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Facts
The Revenue appealed against the deletion of an addition relating to cash commission expenses. The Assessee, in its cross-objection, challenged the validity of the reassessment proceedings initiated under Section 147/148 of the Income Tax Act, 1961. The reassessment was based on information suggesting manipulation of derivative transactions to generate fictitious gains.
Held
The Tribunal held that the reassessment proceedings were initiated based on incorrect and wrong reasons, as the derivative transactions in currencies were not illiquid stock options as alleged. There was no tangible material to support the claim of pre-meditated reversal transactions for non-genuine profit, and the profit was already declared by the assessee.
Key Issues
Validity of reassessment proceedings under Section 147/148 when the reasons recorded are based on incorrect facts, borrowed satisfaction, and lack of tangible material, especially when the original assessment was under Section 143(3) and the income was already disclosed.
Sections Cited
147, 148, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G.
PER VIJAY PAL RAO, VICE PRESIDENT :
Revenue and Cross Objection No.26/Hyd./2025 by the Assessee are directed against the Order dated 15.04.2025 of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC], Delhi, for the assessment year 2013-2014.
ITA.No.1077/Hyd./2025 - A.Y. 2013-2014 [Revenue Appeal]:
The Revenue has raised the following grounds of the appeal:
1. “Whether on the facts and circumstances of the case and in law the order of the Learned CIT(A) erred in holding that the addition on account of cash commission expense of Rs.2,93,31,381/ was made solely on suspicion by ignoring the facts brought on record establishing manipulation of derivative transactions as part of colourable device to generate fictitious gain with the aim to evade taxes due.
2. Whether on the facts and circumstances of the case and in law, the Learned CIT(A) erred in deleting the addition towards commission expenses by overlooking the fact that the entire transactions were stage managed with the object to facilitate 3 ITA.No.1077/Hyd./2025 the assessee to plough back its unaccounted income in the form of non-genuine profit? 3. Whether in the facts and circumstances of the case, the Learned CIT(A) was right in ignoring the fact that tax planning may be legitimate provided if it is within the framework of law, as colourable devices cannot be part of tax planning which cannot be encouraged ? 4. Whether on the facts and circumstances of the case, the Learned CIT(A) erred in deleting the disallowance of commission of Rs.2,93,31,831/- purportedly incurred by the assessee towards payment to brokers who allegedly entered into the derivatives transactions at the behest of the assessee overlooking the fact that the entire transactions were stage managed with the object to facilitate the assessee to plough back its unaccounted income in the form of fictitious gains of Rs.1,49,86,825/- thereby giving rise to the view of flaw in the decision-making process.
Any other ground that may be urged at the time of hearing.”
Cross Objection No.26/Hyd./2025 – A.Y. 2013-2014 [Assessee]:
The assessee in the Cross Objection has raised the following grounds:
“1. (i) For that on the facts and in the circumstances of the case, the Ld. CIT(A) ought to have held that the proceedings initiated u/s 147 was bad in law and 4 ITA.No.1077/Hyd./2025 therefore, the impugned assessment order is liable to be quashed. (ii) For that on the facts and in the circumstances of the case, there was no income escaping assessment in as much as the impugned sum set out in the recorded reasons was already forming part of the taxable income and there was no valid basis to form reasonable belief that the assessee had incurred commission of Rs.2,93,31,831 and in that view of the matter, the condition precedent for reopening the assessment having not been met, the assumption of jurisdiction u/s 148 ought to be held as bad in law. (iii) For that on the facts and in the circumstances of the case, there was no failure on the part of the assessee to fully and truly disclose the primary facts in the course of assessment and therefore, the AO having failed to fulfil the condition set out in the first proviso to Section 147 of the Act, the Ld. CIT(A) ought to have declared the reopening to be void ab initio. (iv) For that on the facts and in the circumstances of the case, the reasons recorded for reopening the assessment was based on borrowed satisfaction and the AO did not objectively apply his own mind to the purported information received by him and therefore, the proceedings initiated u/s 147 ought to be held as bad in law.
