2025 (6) TMI 1453 - AT - Income Tax

Reopening of assessment u/s 147 - addition towards source for the purchase of property as unexplained investment - HELD THAT - We are of the considered view that the assessee is able to explain the source of investment in purchase of property to the tune of Rs. 42 lakhs out of the known source of income including loan borrowed from various persons. To support the contention of the assessee the assessee has filed relevant bank statements and also confirmations from the parties. All these evidences were filed before the AO and the CIT(A) but both the authorities have ignored the evidences filed by the assessee and confirmed the additions towards investment in purchase of property. Therefore we are of the considered view that AO and the CIT(A) has erred in making addition towards investment in purchase of property. Thus we set-aside the order of the CIT(A) and direct the AO to delete the addition made towards unexplained investment in purchase of property. The grounds of appeal of the assessee are accordingly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the reopening of assessment under section 147 of the Income Tax Act, 1961 was justified in the facts and circumstances of the case;

(b) Whether the Assessing Officer was justified in making an addition of Rs. 42 lakhs towards unexplained investment in the purchase of immovable property on the ground that the assessee failed to file return of income and failed to explain the source of funds;

(c) Whether the assessee had adequately explained the source of investment for the purchase of property by furnishing relevant evidence including bank statements and loan confirmations;

(d) Whether the best judgment assessment under section 144 read with section 147 was validly passed by the Assessing Officer in absence of compliance by the assessee;

(e) Whether the order of the CIT(A) sustaining the addition was justified in light of the evidence filed by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Justification for reopening assessment under section 147

The reopening of assessment under section 147 requires the Assessing Officer to have "reasons to believe" that income chargeable to tax has escaped assessment. In this case, the reopening was premised on information regarding purchase of immovable property for Rs. 42 lakhs during the financial year 2011-12, and the absence of a return of income filed by the assessee for the relevant assessment year 2012-13.

The Court noted that the Assessing Officer issued notice under section 148 and subsequently under section 142(1), but claimed non-compliance by the assessee. However, the assessee contended and produced evidence that the return of income was filed both before the due date under section 139 and also in response to the section 148 notice. The Tribunal found that the Assessing Officer's claim of non-filing was factually incorrect, as the assessee had indeed filed returns and responses timely.

Thus, the reopening was based on incorrect factual premise regarding non-filing, rendering the reopening unjustified on that ground.

Issue (b) & (c): Explanation of source of investment and validity of addition of Rs. 42 lakhs

The Assessing Officer made an addition of Rs. 42 lakhs as unexplained investment on the ground that the assessee failed to explain the source of funds for purchase of property. The assessee disputed this, submitting detailed bank statements and loan confirmations evidencing that the entire consideration was paid through banking channels, and the funds were derived from loans taken from three parties: Malani Trading Company, Ganesh Chemicals, and Srikishan Narayandas Malani.

The payments to the seller were made by cheque on various dates, and the source of each payment was traced to corresponding loan receipts from the aforementioned parties, also evidenced by bank statements and confirmations. The Tribunal observed that the evidence was filed before both the Assessing Officer and the CIT(A), but was ignored by both authorities.

The Tribunal applied the principle that if the source of investment is satisfactorily explained by the assessee through credible documentary evidence, no addition can be made. The Tribunal held that the assessee had adequately explained the source of Rs. 42 lakhs through loans received and proper banking transactions. This explanation was sufficient to discharge the onus of proving the source of investment.

Issue (d): Validity of best judgment assessment under section 144 read with section 147

The Assessing Officer completed the assessment under section 144 read with section 147 on the basis of non-filing of return and non-compliance with notices. However, the Tribunal found that the assessee had complied by filing return and replies with evidence. Therefore, the basis for passing best judgment assessment was factually incorrect and legally unsustainable.

Issue (e): Legitimacy of CIT(A) order sustaining addition

The CIT(A) rejected the assessee's explanation and set aside the issue for reassessment under section 251(1)(a), but effectively sustained the addition by not deleting it. The Tribunal found that the CIT(A) failed to appreciate the evidence filed by the assessee and erred in sustaining the addition despite the assessee's credible explanation and documentary proof.

The Tribunal concluded that both the Assessing Officer and CIT(A) erred in ignoring the evidence and making/confirming the addition, and therefore set aside the CIT(A) order and directed deletion of the addition.

3. SIGNIFICANT HOLDINGS

"The addition made by the Assessing Officer on the ground that assessee has not filed any evidence is totally contrary to facts available on record and cannot be accepted."

"It is undisputedly clear that the assessee has received amount from three parties by cheque or bank transfer and the same has been paid to the seller of the property for purchase of property."

"We are of the considered view that the assessee is able to explain the source of investment in purchase of property to the tune of Rs. 42 lakhs out of the known source of income including loan borrowed from various persons."

"The Assessing Officer and the learned CIT(A) has erred in making addition of Rs. 42 lakhs towards investment in purchase of property."

Core principles established include:

• An addition for unexplained investment cannot be sustained if the assessee satisfactorily explains the source of funds with credible documentary evidence including bank statements and loan confirmations.
• Best judgment assessment under section 144 read with section 147 cannot be passed on the erroneous ground of non-filing when the assessee has complied with filing requirements and submitted evidence.
• The reopening of assessment must be based on correct and verifiable reasons; mere non-filing when returns are in fact filed does not justify reopening.
• The appellate authority must consider all evidences filed by the assessee and cannot ignore credible explanations without valid reasons.

Final determinations:

• The reopening of assessment was unjustified on the ground of non-filing.
• The addition of Rs. 42 lakhs as unexplained investment was unsustainable as the assessee explained the source through loans and banking transactions.
• The best judgment assessment under section 144 read with section 147 was invalid due to erroneous factual basis.
• The CIT(A) erred in sustaining the addition and ignoring evidence.
• The appeal of the assessee was allowed with directions to delete the addition of Rs. 42 lakhs.