The Overlap Of Income Tax Act And Cryptocurrency: Reassessment Notice

Post the Finance Act, 2022, Cryptocurrency was made taxable under the ambit of Virtual Digital Assets at a rate of 30%, the Indian Judiciary has been proactive in recognizing such currencies, and assets under the ambit of different laws, and statutes. The Rajasthan High Court in its recent judgment in Parmesh Chand Yadav vs Income Tax Officer[1], (“The Case”) held that reassessment notice under the Income Tax Act, 1961 (“IT Act”) cannot be challenged if the Assessee has failed to submit cryptocurrency account transactions to the Income Tax Department. Before proceeding with an analysis of the case, let us look into the Reassessment and Reassessment Notice under the IT Act.

[1]D.B. Civil Writ Petition No. 7352/2022.

Reassessment Under Section 147

The process of evaluating a previously completed assessment and recalculating the assessee’s total income using previously unreported revenue is known as a ‘reassessment’. Nonetheless, the Assessee may not have filed a return for the Initial Assessment. The Assessment Officer (“AO”) cannot change a completed evaluation at their discretion. It is only feasible if the conditions outlined in Section 147 of the IT Act are met.

Section 147’s aim is to tax previously untaxed income. The two conditions under it are:

  • It happens when a person who is required to file a return fails to do so, resulting in no assessment.
  • It happens when a return is completed and assessed, but some income is not assesse

Reassessment Notice Under Section 148

Section 148 of the IT Act empowers the AO to assess any taxable income that has not been assessed per the IT Act. If AO suspects that any taxable income has not been assessed, he may evaluate or review it. The AO must have a foundation before beginning Section 147 proceedings. AO is responsible for providing justifications. Furthermore, no income-related Notices may be issued for issues that are the subject of an appeal, reference, or revision. 

Further under Section 148A, the Competent Authority must undertake an inquiry before beginning Section 148 proceedings after providing a chance for a hearing under Section 148A of the IT Act. Under Section 148A(d), the AO must make this determination based on the contents of the file, including the assessee’s response, and issue an order with the prior consent of the designated authority. Section 148A(b) requires that the information implies that income subject to tax has not been assessed. The investigation’s goal is to determine whether there is evidence that tax-exempt income was not properly assessed.

Now, that we know what Reassessment and Reassessment Noticeis under the IT Act, let’s delve into the details of the case.

The Case Facts

  • The petitioner/Assessee filed his income tax returns for the fiscal year 2018-19, and assessment proceedings were initiated.
  • The petitioner received a notice under Section 148A(b) of the Income Tax Act stating that evidence obtained indicated that income chargeable to tax for the assessment year 2018-19 had eluded assessment.
  • The Assessee made an investment of Rs.4,65,72,546 in the acquisition of cryptocurrency, however, the source was not verified and was not included in the ITR filed.

Proceedings of the Case

  • As per the petitioner, the sum specified in the notification is not the claimed investment amount, but rather the volume of transactions that happened during digital currency trading.
  • The AO was primarily dissatisfied with the response because it wrongly believed that the investment amount was based on transaction volume, which was not supported by relevant documented evidence.
  • The Income Tax Department stated that it launched 148A(b) proceedings against the petitioner after receiving reliable evidence that the petitioner had made a significant investment. Even though the petitioner had the option of disclosing the necessary electronic ledger records to the authorities, he chose not to do so. According to the petitioner, the amount shown in the transaction was not an investment, but rather a volume of cryptocurrency trading operations.
  • The multiple documents attached to the assessee’s response were insufficient to corroborate the facts stated in the absence of the ledger account relevant to the bitcoin transaction.
  • The court stated that an examination of the cryptocurrency ledger would essentially determine if the entire amount of Rs. 4,65,72,546 reflected the magnitude of the transaction or an investment made in the cryptocurrency without any withdrawals.


A division bench of the Rajasthan High Court comprised of Justice Manindra Mohan Shrivastava and Justice Shubha Mehta declared that the reassessment notice cannot be disputed if the Assessee fails to notify the income tax agency of cryptocurrency account activity. They went on to say that bank transactions alone are insufficient to validate bitcoin transactions. The Assessee was required to provide the department with the necessary ledger statement verifying that he had engaged in bitcoin trading in the way stated using the information provided.


Section 115BBH of the IT Act requires a trader who gains money by trading cryptocurrencies, Non-Fungible Tokens, or Virtual Digital Assets to pay a 30% tax. The Finance Act of 2022 contains section 115BBH. As a result, a crypto trader must report trading profits as capital gains on their tax return and pay a 30% tax on profits. However, because of the lack of a provision in previous years, a considerable number of traders did not register revenue from cryptocurrency trading and did not pay taxes. Section 148 of the IT Act empowers the AO to initiate an assessment or reassessment proceeding by issuing a notice. The AO may further impose a penalty equal to 50% of the tax due if:

  • the income assessed by AO exceeds the income recorded by the crypto trader on Form ITR.
  • the income assessed by AO exceeds the basic exemption limit and the crypto trader has not filed an ITR.

In addition to the tax payable, the AO may impose penalties on the taxpayer for noncompliance. The AO has the authority to apply the punishments listed below. The bitcoin dealer has a set amount of time to react to the income tax notice.

The trader may respond following the criteria set out in the tax notification such as via email or the income tax website’s e-proceedings tool. The nature of the transactions and the source of the funds must be described in responses to Section 148A notices. Finally, depending on how frequently transactions occur, the traders must report the income as either capital gains or business income. The trade must report the money as business income if there were significant trade activities. If the number of transactions was minimal, report the income as capital gains.