5 ITA.No.1077/Hyd./2025 2. For that on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in law and on facts in deleting the addition of Rs.2,93,31,831/- which was made by the AO on account of alleged cash commission solely based on suspicion and surmise.
3. For that on the facts and in the circumstances of the case, the assessee having furnished all relevant contemporaneous documents in support of the profit of Rs.1,49,86,825/- derived in the business of trading of derivatives, the Ld. CIT(A) also ought to have held that the impugned sum was genuine and therefore rightly offered to tax by the assessee as their business income.
4. For that the respondent craves leave to submit additional cross objections and/or amend or alter the cross objections already taken, either at the time of hearing of the appeal or before.”
In the cross objection the assessee has raised a legal issue/ground regarding validity of reopening of the assessment which goes to the root of the matter. Therefore, first we consider the legal issue raised by the assessee in the cross objection in ground no.1.
5. The learned Authorised Representative of the Assessee has submitted that the assessee company is a member of National Stock Exchange of India and engaged in 6 ITA.No.1077/Hyd./2025 the trading in capital market, Futures and Options and currency derivatives. The assessee filed its return of income for the year under consideration on 12.09.2013 and scrutiny assessment was completed u/sec.143(3) of the Income Tax Act [in short "the Act"], 1961 on 24.02.2016 whereby the Assessing Officer made disallowance u/sec.14A of the Act. Thereafter, the Assessing Officer on the basis of the information received from DGIT [Inv.], Mumbai, has reopened the assessment by issuing notice u/sec.148 of the Act on 20.03.2020 which is after 04 years from the end of the assessment year under consideration. The Assessing Officer proposed to assess the income escaped assessment on account of the profit earned by the assessee on derivative transactions of Rs.1,49,86,825/- on the belief that the assessee was involved in reverse trading of ‘illiquid stock options’ for generating an artificial profit to be set off against the losses incurred by the assessee. The learned Authorised Representative of the Assessee has submitted that the Assessing Officer initiated the re-assessment proceedings by recording the reasons solely on the basis of the third party
7 ITA.No.1077/Hyd./2025 information received under “Project Falcon” and accordingly, notice u/sec.148 of the Act dated 20.03.2020 is based on the borrowed satisfaction without applying an independent mind. Further when this amount of Rs.1,49,86,825/- was already declared by the assessee in the original return filed which was subjected to the scrutiny u/sec.143(3) of the Act at the time of the Order passed on 24.02.2016, then, the reopening of the assessment is not valid as per the 1st proviso to sec.147 as there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. He has further contended that the Assessing Officer has recorded reasons which are verbatim reproduction of the information received from the Investigation Wing under “Project Falcon” without any independent enquiry and application of mind and therefore, the notice issued by the Assessing Officer u/sec.148 of the Act is not sustainable in law and liable to be quashed. In support of his contention, he has relied upon the Judgment of Hon’ble Gujarat High Court in the case of Khushboo Anand Bhayani vs. ITO 171 taxmann.com 139 (Guj.HC) and submitted that the Hon’ble
8 ITA.No.1077/Hyd./2025 High Court has held that when no new tangible material on record is brought by the Assessing Officer, then, reopening of the assessment after 04 years from the end of the assessment year amounts to change of opinion only. The learned Authorised Representative of the Assessee has also relied upon the following decisions: a) Judgment of Hon’ble Gujarat High Court in the case of Rikin Industries vs. ITO 171 taxmann.com 58 (Guj.HC); b) Judgment of Hon’ble Gujarat High Court in the case of Ashvin Dye-Chem Industries vs. ITO 171 taxmann.com 687 (Guj.HC); 5.1. He has contended that the Assessing Officer failed to demonstrate that which material was not disclosed by the assessee during the course of original assessment. The learned Authorised Representative of the Assessee has submitted that all primary facts including the profit from the derivative trading were already disclosed in the return and examined by the Assessing Officer in the scrutiny assessment u/sec.143(3) of the Act. He has further submitted that even
