Reassessment Quashed for “Borrowed Satisfaction”; AO failed to verify Accommodation Entry allegations independently

By | December 13, 2025
0 Comment

Reassessment Quashed for “Borrowed Satisfaction”; AO failed to verify Accommodation Entry allegations independently

Issue

Whether a reassessment notice issued under Section 148 is valid if the reasons recorded by the Assessing Officer (AO) are mere reproductions of a general report from the Investigation Wing (DIT) without any independent application of mind or specific verification of the assessee’s data (“Borrowed Satisfaction”).

Facts

  • Assessment Year: 2015-16.

  • The Trigger: The AO reopened the assessment via a notice dated 30-03-2021.

  • The Allegation: Information suggested the assessee showed a profit of Rs. 1.31 Crores through “reversal entries of option trades” (NSEL/Stock Exchange), which were alleged to be bogus accommodation entries.

  • The Action: The AO completed the assessment ex-parte under Section 144 (Best Judgment Assessment) read with Section 147, adding the entire amount under Section 68 (Cash Credit).

  • The Flaw:

    • The “Reasons to Believe” recorded by the AO were general statements copied from a DIT (Intelligence & Criminal Investigation) report.

    • There was no discussion on specific scrips, price fluctuations, or how the general findings applied to the assessee.

    • The AO did not independently verify the data before issuing the notice.

Decision

  • Borrowed Satisfaction: The Tribunal held that reopening an assessment requires the AO to form their own “reason to believe.” Simply copying a report from another authority constitutes “borrowed satisfaction,” which is legally impermissible.

  • Lack of Specificity: The failure to provide details of the specific trades, scrips, or price movements proved that the AO had not applied their mind to the facts of the case.

  • Invalid Jurisdiction: Consequently, the notice under Section 148 was deemed invalid. Since the foundation (the notice) was illegal, the subsequent assessment order passed under Section 144 was also quashed as being without jurisdiction.

  • Ruling: In favour of the assessee.

Key Takeaways

“Borrowed Satisfaction” is Fatal: This is a standard defense in reassessment cases involving “Penny Stocks” or “Accommodation Entries.” If the AO’s reasons read like a generic copy-paste of an Investigation Wing report without mentioning your specific trade dates or contract notes, the proceedings can be challenged for lack of independent application of mind.

Section 148 Requirements: The AO must establish a “live link” between the information received and the belief that income has escaped assessment. A vague reference to “suspicious transaction” is insufficient.

