“Borrowed Satisfaction” in Section 148 Reopening: How RMS-Flagged Cases Are Being Quashed by Courts (2024-25 Update)

The reassessment provisions under the Income Tax Act have long been a battleground between taxpayers and revenue authorities. At the heart of recent litigation lies a critical question: can an Assessing Officer mechanically act upon system-generated alerts from the Risk Management Strategy or information from Investigation Wings, or must they independently apply their mind to form a reason to believe that income has escaped assessment? The doctrine of “borrowed satisfaction” has emerged as a powerful judicial tool that taxpayers are increasingly wielding to challenge reassessment proceedings initiated under Section 148 of the Income Tax Act. Recent decisions from 2023 through 2025 demonstrate that courts are taking a strict view against revenue authorities who fail to independently evaluate information before reopening assessments.

The Legal Framework: Section 148 and the Finance Act 2021 Amendments

The power to reopen assessments finds its source in Section 148 of the Income Tax Act, 1961, which authorizes the Assessing Officer to issue notices when they have reason to believe that income chargeable to tax has escaped assessment. However, the Finance Act of 2021 brought about transformative changes to this framework, effective from April 1, 2021. These amendments introduced Section 148A, which mandates a specific procedural safeguard before any notice under Section 148 can be issued. Under Section 148A, the Assessing Officer must conduct an inquiry if required, provide the assessee with an opportunity to be heard through a show cause notice, and obtain prior approval from specified authorities before proceeding.[1]

More significantly, the amended provisions introduced the concept of “information” as defined in Explanation 1 to Section 148. This explanation specifically includes information flagged in accordance with the Risk Management Strategy formulated by the Central Board of Direct Taxes from time to time. The RMS represents a data-driven approach where algorithms analyze vast amounts of financial data to identify high-risk taxpayers and potential instances of tax evasion. While this technological advancement promised greater efficiency in tax administration, it has simultaneously raised questions about the extent to which human judgment can be replaced by algorithmic determinations.

The Critical Distinction: Information versus Reason to Believe

The statutory framework creates two distinct requirements that must not be conflated. First, there must be “information” that suggests income has escaped assessment. This information can indeed be system-generated, received from Investigation Wings, or obtained from various other sources. Second, and more importantly, the Assessing Officer must form a “reason to believe” based on that information. This second requirement is inherently subjective and demands conscious application of mind by the officer concerned. The mere existence of information does not automatically translate into a valid reason to believe. As courts have repeatedly emphasized, the formation of belief requires the officer to examine the information, assess its relevance and credibility, establish a nexus between the information and the alleged escaped income, and independently conclude that there are reasonable grounds to suspect income escapement.

Understanding “Borrowed Satisfaction”: The Core Principle

The doctrine of “borrowed satisfaction” arises when an Assessing Officer initiates reassessment proceedings not based on their own independent assessment of the facts, but by mechanically adopting conclusions drawn by another authority or system. This concept finds its roots in administrative law principles that demand that statutory powers must be exercised by the authority vested with them, not by proxy or delegation. When the Income Tax Act confers power on the Assessing Officer to form a reason to believe, it is that specific officer who must personally be satisfied about the escapement of income. They cannot simply borrow the satisfaction of the Investigation Wing, the RMS algorithm, or any other source.

The term “borrowed satisfaction” was judicially crystallized through various High Court decisions, but its most authoritative exposition came in the landmark case of Principal Commissioner of Income Tax v. Meenakshi Overseas Pvt. Ltd.[2] In this case, the Delhi High Court examined a situation where the Assessing Officer had reopened assessment based entirely on a report from the Investigation Wing alleging that the assessee was a beneficiary of accommodation entries. The court observed that the reasons recorded by the Assessing Officer contained not the reasons but merely conclusions, one after the other. There was no independent application of mind to the tangible material that should have formed the basis of the reason to believe. The conclusions were simply a reproduction of those found in the investigation report. The court categorically held this to be a case of borrowed satisfaction, and the reopening was consequently quashed.