9 ITA.No.1077/Hyd./2025 the reopening of the assessment is based on the incorrect and non-existing facts as the Assessing Officer has alleged trading in illiquid stock options, whereas the assessee has traded in currency futures which are liquid and recognized by Securities and Exchange Board of India [in short “SEBI”]. Therefore, the reasons recorded by the Assessing Officer are without application of mind and factually incorrect. The learned Authorised Representative of the Assessee has submitted that the reason recorded by the Assessing Officer shows non-application of mind without conducting any independent enquiry or satisfaction of the Assessing Officer and therefore, the reopening based on borrowed satisfaction is not sustainable in law. In support of his contention, he has relied upon the Judgment of Hon’ble Supreme Court in the case of DCIT vs. Gokul Agro Resources Ltd. 176 taxmann.com 718 (SC) and submitted that the Hon’ble Supreme Court has dismissed the SLP filed by the Revenue and upheld the Judgment of Hon’ble High Court quashing the notice issued u/sec.148 of the Act based on the information found to be issued on change of opinion and only 10 ITA.No.1077/Hyd./2025 on borrowed satisfaction without there being any tangible material. He has also relied upon Judgment of Hon’ble Supreme Court in the case of DCIT vs. Rakesh Ramanlal Shah 177 taxmann.com 200 (SC) and submitted that the SLP filed by the Revenue was dismissed and Order of the Hon’ble High Court quashing the notice issued u/sec.148 of the Act based on the reasons without disclosing any live link or fresh material to connect the transactions entered into by the assessee with the information in possession of the Assessing Officer. He has then relied upon Judgment of Hon’ble Gujarat High Court in the case of Raajratna Stock Holdings (P.) Ltd., vs. ACIT 170 taxmann.com 473 (Guj.HC) and submitted that the Hon’ble High Court has set aside the notice issued u/sec.148 of the Act issued on the basis of the information received from the Insite Portal regarding coordinated and premeditated trading on the BSE by engaging in reversal trade and illiquid stock options as the notice was issued on borrowed satisfaction without an independent opinion formed by the Assessing Officer and amount of the said non-genuine profit was already offered to 11 ITA.No.1077/Hyd./2025 tax in return of income. Thus, the learned Authorised Representative of the Assessee has submitted that the reopening of the assessment is not valid and liable to be quashed.
On the other hand, learned DR has referred to the reasons recorded by the Assessing Officer and submitted that the Assessing Officer has given all the details of trading carried out by the assessee in the reasons recorded which are not in dispute and therefore, as per the investigation carried out by the Investigation Wing, Mumbai it was found that the assessee was part of the reverse and circular trading generating artificial profit and loss. Accordingly, the Assessing Officer was having tangible material to form the belief that the income assessable to tax has escaped assessment and assessee failed to disclose fully and truly all the relevant facts necessary for the assessment by concealing the involvement of the assessee in reverse and circular trading of derivatives. In support of his contention, he has relied upon the following decisions:
12 ITA.No.1077/Hyd./2025 i. Judgment of Hon’ble Gujarat High Court in the case of Yogendra Kumar Gupta vs. ITO [2014] 366 ITR 186 [Guj.- HC]; ii. Judgment of Hon’ble Rajasthan High Court in the case of Ankit Agrochem (P.) Ltd. vs. JCIT, Range-1, Bikaner [2018] 253 Taxman 141 [Rajasthan-HC]; iii. Judgment of Hon’ble Gujarat High Court in the case of Ankit Financial Services Ltd. vs. DCIT, Circle-1(1)(2) [2017] 78 taxmann.com 58 [Gujarat-HC]; iv. Judgment of Hon’ble Supreme Court in the case of Securities and Exchange Board of India vs. Rakhi Trading Private Ltd., in Civil Appeal No.1969 of 2011 Dated 08.02.2018; v. Judgment of Hon’ble Calcutta High Court in the case of Pr. CIT-9, Kolkata vs. P L Goenka HUF in ITAT 241/2024 in IA No. GA/2/2024 dated 06.05.2025; 6.1. Thus, the learned DR has submitted that after the completion of the assessment u/sec.143(3) of the Act, the Assessing Officer has received the fresh information disclosing the fact that the profit declared by the assessee from the derivative transaction is a bogus claim of the 13 ITA.No.1077/Hyd./2025 assessee from the reverse and circular transactions carried out by the assessee. The assessee carried out premeditated and circularised transactions with the sole purpose of generating artificial/bogus profit/loss to the respective parties. The learned DR further submitted that when a specific and reliable information relevant for assessment of income of the assessee was in the possession of the Assessing Officer subsequent to the scrutiny assessment, then, the Assessing Officer was right to believe that income assessable to tax has escaped assessment and that too by the reason of failure on the part of the assessee to make true and full disclosure of all material facts necessary for the assessment. He has further submitted that mere disclosure of such transactions at the time of original assessment proceedings cannot be said to be disclosure of full and true facts and the Assessing Officer has rightly assumed the jurisdiction to reopen the assessment based on the new material received by the Assessing Officer. The learned DR has relied upon the impugned order of the learned CIT(A) on this issue.
