Reassessment u/s 147 and 148 quashed for lack of independent reasons, faceless flaws, and invalid cash additions u/s 69A

ITAT Jaipur-AT allowed the assessee's appeals, quashing the reassessment u/s 147. It held that reopening based solely on Investigation Wing information, without independent material or proper reasons at the time of the original notice, was invalid. Further, notices u/s 148A and 148 and order u/s 148A(d) were issued by the Jurisdictional AO instead of the Faceless AO and in violation of s.151A requirements, rendering the notice u/s 148 (also issued without DIN) bad in law. On merits, additions u/s 69A treating recorded trading profits and alleged unexplained money, based only on third-party search documents without cross-examination, were deleted as unsustainable.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the reassessment proceedings initiated under section 147, and notices/orders under sections 148, 148A and 147, were valid in law in view of limitation under section 149, lack of independent "reason to believe", non-compliance with the faceless regime under section 151A/Notification No. 18/2022, absence of DIN, and reopening of a completed assessment under section 143(3) read with section 153A without allegation of failure to disclose material facts.

1.2 Whether the addition of Rs. 5,12,17,312/- made under section 69A by treating profit from futures and options trading as "fictitious profit" and "unexplained money" was justified, where all trades were carried out through recognised stock exchanges, duly recorded in audited books, and already offered to tax.

1.3 Whether the addition of Rs. 74,51,800/- under section 69A as "unexplained money" based on a ledger titled "M B Agarwal" found in a third-party (Veto Group) tally file was legally sustainable in absence of corroborative evidence, identification of the assessee, or opportunity of cross-examination.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of reassessment proceedings under section 147 (Grounds 1-1.3)

Legal framework discussed

2.1 The Court recorded and applied the substituted section 149(1)(a)-(b) along with its first proviso and the Explanation defining "asset"; and section 151A regarding faceless assessment of income escaping assessment, together with CBDT Notification No. 18/2022 dated 29.03.2022 mandating automated allocation to Faceless Assessment Units for notices under section 148.

2.2 The Court took note of the judgment in Hexaware Technologies Ltd., interpreting the first proviso to section 149 and the limitation regime, and of the Supreme Court decision in Union of India v. Ashish Agarwal concerning deeming of old section 148 notices as section 148A(b) show cause notices, preserving all defences under section 149 and the Finance Act, 2021.

2.3 The Court referred to decisions holding that reassessment based solely on information from Investigation Wing without independent application of mind is invalid, and that notices under section 148/148A must be issued by the Faceless Assessing Officer (FAO) and not by the Jurisdictional Assessing Officer (JAO), under section 151A and the faceless scheme.

Interpretation and reasoning

2.4 The reassessment was initiated on two planks: (i) information from Investigation Wing/Project Falcon and a SEBI order alleging "fictitious profit" of Rs. 5,12,17,312/- from reversal trades in stock options; and (ii) information later arising from a search on Veto Group (22.12.2021) showing a ledger in the name "MB Agarwal" aggregating Rs. 74,51,800/-. The initial notice under section 148 was issued on 13.05.2021.

2.5 The Court found that the reasons for reopening based on Project Falcon/SEBI constituted mere "borrowed satisfaction": the Assessing Officer did not conduct any independent enquiry under sections 131/133(6) with counterparties or otherwise; there was no material brought on record showing how the assessee was linked to any alleged accommodation entry or how any counterparty benefited. The SEBI order itself was based on presumptions and did not quantify any unfair advantage to the assessee.

2.6 Relying on precedents (including Sarthak Securities, RMG Polyvinyl, Bhaijee Commodities, decisions of the Gujarat High Court and various Tribunals), the Court held that general information from Investigation Wing and third-party statements, without independent verification, cannot by itself constitute "tangible material" or valid "reason to believe" that income has escaped assessment; at best it gives rise to suspicion.

