Reassessment under Section 147 invalidated for relying on unspecified portal information; additions under Section 68 deleted after demat records produced

ITAT held the reassessment initiated u/s.147 invalid because the AO relied on unspecified "information" from an insight portal without furnishing particulars or correlating it to the assessee's trading; objections by the assessee went unanswered and requisite disclosure and inquiry were not made. Additions u/s.68 were deleted as the assessee produced demat records, market purchase/sale details and other documents which the AO did not disprove or examine in the assessment order. Appeal was allowed and the additions sustained in favour of the assessee.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the reopening of assessment under section 147 read with section 144B (notice under section 148) is valid where the reason recorded refers only to information reflected on the "Insight Portal" without furnishing the underlying material or explaining the tangible nexus to the assessee's transactions.

2. Whether a notice under section 148 issued on the basis of information from the investigation/insight portal (or a report of the Investigation Wing) constitutes valid "reason to believe" escapement of income where the Assessing Officer has not made independent inquiry, recorded independent reasons, or provided the assessee with the investigation material relied upon.

3. Whether long-term capital gains (LTCG) claimed as exempt under section 10(38) (or treated as LTCG in computation) in respect of trading in a penny stock can be treated as bogus and added under section 68 (unexplained cash credits) where the assessee produced demat records, broker ledgers, contract notes, STT paid, bank payments, and where no live nexus or payment to accommodation providers is shown by the revenue.

4. Whether reliance on investigation reports or statements not confronted to the assessee, and absence of opportunity for cross-examination, permits adducing such material as basis for additions.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of reopening where reasons only refer to "information on Insight Portal"

Legal framework: Section 147 permits reopening where the Assessing Officer has "reason to believe" that income has escaped assessment; notice under section 148 must be preceded by recording of such reasons. Principles of natural justice require disclosure of material relied upon when it forms the basis of adverse action, and the AO must apply independent mind.

Precedent treatment: The judgment refers to authorities holding reopening bad where there is no tangible material or independent application of mind and where material relied upon is not disclosed to the assessee. (References in the record include authorities holding that mere portal references or general information are insufficient; independent inquiry and disclosure are required.)

Interpretation and reasoning: The Assessing Officer's reasons recorded merely mention that information was reflected on the Insight Portal identifying 18 penny scrips and the assessee's name, without furnishing the extract or any investigative report, statement, or tangible material linking the assessee to accommodation entries. The assessee repeatedly sought the underlying material in objections and applications under procedure provisions and RTI, but the assessment order does not display any nexus or independent reasons based on inquiry. The AO did not record specific reasons connecting the portal information to escapement of income in respect of the assessee's transactions.

Ratio vs. Obiter: Ratio - Reopening is invalid if based solely on a terse reference to portal information without disclosure of the underlying material or independent application of mind connecting that material to the assessee; mere mention of "information" is insufficient. Obiter - Observations about the general nature of portal information as a starting point for investigation but not a substitute for evidence.

Conclusions: The reopening under section 147/notice under section 148 is quashed for lack of valid reasons and for failure to disclose and rely upon tangible material; grounds 1-3 are allowed. The AO's recorded satisfaction was insufficient and did not meet statutory and natural justice requirements.

Issue 2 - Reliance on Investigation Wing/Insight Portal information without independent inquiry or disclosure

Legal framework: Information supplied by investigation wings or external authorities can furnish a basis for inquiry, but for valid reopening the AO must independently apply his mind, investigate, record fresh reasons and disclose material if it is to be used against the assessee; principles of fair hearing require confronting the assessee with adverse material.

Precedent treatment: Decisions cited in the record establish that information from other wings/portals is a starting point, but cannot substitute for independent reasons; reopening on "borrowed satisfaction" or without disclosure violates law and natural justice.

Interpretation and reasoning: The AO did not perform or record independent investigation correlating portal information with the assessee's facts, nor did the AO supply the investigation report or excerpts to the assessee. The absence of such steps means the AO's belief was not the AO's own formed after application of mind but relied on undisclosed third-party information. The assessing process did not bridge the factual gulf between general information about a scrip and the assessee's bona fide transactions.