14 ITA.No.1077/Hyd./2025 7. We have considered the rival submissions as well as relevant material on record. There is no dispute that the original return of income filed by the assessee on 12.09.2013 was subjected to scrutiny and assessment was completed u/sec.143(3) of the Act on 24.02.2016 whereby the Assessing Officer made the disallowance u/sec.14A of the Act. Thereafter, the Assessing Officer has reopened the assessment by recording the reasons as under:
15 ITA.No.1077/Hyd./2025 16 ITA.No.1077/Hyd./2025 17 ITA.No.1077/Hyd./2025 18 ITA.No.1077/Hyd./2025 19 ITA.No.1077/Hyd./2025 7.1. Thus, the Assessing Officer has specifically stated in Para no.2 of the reasons recorded that in this case information has been received in “Project Falcon” from DGIT (Inv.), Mumbai on 06.03.2020 through the Income Tax Business Application [in short “ITBA”] Portal regarding coordinated and premediated trading on Bombay Stock Exchange [in short “BSE”] by engaging in reversal trades in illiquid stock option resulting in non-genuine business loss/gains to the beneficial assessee. The Assessing Officer has also given the details of the transactions in Para no.4.1 of the reasons which are reproduced at the cost of repetition as under:
20 ITA.No.1077/Hyd./2025 7.2. Thus, it is clear from the above details of 07 derivative transactions that the assessee carried out in the currencies such as Great Britan Pound, US Dollars and Japanese Yen. Therefore, the reasons recorded by the Assessing Officer and information gathered during investigation carried out by the Investigation Wing, Bombay were only in respect of the transactions in illiquid stock options for generating an artificial/non-genuine business loss/gain. It is pertinent to note that the future/derivative transactions in these currencies cannot be said to be transactions in illiquid stock option because these are prominent currencies traded internationally and based on 21 ITA.No.1077/Hyd./2025 the exchange rate determination by the international data and not confined to the transactions of one country or particularly, transactions are carried out in one stock exchange. Further, the other allegation in the reasons is regarding reversal and coordinated premediated trading on Bombay Stock Exchange to manipulate the price of purchase and sale which is not possible in case of the trading in these currencies as the prevailing rate at the time of trading is not in dispute. In Para no.3 of the reasons recorded, the Assessing Officer has specifically mentioned that the information shows that the SEBI has been investigating the cases involving reversal trade covering period from 01.04.2014 to 31.03.2015 and an interim order dated 20.08.2015 was also passed by the SEBI which shows that the period of trading of the alleged manipulated transactions under the investigation of the SEBI was subsequent period not relevant to the assessment year under consideration. Therefore, even the SEBI has not carried out any investigation or given finding on the transactions carried out during the previous year relevant to the assessment year 22 ITA.No.1077/Hyd./2025 2013-2014 before us. A reference of Judgment dated 08.02.2018 in CA.No.1969 of 201 of Hon’ble Supreme Court in the case of Rakhi Trading Private Limited was also given in the reasons. However, that was entirely in a different context of incurring deliberate loss during the intentional trading, which is found as not genuine, whereas in the case before us, the assessee has earned profit from these derivative transactions of trading in prominent currencies. It is also manifest from the details of the transactions as recorded by the Assessing Officer that there is no material to show that the assessee was involved in any reversal transactions. In other words, it is not reflected from the details of the transactions