IPO Financing Explains Source of Investment: ITAT Remands Section 69 Addition for Verification

Shankar Mallayya Vasal Vs ITO (ITAT Mumbai)

IPO Financing Is an Explainable Source, Not Automatically Unexplained Investment u/s 69: Evidence Must Be Examined Even in an Ex Parte Assessment

The Mumbai Bench of the ITAT has restored an addition of ₹50 lakh made u/s 69 to the AO for fresh examination after finding that the documents produced by the assessee regarding IPO financing obtained from ECL Finance Ltd. constituted prima facie plausible evidence explaining the source of investment. The Tribunal held that although the original assessment was rightly completed ex parte due to the assessee’s repeated non-compliance, the supporting documents subsequently furnished could not be rejected without proper verification.

Information received by the Income-tax Department through its Risk Management Strategy indicated that the assessee had invested ₹50 lakh in applications for allotment of bonds, public debentures & IPOs of different companies. The information also showed receipt of ₹47,700 from transactions in securities. Since the assessee had not filed a return of income, the AO reopened the assessment by issuing a notice u/s 148 dated 15-03-2023.

The assessee did not file a return in response to the notice u/s 148. He also failed to comply with notices issued u/s 142(1) dated 27-10-2023 & 16-11-2023 and the final show-cause notice dated 05-01-2024. In the absence of any response or explanation, the AO completed the reassessment ex parte u/s 144 r.w.s. 147.

Based upon the information available on the income-tax portal, the AO treated the entire investment of ₹50 lakh as unexplained investment u/s 69. A further amount of ₹47,740 was brought to tax as short-term capital gain arising from the alleged sale of securities.

Before the CIT(A), the assessee challenged both the validity of the reassessment and the additions on merits. One of the legal objections was that the notice u/s 148 had been issued by the Jurisdictional Assessing Officer instead of the Faceless Assessing Officer. The CIT(A) rejected this contention by treating the issuance of notice by the JAO as a procedural and curable defect which did not invalidate the reassessment proceedings.

On the merits of the addition, the assessee furnished several documents to establish that the investment was not made out of unexplained money. These included statements containing details of the investments, a confirmation from ECL Finance Ltd., the assessee’s ledger account in the books of the finance company, bank statements and a power of attorney executed in favour of ECL Finance Ltd.

The assessee explained that ECL Finance Ltd., a Non-Banking Financial Company, had provided finance for making applications in public issues of bonds and debentures. The financial arrangement was in the nature of IPO financing, under which the finance company provided funds and operated the designated account pursuant to the power of attorney.

The CIT(A), however, did not accept these documents or the explanation regarding the source. He upheld the addition of ₹50 lakh u/s 69 and also confirmed ₹47,700 as short-term capital gain. The levy of interest and initiation of penalty proceedings were also sustained.

Before the ITAT, the assessee reiterated that the investments had been made entirely through finance provided by ECL Finance Ltd. The details placed before the Tribunal showed that ₹40 lakh had been provided for applications in the bonds of four companies. Out of the total amount applied, bonds worth approximately ₹12.97 lakh were allotted, while the balance amount of about ₹27.03 lakh was returned to the account operated under the power-of-attorney arrangement.

The securities involved included tax-free bonds issued by entities such as IRFC, REC, PFC & NTPC. On redemption or sale, the aggregate amount received was approximately ₹13.14 lakh. The assessee claimed that the gross income arising from these transactions was only ₹17,195, out of which ₹10,694 was payable to ECL Finance Ltd. The net income earned by the assessee was stated to be merely ₹6,500. Therefore, according to him, the Department’s information showing securities receipts or capital gains of ₹47,700 was incorrect.

The ITAT took note of the assessee’s failure to participate in the original assessment proceedings. Since no return was filed in response to the notice u/s 148 and the statutory notices remained unanswered, the AO had little option but to complete the assessment on the basis of the information available with him. Thus, the assessee’s conduct during assessment proceedings was certainly not approved by the Tribunal.

Nevertheless, the Tribunal found that the evidence subsequently furnished regarding the loan from ECL Finance Ltd. was prima facie plausible. The documents indicated that finance had been obtained from the NBFC specifically for making applications in different bonds and public issues. If this explanation was factually correct, the entire application amount could not be treated as the assessee’s unexplained investment merely because the application appeared against his PAN.