Landmark Judicial Pronouncements: The 2023-2025 Period

The Gandhibag Sahakari Bank Precedent

One of the most significant developments came from the Bombay High Court’s decision in Gandhibag Sahakari Bank Ltd. v. Deputy Commissioner of Income Tax, decided in September 2023.[3] In this case, the bank challenged a reopening notice issued under Section 148 for the assessment year 2017–18. The Assessing Officer had relied entirely on information available on the Insight Portal, which is a technology-based platform used by the Income Tax Department to flag suspicious transactions. The High Court held that, in the absence of any independent verification of the information available on the Insight Portal, initiation of reassessment under Section 148 amounted to borrowed satisfaction, as the Assessing Officer had proceeded mechanically without forming an independent reason to believe that income had escaped assessment. The Court emphasized that algorithmic flags or portal alerts, no matter how sophisticated, cannot substitute the statutory requirement of the Assessing Officer’s personal satisfaction. The reassessment was consequently quashed.

What made this decision particularly significant was that the Revenue filed a Special Leave Petition before the Supreme Court of India challenging the High Court’s judgment. On September 3, 2024, the Supreme Court dismissed the Special Leave Petition, thereby affirming the Bombay High Court’s position. This dismissal gave the Gandhibag Sahakari Bank principle the imprimatur of the highest court in the land, making it binding precedent across India. The message was clear: Insight Portal alerts or RMS flags cannot be the sole basis for reopening assessments; independent verification and application of mind by the Assessing Officer remains mandatory.

The Investigation Wing Cases: Meenakshi Overseas and RMG Polyvinyl

The Delhi High Court has been particularly active in scrutinizing cases where Assessing Officers have relied on Investigation Wing reports without conducting independent analysis. In Principal Commissioner of Income Tax v. RMG Polyvinyl (I) Ltd.,[4] the court dealt with a situation involving alleged bogus accommodation entries. The Investigation Wing had provided information about certain entities allegedly providing such entries, and the Assessing Officer had simply reproduced this information in the reasons recorded for reopening. The High Court found that the Assessing Officer had not undertaken any further inquiry to establish how this information related specifically to the assessee’s income. There was no examination of whether the alleged transactions actually occurred, no verification of the source documents, and no attempt to establish the quantum of alleged unaccounted income. The court held that information from the Investigation Wing cannot be treated as tangible material per se without further inquiry being undertaken by the Assessing Officer.

Similarly, in the Meenakshi Overseas case cited earlier, the Delhi High Court elaborated on what constitutes proper application of mind. The court noted that the Assessing Officer must demonstrate a crucial link between the tangible material received and the formation of belief regarding income escapement. Simply stating that information has been received from the Investigation Wing is insufficient. The reasons recorded must show that the officer has processed this information, analyzed its implications for the specific assessee, and arrived at an independent conclusion that income has likely escaped assessment. Without this demonstration of mental engagement with the material, the satisfaction remains borrowed rather than independently formed.

The RMS Paradox: Procedural Efficiency versus Judicial Scrutiny

The Central Board of Direct Taxes has consistently emphasized the importance of the Risk Management Strategy in making case selection more objective and efficient. A significant development came through the CBDT’s Office Memorandum dated February 27, 2025, which clarified that information obtained from search and survey actions is exempted from regular RMS execution and need not be uploaded on CRIU or VRU functionalities. Instead, such information must be directly forwarded to the Jurisdictional Assessing Officer through a dissemination note. This memorandum was intended to streamline procedures and reduce delays in acting upon survey and search findings.

However, this administrative convenience has created what might be termed the “RMS Paradox.” On one hand, the CBDT’s guidelines suggest that RMS-flagged cases or search/survey findings constitute valid information that can trigger reassessment without the need for elaborate procedural checks. On the other hand, courts are uniformly holding that even RMS-generated information requires independent verification and conscious evaluation by the Assessing Officer. The administrative exemption from RMS protocols does not translate into judicial acceptance of mechanical reopening. If anything, courts appear to be applying even stricter scrutiny to such cases, demanding clear evidence that the Assessing Officer has personally examined the material and formed their own belief.