that the assessee has bought and sold in a particular currency to the same person or party. The details as given by the Assessing Officer in Para no.2 of the reasons clearly reveal that the assessee bought these currencies from different parties and sold to the different parties. Therefore, when the transactions of purchase and sale is not with the same party, then, it cannot be said to be a reversal trade for non-genuine or bogus profit or loss. It is also pertinent to note 23 ITA.No.1077/Hyd./2025 that the profit of Rs.1,49,86,825/- is duly reported by the assessee at the time of filing the original return of income and therefore, to the extent of the profit disclosed by the assessee, it does not fall in the category of ‘income assessable to tax has escaped assessment’. The only difference would be that the addition was finally made by the Assessing Officer u/sec.68 of the Act which was declared by the assessee as business profit. Therefore, it is not a case of non-disclosure of income on the part of the assessee which can be treated as the income escaped assessment, but the Assessing Officer has proposed to assess the said income by treating the profit as non-genuine. The Assessing Officer has not disputed the fact that the transactions are carried out on the Stock Exchange in the normal trading hours and all the payments and receipts are through banking channel. Therefore, when the transactions are not in illiquid stock option, then, the opinion formed by the Assessing Officer while recording the reasons is based on incorrect and wrong facts. The Hon’ble Gujarat High Court in the case of Sunbarg Tradelink (P.) Ltd. v. ITO [2016] 74 taxmann.com 16 (Gujarat-HC) has 24 ITA.No.1077/Hyd./2025 considered the issue of validity of reopening based on wrong reasons as under:
“12. Learned counsel for the Revenue however, made a last desperate attempt to save the proceedings by suggesting that the notice of reopening merely carried a reference to a wrong assessment year through a typographical error. On the basis of material pertaining to the financial year 2008-09 by error notice came to be issued for the assessment year 2008- 09 instead of assessment year 2009-10. Had this been a mere typographical error so treated by the Assessing Officer, we would have considered the question whether a mere typographical error could invalidate otherwise valid proceedings. However, even the Assessing Officer has not treated the impugned notice as to referring to the assessment year 2009-10 wrongly typed as assessment year 2008-09. He has all along acted as if through the impugned notice, the assessment for the assessment year 2008- 09 having been reopened. Whatever doubt one may have would disappear when one refers to multiple notices that the Assessing Officer issued to the assessee for supplying documents pertaining to the said assessment year and the final order of assessment that he passed. The Assessing Officer made multiple additions in the assessment order for the assessment year 2008-09 which obviously he could not have done had he treated the notice for reopening as relatable to the assessment year 2009-10.
Under the circumstances, inescapable conclusion that one would reach is that the notice for reopening the assessment for the assessment year 2008-09, was based on completely wrong reasons. In other words, reasons lacked validity. When the notice itself was thus, defective, it would have no effect of reopening on 25 ITA.No.1077/Hyd./2025 the assessment. Any action taken by the Assessing Officer subsequent to or in pursuance of such notice would also be invalidated.
In the result, impugned notice dated 30.03.2015 for reopening the assessment is set aside and as a result, the order of assessment dated 23.03.2016 framed by the Assessing Officer pursuant to such notice also stands invalidated.”
