A Lucknow taxpayer who claimed to have invested only Rs 9.6 lakh in Bitcoin but reported a loss landed in an Rs 88.55 lakh tax dispute. Here’s why ITAT stepped in.
Bitcoin tax case: ITAT quashes Rs 88 lakh reassessment against Lucknow taxpayer (AI-generated image)
A taxpayer who said he invested only around Rs 9.6 lakh in Bitcoin trading and eventually incurred a loss found himself facing a massive tax addition of Rs 88.55 lakh.
But in a significant relief, the Income Tax Appellate Tribunal (ITAT), Lucknow Bench, has quashed the reassessment proceedings against him, not because it agreed with his crypto tax claims, but because it found that the tax department failed to follow due legal process.
The case (Surya Pratap Singh Chauhan vs Income Tax Officer, Ward-2(1), Lucknow) offers an important lesson for crypto investors: even if you made losses, unclear transaction records and documentation gaps can still invite tax scrutiny.
How did Rs 9 lakh become an Rs 88 lakh dispute?
The case relates to Assessment Year 2018-19, much before India introduced the current 30% tax regime for virtual digital assets (VDAs).
According to the ITAT order, the Income Tax Department received information through its Insight Portal suggesting that the taxpayer had undertaken substantial Bitcoin trading during FY 2017-18, with total transaction value pegged at Rs 83.78 lakh.
Based on this, reassessment proceedings were initiated.
During the proceedings, the taxpayer disclosed that he had incurred a capital loss of Rs 3.34 lakh from Bitcoin transactions. His revised details showed cost of acquisition at Rs 88.14 lakh and sale consideration at Rs 84.80 lakh.
The tax department then took the view that the taxpayer had made Bitcoin purchases worth Rs 88.55 lakh but failed to satisfactorily explain the source of funds for these transactions. As a result, the amount was treated as unexplained investment under Section 69 of the Income Tax Act.
The taxpayer, however, argued that the tax department had misunderstood the nature of crypto trading.
His claim was that the actual money invested was only around Rs 9.63 lakh, while the larger number reflected cumulative buy-sell transactions where the same funds were repeatedly recycled for trading.
Expert view: Can total turnover be treated as fresh investment?
Jignesh Shah, Partner Direct Tax, Bhuta Shah & Co LLP, said:
“The tax department has erred in treating the cumulative purchase value of the crypto transactions, which includes purchases made out of the subsequent sale proceeds, at par with initial investment in cryptocurrencies, which led to a conclusion that total purchase value is an unexplained investment. From a tax standpoint, the source of the initial investment in crypto transactions is important.”
He further explained that repeated trading activity can significantly inflate gross transaction values without reflecting actual fresh capital infusion.
What happened before ITAT?
Before reaching ITAT, the taxpayer challenged the addition before the Commissioner of Income Tax (Appeals).
He argued that crypto trading often involves multiple purchase and sale transactions using the same trading pool, which can make cumulative numbers appear much larger than actual investment.
He also told the appellate authority that the department ignored the sale side of the transactions and focused only on purchases.
However, the appellate authority was unconvinced.
It observed that the bank statements submitted did not fully match the volume of crypto transactions reflected in the records, raising doubts over whether the complete source trail had been disclosed.
The addition was therefore upheld.
Why ITAT quashed the case
The tribunal’s relief came on procedural grounds.
Here’s the timeline:
March 25, 2022: Notice issued under Section 148A(b), asking the taxpayer to explain why reassessment should not be initiated
March 31, 2022: Deadline given to respond
March 26, 2022: Taxpayer submitted his reply
March 29, 2022: Tax department passed its order stating no explanation had been furnished
ITAT found multiple problems here.
The tribunal noted that the taxpayer was not given the full statutory opportunity contemplated under law. More importantly, the department passed the order before the response deadline expired.
It also found that the taxpayer’s reply, which had already been filed, was not considered at all.
Because the reassessment process itself was flawed, the tribunal held the proceedings to be invalid.
Why this matters for crypto taxpayers
Though the taxpayer got relief, ITAT did not rule on whether the Rs 88 lakh addition itself was justified on merits.
That means the order should not be read as a broader ruling on crypto taxation methodology.
However, the case does spotlight an issue many crypto investors may overlook: gross turnover and actual capital invested can be very different numbers.
On this, Shah said: “Please note that the cumulative purchase turnover in crypto trading cannot be considered as fresh unexplained investment since the initial investment in crypto assets gets circulated on regular basis thereby making a loop of repetitive transactions in respect of purchases and sales during a given period.”
He added: “Section 68 / Section 69 of the Act places importance on unexplained credit instead of total trading volume.”
For investors, the practical lesson is straightforward: profit or loss alone does not end the tax conversation. Clear transaction trails, source of funds, and complete documentation remain critical.
Disclaimer: This article is based on the Income Tax Appellate Tribunal (ITAT), Lucknow Bench order. The ruling turned on procedural lapses in the reassessment process and should not be construed as a blanket precedent on the tax treatment of all cryptocurrency transactions. Tax outcomes can vary depending on facts, documentation, transaction trail, and applicable law. Readers should consult a qualified tax professional for case-specific advice.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
aniltikotekar4sme.com 