Ratio vs. Obiter: Ratio - Information from an investigation portal must be converted into a reasoned, independent belief by the AO through inquiry and must be disclosed to the assessee if relied upon; otherwise reopening is invalid. Obiter - Emphasis that portal information can be useful for initiating enquiries but cannot itself be determinative.

Conclusions: The notice under section 148 issued on the basis of nondisclosed portal/investigation information is legally defective; the AO failed to disclose material and did not form independent reasons, rendering the reopening void.

Issue 3 - Legitimacy of LTCG and appropriateness of addition under section 68

Legal framework: Additions under section 68 require unexplained credits/receipt of money; when a taxpayer produces credible documentary evidence (demat records, contract notes, bank payments, STT payment), the burden to establish that gains are bogus or accommodation entries rests on the revenue with cogent material linking the taxpayer to entry providers and exchange of consideration outside banking channels.

Precedent treatment: Authorities relied upon by the assessee in the record indicate that mere suspicious price movement in penny stocks, suspension of trading later, or general investigation findings are not sufficient to treat bona fide transactions as accommodation entries absent direct linkage or evidence of cash payments or collusion. Also, non-confrontation with investigation reports and denial of opportunity for cross-examination weakens the basis for additions.

Interpretation and reasoning: The assessee produced consistent documentary evidence: purchases through recognized exchange, shares held in demat for more than one year, payments by cheque, STT paid, and broker documents/contract notes. The AO allowed cost of acquisition in computing LTCG, implying recognition of purchases, yet simultaneously treated gains as bogus without producing material linking the assessee to accommodation providers or money trail. Revenue relied on general information about the scrip but did not confront the assessee with investigative material or permit cross-examination of persons whose statements were cited. Suspicion, however strong, was not treated as evidence in the assessment order.

Ratio vs. Obiter: Ratio - Where the assessee furnishes documentary proof of genuine purchase and sale through recognized market mechanisms and the revenue fails to produce cogent material connecting the assessee to accommodation entry providers or proof of undisclosed consideration, gains cannot be treated as bogus or added under section 68. Obiter - Observations that market-driven price movements and later regulatory actions (e.g., suspension for non-payment of listing fees) do not ipso facto render prior transactions nonexistent or fraudulent.

Conclusions: On the merits, even if reopening were sustainable, the addition of Rs. 3,71,94,167 as bogus LTCG under section 68 was not justified given the documentary proof and absence of disclosed, corroborative material from the revenue; since grounds 1-3 succeed and reopening is quashed, the assessment itself is invalid and the addition cannot stand.

Issue 4 - Admissibility and use of undisclosed investigation reports and statements without opportunity for cross-examination

Legal framework: Principles of natural justice and evidentiary fairness require that material relied upon to make adverse findings be disclosed to the affected party and, where statements are used, the assessee should have an opportunity to cross-examine the declarants where appropriate; undisclosed investigation material cannot constitute admissible basis for addition.

Precedent treatment: The record cites authorities holding that statements or reports not confronted to the assessee and without cross-examination cannot legitimately be the basis for additions; failure to afford opportunity of cross-examination renders such material inadmissible for assessment purpose.

Interpretation and reasoning: The AO relied upon contents of an Investigation Wing report and unspecified statements but did not provide them to the assessee or permit cross-examination. Only a snippet of an excel sheet was available; the substantive material was neither placed on record nor confronted. The AO thus relied on material that was effectively used behind the assessee's back.

Ratio vs. Obiter: Ratio - Additions cannot be sustained on the basis of undisclosed investigation reports or statements which the assessee was not permitted to meet or cross-examine. Obiter - Emphasis on fair trial standards within assessment proceedings where evidentiary fairness is required.

Conclusions: Material from the Investigation Wing not disclosed to the assessee and statements without opportunity for cross-examination are inadmissible as basis for addition; reliance on such material vitiates the assessment.

Overall Conclusion

The reopening under section 147/notice under section 148 was invalid for lack of disclosed tangible reasons and independent application of mind; the assessment based on such reopening is quashed. On the merits, documentary evidence showed genuine market transactions and the revenue failed to produce cogent, disclosed material linking the assessee to accommodation entries, so the addition of the claimed LTCG as bogus could not be sustained. The appeal is allowed.

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