In a recent judgment, the Income Tax Appellate Tribunal ( ITAT ) in Mumbai ruled in favor of an assessee, Ashok Jasraj Jain, dismissing an appeal by the Revenue Department that questioned the legitimacy of loans the assessee received for a property purchase in the 2011-12 assessment year, observing “no reason to doubt the source of funds” the assessee had used as loans in bank statement.
The ITAT found no reason to doubt the source of funds the assessee had used, specifically a loan from M/s Sneha Ferromet Pvt. Ltd., a company connected to him.
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The case began from the assessee’s filing of his income tax return on September 28, 2011, in which he declared a total income of Rs. 35,00,611, accepted under Section 143(1) of the Income Tax Act 1961 (ITA). A subsequent search and seizure operation on October 12, 2011, on Pipavav Defence and Offshore Engineering Co. brought the assessee’s finances under scrutiny, as he was allegedly linked to the company. This led to a reassessment under Section 143(3) of ITA read with Section 153A of the tax legislature , increasing the assessee’s taxable income to Rs. 49,06,660.
In March 2018, the Income Tax Department’s Investigation Wing informed the assessing officer that the assessee had purchased property for Rs. 3.44 crore in 2010-11, despite reporting an income of Rs. 29,15,842 in his return. The Revenue raised concerns over the loan of Rs. 2.65 crore provided by Sneha Ferromet Pvt. Ltd., questioning its financial capacity given its net worth of Rs. 24,41,033 and gross receipts of Rs. 21 lakh. The Department argued that the loan’s source appeared “suspicious,” prompting the reopening of the assessee’s assessment under Section 148 of the tax statute.
In response, the assessee filed objections, arguing that his funds and property transactions had been adequately explained and scrutinized in the original assessment. He provided detailed documents, including loan confirmations, bank statements, purchase agreements, and financial statements, to prove the loan’s legitimacy and the source of funds.
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The assessee contended that the reassessment was baseless, amounting to a “change of opinion,” which is impermissible under tax law. However, the assessing officer dismissed his objections, citing legal precedents supporting the reassessment based on “credible information.”
During the reassessment, the assessee reiterated that the loan of Rs. 1,96,50,000 received from Sneha Ferromet Pvt. Ltd. was genuine, presenting confirmations, bank statements, and tax returns as evidence. Despite this, the assessing officer concluded that the lending-company lacked sufficient capital to make the loan and thus added Rs. 3.44 crore to the assessee’s taxable income, along with a penalty under Section 271(1)(c) of the ITA for alleged concealment of income.
Aggrieved, the assessee appealed the order, and the Commissioner of Income Tax (Appeals) [CIT (A)] ruled in his favor, quashing the addition on grounds that the lender’s identity, transaction genuineness, and financial capacity were adequately documented. The CIT (A) noted that the assessee had provided all requisite documents and that the loan transactions were conducted via banking channels, recorded in the assessee’s accounts and financial statements. CIT (A) also observed that creditworthiness should consider the lender’s balance sheet, not just income, as evidence of capacity.
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On further appeal by the Revenue, the ITAT bench of Judicial Member Amit Shukla and Accountant Member Renu Jauhari, examined the case thoroughly.
The bench noted that the initial reopening relied solely on data from the Investigation Wing, based on property value and income comparisons without direct inquiries into Sneha Ferromet’s financial operations. The tribunal highlighted that no further investigation into the company’s records was conducted to substantiate the claims. Additionally, the ITAT stressed that the addition was based on the current market value of Rs. 3.44 crore rather than the assessee’s actual investment of Rs. 2.79 crore. The tribunal pointed out that the major portion of the investment was made in the prior year, which the assessing officer overlooked.
The ITAT observed that the assessee had sufficiently discharged his burden of proof, presenting documents that established the transaction’s genuineness and the lender’s financial capacity. The tribunal found no tangible evidence from the Revenue to dispute the assessee’s claims, ruling that reliance on assumptions was inadequate to justify the addition.
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Thus, the tribunal quashed the assessment, dismissing the Revenue’s appeal and allowing the assessee’s cross-objection, asserting that the reasons for reopening the case were based on “certain presumptions” without concrete material evidence.
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