IN THE ITAT DELHI BENCH ‘B’
Aroma Chemicals
v.
ACIT*
Yogesh Kumar U.S., Judicial Member
and BRAJESH KUMAR SINGH, Accountant Member
IT Appeal No. 2465 (Del) of 2025
[Assessment year 2015-16]
NOVEMBER  20, 2025
Sorabh Rustogi, Adv. for the Appellant. Rajesh Kumar Dhanesta, Sr. DR for the Respondent.
ORDER
Brajesh Kumar Singh, Accountant Member.- This appeal by the assessee is directed against the order of the National Faceless Appeal Centre (NFAC), Delhi, dated 04.03.2025 [hereinafter referred to as the ‘Ld. CIT(A)’] arising out of the assessment order dated 27.03.2022 passed under Section 147 r.w.s. 144 r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the National Faceless Assessment Centre, Delhi, (hereinafter referred to as the ‘Ld. AO’) pertaining to A.Y. 2015-16.
2. In this case, the assessment was reopened vide notice issued u/s 148 of the Act, dated 30.03.2021. The assessment was reopened on the basis of information that the assessee had shown profit of Rs. 1,31,95,650/-, during the financial year 2014-15, relevant to A.Y. 2015-16 through “reversal entries” of option trades, which were carried out with a view to obtain accommodation entries of profit and losses. Several notices, as noted by the AO on page 2 of its order, were issued to the assessee which were non-complied to the assessee and the assessment was completed u/s 144 of the Act, by making an addition of Rs. 1,31,95,650/-. Before passing the order, the AO had issued a show cause notice dated 24.03.2022, and the assessee submitted its reply vide letter dated 26.03.2022, which were not accepted by the AO for the reasons discussed in the assessment order, which are reproduced as under:
” In response to the show cause, the assessee has filed its written reply dated 26.03.2022 The reply of the assessee has been carefully considered but not found acceptable. The assessee has stated that the alleged escaped income of Rs. 1,31,95,650/- was already included in the income of Rs.2,01,12,181/-. In support of the claim of the assessee, the assessee has submitted only copies of contract notes alongwith a summary of contract notes showing that Rs.1,31,95,650/- is included in Rs.2,01,12,181/- for the year under consideration. In support of its claim the assessee has not submitted any details of expenses which were set off against the said income. Further, in the light, the transactions done by the assessee was analyzed and found to be an unfair trade practice with an intention to create an artificial loss through reversal trades in stocks of illiquid scrips. Therefore, it is evident that the afore said trades were non genuine, created falsely of misleading by appearance of trading in terms of artificial volume in stock.
The argument of the assessee is not found acceptable that it has already been disclosed the said income in its return of income for A.Y. 2015-16. The facts and the circumstances that the amount of profit/loss of the counterparties to the trades are as a result of such non genuine trades and therefore should not be taken as the income(loss) is thus not from the sources as being put up or explained by the assessee in the details filed but are artificially generated to mask the income that remains unexplained. Therefore, the office has finalise the assessment order on the basis of merits of details available on record.”
2.1. Accordingly, the AO added the sum of Rs. 1,31,95,650/- under section 68 of the Act.
3. Against, the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) dismissed the appeal of the assessee and the findings of the Ld.CIT(A) on merits in para no. 5.5. of the said order are reproduced as under:
“5.5 The ground of appeal No. 1 and 4 related to the quantum addition. As discussed above, the appellant has failed to submit the details before the Assessing Officer. The entire transactions of stock options has been held by SEBI / Hon’ble Supreme Court as non genuine. It is also noted that the appellant firm is primarily into the business of chemicals and not trading in stocks. Therefore, it is the onus of the appellant to prove that he was into the genuine business. He has failed to provide details when the information received by the AO was proving that the appellant was into non-genuine stock transactions. The appellant has not proved with documents as to how the addition made by the AO was double taxation. In view of these facts, the grounds of appeal No. 1 and 4 are dismissed.”
4. Aggrieved with the said order, the assessee has filed an appeal before us on the following grounds of appeal:
” 1. That under the facts and circumstances, invoking of Sec. 147 and consequential proceedings u/s. 148 culminating into Asstt. Order U/s. 147 / 144 is without jurisdiction, illegal and unsustainable in law as well as on merits.
2. that in the absence of prior approval as required u/s 151, the whole proceedings are without jurisdiction.
“3. That without prejudice, the approval of appropriate authority, if do not show the application of mind while granting approval, such approval should not be taken as a valid approval, so as to allow the AO to proceed for initiating further proceedings u/s. 147 and notice u/s. 148.
4. That the proceedings U/s. 147 / 148 are without jurisdiction and bad in law as income had already been declared in the audited accounts.
5. That the impugned proceedings are bad in law for non-service of notice U/s. 143(2) within prescribed time limit.
6. That under the facts and circumstances of the case both the lower authorities erred in law as well as on merits in making and sustaining the addition of Rs. 1,31,95,650/- on account of profit from reversal entries of option trades.
7. That under the facts and circumstances of the case, no interest U/s. 234B should have been charged. Without prejudice, interest charged is excessive.”
5. In this regard, the present AO of the case, submitted a para wise comments on the above grounds of appeal before the Tribunal vide letter dated 12.09.2025.
6. Ground no. 2 of the appeal regarding the absence of prior approval as required u/s 151 of the Act was not pressed by the assessee. Hence, this ground is dismissed as not pressed.
7. Ground no. 1, challenges the legality and jurisdiction of the proceedings initiated by the AO, vide notice u/s 148 of the Act, dated 30.03.2021 in this case. In this regard, the comments of the AO in respect of ground no. 1 is reproduced as under:
“1. That under the facts and circumstances, invoking of Sec. 147 and consequential proceedings w/s. 148 culminating into Asstt. Order U/s. 147/144 is without jurisdiction, illegal and unsustainable in law as well as on merits.
The contention of the assessee that the reassessment proceedings initiated u/s 147 culminating into assessment order u/s 147/144 are without jurisdiction is emphatically denied. The Assessing Officer had recorded detailed reasons to believe, based on tangible material on record, that income chargeable to tax had escaped assessment. The reopening was done strictly in accordance with the provisions of Section 147 read with Section 148 of the Income-tax Act, 1961 and within the period of limitation. The Hon’ble Supreme Court has consistently held that sufficiency of reasons cannot be questioned at this stage. The assessee was provided with multiple opportunities to submit its explanation, but failed to furnish a satisfactory reply. Hence, this ground is devoid of merit and liable to be rejected.”
8. This ground goes to the root of the assessment proceedings and therefore, we first take up this ground for adjudication.
9. In this regard, the Ld. AR referred to the reasons recorded by the AO for initiating the proceedings u/s 148 of the Act, dated 30.03.2021 which were enclosed as Annexure to the AO’s letter dated 12.09.2025 while submitting the para-wise comments on the grounds of appeal filed by the assessee before us and also placed at page no. 71 to 75 of the paper book filed by the assessee. The Ld. AR submitted that in the reasons recorded, no intelligible basis for the escapement of income of Rs. 1,31,95,600/- has been brought on record by the AO. Further, there is factual inaccuracy and contradiction in recording of the fact in para no. 1 of the reasons recorded wherein the AO noted that assessee had filed its Return of Income (ROI) on 16.09.2015 and the assessment was completed u/s 143(3) of the Act on 28.06.2016, whereas in the concluding para no. 8 of the reasons recorded it is statedthat the ROI was filed but no scrutiny assessment was completed.
10. We have heard both parties and perused the material available on record. In this regard, the reasons recorded by the AO for re-opening the assessment in this case vide notice dated 30.03.2021 are reproduced as under:
“1. Brief details of the assess ANNEXURE
The assessee has e filed ITR on 16.09.2015 declaring total income of Rs 2,05,480/-. In this case all relevant records on AST/ITBA including DCRs of respective years have been verified and it was found that As per Board’s Instruction dated 04.03.2021, this case falls under Para 1(iii)(b):
2. Brief details of information collected/received by the AO:
This information has been flagged by the System in the Insight Portal as per the new Instructions dated 04.03.2021 and it falls within the category 1(iii)(b). Information has been uploaded by the Director of Income Tax (I&CI), Lucknow that the assessee Firm has, during the year been engaged in reversal trade in BSE Stock option which as per the SEBI as well as Hon’ble Supreme Court are non genuine transaction which are carried out with a view to obtain accommodation entries of profits/losses. As per the information the transactions carried by the assessee exhibit all trades of reversal trades and therefore, any loss claimed on this account is disallowable as such losses are deliberately incurred in order to avoid tax. Similarly, any profits earned on such transactions are also bogus. In the case of the assessee, it is seen that the assessee has profits of Rs 1,31,95,650/- during F.Y. 2014-15 through “reversal entries of Option Trades.
3. Analysis of information collected/received:
As per the information uploaded in Insight Portal, a detailed enquiry was conducted by I&CI Wing of the Department and it was found by them that the transactions carried out by the assessee Firm where squared up and all transactions were trade reversal l.e. if the stock options were sold first to an entity they would be bought back in exact quantity from the same entity or vice-versa. Further, Trades that have been carried out by the assessee are completely out of sync with the market i.e. intrinsic value has been completely disregarded in such contracts. Moreover, during the, period of trade, there was no significant change in the, price of the underlying scrip to justify the difference between the prices of the two legs of the reversal trade. Most of the times the trades have been carried out at prices which is even below the average price of the contract on that day. It was also noted that the contacting parties had matched its trade consistently with same counter parties with whom first leg of trade was undertaken. It was concluded in the report that the trades carried out by the parties were non-genuine and created a misleading appearance of trading. The facts and the circumstances as discussed shows that the amount of profit/loss of the counterparties to the trades are as a result of such non-genuine trades and therefore should not be taken as the income (loss) is thus not from the sources as being put up or explained by the assessee in the details filed but are artificially generated to mask the income that remains unexplained.
4. Enquiries made by the AO as sequel to information collected/receive:
On receipt of this information, the ITR of the assessee for A.Y 2015-16 was downloaded. The report suggests that income of Rs. 1,31,95,650/- during the F.Y. 201415 may not be treated as to be the business income from F&O operations as claimed by the assessee. In fact, this income is income from undisclosed sources covered u/s 68 r.w.s. 115BBE of the I.T. Act 1961. Thus, since this profit earned by the assessee has been earned through dubious means, it cannot be assessed under the head business income.
5. Finding of the AO:
On going through the information and on the perusal of ITR of the assessee for the A.Y 2015-16, it is found that the assessee has earned bogus profit of Rs 1,31,95,650/- by involving in reversal trade practice through options which is a completely unfair and non- genuine trade, practice as heldSEBIas well as by Hon’ble Apex Court in the case of M/s Rakhi Trading Pvt. Ltd. This Income is, thus not from the sources as being, put up or explained by the assessee but have been artificially generated out of own unaccounted money.
