The Gujarat High Court, in a recent ruling reiterated the settled principle that reassessment proceedings cannot be sustained when initiated on the basis of borrowed satisfaction. In this case, although the assessee had duly disclosed and paid tax on short-term capital gains arising from the sale of shares, the Assessing Officer reopened the assessment solely on the basis of third-party search information, without establishing any live link or direct nexus between such material and the assessee’s own transactions. The Court held that absence of independent application of mind by the Assessing Officer vitiates the very foundation of reassessment, rendering the notice invalid in law.
Facts of the Case
- The assessee had sold shares of KTL Ltd. and duly declared Short-Term Capital Gains (STCG) in the return of income.
- Applicable taxes on such STCG were paid by the assessee.
- Subsequently, the Assessing Officer (AO) initiated reassessment proceedings under section 148.
- The reopening was based on search/investigation material relating to “K Group”, alleging that transactions in certain shares were accommodation entries.
- However, the reasons recorded did not establish any direct or live nexus between:
- the search material of K Group, and
- the assessee’s own share transactions in KTL.
Issue Before the Court
Whether reassessment proceedings are valid when the AO:
- relies entirely on borrowed satisfaction from third-party search information, and
- fails to establish a live link between such information and the assessee’s specific transactions.
Contentions
Assessee
- STCG was genuinely earned and fully disclosed.
- No incriminating material existed against the assessee.
- AO acted mechanically on third-party information without independent application of mind.
Revenue
- Reopening was justified based on information received from investigation wing relating to manipulation in shares.
Held (Decision)
- The Gujarat High Court quashed the reassessment notice.
- The Court held that:
- The AO did not form an independent belief of income escapement.
- The reopening was based solely on borrowed satisfaction.
- There was no live link or rational connection between the information received and the assessee’s transaction.
- Mere reference to search material of another group cannot substitute independent satisfaction required under law.
Ratio / Legal Principle
- Reassessment is invalid if based on borrowed satisfaction without:
- independent verification, and
- a demonstrable nexus between third-party information and the assessee’s own data.
- “Reason to believe” must be personal, objective, and based on tangible material relating specifically to the assessee.
Key Takeaways
- Reopening cannot be done on general or vague investigation reports.
- AO must establish a live and proximate link between material relied upon and alleged escapement of income.
- Mechanical reopening violates Article 14 and settled reassessment jurisprudence.
Citation: 11 Dec 2025 | [2025] 180 taxmann.com 815 (Gujarat HC) | Decision dated 23-09-2025