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The Income Tax Appellate Tribunal (ITAT), Lucknow, has annulled a reassessment against Surya Pratap Singh Chauhan because the tax officer issued the reopening order before the taxpayer’s response deadline and ignored a reply that had already been filed. The dispute involved Bitcoin transactions: the department treated ₹88.55 lakh of cumulative purchases as unexplained investment, while the taxpayer said his fresh capital was only about ₹9.63 lakh and that he repeatedly recycled sale proceeds through an exchange wallet. In its order pronounced on 13 February 2026, the tribunal ruled on procedure, not on whether the Bitcoin funds were genuinely explained or whether the ₹88.55 lakh addition was correct.
What exactly did the Lucknow ITAT decide?
The tribunal held that the reassessment could not stand because the statutory pre-notice process under Section 148A was defective. A notice under Section 148A(b) dated 25 March 2022 gave the taxpayer until 31 March to respond, but the Assessing Officer passed the Section 148A(d) order on 29 March and issued the Section 148 notice on 30 March. The taxpayer’s written reply, filed on 26 March, was not considered.
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The Lucknow ‘A’ Bench therefore treated the Section 148A(d) order as legally vitiated. Its operative conclusion was: “Since, the initiation of the proceeding is itself vitiated in the eyes of law, the consequent re-assessment proceedings are held to be void ab initio.” The appeal was disposed of on that legal ground, and the remaining grounds were treated as infructuous.
How did a claimed ₹9.63 lakh investment become an ₹88.55 lakh tax dispute?
The disagreement was over the difference between fresh capital and cumulative transaction value. Information on the Income Tax Department’s Insight Portal indicated Bitcoin transactions of about ₹83.78 lakh during financial year 2017-18. The Assessing Officer relied on exchange statements from Coin Secure and Zebpay and treated Bitcoin purchases totaling ₹88.55 lakh as investments whose source had not been established under Section 69.
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Chauhan’s explanation was that he initially invested about ₹9.63 lakh. As coins were sold, the proceeds were reused for later purchases through the exchange wallet, causing the gross purchase total to become much larger than the new money put into the account. He reported a ₹3.34 lakh loss in the reassessment return rather than a profit.
| Figure or event | What it represented | Qualification |
|---|---|---|
| ₹83.78 lakh | Bitcoin transaction information | Insight Portal figure for FY 2017-18 recorded by the ITAT |
| ₹88.55 lakh | Unexplained-investment addition under Section 69 | Assessing Officer’s treatment of exchange purchase statements |
| ₹9.63 lakh | Fresh capital claimed by the taxpayer | His explanation of the money initially invested |
| ₹3.34 lakh | Loss disclosed in the reassessment return | Taxpayer’s reported result, not a finding on the merits by the tribunal |
Why did the response deadline matter?
Section 148A(b) requires a taxpayer to receive the minimum response opportunity specified by law before an order under Section 148A(d) is made. The ITAT discussed seven days as the statutory minimum. In this case, the notice was dated 25 March 2022 and set 31 March as the last day, but the officer acted two days before that date.
- 25 March 2022: Section 148A(b) show-cause notice issued.
- 26 March 2022: The taxpayer filed his reply.
- 29 March 2022: Section 148A(d) order passed without considering the reply.
- 30 March 2022: Section 148 notice issued to reopen the assessment.
- 31 March 2022: The response deadline stated in the notice would have expired.
The sequence meant that the officer both cut short the stated response period and failed to deal with a submission that was filed before the order. For the tribunal, that was not a minor technical defect: it denied the taxpayer the hearing opportunity built into the reopening procedure.
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Did the ITAT decide whether the Bitcoin source was explained?
No. The tribunal expressly resolved the appeal on jurisdiction and natural justice, so it did not decide whether ₹9.63 lakh was the true initial investment, whether the exchange records proved repeated recycling of sale proceeds, or whether the Section 69 addition was sustainable on the evidence.
The cumulative-turnover explanation is economically possible in an actively traded wallet: the same rupee can fund several purchase-and-sale cycles. But possibility is not proof. The Commissioner of Income Tax (Appeals) had noted that the bank statement submitted by the taxpayer was incomplete when compared with the exchange totals. The ITAT did not test that evidentiary issue because the defective Section 148A process ended the case first.