6. Basis of forming reason to believe and details of escapement of income :
On the basis of information uploaded by the I&CI Wing and material available as discussed above, I am of the view that assessee has shown bogus income in the form of reversal trade in stock option in BSE amounting to Rs 1,31,95,650/- during F.Y. 201415 relevant to A.Y.2015-16. Since this income is artificially generated hence I have reason to believe that this income Is nothing but own unaccounted Income of the assessee which has been brought to the books through dubious means. Thus, the sum of Rs 1,31,95,650/- represents undisclosed income of the assessee which has escaped assessment within the meaning of Section 147 of the I.T. Act, 1961.
7. Escapement of income chargeable to tax in relation to any assets located outside India:
NIL
8. Applicability of the provisions of Section 147/151, to the facts of the case:
In this case, a return of income was filed for the year under consideration and no scrutiny assessment u/s 143(3) of the Act was completed. Accordingly, in this case the only requirement to initiate proceedings u/s 147 is reason to believe which has been recorded above. In view of the above, provisions of clause (b) of explanation to section 147 are applicable to facts of this case and income chargeable to tax has escaped assessment for the assessment year under consideration.”
(emphasis supplied by us)
10.1 We have carefully considered the above reasons recorded by the AO. However, we notice that the above reasons recorded are not supported by any relevant evidence on record, except for general statements without co-relating it with the facts in the case of the assessee, as to how the income of Rs. 1,31,95,650/- cannot be treated as business income from F & O operations as claimed by the assessee and which as per the reasons recorded by the AO represents income from undisclosed sources and was covered u/s 68 r.w.s. 115BBE of the Act. There is no discussion in the reasons recorded as to how the decision of the Hon’ble Apex Court in the case of M/s Rakhi Trading Pvt. Ltd. was applicable to the facts of the case of the assessee. Similarly, there is no linking of the facts as to how the finding of the SEBI supports the case of the AO that the reversal trade practice through option was completely unfair and non-genuine trade practice. No details of any price fluctuation and the name of the scrip has been mentioned by the AO but only made an observation in the reasons recorded that during the period of trade, there was no significant change in the price of the underlying scrip to justify the difference between the prices of the two legs of the reversal trade. Therefore, the AO has only recorded the conclusion holding that the amount of Rs. 1,31,95,650/- represents undisclosed income of the assessee which had escaped assessment but without giving relevant basis or the facts / evidences relied by him extracted out of the enquiries conducted by the Director of the Income Tax, (I&CI) Lucknow as referred in the reason recorded relevant to the present case.
10.2 We after giving thoughtful consideration to the above facts, are of the considered view that the reasons recorded by the AO for reopening of the assessment u/s 148 of the Act in this case amounts to ‘borrowed satisfaction’ as held by the Hon’ble Delhi High Court in the case of PCIT v. Meenakshi Overseas (P) Ltd. (Delhi)/[2017] 395 ITR 677 (Delhi) In this case, the conclusions of the AO are nothing but reproduction of the conclusions in the report of the DIT(I&CI), Lucknow, without linking as to how the said information was relevant to the facts of the case of the assessee in forming the belief by the AO that the income of Rs. 1,31,95,650/- represents undisclosed income of the assessee which had escaped assessment and was liable to be taxed u/s 68 r.w.s. 115BBE of the Act. The enquires as made by the AO and discussed in para no. 4 of the reasons as reproduced above only states that on the receipt of the information the ITR of the assessee for A.Y. 2015-16 was downloaded and the report suggests that income of Rs. 1,31,95,650/- during the F.Y. 2014-15 may not be treated as to be the business income from F&O operations as claimed by the assessee and in fact, this income was income from undisclosed sources covered u/s 68 r.w.s. 115BBE of the I.T. Act 1961. Such enquiries also do not give any basis for the conclusion drawn by the AO in the reasons recorded.
10.3 On similar facts, the Hon’ble Delhi High Court in the case of Meenakshi Overseas (P) Ltd. (supra), para 36 and 37 of its order held as under:
” 36. In the present case, as already noticed, the reasons to believe contain not the reasons but he conclusions of the Assessing Officer one after the other. There is no independent application of mind by the Assessing Officer to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the Assessing officer are at best a reproduction of the conclusion in the investigation report. Indeed it is a “borrowed satisfaction”. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.
37. For the aforementioned reasons, the court is satisfied that in the facts and circumstances of the case, no error has been committed by the Income-tax Appellate Tribunal in the impugned order in concluding that the initiation of the proceedings under section 147/148 of the Act to reopen the assessments for the assessment years in question does not satisfy the requirement of law.”
10.4 Therefore, respectfully following the above order of the Hon’ble Delhi High Court and in view of the facts, as discussed above, we hold that the reasons recorded to initiate the proceedings u/s 148 of the case does not satisfy the requirement of the law and therefore the proceedings initiated on the basis of the said reasons vide notice dated 30.03.2021 u/s 148 of the Act are not valid and the resultant assessment order u/s 144 of the Act, dated 27.03.2022, in the case of the assessee is held to be illegal and without jurisdiction, and hence quashed.
11. Ground no. 1 of appeal is allowed.
12. In view of the ground no. 1 of appeal being allowed the other surviving grounds of appeal does not survive.
13. In the result, appeal filed by the assessee is allowed.