2.7 The Court noted that the assessee's assessment for the year had already been completed under section 143(3) read with section 153A pursuant to a search on the group, and there was no allegation in the reasons that the assessee had failed to fully and truly disclose material facts. Reopening therefore amounted to an impermissible "change of opinion," particularly in light of the precedent that reopening beyond the prescribed period, without such allegation, is not justified.

2.8 On the Veto Group ledger issue, the Court observed that the first notice under section 148 (13.05.2021) pre-dated the Veto search (22.12.2021). Hence, at the time of the original notice, no information regarding the alleged Rs. 74,51,800/- existed; reasons to believe on this issue could not have been recorded then and could not be retrospectively incorporated via a later section 148A(b) notice. Thus, reopening on that ground lacked foundational "reason to believe."

2.9 Considering the limitation under section 149 and the interpretation in Hexaware Technologies (specifically for AY 2015-16 and the first proviso to section 149), the Court noted that the time-barring date for valid section 148 proceedings for AY 2015-16, under the applicable regime, was 31.03.2022, and the assessee specifically pleaded that the impugned notice dated 30.07.2022 was issued beyond this limit, rendering the reopening time-barred.

2.10 The Court further held that the notices under sections 148A(b) and 148 and the order under section 148A(d) were issued by the JAO (ACIT, Circle-1, Jaipur) and not by a Faceless Assessing Officer through automated allocation as mandated by section 151A and CBDT Notification No. 18/2022. Relying on a series of High Court judgments (including Hexaware, Ganesh Nivrutti Jagtap, Dosch Pharmaceutical, Mettler Toledo, Reliance Jio, Sundaram Multi Pap and others), it concluded that only FAO, and not JAO, has jurisdiction to issue notices under section 148 under the faceless scheme; any notice issued contrary to this scheme is without jurisdiction and invalid per se, irrespective of any separate showing of prejudice.

2.11 The Court also took note that the notice dated 30.07.2022 under section 148 was issued without a Document Identification Number (DIN), and following the reasoning in Hexaware, held that such notice, issued without DIN in contravention of the DIN requirement, is invalid and bad in law.

Conclusions on Issue 1

2.12 The Court held that:

(a) Reassessment was initiated solely on borrowed satisfaction from Investigation Wing/SEBI without independent enquiry or cogent evidence linking the assessee to any escapement of income.

(b) Reopening of an assessment already completed under section 143(3) read with section 153A, without allegation of failure to disclose material facts, is a mere change of opinion and impermissible.

(c) The additional ground of reopening based on Veto Group ledger could not support jurisdiction as no such material existed or reasons were recorded at the time of the original section 148 notice.

(d) Notices and orders under sections 148A and 148, having been issued by the JAO and not by the FAO in violation of section 151A and Notification No. 18/2022, were without jurisdiction and invalid.

(e) The section 148 notice without DIN was independently bad in law.

(f) In view of the above defects, the initiation of reassessment proceedings under section 147 was not in accordance with law; the reassessment order under section 147 was held bad in law and liable to be quashed. The Court, however, proceeded to decide Grounds 2 and 3 on merits as well.

Issue 2 - Addition of Rs. 5,12,17,312/- under section 69A for alleged fictitious profit on F&O trades (Grounds 2-2.3)

Legal framework discussed

2.13 The Court reproduced and applied section 69A, which deems as income any money, bullion, jewellery or valuable article found to be owned by the assessee in a financial year but not recorded in the books, where no satisfactory explanation of nature and source is offered.

2.14 The Court also relied on judicial precedents, including:

- CCE v. Andaman Timber Industries (principle that denial of cross-examination of persons whose statements are relied upon vitiates the order for breach of natural justice).

- CIT v. Odeon Builders (no addition solely on third-party information without further scrutiny; denial of cross-examination renders addition unsustainable).

- Maverick Commodity Brokers (Jaipur ITAT) (SEBI/SIT reports are only information; AO must convert them into evidence by proper enquiry).

- GTC Industries (Special Bench) (suspicion, however strong, cannot substitute evidence).

- Sanjiv Dhireshbhai Shah (Gujarat High Court) (no reopening/addition merely on allegation of non-genuine trades in illiquid stock options where all details are disclosed and there is no unoffered income).

