One of the most contested issues in tax law is the power of the Assessing Officer (AO) to reopen assessments. Sections 147 and 148 of the Income-tax Act grant this power, but it comes with a safeguard: the AO must have “reasons to believe” that income has escaped assessment.
The recent decision in ITO v. Kapil Arun Agrawal [2025] is an important reminder that this safeguard cannot be diluted. Suspicion, rumor, or vague departmental inputs cannot replace genuine belief based on relevant material.

The Case in Brief

The AO received information from the Insight Portal that a syndicate led by one “Mr. X” was engaged in share price rigging and providing bogus long-term capital gains (LTCG) through accommodation entries. The assessee, Kapil Arun Agrawal, was alleged to be one of the beneficiaries.

However, in the “reasons recorded,” the AO failed to specify:

• What the alleged transaction was.
• From which company the entry came.
• How the assessee benefited from it.

In short, the reasons were vague, general, and lacked any direct nexus with the assessee’s accounts.

The Assessee’s Stand

1. The only information mentioned in the reasons recorded for was that AO had information that the assessee was beneficiary of accommodation entry however, it has not mentioned as to what was the nature and in which manner the assessee had obtained the accommodation entry, thereby the information available with the AO was general and vague and does not correlate with the account of the assessee.
2. For the purpose of making reassessment the AO must have “reasons to believe”, it does not mean a purely subjective satisfaction of the assessing authority, and such reasons should be held in good faith and cannot merely be a pretence.
3. The rational connection postulates that there must be direct nexus or live link between the material coming to the notice of AO and the formation of belief regarding escapement of income. The powers of AO to reopen an assessment, though wide, are no plenary.

The Revenue’s Position

The AO contended that credible information was received from the Investigation Wing that the scripts are used by Mr X and its associates to rig the stock and to provide accommodation entries and the assessee has traded in such penny scripts and obtained accommodation entry of bogus STCG in his books.

Tribunal’s Findings

The Tribunal held the reopening to be invalid and upheld the CIT(A)’s deletion of the addition. Key points included:

1. Reopening bad in law: The AO only stated that the assessee was a beneficiary of accommodation entries without specifying nature, source, or manner. Such vague information cannot justify reopening.
2. Reason to believe is not reason to suspect: The law requires an honest and reasonable belief based on material evidence, not assumptions or general reports.
3. Lack of evidence: The AO made additions merely on presumption without showing any corroborative evidence that the assessee indulged in bogus LTCG.

Why This Case Matters

This ruling highlights that while the AO’s powers of reopening are wide, they are not unfettered. The phrase “reason to believe” carries a clear legal standard — it demands a rational connection between information and the conclusion that income has escaped assessment.

The case is a significant precedent for taxpayers facing reassessment notices based on generic departmental reports or portal insights without proper verification.