Loan Confirmations Alone cannot Prove Creditworthiness of Creditors: ITAT Mumbai

Baby Naz Shoukat Shaikh Vs National Faceless Assessment Centre (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai, partly allowed the assessee’s appeal concerning an addition of ₹75 lakh under Section 68 of the Income Tax Act, 1961 for Assessment Year 2013-14.

At the outset, the Tribunal condoned a delay of 447 days in filing the appeal. The assessee explained that the appellate order had been communicated to the email address of an ex-employee instead of the registered email address, resulting in lack of knowledge of the order. The Tribunal accepted the explanation as a reasonable cause and admitted the appeal.

The assessee had originally filed a return declaring income of ₹5,86,640. The case was selected for scrutiny to examine investments made in immovable properties. According to the Assessing Officer (AO), despite repeated notices seeking details and documentary evidence, the assessee failed to respond. Consequently, the AO completed the assessment under Section 144 on a best judgment basis. The AO found that the assessee had purchased two immovable properties and, since the source of investment was not explained, added ₹1.10 crore as unexplained investment under Section 69. An additional amount of ₹15,14,798 was added as unexplained cash credit under Section 68.

Before the first appellate authority, the assessee furnished additional evidence, which was admitted under Rule 46A. After examining the material, the appellate authority deleted the addition of ₹35 lakh relating to one property and also deleted the addition of ₹15,14,798 relating to cash deposits. However, the addition of ₹75 lakh relating to another property was sustained on the ground that the source of investment had not been established through authentic evidence.

Before the Tribunal, the assessee explained that the investment of ₹75 lakh comprised a housing loan of ₹29.84 lakh from Jammu & Kashmir Bank, unsecured loans of ₹29 lakh from friends and relatives, and ₹16.62 lakh from own capital and savings.

The Tribunal found that the housing loan of ₹29.84 lakh was reflected in the bank statement and was further supported by a certificate issued by the bank confirming the loan and its subsequent closure. Accordingly, the Tribunal held that the source of investment to that extent stood explained and the addition corresponding to that amount could not be sustained.

Regarding the unsecured loans from friends and relatives, the Tribunal noted that although loan confirmations and bank statements had been furnished before the appellate authority, there was no evidence on record establishing the creditworthiness of the lenders or the genuineness of the transactions. No supporting documents such as lenders’ bank statements, income tax returns, or other evidence demonstrating financial capacity had been produced. The Tribunal observed that mere loan confirmations were insufficient to establish creditworthiness and genuineness.

The Tribunal also noted that there was no indication that the additional evidence had been subjected to verification by the AO or that any enquiry had been conducted regarding the loan transactions. Similarly, no documentary evidence had been furnished to substantiate the claim of opening capital, accumulated savings, or availability of funds.

In these circumstances, the Tribunal set aside the issue to the AO for the limited purpose of verifying the source of investment amounting to ₹45.16 lakh, representing unsecured loans from friends and relatives and capital/savings. The AO was directed to conduct necessary enquiries and provide the assessee a reasonable opportunity of being heard before deciding the matter. Consequently, the appeal was partly allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal of the assessee arises out of order dated 13.08.2024, passed by National Faceless Appeal Centre (‘NFAC’ for short), Delhi for the assessment year (A.Y. for short) 2013-14.

2. The solitary dispute arising in the appeal relates to addition of an amount of Rs.75 lacs u/s. 68 of Income Tax Act, 1961 (‘the Act’ for short).

3. There is a delay of 447 days in filing the appeal. Explaining the cause of delay, the assessee has filed an application supported by Affidavit. It is the say of the assessee that the order of ld. First appellate authority was communicated to the email-id of ex-employee, instead of the registered email-id of the assessee. Hence, the assessee remained unaware of the order passed by the appellate authority. It is submitted, after the assessee had knowledge of the said order, she immediately took steps for filing the appeal.

4. Having considering the submissions of the parties, we are of the view that the delay in filing the appeal was due to reasonable cause. Accordingly, we condone the delay and admit the appeal for adjudication on merits.

5. Briefly the facts relating to the issue are, the assessee is a resident individual. For the assessment year under dispute, the assessee filed her return of income on 15.01.2014, declaring income of Rs.5,86,640/-. The return of income so filed by the assessee was selected for scrutiny to examine the investments made by the assessee, in purchasing immovable properties. As observed by the Assessing Officer (A.O. for short), though the assessee was repeatedly called upon to furnish the requisite details and documentary evidences, however, she did not respond to any of the notices. Therefore, finally the A.O. issued a show cause notice to the assessee expressing his intention to complete the assessment to the best of his judgment invoking provisions of section 144 of the Act due to repeated non-compliance by the assessee. However, the said show cause notice also remained uncomplied. Therefore, finding no other alternative, the A.O. proceeded to complete the assessment to the best of his judgement based on information available on record. He found that during the year under consideration, the assessee had purchased two immovable properties, being Flat No. 502A at Royal Garden, Shanti Park, Thane-400 601 of Rs.75 lacs and another property being Flat No.C-102, 1 Nyandip Laxmi Industrial Estate, Link Road, Andheri, Mumbai-400 053. Since, the assessee failed to explain the source of the investments made in the immovable properties, the A.O. added back the amount of Rs.1,10,00,000/- to the income of the assessee by treating it as unexplained investments u/s. 69 of the Act. Additionally, the A.O. added an amount of Rs.15,14,798/-, being cash deposits in Jammu & Kashmir Bank Ltd. as unexplained cash credit u/s. 68 of the Act.