The GKN Driveshafts Procedure and Its Evolution

The foundation for procedural safeguards in reassessment proceedings was laid by the Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer.[5] This 2003 judgment established that when a notice under Section 148 is issued, the proper course for the assessee is to file a return and, if desired, seek reasons for the notice. The Assessing Officer is bound to furnish these reasons within a reasonable time. Upon receipt of the reasons, the assessee is entitled to file objections, and the Assessing Officer must dispose of these objections by passing a speaking order before proceeding with the assessment. This procedure ensures that reassessment under Section 148 does not become an arbitrary exercise of power or an act based on borrowed satisfaction, but remains subject to reasoned decision-making and judicial review.

The Finance Act of 2021, through the insertion of Section 148 A, codified and expanded upon the GKN Driveshafts procedure, reinforcing the requirement of a fair opportunity to challenge the basis of reopening. Crucially, when an Assessing Officer issues a notice under Section 148 based on borrowed satisfaction merely adopting information from RMS alerts or Investigation Wing reports without independent evaluation—they violate both the substantive requirement of forming a personal reason to believe and the procedural fairness that the GKN Driveshafts framework seeks to protect. An assessee cannot meaningfully object to reasons that the Assessing Officer has not independently examined.

Practical Implications for Taxpayers and Revenue Authorities

The doctrine of borrowed satisfaction has emerged as the most effective legal challenge to reopening notices in recent years. Taxpayers who receive notices under Section 148 should carefully scrutinize the reasons recorded to identify telltale signs of borrowed satisfaction. These red flags include reasons that merely state information has been received from a specified source without further analysis; absence of any discussion on how the information relates to the specific assessee; reproduction of Investigation Wing reports or RMS alerts verbatim without independent commentary; failure to mention what tangible material was examined by the Assessing Officer personally; and lack of any nexus established between the information and the quantum or nature of alleged escaped income.

When such indicators are present, taxpayers should file objections under Section 148 A specifically raising the ground of borrowed satisfaction. These objections should point out the absence of independent application of mind, cite the Gandhibag Sahakari Bank and Meenakshi Overseas precedents, and demand that the Assessing Officer demonstrate what independent inquiry or verification they conducted. If the objections are rejected or not properly addressed, the reassessment order itself becomes vulnerable to challenge before appellate authorities on the ground that it is based on invalid assumption of jurisdiction.

From the Revenue’s perspective, these judicial developments necessitate a fundamental shift in how reopening proceedings are initiated. Assessing Officers must understand that RMS alerts or Investigation Wing reports are merely starting points for inquiry, not substitutes for it. Before issuing a notice under Section 148, the officer should conduct independent verification, document the steps taken in this verification process, establish a clear nexus between the information and the alleged escaped income, and record reasons that demonstrate their own thought process rather than simply reproducing source material. The reasons should explicitly state what tangible material was examined, what independent conclusions were drawn, and why there is prima facie reason to believe income has escaped assessment. Only such reasoned decision-making will withstand judicial scrutiny.

The Way Forward: Balancing Technology and Human Judgment

The ongoing tension between the Revenue’s use of technology-driven case selection and judicial insistence on human judgment reflects a broader challenge in modern tax administration. The RMS and similar algorithmic tools are undoubtedly valuable in processing vast amounts of data and identifying patterns that might escape human notice. However, tax assessment ultimately involves questions of fact and law that require contextual understanding, evaluation of credibility, and application of legal principles to specific circumstances. These are tasks that algorithms cannot perform, at least not yet.

