Reopening an assessment based on vague, unverified information from a portal is invalid.

Reopening an assessment based on vague, unverified information from a portal is invalid.

Issue

Is a notice for reassessment legally valid if it is based on general information from a third-party investigation, without the Assessing Officer specifying the exact transaction and independently verifying the information’s relevance to the assessee?

Facts

• The Assessing Officer (AO) issued a notice to reopen the assessee’s completed assessment.
• The basis for this action was general information from the tax department’s Insight Portal. This information stated that a search on an entry operator revealed a large racket of providing bogus Long Term Capital Gains through penny stocks, and that the assessee was named as one of the many beneficiaries.
• However, the reasons recorded by the AO for reopening were extremely vague. They did not specify the nature of the alleged bogus transaction, the name of the specific penny stock company involved, or the manner in which the assessee had supposedly taken the accommodation entry.
• The AO had acted on this raw, third-party information without conducting any independent inquiry to verify its truthfulness or to make it specific to the assessee’s case.

Decision

The court ruled in favour of the assessee and quashed the reopening notice.

• It held that an assessment cannot be reopened based on general and vague information. The AO has a legal duty to first apply their mind, verify the information, and form a specific, independent “reason to believe” that pertains directly to the assessee and the alleged escaped income.
• Since the AO failed to do this and acted mechanically on the information, the jurisdictional requirement for a valid reopening was not met. The notice was therefore unjustified and invalid.

Key Takeways

• “Reason to Believe” Must Be Specific, Not General: The foundation for a valid reassessment is a “reason to believe,” not a “reason to suspect.” This belief must be based on specific, tangible information directly related to the assessee, not on broad allegations involving multiple parties.
• An AO Cannot Act as a “Post Office”: An Assessing Officer cannot simply issue a notice just because some information appears on a portal or in an investigation report of another person. They must conduct their own due diligence and independent application of mind before initiating proceedings.
• Vague Reasons Invalidate the Notice: The reasons recorded for reopening must be clear and specific, enabling the taxpayer to understand exactly what allegation they need to respond to. Vague reasons that do not specify the transaction render the notice invalid.

No addition can be made for an alleged bogus capital gain if the share transaction actually resulted in a reported capital loss.

Issue

Can the sale consideration from a share transaction be added as unexplained income under Section 68 of the Income-tax Act, 1961, when the transaction, in fact, resulted in a reported Short-Term Capital Loss (STCL) for the assessee?

Facts

The Assessing Officer (AO), acting on the general information about penny stock rigging, targeted the assessee’s transactions in the shares of a company named Oasis Tradelink Ltd. The assessee provided evidence to show that they had acquired these shares through an IPO and subsequently sold them, incurring a Short-Term Capital Loss (STCL), which was duly reported in their tax return. Despite the assessee not having any gains, the AO treated the entire sale consideration as unexplained income and made an addition under Section 68. This addition was made based on mere assumptions, without any corroborating evidence of price rigging against the assessee.

Decision

The court ruled in favour of the assessee.

• It held that making an addition for the sale consideration of a transaction that did not result in any capital gain, but rather a loss, is legally unsustainable.
• The very premise of an accommodation entry scheme for bogus capital gains is to generate fictitious profits to evade tax. This premise was completely absent in a transaction that resulted in a loss. The addition, being based on mere assumptions without evidence, was therefore deleted.

Key Takeways

• The Premise for the Addition Must Exist: An addition for bogus capital gains requires the existence of a capital gain. When the actual transaction results in a loss, the entire basis for the AO’s allegation of tax evasion through a bogus gain scheme collapses.
• Assumptions Cannot Replace Evidence: An AO cannot make an addition based on general theories or assumptions about a stock being a “penny stock.” There must be specific, corroborating evidence to prove that the assessee’s transaction was not genuine.

No addition can be made for a bogus gain in a share that was not even part of the information that triggered the reassessment.

Issue

Can an addition for a bogus Long-Term Capital Gain (LTCG) be made in respect of a share transaction when the scrip in question was not even mentioned in the information that formed the basis for the reassessment?

Facts

The Assessing Officer (AO) made an addition to the assessee’s income, alleging that the LTCG the assessee had earned from the sale of shares of IndusInd Bank Ltd. was bogus. However, the foundational information that the AO had received from the Insight Portal, which contained a list of allegedly rigged penny stocks, did not include the name of IndusInd Bank Ltd. There was absolutely no allegation or evidence on record to suggest that the shares of this well-known, large-cap company were subject to any price rigging.

Decision

The court ruled in favour of the assessee and deleted the addition.¹

• It held that the AO had made the addition based on mere assumption and presumption, without any corroborating evidence whatsoever.
• Since the very basis for the reopening (the list of rigged scrips) did not contain the name of this company, the addition was entirely baseless, arbitrary, and unsustainable in law.

Key Takeways

• Additions Must Be Linked to the Available Evidence: Any addition made by an AO must be directly linked to the specific evidence or information that is available on the record. An AO cannot make additions for transactions that are completely outside the scope of the information that triggered the assessment in the first place.
• Presumption Has No Place in Assessment: Tax assessments must be based on evidence, not on the personal presumptions, theories, or conjectures of the Assessing Officer.
• The Character of the Scrip Matters: While not a conclusive factor, it is highly improbable that a widely traded, large-cap stock like IndusInd Bank would be used for penny stock manipulation, and an allegation to that effect would require exceptionally strong proof, which was absent here.

No addition for an alleged commission is sustainable when the main addition for the underlying bogus transaction itself fails.

Issue

Can a consequential addition for an alleged commission paid for obtaining accommodation entries be sustained when the primary additions for the accommodation entries themselves have been found to be baseless and are deleted?

Facts

In addition to the additions for the capital gains, the Assessing Officer (AO) made a separate, consequential addition under Section 69C of the Income-tax Act, 1961, for the commission that the assessee had allegedly paid to the entry operator to arrange the so-called bogus transactions.

Decision

The court ruled in favour of the assessee and deleted this addition as well.

• It held that the addition for the commission was purely consequential to the main additions for bogus capital gains.
• Since the basis for the alleged accommodation entries itself was not established (as the additions for the share transactions in Oasis Tradelink and IndusInd Bank were deleted), the consequential addition for the commission supposedly paid to arrange those non-existent bogus entries was also rendered unsustainable and had to be deleted.

Key Takeways

• Consequential Additions Cannot Stand Alone: When an addition (like a commission) is made as a direct consequence of another primary addition (like bogus gains), the consequential addition cannot survive independently if the primary addition is deleted by an appellate authority.
• If the Primary Transaction is Valid, the Consequential Addition is Invalid: The commission was the alleged “cost” of the “crime” of taking bogus entries. Once the court found that there was no crime (no bogus gain had been established), the addition for the cost of committing that non-existent crime automatically becomes baseless.
• A Domino Effect: In tax assessments, additions are often linked. The deletion of a primary, foundational addition will often cause any other additions that are dependent on it to fall as well, like a line of dominos.