- Vishal Jhajharia (Calcutta High Court) (addition under section 69A cannot be made when show cause notice only alleged section 68 unexplained cash credits).

- Ramchandra Kanu Mendadkar (Mumbai ITAT) (section 69A cannot apply where the amount is recorded in books and offered to tax).

Interpretation and reasoning

2.15 The Assessing Officer alleged that the assessee generated non-genuine profit of Rs. 5,12,17,312/- through reversal trades in illiquid stock options on BSE, based on Project Falcon data and statements of third-party brokers (Sanjay Kumar Periwal and Harshvardhan Kayan). This amount, according to the AO, represented bogus profit introduced as unexplained investment/unaccounted income and was added under section 69A.

2.16 The Court noted that the AO's stand was inconsistent and shifting: initial notices referred to bogus loss of Rs. 4,68,75,013/- and fictitious profit of Rs. 5,12,17,312/-; later orders under section 148A(d) ignored the former; the show cause notice proposed addition as unexplained cash credits under section 68; the final assessment treated the same as "unexplained investment" under section 69A. This inconsistency indicated lack of clear application of mind and mechanical reliance on external information.

2.17 The Court found that:

- The statements of the brokers, heavily relied upon, were neither supplied to the assessee nor did they name the assessee as beneficiary; no opportunity of cross-examination was granted despite specific request.

- The SEBI adjudication order itself expressly recorded that, considering the nature of artificial volumes between counterparties, "it is not possible from the material available on record to quantify the amount of disproportionate gain or unfair advantage resulting from the artificial trades between the counterparties or the consequent loss caused to investors."

- The trades in question involved recognised, large-cap/BSE-500 companies (such as Power Grid, Axis Bank, SBI, NTPC, etc.), not penny or illiquid stocks, all executed on the online exchange platform, subject to STT, exchange margins, and SEBI/Exchange regulations, with settlement through the exchange and not directly between parties.

2.18 The Court accepted the assessee's explanation that:

- All F&O transactions were routed through a SEBI-registered broker on recognised stock exchanges, documented via contract notes, bank statements and audited books; all profits were offered to tax and there was no allegation that any income was left out of return.

- In an order-driven anonymous market, it is practically impossible for the assessee to pre-determine counterparties or engineer specific reversal trades with identified persons; the AO brought no material to show any connection between the assessee and alleged counterparties or that any benefit was passed on.

- The pattern of intraday or quick reversal trades and the presence of both profits and losses are part of normal market behaviour and do not, without more, demonstrate that profits are fictitious.

2.19 The Court held that the AO had based the entire addition on generalised information from I&CI Wing and SEBI and untested statements of unrelated third parties, without bringing any direct material to show:

- that the trades were sham or non-existent, or

- that any income had escaped assessment, or

- that the assessee had introduced any unaccounted money through these recorded and taxed profits.

2.20 On the nature of the provision applied, the Court emphasised that section 69A applies only where the assessee is "found to be the owner" of money, etc., "not recorded" in the books; here, the F&O transactions and the resulting profit were duly recorded in the regular books and already offered to tax. Therefore, the essential condition for invoking section 69A was not met.

2.21 The Court further observed that the AO had issued show cause notice for addition under section 68 as unexplained cash credits but ultimately made the addition under section 69A as unexplained money, without giving a separate opportunity to the assessee to meet that specific statutory basis, which is contrary to the ratio in Vishal Jhajharia.

2.22 The denial of cross-examination of persons whose statements were the foundation of the adverse conclusion was found to be a serious violation of the principles of natural justice, vitiating the addition, in line with Andaman Timber and Odeon Builders.

Conclusions on Issue 2

2.23 The Court concluded that:

(a) The addition of Rs. 5,12,17,312/- was made solely on conjectures and surmises, on unverified information and third-party statements, without independent enquiry or cogent evidence linking the assessee to any bogus entry or unaccounted money.

