ITAT Strikes Down Reassessment based on Borrowed Satisfaction [Read Order]
ITAT Mumbai quashed the reassessment, stating it was based on borrowed satisfaction without independent verification, making the addition unsustainable
![ITAT Strikes Down Reassessment based on Borrowed Satisfaction [Read Order]](https://www.taxscan.in/wp-content/uploads/2025/03/ITAT-Strikes-Down-Reassessment-Borrowed-Satisfaction-taxscan.jpg "ITAT Strikes Down Reassessment based on Borrowed Satisfaction [Read Order]")
The Income Tax Appellate Tribunal (ITAT), Mumbai held that reopening an assessment based solely on an external report, without the Assessing Officer’s (AO) independent application of mind, makes the proceedings legally unsustainable. The assessee Sejal Jignesh Shah, filed her income tax return for the Assessment Year (AY) 2012-13 on July 31, 2012, declaring an income of ₹1,89,170....
The Income Tax Appellate Tribunal (ITAT), Mumbai held that reopening an assessment based solely on an external report, without the Assessing Officer’s (AO) independent application of mind, makes the proceedings legally unsustainable.
The assessee Sejal Jignesh Shah, filed her income tax return for the Assessment Year (AY) 2012-13 on July 31, 2012, declaring an income of ₹1,89,170. The return was initially processed under Section 143(1) of the Income Tax Act, 1961, without detailed scrutiny. Subsequently, the Deputy Directorate of Income Tax (Investigation) ( DDIT(Inv.) ), Mumbai, reported that the assessee had traded in Banas Finance Ltd. (BFL) shares, a company allegedly providing accommodation entries. The report suggested that the assessee had claimed long-term capital gains (LTCG) on selling these shares to introduce unaccounted income.
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Based on the report, the Assessing Officer (AO) issued a notice under Section 148, reopening the assessment. The AO concluded that the sale of BFL shares amounting to ₹8.01 crore was an accommodation entry designed to claim bogus LTCG exemption under Section 10(38). Consequently, an addition of ₹8.01 crore was made under Section 68 of the Income Tax Act, 1961, treating the amount as unexplained income.
The tax department, represented by Bhangepatil Pushkaraj Ramesh, justified the reopening of the assessment and the addition under Section 68 by arguing that BFL was identified as a penny stock used for tax evasion. The AO relied on the pattern of trading in BFL shares, which indicated artificial price inflation followed by the sale of shares at a significantly higher price to book tax-free LTCG. This pattern was consistent with schemes used to launder unaccounted income.
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The revenue also cited the Calcutta High Court’s ruling in PCIT vs. Swati Bajaj (2022), which upheld tax additions in similar cases involving penny stocks. The judgment in Swati Bajaj placed the onus on the assessee to prove the legitimacy of share transactions beyond doubt. The AO argued that since BFL was involved in providing accommodation entries, any transactions involving its shares should be treated with suspicion.
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The assessee, represented by Fenil Bhatt, challenged the reassessment and Section 68 addition, arguing that the AO reopened the case without independent inquiry, relying solely on a DDIT report. Documentary evidence, including contract notes, broker ledgers, bank statements, and demat records, proved the transactions were legitimate and conducted through recognized stock exchanges.
The assessee also cited the Securities Appellate Tribunal’s (SAT) ruling that overturned Securities and Exchange Board of India’s (SEBI) penalty on BFL, confirming compliance with disclosure norms. Despite this, the AO ignored the SAT decision and misinterpreted the transaction, wrongly assuming a short-term capital loss instead of a reported long-term capital gain.
After hearing both sides, the ITAT bench led by Sunil Kumar Singh (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) held that the reassessment and Section 68 addition were unjustified, as the AO failed to conduct an independent verification before reopening.
The tribunal ruled that an investigation report alone cannot justify reassessment without the AO’s application of mind. The tribunal found the addition unsustainable since the assessee provided sufficient documents to prove transaction genuineness, while the AO failed to present contrary evidence. It also noted that the assessee was not named in any investigation report.
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Differentiating from PCIT vs. Swati Bajaj (2022), it emphasized that the transactions were through stock exchanges, with payments via banking channels. Thus the tribunal ruled in favor of the assessee.
To Read the full text of the Order CLICK HERE
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