Accordingly, the ruling does not establish that every crypto trader may equate total purchases with turnover, nor that every tax addition based on exchange data is unlawful.
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What does “void ab initio” mean for this reassessment?
“Void ab initio” means the reassessment is treated as invalid from its inception because the jurisdictional step that enabled it was not legally effective. The Section 148A(d) order could not support the Section 148 notice, and the reassessment proceedings flowing from that notice therefore fell with it.
This is a procedural victory, not a merits certificate for the taxpayer’s accounting. The order does not say that the Bitcoin investment was sourced, that a loss definitely occurred, or that the department’s transaction figures were wrong.
Can cumulative crypto purchases be treated as fresh investment?
Not automatically. A tax analysis must distinguish the amount of new money introduced from the gross value of purchases recorded over multiple trading cycles, while also reconciling exchange data with bank movements and wallet activity.
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| Issue | Taxpayer’s position | Departmental concern |
|---|---|---|
| Fresh capital versus turnover | About ₹9.63 lakh was introduced initially; later purchases used sale proceeds. | Gross purchases of ₹88.55 lakh were treated as investments requiring explanation. |
| Exchange records versus bank reconciliation | Exchange wallet activity showed repeated buy-sell cycles. | The appellate record noted that the bank statement did not fully match the exchange totals. |
| Procedure versus merits | The notice process was defective and the reply was ignored. | The merits of the source-of-funds explanation were never adjudicated by the ITAT. |
A convincing reconciliation would normally map deposits, withdrawals, each trade, sale proceeds reused for later purchases, fees and the closing balance. The tribunal’s decision does not remove that evidentiary burden in a properly conducted proceeding.
What should a crypto taxpayer preserve after receiving a tax notice?
Anyone asked to explain historical digital-asset transactions should preserve a complete, time-ordered record before responding. The following documents can help separate recycled turnover from fresh funds:
- CSV or spreadsheet exports for every exchange account, including trade IDs, timestamps, quantities, prices and fees.
- Wallet addresses, transfer histories and records of deposits and withdrawals between wallets and exchanges.
- Bank statements showing the original funding, later withdrawals and transfers to or from exchanges.
- Evidence of the source of the initial capital, such as salary savings, asset-sale proceeds or other documented funds.
- A transaction-level reconciliation connecting each purchase to available cash or earlier sale proceeds.
- Copies of every notice, submission, acknowledgement, email and portal timestamp proving that a reply was filed before the deadline.
These records do not guarantee deletion of an addition. They make it possible to answer the actual source-of-funds question and to demonstrate whether a notice response was timely.
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Does this 2026 order settle tax treatment for later crypto years?
No. The transactions in the case relate to FY 2017-18 and assessment year 2018-19, before the later virtual-digital-asset tax regime discussed in subsequent reporting. The order should therefore be read as a ruling on the validity of this reopening procedure, not as a blanket statement about how all later cryptocurrency gains, losses or transfers must be taxed.
Frequently Asked Questions
What is a Section 148A(b) notice in an income-tax case?
It is a pre-reopening show-cause notice that gives a taxpayer an opportunity to explain information suggesting escaped income before the officer decides whether to issue a Section 148 notice. The taxpayer should check both the response period and the documents relied on.
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Is an ITAT bench order the same as a Supreme Court ruling?
No. This is an order of the Lucknow Bench of the Income Tax Appellate Tribunal in the named assessee’s appeal. It decides that proceeding and may be persuasive in similar cases, but it is not a nationwide Supreme Court declaration on every crypto-tax dispute.
What records best show that crypto money was recycled rather than newly invested?
A useful package links each exchange trade to deposits, withdrawals and wallet transfers, then reconciles those entries to bank statements. Include transaction IDs and timestamps so an examiner can follow sale proceeds into subsequent purchases without relying on a gross turnover figure.
What was the significance of the ₹3.34 lakh loss figure?
It was the loss the taxpayer disclosed in the reassessment return. The ITAT did not verify that calculation because it cancelled the reassessment on procedural grounds, so the figure is not a judicial finding that the trading activity produced a loss.
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