7.3. Accordingly, when the entire information received by the Assessing Officer from the Investigation Wing in respect of the manipulative trading in illiquid stock options, then, forming the belief by considering the derivative transactions in the currencies as the illiquid stock option is apparently based on incorrect and non-existing facts. It also reveals non-application of mind on the part of the Assessing Officer while issuing the notice u/sec.148 of the act as the reasons recorded by the Assessing Officer are not the Assessing Officer’s own analysis of the relevant facts but appears to be the reproduction of the information as received from the Investigation Wing. Therefore, we find force in the contention of the learned Authorised Representative of the Assessee which is supported by various Judgments. In the case of Raajratna Stockholdings (P.) Ltd., vs. ACIT (supra), 26 ITA.No.1077/Hyd./2025 the Hon’ble Gujarat High Court while dealing with an identical issue has held in Para nos.8 to 12 as under:
“8. Having considered rival submissions made by learned advocates for the respective parties and on perusal of the material on record as well as documents placed by the petitioner by way of a separate compilation containing the return of income, tax audit report and financial accounts, copy of ledger account which are on the record of the respondent which were produced by the petitioner at the time of regular assessment, il appears that the petitioner has disclosed the profit earned from the Speculation Profit on currency derivatives of Rs. 50,24,999 .94 and Speculation profit on shares of Rs.1,02,28,243.76 totaling to Rs.1,52,59,143.70 which is already credited in Profit and Loss Account. It, therefore, cannot be said that the petitioner has not disclosed fully and truly all material facts relevant for assessment.
It also appears from the reasons recorded that the no verification of the material on record is made by the respondent and there is no independent opinion that any income has escaped assessment due to any failure on the part of the assessee in not disclosing, fully and truly all material facts necessary for assessment.
Moreover, from the reasons recorded it appears that the initiation of reopening proceedings are on the borrowed satisfaction as no independent opinion is formed and on bare perusal of the reasons recorded, it emerges that the Assessing Officer, considering the information received from the insight portal, has issued impugned notice forming reason to believe that the income has escaped the assessment on the presumption that the petitioner has been involved in creating the non-genuine profit which is 27 ITA.No.1077/Hyd./2025 already offered to tax in the return of income which is accepted in the regular course of assessment by passing the order under section 143(3) of the Act.
It is also pertinent to note that there is no basis to form reasonable belief for escapement of income except the information made available on the insight portal. The respondent-Assessing Officer has not considered the material on record to come to the conclusion that there is failure on the part of the petitioner to disclose truly and fully all material facts to have reason to believe for escapement of income. Therefore, on the basis of the information received from another agency on insight portal or from the SEBI report, there cannot be any reassessment proceedings unless the respondent, after considering such information/ material received from other sources, consider the same with the material on record in the case of the petitioner assessee and thereafter, is required to form independent opinion that income has escaped assessment. Without forming such opinion solely and mechanically relying upon the information received from the other sources, the respondent-Assessing Officer could not have assumed the jurisdiction to reopen the assessment based on such information. This view is fortified by the decision of this Court in case of Harikishan Sunderlal Virmani v Deputy Commissioner of Income-tax [2017] 88 taxmann.com 548/394 ITR 146 (Gujarat).
Considering the facts the case, we are of the opinion that the respondent-Assessing Officer could not have assumed the jurisdiction merely and solely relying upon the information made available on the insight portal without forming any independent opinion on the basis of the material on record vis-a-vis the petitioner is concerned. The petition therefore, succeeds and is accordingly allowed. Impugned notice dated 30.03.2021 issued 28 ITA.No.1077/Hyd./2025 under section 148 of the Act is hereby quashed and set aside. Rule is made absolute to the aforesaid extent. No order as to costs.”
7.4. Accordingly, in the facts and circumstances of the case as discussed above as well as following the Judgments as cited above, we hold that the reopening of the assessment based on incorrect and wrong reasons as well as without specifying any tangible material to show that the transactions carried out by the assessee in currency derivatives are premediated reversal transactions with the sole purpose of generating non-genuine/bogus profit, is not valid and liable to be quashed. We Order accordingly.
Since, we have quashed the reopening of the assessment while deciding the legal issue raised by the assessee in the cross objection, therefore, the other grounds raised by the Revenue in the appeal becomes infructuous. Therefore, we do not propose to go into the merits of the grounds raised by the assessee.
29 ITA.No.1077/Hyd./2025 9. In the result, appeal ITA.No.1077/Hyd./2025 of the Revenue is dismissed and Cross Objection No. 26/Hyd./ 2025 of the Assessee is allowed. A copy of this common order be placed in the respective case files.
Order pronounced in the open Court on 11.03.2026.