mehta and Vinod Kumar, in a judgment delivered on February 27, observed that the prolonged continuation of such an LOC would infringe an individual’s fundamental rights.

The court rendered the decision while hearing a petition filed by two businessmen, Gaurav Dalmia and Mridu Hari Dalmia, who challenged the Income Tax (I-T) Department’s decision to issue and continue a LOC against them without justification. They contended that a search was conducted at their residence and business premises in March 2021, following which an LOC was issued in April - May 2021 without any prior intimation.

“In the present factual backdrop, so far as the proceedings under the Income Tax Act, 1961, are concerned, they have culminated, and as of today, not even a demand is outstanding against the petitioners. A search was conducted on 17.03.2021... the proceedings have been pending for about 5 years. If, for one reason or another, 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,” the court said in the ruling.

According to the petitioners, upon learning of the LOC, they submitted a representation in May 2021 seeking its withdrawal, but the request was rejected by a letter issued in June 2021, which declined to lift the restrictions on their international travel.

They maintained that they had cooperated fully with the authorities since May 2021 and had appeared whenever summoned. They pointed out that the last summons was issued in June 2021 and no further notices were served thereafter, negating any allegation of non-cooperation. The petitioners further informed the court that the Income Tax Appellate Tribunal, through orders passed between July 23 and January 2026, had quashed the assessments initiated against them. As of now, no proceedings are pending, and no tax demand remains outstanding. Despite this, their counsel argued, the continued operation of the LOC unjustifiably curtailed their freedom.

Counsel for the Income Tax Department opposed the petition, contending that the issuance of the LOC was justified and that no individual can claim, as a matter of right, immunity from such action, particularly where there exists a potential risk of flight.

As the process of gathering this information was still underway, the department argued that there was no ground to interfere with the continued operation of the LOC.

In a five-page order, the court set aside the LOC, observing that proceedings under the Income Tax Act had concluded, no tax demand remained outstanding against the petitioners, and the search had been conducted in March 2021. The court also noted that the references made by the Income Tax Department to the Foreign Tax and Tax Research Division had been pending for nearly five years and could not justify the continued operation of the LOC.

However, the court directed the petitioners to furnish an undertaking to the department stating that they would not alienate, transfer, or create any third-party rights in respect of their assets located outside India. It further directed that, if they intended to do so, they must give the department at least 30 days’ prior intimation.