Section 148 IT Act | Reopening of Assessment Based Solely on Investigation Wing Report Violates Natural Justice: ITAT Kolkata

The Income Tax Appellate Tribunal, Kolkata, has invalidated the reopening of assessment under Section 148 of the Income-tax Act, 1961, where the Assessing Officer relied entirely on unverified information from the investigation wing without applying independent judgment. This ruling reinforces the legal requirement that subjective satisfaction must be formed on tangible material, not on conclusory reports.

Background & Facts

The Dispute

The dispute arose from the reopening of the assessment for Assessment Year 2011-12 against M/s Shagun Impex Pvt. Ltd. The Assessing Officer (AO) issued a notice under Section 148 on 30.03.2018, alleging that income of ₹66,55,711 had escaped assessment due to bogus losses claimed through currency derivative trading with M/s Mari Gold Vanijya Pvt. Ltd. The AO relied exclusively on information received from the Directorate of Investigation, which alleged that M/s Mari Gold Vanijya Pvt. Ltd. had provided accommodation entries of fictitious losses to various assessees.

Key Facts

• The notice under Section 148 was issued on 30.03.2018 and served on the assessee.
• The assessee filed its return on 18.04.2018 and requested reasons for reopening, which were supplied on 23.04.2018.
• The assessee filed objections to the notice on 06.09.2018, which were disposed of by the AO on 06.12.2018.
• The assessee submitted comprehensive documentation including bank statements, transaction details, contract notes from MCX, and invoices from M/s Mari Gold Vanijya Pvt. Ltd.
• The AO did not conduct any independent verification of the transactions, nor did he examine the MCX platform records or seek a full reply to his notice under Section 133(6).
• The AO’s reasons for reopening merely reproduced the investigation wing’s conclusions without explaining how the transactions were manipulated or how the losses were fictitious.
• The AO relied on a statement made by Mr. Sachet Saraf, Director of M/s Mari Gold Vanijya Pvt. Ltd., during a search under Section 132, but did not provide this statement to the assessee or afford him an opportunity for cross-examination.
• Mr. Sachet Saraf later retracted his statement.
• The AO made no attempt to corroborate the allegations with independent evidence such as exchange records, broker confirmations, or financial trail analysis.

Procedural History

• 30.03.2018: Notice under Section 148 issued.
• 18.04.2018: Assessee filed return of income.
• 23.04.2018: Reasons for reopening supplied to assessee.
• 06.09.2018: Assessee filed objections to notice.
• 06.12.2018: AO disposed of objections.
• 2018-2019: AO completed reassessment, adding ₹66,55,711 as income on account of bogus losses.
• 10.10.2025: Commissioner of Income Tax (Appeals) [CIT(A)] dismissed the assessee’s appeal, upholding the addition.
• 19.03.2026: Hearing before ITAT Kolkata.
• 28.04.2026: ITAT pronounced order.

Relief Sought

The assessee sought deletion of the addition of ₹66,55,711 on the grounds that the reopening was invalid due to lack of independent application of mind and that the addition was not supported by any corroborative evidence.

The Legal Issue

The central question was whether the reopening of assessment under Section 148 of the Income-tax Act, 1961 is valid when the Assessing Officer relies solely on the conclusions of an investigation wing report without forming an independent opinion based on tangible material or conducting any verification.

Arguments Presented

For the Appellant

The assessee contended that the reopening was void ab initio because the AO had not applied his own mind to the information received. The reasons recorded were a mere reproduction of the investigation wing’s report, amounting to "borrowed satisfaction." The assessee submitted all transaction records, bank statements, and contract notes from MCX, demonstrating the genuineness of the trades. The AO failed to provide the statement of Mr. Sachet Saraf to the assessee, violating principles of natural justice. The assessee relied on multiple precedents including PCIT v. Meenakshi Overseas Pvt. Ltd., CIT v. SFIL Stock Broking Ltd., and DCIT v. Santosh Promoters Private Limited, all of which held that reliance on uncorroborated investigation reports without independent verification renders the reopening invalid.

For the Respondent

The Revenue argued that the information received from the investigation wing was sufficient to constitute "reason to believe" under Section 148. It contended that the AO had examined the bank statements and cash trail, thereby satisfying the requirement of independent application of mind. The Revenue did not dispute the retraction of Mr. Sachet Saraf’s statement but maintained that the pattern of transactions with M/s Mari Gold Vanijya Pvt. Ltd. was inherently suspicious and warranted reassessment.

The Court's Analysis

The Tribunal held that the AO’s reasons for reopening were devoid of any independent reasoning. The order stated: "the transactions have been verified from cash trail and bank statement available in the case and hence, I have reasons to believe that ₹66,55,711/- had escaped assessment." However, the Tribunal noted that no specific verification of the cash trail or bank statements was detailed, nor was any discrepancy identified in the documents submitted by the assessee.

"The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a borrowed satisfaction."

The Tribunal emphasized that Section 148 requires the AO to form a subjective belief based on tangible material, not on the opinions or conclusions of another agency. The reliance on a retracted statement from a third party, without cross-examination or corroboration, violated the principles of natural justice. The Tribunal further noted that the co-ordinate bench in DCIT v. Santosh Promoters Private Limited and DCIT v. Delight Suppliers Pvt. Ltd. had already held that transactions through M/s Mari Gold Vanijya Pvt. Ltd. on MCX were genuine where the assessee had submitted contract notes and the AO had failed to produce any contradictory evidence.

The Tribunal observed that the AO had issued a notice under Section 133(6) to MCX but received only a partial reply, which he did not analyze or discuss in his order. This omission further demonstrated a failure to apply independent judgment. The Tribunal concluded that the reopening was not merely erroneous but legally invalid due to non-application of mind and procedural illegality.

The Verdict

The appeal of the assessee is allowed. The addition of ₹66,55,711 made by the Assessing Officer is deleted. The reopening of assessment under Section 148 for AY 2011-12 is set aside as void ab initio. The order of the CIT(A) dated 10.10.2025 is quashed. The case is directed to be closed with no further action on the reassessment.

What This Means For Similar Cases

Borrowed Satisfaction Invalidates Reopening

• Practitioners must challenge any reopening where the AO’s reasons merely replicate investigation reports without independent analysis.
• The burden shifts to the Revenue to prove that the AO applied his mind to tangible material, not just to the existence of an investigation report.

Natural Justice in Tax Proceedings

• Statements obtained under Section 132 must be disclosed to the assessee and an opportunity for cross-examination must be granted before reliance.
• Failure to provide such opportunity renders the assessment proceedings void.

Documentary Evidence Prevails Over Allegations

• When an assessee submits contract notes, bank statements, and exchange records, mere suspicion based on third-party statements is insufficient for addition.
• Revenue authorities must produce corroborative evidence to rebut documentary proof of genuine transactions.

Precedent Binding Across Jurisdictions

• ITAT benches across India must follow consistent rulings on identical facts involving M/s Mari Gold Vanijya Pvt. Ltd.
• A co-ordinate bench’s decision on the same broker and trading pattern is binding unless distinguished on material facts.

Procedural Compliance Is Non-Negotiable

• Issuing notices under Section 133(6) without analyzing replies or incorporating them into the order constitutes procedural negligence.
• AO’s failure to discuss evidence submitted by the assessee or to explain discrepancies in the records is fatal to the assessment.