(b) All relevant F&O transactions and profits were duly recorded in audited books and offered to tax; hence, section 69A had no application.

(c) The procedure adopted, including shifting statutory grounds (from section 68 to section 69A) and denial of cross-examination, violated the requirements of law and natural justice.

(d) The addition of Rs. 5,12,17,312/- under section 69A was unsustainable and was deleted. Grounds 2 to 2.3 were allowed.

Issue 3 - Addition of Rs. 74,51,800/- under section 69A based on third-party ledger "MB Agarwal" (Grounds 3-3.3)

Legal framework discussed

2.24 The Court applied section 69A and relied upon principles laid down in:

- V.C. Shukla (Supreme Court) (private entries in books or diaries of a person, without handwriting, signature or acknowledgment of the alleged other party, do not by themselves fasten liability on that other party).

- DCIT v. Mahabir Prasad Gupta (Delhi ITAT) affirmed by Delhi High Court, and CIT v. Sant Lal (Delhi High Court) (no addition based solely on coded/abbreviated notings in third-party records not linked by evidence to the assessee).

- Naren Premchand Nagda, Jawaharbhai Atmaram Hathiwala, Prabhat Oil Mills, and Daga Fibres (no addition on the strength of third-party loose papers/statements without corroboration and without establishing a live link with the assessee).

Interpretation and reasoning

2.25 During a search on Veto Group on 22.12.2021, a pen drive was found containing a tally file "VIKAS," in which a ledger titled "MB Agarwal" reflected aggregate entries of Rs. 74,51,800/-. Statements of the Veto Group accountant (Sh. Nand Lal Alwani) allegedly characterised the tally data as unaccounted transactions of the group. On this basis, the AO treated the ledger as representing unaccounted transactions of the assessee and added Rs. 74,51,800/- under section 69A as unexplained money.

2.26 The Court noted that:

- The ledger contained only the name "M B Agarwal" without PAN, address, signature, handwriting or any other identifier linking it to the assessee "Mukut Behari Agarwal".

- No document, handwriting, or signature of the assessee was found at Veto Group premises; there was no evidence of any payment by the assessee to Veto Group, to "Vikas," or to Sh. Nand Lal Alwani.

- The assessee specifically denied any connection with Veto Group or with the transactions and demanded copies of statements of Sh. Nand Lal Alwani and opportunity to cross-examine him; neither was provided.

2.27 Applying V.C. Shukla and the line of ITAT/High Court authorities, the Court held that mere notings or ledger entries in the private records of a third party-even if that third party claims them to be unaccounted transactions-cannot by themselves bind or implicate another person, unless:

- there is corroborative material linking the entries to that person (e.g., handwriting, signature, confirmation, independent evidence of payment/receipt), and

- the person is given full opportunity to confront and cross-examine the maker of the entries.

2.28 The Court observed that:

- The Revenue failed to establish any "live link" between the ledger "MB Agarwal" and the assessee; no business connection, financial flow or corroborative document was brought on record.

- The entire addition rested only on untested statement(s) of a third party and uncorroborated entries in third-party electronic records, without independent enquiry or verification.

- No cross-examination of the key person (Sh. Nand Lal Alwani) was afforded, despite specific request; statements relied upon were not even supplied to the assessee, amounting to violation of principles of natural justice as per Andaman Timber and kindred authorities.

Conclusions on Issue 3

2.29 The Court concluded that:

(a) The ledger titled "MB Agarwal" found in Veto Group's tally file, absent any corroboration linking it to the assessee, could not be treated as evidence of unexplained money of the assessee.

(b) The addition of Rs. 74,51,800/- under section 69A on the basis of third-party records and statements, without providing copies of such statements or allowing cross-examination and without any independent corroborative material, was contrary to settled law and violated natural justice.

(c) The Revenue failed to discharge its burden of proving that the assessee had made any payment or was owner of the alleged unaccounted money.

(d) The addition of Rs. 74,51,800/- was unsustainable and was deleted. Grounds 3 to 3.3 were allowed.

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