The solution lies not in abandoning technological tools but in properly integrating them into a framework that respects both efficiency and fairness. The RMS should be viewed as an investigative aid that alerts officers to potential issues requiring examination, not as a decision-making substitute that obviates the need for human judgment. Once an alert is generated, the Assessing Officer must treat it as a prompt to conduct targeted inquiry into the specific circumstances of the assessee. The results of this inquiry, not the algorithmic alert itself, should form the basis for any decision to reopen assessment. Such an approach would satisfy both the administrative goal of efficient case selection and the judicial requirement of independent satisfaction.

Conclusion

The doctrine of borrowed satisfaction has firmly emerged as a constitutional and statutory safeguard against arbitrary reassessment proceedings under Section 148 of the Income Tax Act. Judicial developments between 2023 and 2025, culminating in the Supreme Court’s affirmation of the Gandhibag Sahakari Bank ruling, make it clear that reassessment notices based solely on RMS alerts, Insight Portal flags, or Investigation Wing reports cannot survive judicial scrutiny unless accompanied by independent application of mind by the Assessing Officer. The requirement of “reason to believe” is a substantive jurisdictional condition, not a procedural formality, and demands conscious evaluation of information, establishment of a live nexus with alleged escaped income, and personal satisfaction of the statutory authority. As tax administration increasingly relies on algorithmic tools and data-driven risk assessment mechanisms, courts have reaffirmed that technology may inform the reopening process but cannot replace the reasoned judgment that the law mandates. Reassessment, with its serious civil consequences, must therefore rest on evaluated evidence and independent satisfaction, ensuring that efficiency in tax administration does not come at the cost of legality, fairness, and due process.

References

[1] Section 148A of Income-tax Act – Inquiry Before Reassessment, Taxmann. Available at: https://www.taxmann.com/post/blog/section-148a-of-income-tax-act

[2] Principal Commissioner of Income Tax v. Meenakshi Overseas Pvt. Ltd., (2017) 395 ITR 677 (Delhi High Court). Available at: https://www.latestlaws.com/judgements/delhi-hc/2017/may/2017-latest-caselaw-2680-del

[3] Gandhibag Sahakari Bank Ltd. v. Deputy Commissioner of Income Tax, Writ Petition No. 3177/2022, Bombay High Court, decided on September 25, 2023. Available at: https://taxguru.in/income-tax/reopening-assessment-based-change-opinion-unsustainable.html

[4] Principal Commissioner of Income Tax v. RMG Polyvinyl (I) Ltd., (2017) 396 ITR 5 (Delhi High Court). Available at: https://www.taxscan.in/information-received-investigation-wing-dept-not-tangible-material-purpose-re-assessment-delhi-hc/9184/

[5] GKN Driveshafts (India) Ltd. v. Income Tax Officer, (2003) 259 ITR 19 (Supreme Court of India). Available at: https://indiankanoon.org/doc/1801435/

[6] “Borrowed Satisfaction” for “Reason to believe” for reopening U/s 148 of I.Tax Act 1961, TaxGuru. Available at: https://taxguru.in/income-tax/borrowed-satisfaction-reason-believe-reopening.html

[7] Decoding Tax Dynamics: Unravelling Legal Complexities in Income Tax Reassessment Notices under Section 148, IT Act Post-Finance Act, 2021, SCC Times. Available at: https://www.scconline.com/blog/post/2024/05/15/decoding-tax-dynamics-unravelling-legal-complexities-in-income-tax-reassessment-notices-under-section-148-it-act-post-finance-act-2021/

[8] Failure To Dispose Of Objections – Whether Renders Reassessment Void Or Defective And Curable?, BCAJ. Available at: https://bcajonline.org/journal/failure-to-dispose-of-objections-whether-renders-reassessment-void-or-defective-and-curable/

[9] AO Fails To Demonstrate Live Link Between Tangible Material & Reason To Believe Escaped Income: Delhi ITAT Quashes Reopening, LiveLaw. Available at: https://www.livelaw.in/tax-cases/delhi-itat-reassessment-sec-143-147-income-tax-act-252487