2025 (7) TMI 875 - AT - Income Tax

Unexplained investments - loans received by Husband of the appellant was unexplained - case of the assessee was selected for limited scrutiny assessment on the point as to whether the investment and income relating to the properties were duly disclosed by the assessee? - HELD THAT - The entire investment was made by assessee s husband. It was also submitted that the details of entire investment were duly reflected in the books of accounts and duly furnished along with return of income. Even the assessee also furnished the source of investment. Under these circumstances the investigation regarding the source of investment in the properties by her husband could have been done while making the assessment proceedings relating to his income. Even though the AO in his remand report was suspicious about the credit-worthiness of the creditors of Husband however he did not make any inquiries to verify the credit-worthiness of his creditors. Assessee was having sufficient capital with her. Nonetheless the assessee has duly demonstrated before both the lower authorities that the investment in the properties in question was made by her husband. The source of investment of her husband was also furnished. The burden of prove on the part of the assessee was fully discharged. Credit-worthiness of her husband that was to be examined in the assessment proceedings relating to her husband. Moreover no inquiry from the creditors was made even during the assessment proceedings or in the remand proceedings by the AO in the case of the assessee and the AO himself noted that he was not going into this aspect as it relates to the assessment of her husband. Appeal of the assessee stands allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the Learned Commissioner of Income Tax (Appeals) erred in remanding the matter to the Assessing Officer without informing the appellant and relying on the remand report without giving proper opportunity to the appellant to respond.
• Whether the Learned Commissioner of Income Tax (Appeals) was justified in concluding that the loans taken by the appellant's husband were not proved, thereby rendering the appellant's investment unexplained under section 69A of the Income Tax Act, 1961.
• Whether the addition of Rs. 2,18,19,600/- made under section 69A of the Act on account of unexplained investment was justified.
• Whether the appellant was given a proper opportunity to submit replies and rebut the remand report.
• Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) erred in disregarding the submissions and evidences filed during the assessment proceedings and relying solely on the remand report.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Procedural fairness regarding remand and opportunity to the appellant

Relevant legal framework and precedents: Principles of natural justice and fair hearing require that the appellant be informed of any remand and be given adequate opportunity to respond to reports relied upon by the appellate authority. The Income Tax Act mandates that the appellant must be given a reasonable chance to rebut adverse findings.

Court's interpretation and reasoning: The appellant contended that the CIT(A) erred in remanding the matter to the AO without informing her and subsequently relying on the remand report without providing an opportunity to respond. The Tribunal noted that the appellant raised grounds alleging lack of proper opportunity to rebut the remand report and that the CIT(A) relied merely on the remand report to confirm additions.

Key evidence and findings: The record indicated that the CIT(A) called for a remand report from the AO, who expressed doubts about the credit-worthiness of creditors and the appellant's husband but did not conduct any inquiry to verify these doubts. The appellant was not given an opportunity to specifically rebut the remand report.

Application of law to facts: The Tribunal observed that the appellant was not afforded adequate opportunity to address the remand report's findings, which is contrary to the principles of natural justice.

Treatment of competing arguments: The Revenue did not produce any evidence that the appellant was given an opportunity to rebut the remand report. The Tribunal found the appellant's submissions credible and consistent with procedural fairness requirements.

Conclusions: The Tribunal found merit in the appellant's contention that the CIT(A) erred in relying on the remand report without giving proper opportunity to the appellant to respond.

Issue 2: Whether loans taken by the appellant's husband were proved and the investment explained

Relevant legal framework and precedents: Under section 69A of the Income Tax Act, unexplained investments can be added to income if the assessee fails to prove the source of such investments. However, if the investment is made by a third party (here, the husband), the source of investment of that third party must be examined in the relevant assessment proceedings of that person.

Court's interpretation and reasoning: The appellant asserted that the investment in the two agricultural lands was made by her husband, who purchased the properties in joint names for convenience. The investment was reflected in the husband's income tax returns and books of accounts. The appellant also furnished the source of the husband's investment, including loans from six parties totaling Rs. 1,68,50,000/-, and a loan of Rs. 12.50 lakhs from herself to her husband.

The AO and CIT(A) doubted the credit-worthiness of the creditors and the appellant to advance such loans but did not conduct any inquiry to verify these doubts. The AO himself noted that since the case was not against the husband, his office was not investigating the root of the matter.

Key evidence and findings: The appellant's husband's ITR and books of accounts showed the investments and loans. The appellant demonstrated her capacity to advance the loan of Rs. 12.50 lakhs by showing her income from bank interest, house property, and agriculture income. The AO's suspicion was unsupported by inquiry or evidence.

Application of law to facts: The Tribunal held that the source of the husband's investment should be examined in the husband's assessment proceedings and not in the appellant's case. The appellant discharged her burden of proof regarding her own investment and the source of funds advanced to her husband.

Treatment of competing arguments: The Revenue's reliance on suspicion without inquiry was rejected. The Tribunal emphasized the lack of investigation into the creditors' credit-worthiness and the appellant's financial capacity.

Conclusions: The Tribunal concluded that the appellant's investment was explained and that the loans taken by her husband were not to be doubted in her assessment. The addition under section 69A was unjustified.

Issue 3: Justification of addition under section 69A of the Act

Relevant legal framework and precedents: Section 69A permits addition of unexplained investments to income if the assessee fails to explain the source satisfactorily. However, when the investment is made by a third party, the source of that third party must be examined in their assessment.

Court's interpretation and reasoning: The AO's addition was based on the assumption that the loans and investments were unexplained. The CIT(A) confirmed the addition relying on the AO's remand report. The Tribunal found that the appellant had sufficiently explained the source of investment, and the AO's suspicions were not supported by inquiry or evidence.

Key evidence and findings: The appellant's income details, husband's ITR, and loan documents were on record. The AO's failure to verify creditors' credit-worthiness and the appellant's financial capacity rendered the addition unsustainable.

Application of law to facts: The Tribunal applied the principle that unexplained investment must be established with credible evidence. Mere suspicion without inquiry cannot justify addition under section 69A.

Treatment of competing arguments: The Tribunal rejected the Revenue's contention that the loans were unexplained due to lack of verification and inquiry.

Conclusions: The addition of Rs. 2,18,19,600/- under section 69A was deleted.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"It is quite evident from the above table that, none of the creditors who had the credit worthiness to advance such an amount. Nevertheless since the case in question is not that of Dipak Patel, this office is not getting into the root of the case."

This observation by the AO was pivotal in the Tribunal's reasoning that the AO did not conduct any substantive inquiry into the credit-worthiness of the creditors or the appellant's financial capacity, thereby undermining the basis for additions.

The Tribunal established the core principle that when investments are made by a third party (here, the husband), the source of investment of that third party must be examined in the assessment proceedings of that person and cannot be doubted in the assessee's case without proper inquiry.

Further, the Tribunal emphasized the necessity of affording the appellant a proper opportunity to rebut adverse findings, especially when the appellate authority relies on remand reports.

Accordingly, the Tribunal concluded that the appellant had discharged the burden of proof regarding the source of investment, and the additions under section 69A were not sustainable. The appeal was allowed, and the additions were deleted.