The Tribunal observed that the source of the funds required proper verification, including examination of the relevant bank accounts, the flow of money from ECL Finance Ltd., the operation of the account under the power of attorney, the allotment of securities and the refund of the unallotted application money.

The assessee also submitted that in nearly 20 other cases involving identical facts, the Department had conducted inquiries, accepted similar explanations relating to IPO financing and completed assessments without making additions. Although this assertion was not independently accepted as conclusive, it further supported the requirement for a factual examination instead of outright rejection.

Considering that the original assessment was ex parte and that the documents now produced had not been properly verified, the ITAT restored the matter to the AO. The AO was directed to examine the evidence and determine the actual source of the investments in accordance with law. The assessee’s legal ground challenging the notice issued by the JAO instead of the faceless AO was not pressed and was, therefore, dismissed. The appeal was allowed for statistical purposes.

Author’s Comments

The decision does not finally delete the addition u/s 69; it gives the assessee another opportunity to prove the source before the AO. Nevertheless, it recognises an important commercial reality. In an IPO financing arrangement, the application may appear in the investor’s name and against his PAN, but the underlying funds may have been directly provided by an NBFC. The amount of an IPO application cannot automatically be equated with an investment from the assessee’s own unexplained resources.

At the same time, the ruling contains a practical warning. Non-compliance with notices can convert an otherwise explainable transaction into a substantial ex parte addition. The assessee must now establish the complete money trail—NBFC disbursement, bank-account credit, application payment, actual allotment, refund of excess funds & repayment to the financier. Section 69 applies where the nature and source of investment are not satisfactorily explained; once credible evidence explaining both is produced, it must be examined on facts and cannot be brushed aside merely because it was furnished at the appellate stage.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been filed by the Assessee against the order under section 250 of the Income-tax Act, 1961, dated 08.01.2026 arising out of the assessment order passed under section 147 read with section 144 of the Income Tax Act, 1961 dated 29th February, 2024.

2. The assessee has raised the following grounds of appeal:

1. The Hon’ble Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred in confirming the action of AO in issuing the notice u/s 148 of the Income Tax Act, 1961 (Act) and passing the order u/s 147 r.w.s 144B of the Act. The Appellant submits that the notice issued u/s 148 of the Act and order passed u/s 147 r.w.s 144B of the Act is against the provision of the law, ultra vires and without jurisdiction; hence, the same shall be quashed.

2. The Hon’ble CIT(A) erred in confirming the action of AO in making the addition of Rs.50,00,000/- being alleged unexplained investment u/s 69 of which nature and source is not explained by the Appellant. The Appellant submits that he has made investment in bonds and debentures through funds advanced by a Non-Banking Financial Corporation named as M/s. ECL Finance Limited through IPO Financing. Nature and source of investment is fully explained; hence, the addition made by the AO and confirmed by CIT(A) shall be deleted.

3. The Hon’ble CIT(A) erred in confirming the action of AO in making addition of Rs.47,700/- being amount received on sale of securities and treating the same as Short Term Capital Gain earned by the Appellant. The Appellant submits that as stated at Ground No. 2, he has earned interest income of Rs.6500/- on sale of bonds and has not earned any other income. Hence, the disallowance of Rs.47,700/- made by the AO and confirmed by CIT(A) shall be deleted.

The Appellant craves leave to add, amend, and alter the above grounds of appeal.

3. The brief facts of the case are that the Assessing Officer, based on the information found under the Risk Management Strategy, observed that the Assessee had invested Rs.50,00,000/- in applications for allotment in bonds, public debentures and IPOs of various companies, received Rs.47,700/- from shares during the year, and did not filed return of income, hence, the assessment has been reopened under section 147 of the Act by issuing notice under section 148 of the Act dated 15.03.2023.

4. The Assessee failed to comply with notice by furnishing of return of income; did not comply with the notices under section 142(1) of the Act dated 27th October, 2023 and 16th November, 2023 and final show-cause notice dated 5th January, 2024 also remained non-complied with. Therefore, Assessing Officer based on the information available on the portal, non submission of explanation and non-compliance by assessee, made an addition of Rs.50,00,000/- under section 69 of the Act on account of unexplained investment made in IPO/ Funds, Rs.47,740/- on account of short-term capital gain on sale of securities. The assessment order has been passed under section 144 read with section 147 of the Act.

5. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. Commissioner of Income-tax (Appeals), raising grounds of appeal, including a legal ground challenging the issuance of notice under section 148 by the Jurisdictional Assessing Officer (JAO), along with grounds challenging the additions made under section 69 of the Act.

6. Before Ld. CIT(A), the Assessee furnished various evidences, being statements showing investments made in advance, in support of sources, confirmation from ECL Finance Limited, ledger account of the assessee in the books of ECL Finance Limited, power of attorney, bank statement and power of attorney given in favour of ECL Finance Limited. Through these documents, the assessee tried to substantiate the source of investment of Rs. 50,00,000/- being finance taken by him from ECL Finance Limited for making such investment. The assessee also submitted that he had sold shares or securities of Rs 6,500/- not of Rs. 47,700/-.

7. However, the Ld. CIT(A) dismissed the legal ground relating to the issuance of notice under section 148 by the JAO instead of the FAO, holding that issuance of notice by the JAO instead of the FAO is a procedural defect and curable in nature and does not vitiate the entire assessment proceedings. In respect of the other additions under section 69 amounting to ₹50 lakhs and short-term capital gain of Rs. 47,700/- the Ld. CIT(A) did not accept the documents and explanation furnished before him. The finding of CIT(A) order recorded at para 7 here under:

“7. CONCLUSION

7.1 After detailed examination of facts, submissions, documentary evidence, legal provisions, and judicial precedents, I conclude that:

(a) The reassessment proceedings are valid and do not suffer from any jurisdictional defect.

(b) The addition of Rs. 50,00,000/- u/s 69 as unexplained investment is fully justified.

(c) The addition of Rs. 47,700/- as short-term capital gain is justified.

(d) The charging of interest u/s 234A, 234B, and 234F is mandatory and correct.

(e) The initiation of penalty proceedings u/s 271(1)(c), 271(1)(b), and 271F is justified.

7.2 The assessment order passed by the AO is well-reasoned, based on credible information, and in accordance with law. The appellant has failed to make out any information, and in accordance with law. The appellant has failed to make out any case for interference with the assessment order.

8. Before us, the learned AR of Assessee submitted same documents as were furnished before the Ld. Commissioner of Income Tax (Appeals) and explained that these documents proves that he has obtained finance from ECL Finance Limited for making application in IPO/ debentures/ funds for investment during the year. Above loan, being substantial source of application for allotment of Bonds of four companies for Rs. 40,00,000/-, having allotment of Rs. 12,96,796/- and returned back Rs. 27,03,204/-, also mentioned that assessee had not sold shares or securities amounting to Rs.47,700/- during the year.

Shankar Vasal Assessment Year 2016-2017

9. We have considered the rival submissions and perused the material available on record. We find that assessee had neither furnished the return of income in pursuance to notice issued under section 148 of the Act nor complied with the other notices issued during the assessment proceedings. Therefore, the assessment was completed under section 144 read with section 147 of the Act by making the aforesaid additions.

10. However, that the details and documents furnished in support of source of investment furnished before the First Appellate Authority are found prime facie plausible evidences. On careful examination of these documents, we find that the Assessee had taken a loan from ECL Finance Limited for making applications for investments in various bonds/IPO applications during the year. Looking to the nature of the documents and evidence furnished by the assessee, we find that the matter requires proper examination being the source of investments through newly opened bank account or existing ones etc.

11. The Assessee further stated that the Department has, in as many as in around 20 cases having identical facts, after conducting enquiries, accepted the explanation of the Assessee’s and passed orders without making any additions therein. 12. As, the impugned assessment order passed under section 144 read with section 147 of the Act, being ex party, solely on the basis of information that Assessee had made investments in applications for allotment in bonds, public debentures and IPOs of various companies and source remained unexplained on the part of assessee.

13. Accordingly, in the interest of justice, we deem it appropriate to restore the matter back to the file of Assessing Officer for examination and perusal of evidences in the light of sources for investment, in accordance with law.

14. The Ld. AR of the Assessee, did not press Ground No. 1 relating to challenge the validity of the notice issued under section 148 of the Act by the Jurisdictional Assessing Officer in place of the faceless Assessing Officer, thus, dismissed as not pressed.

15. In the result, Assessee’s appeal is allowed for statistical purposes.

Order pronounced in the open court on 15.09.2026.