6. The assessee contested the additions before the first appellate authority.

7. In course of proceedings before the first appellate authority, the assessee furnished additional evidences, which were admitted under Rule 46A of the Income Tax Rules. After considering the submissions of the assessee, in the context of facts and materials on record, ld. First appellate authority was convinced that the alleged investment of Rs.35 lacs in the second immovable property stood explained. Accordingly, he deleted the addition of Rs.35 lacs. Further, accepting assessee’s explanation with regard to the cash deposits in Jammu & Kashmir Bank, he deleted the addition of Rs.15,14,798/- made u/s. 68 of the Act. Insofar as, the investments of Rs.75 lacs in another immovable property, ld. First appellate authority, after analyzing the evidences furnished by the assessee, was not convinced. He was of view that the assessee has failed to establish the source of investment through authentic evidence. Accordingly, he sustained the addition of Rs.75 lacs.

8. Before us, ld. Counsel appearing for the assessee submitted that in course of proceedings before the first appellate authority, the assessee had explained the source of investment in the house property through proper documentary evidences. He submitted, an amount of Rs.29,84,000/- was availed as housing loan through Jammu & Kashmir Bank, which is reflected in the bank statement. He submitted, an amount of Rs.29 lacs was availed as unsecured loans from friends and relatives, which are supported by loan confirmation of the lender. He submitted, balance amount of Rs.16,60,000/- was out of own capital in the form of opening bank, cash, current years sale and income. Thus, he submitted, there is no ground for adding the amount. The ld. DR submitted, the assessee had not furnished any verifiable evidence to explain the source of investment.

9. We have considered rival submissions and perused the materials available on record. Undisputedly, in course of assessment proceeding, the assessee had failed to respond to even a single notice issued by the A.O. seeking information regarding the source of investment. The assessee neither participated in the assessment proceedings nor furnished any documentary evidence to explain the source of investment in house property. Therefore, the A.O. was compelled to complete the assessment to the best of his judgement u/s. 144 of the Act. However, before the first appellate authority, the assessee furnished fresh evidences explaining the source of investment in house property as under:

10. Insofar as, the housing loan of Rs.29,84,000/- from Jammu & Kashmir Bank, we find that the amount is reflected not only in the bank statement of the assessee, but subsequently the bank has issued a certificate acknowledging the housing loan availed by the assessee. The bank has also confirmed that loan account was closed on 03.09.2018. Thus, in our view, out of the total investments of Rs.75 lacs made in the housing property, source of Rs.29,84,000/- stands explained. Therefore, the addition to that extent cannot be sustained. Insofar as, the rest of the amount is concerned, it is the claim of the assessee that amount of Rs.29 lacs was availed as unsecured loans from friends and relatives. Admittedly, the assessee neither explained the source, nor furnished any documentary evidence before the A.O. regarding the unsecured loans. However, before the first appellate authority, the assessee had furnished certain documentary evidences to prove the unsecured loans.

11. On perusal of the bank statement and the loan confirmations, stated to have been filed before the first appellate authority, though, it is observed that the name of some of the lenders and unsecured loans stated to have been availed from them appear in the bank statement of the assessee, however, there is no further evidence available on record to demonstrate the creditworthiness of the parties and the genuineness of the transaction. Except the loan confirmations, no other documentary evidences, bank statement, return of income etc. of lenders have been furnished by the assessee before us to establish the financial capacity of the lenders to advance the loan. Though, the first appellate authority has admitted the additional evidences, however, nothing is forthcoming from the order of the first appellate authority as to whether the evidences were forwarded to the A.O. for factual verification and further enquiry and whether any report of the A.O. is available. Atleast, no such facts are available before us. By simply furnishing loan confirmations, the creditworthiness of the creditors and genuineness of the loan transaction cannot be established. There is nothing on record to suggest that any enquiry with regard to the loan transactions were undertaken at the first appellate stage. It is also unknown whether the assessee was directed to produce the concerned lenders either before the A.O. or the first appellate authority. Thus, without conducting a thorough enquiry with regard to assessee’s claim of availability of unsecured loans, no logical conclusion can be reached.

12. Insofar as, the claim of availability of opening capital, savings, etc. no documentary evidence has been furnished to show the accumulation of fund with the assessee. Neither the returns filed in the past years, nor any financial statements relating to the past years have been furnished by the assessee to establish availability of opening capital, past savings, etc. In such circumstances, we cannot accept the explanation of the assessee regarding the availability of unsecured loans and opening capital/savings, etc. as no enquiry has been conducted at any stage to verify the authenticity of assessee’s claim. In view of the aforesaid, we are inclined to set aside the issue to the A.O. only for the limited purpose of verifying the source of investment of Rs.45,16,000/- representing the unsecured loan from friends and relatives and capital and past savings. The A.O. is directed to conduct necessary enquiry to verify assessee’s claim in relation to availability of unsecured loans and opening capital/savings. Needless to mention, before deciding the issue, the A.O. must provide reasonable opportunity of being heard to the assessee.

13. In the result, the appeal is partly allowed.

Order pronounced in the open court on 29.05.2026