A person invested Rs 10 lakh, which the tax department treated as unexplained; first cited loan, then bank withdrawal as source, ITAT Nagpur removes surcharge and penalty of Rs 2.11 lakh

Keeping track of your investments and their sources is important. Undisclosed income and investments can invite scrutiny from the Tax Department.In one such case, a man invested some money in a wealth management company and faced an appeal from the tax department for unexplained sources. At the appeal stage he cited one source and then changed his interpretation.The Income Tax Appellate Tribunal (ITAT), Nagpur bench, removed the addition of Rs 10 lakh and penalty after accepting his explanation.

What is the case about

The controversy erupted after the income tax department received information about an investment of Rs 11.25 lakh made by a man with a wealth management company.The assessing officer accepted that Rs 1.25 lakh was paid by cheque, but it was asked where the remaining Rs 10 lakh came from.Read Also | A senior citizen invested Rs 3 crore in tax-free bonds, but mistakenly paid tax on Rs 25.42 lakh in interest; why ITAT Delhi ordered refund of Rs 9.91 lakhThis man first said that he had borrowed money of Rs 10 lakh for immovable property. The assessing officer was not satisfied with the explanation, as the information provided was considered insufficient to establish the nature and source of the loan.So the official treated Rs 10 lakh as unexplained investment. The man challenged the addition before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi.However, during those proceedings, he gave a different explanation about the origin of the money. He said that he had withdrawn Rs 8 lakh from one bank account and Rs 3.75 lakh from another, and said that the cash was used to fund the money.The first appellate authority rejected this explanation and agreed with the addition. The suspect then went to court, revealing details of his bank accounts to support his claim.He also challenged the separate penalty of Rs 2,11,710 imposed under Section 271(1)(c) for alleged concealment of income. Both applications were considered by the panel.Read Also | He left his BMW locked on the highway after it was punctured in the middle of the night, and the next morning it was found burnt; the insurer has rejected the claim, but the brokers commission is ordering Rs 70 lakh plus 7% interest.

Why did this man get relief from ITAT?

Before considering the tax dispute, the court had to deal with the delay in the filing of appeals. The appeal for the addition of Rs 10 lakh was delayed by 606 days, while the appeal against the penalty of Rs 2.11 lakh was delayed by 602 days.The man filed a motion to condone the delay supported by affidavits. After hearing both sides, the court found that the delay was “unintentional or willful” and excused it, allowing both appeals to proceed. The order does not specify the circumstances that caused the delay.The court examined the bank records to find out whether the man had enough money to explain the investment of Rs 10 lakh.Its order records a withdrawal of Rs 8 lakh from one bank, and a further withdrawal of Rs 3.75 lakh from another bank. It also notes that the balance in the original account stood at Rs 9,70,491 on April 1, 2012.These records were important because the question was whether the taxpayer could explain the origin of the invested money. The court found that the withdrawal, and the balance shown in the original bank account, supported his claim that sufficient funds were available prior to the investment.Read Also | His son died, and LIC denied his father Rs 5 lakh for an alleged undisclosed heart condition; Consumer Commission does not find reliable medical evidence, orders Rs 5 lakh plus 7% interest and Rs 10,000The court did not ignore the change in the man’s description. He said the money was borrowed but later he said it came from his bank.However, it found merit in the revised definition after scrutinizing the bank statements and the fact that the accounts were disclosed.The tribunal concluded that the amount could be defined by reference to the taxpayer’s exemption and ordered that it be set aside.The penalty appeal was decided on the basis of the removal of the basic supplement. The assessing officer imposed a penalty of Rs 2,11,710 under Section 271(1)(c) in connection with the alleged concealment of Rs 10 lakh. Since the additions were removed, the court also canceled the sentence.Both appeals were upheld.Read Also | The builder promised to pay stamp duty on the property worth Rs 1.6 million, which he later called a typo; MahaRERA directs him to pay the costs and interest of the delayed purchase to the buyer

Understanding the decision

This decision has two important aspects.First, to justify the delay of 606 days in filing the complaint.“The ITAT allowed the delay, realizing that it was unintentional and unintentional. However, the exact reasons for the delay are not set out in the judgment; the order records only that a petition for pardon, supported by an affidavit, has been filed. The ITAT relied, inter alia, on Collection, Acquisition of Land, Anantnag v. Mr. Katiji, where the delay was only four days, and Inder Singh v. State of Madhya Pradesh, where the delay was 1,537 days,” Kuldip Kumar, Partner at Mainstay Tax Advisors LLP.In a recent case, the Supreme Court upheld the decision of the Supreme Court to condone the delay, considering the unusual facts and the need for the underlying dispute to be decided on merits. An amnesty of Rs 50,000 was paid to the complainant. At the same time, the Supreme Court recognized that all litigants, including the State, are expected to act with great determination and speed.According to Kumar, the second factor relates to the change in the definition of source of investment in the CIT(A) section.Read Also | Taxpayer declared Rs 1.79 lakh in ITR, incurred additional income of Rs 11.22 crore in capital deposits, unsecured loans; ITAT gives him an opportunity to confirm his status of planting 500 trees“The ITAT has accepted the revised explanation because it is supported by documentary evidence, particularly bank statements of duly disclosed bank accounts, and the time and amount of withdrawals. In my view, this factor is based on fact rather than a general plea,” Kumar told TOI.Previous withdrawals from a bank account do not automatically establish the source of subsequent investments. The connection between withdrawals and subsequent investments, including timing, availability of funds and lack of evidence of their use elsewhere, will need to be assessed.“There are also judicial decisions where the same explanations based on previous withdrawals have not been accepted,” he adds.Kuldip Kumar says that the key to the judgment is that where the taxpayer has a factual and otherwise proven explanation that was not sufficiently presented at the examination stage, it may be useful to pursue the explanation at the appeal stage.“Appellate authorities have sufficient power, subject to applicable legal and evidentiary requirements, to consider a revised explanation and grant relief where the facts and supporting evidence warrant it. Delay in filing an appeal may be excused when sufficient cause is found and the circumstances warrant a decision on merit,” he explained.Read Also | He moved to Canada and rented his house in Punjab for Rs 20,000 a month, then wanted it out for use during a visit to India; Punjab & Haryana HC rules against the landlord, allowing the tenant to stay