Shwetha Rajanna Vs ITO (ITAT Bangalore)
No Reply to Second Show-Cause Notice, Yet the Source Was Already on Record: Bangalore ITAT Deletes ₹37.60 Lakh Addition
Housing loan, mutual fund redemptions and bank payments explained the jointly purchased house
An assessee should respond to every show-cause notice. But failure to reply to a later notice does not make an investment unexplained when the supporting evidence is already before the Assessing Officer. The Bangalore ITAT applied this principle in Shwetha Rajanna v. ITO, ITA No. 1706/Bang/2026, order dated 21 September 2026, for AY 2022–23.
The assessee and her husband had jointly purchased a residential property for approximately ₹1.95 crore. The Assessing Officer accepted a ₹1 crore housing loan and some mutual fund proceeds, but treated the remaining ₹75.20 lakh as unexplained. He added 50% of that amount, ₹37.60 lakh, in the assessee’s hands under section 69. The Tribunal examined the bank accounts and supporting documents, found the acquisition funds explained, and deleted the addition.
How the assessment moved from ₹1 crore to ₹37.60 lakh
The assessee, a salaried individual, returned income of ₹12,10,720. Her return was selected for scrutiny concerning the property investment and a capital gains deduction claim. She explained that she and her husband were joint purchasers and that the consideration had been paid through banking channels. Both had deducted and deposited TDS on their respective shares of the purchase payments.
The funding comprised a housing loan and amounts available in their individual bank accounts, principally from redemption of investments. To support the explanation, the assessee produced bank statements, the housing loan sanction letter, sale documents, capital gains statements and other records.
The AO’s first show-cause notice proposed a much larger addition. It questioned the evidence for the ₹1 crore housing loan and suggested that the remaining ₹95 lakh represented cash paid over and above the registered value. After the assessee gave a detailed response, the AO changed his proposal. He accepted the housing loan and mutual fund redemption of ₹19.80 lakh, but considered ₹75.20 lakh of the property payment unexplained. Since the property was jointly purchased, he proposed to add half that sum in the assessee’s hands.
The assessee did not reply to this second show-cause notice. The AO consequently made the proposed addition of ₹37,60,069, taking the assessed income to approximately ₹49.71 lakh. The CIT(A) declined to admit additional evidence sought to be filed under Rule 46A and upheld the addition.
The Tribunal followed the money through the accounts
The Tribunal examined the material before the lower authorities and found that the documents needed to explain the payment were already on record when the second notice was issued. The AO had accepted the ₹1 crore housing loan, so that source was no longer in dispute.
The assessee’s HDFC Bank account showed funds of ₹55,06,980, mainly from mutual fund redemptions, including HDFC Liquid Fund and ICICI Prudential Liquid Fund. She paid approximately ₹48.95 lakh from that account towards the property. Her husband’s HDFC Bank account showed redemptions of ₹49,22,738, from which he paid ₹46,25,068 towards the acquisition. The order also refers to a ₹25 lakh provident fund withdrawal credited to an HDFC Bank account.
The timing reinforced the explanation. The mutual fund redemptions had taken place shortly before the property payments: the investments were redeemed in November and payments were made on 1 December 2021. The funds could therefore be followed from the accounts to the acquisition within a short period.
On these facts, the Tribunal held that the source and application of funds were traceable. The loan, together with funds available in the two purchasers’ bank accounts, explained the investment. The fact that the assessee had missed the second notice did not justify disregarding documents she had already supplied in response to the earlier notice and which were also before the CIT(A). The Tribunal directed deletion of the ₹37,60,069 addition and allowed the appeal.
Author’s comment
The order illustrates an important distinction between failure to respond to a notice and failure to explain an investment. A missed reply may leave an AO to decide the case on the available record. It does not permit an addition founded on the assumption that no explanation exists when the bank trail and supporting documents are already in that record.
The case also shows why a joint purchase must be examined through both purchasers’ accounts. The AO attributed half the supposedly unexplained balance to the assessee, but the Tribunal found that payments from both spouses’ accounts, supported by recent investment redemptions and the accepted housing loan, accounted for the purchase.
The decision should be applied to its evidence. Here, the Tribunal found a close link in amount and timing between redemption, bank credit and property payment. It did not hold that a general statement about savings or investments would suffice without a traceable payment trail. Its practical lesson is to place the complete funding reconciliation on record early and to ensure that an adverse proposal is tested against all documents already furnished, even where a subsequent response was missed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by the assessee against the appellate order dated 26 February 2026 passed by the National Faceless Appeal Centre, Delhi (learned CIT(A)), for assessment year 2022–23. By that order, the assessee’s appeal against the assessment order dated 18 March 2024, passed under section 143(3) of the Income-tax Act, 1961 by the assessment unit determining total income at ₹ 4,970,789 as against the returned income of ₹ 1,210,720, was dismissed. The assessee is aggrieved.
2. The Assessee has raised the following grounds of appeal:
1. The appellate order passed by the learned Commissioner of Income-tax [Appeals] NAFC, under Section 250 of the Act for the Assessment Year 2022-23, dated 26/02/2026, in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant’s case, may be quashed.
2. The appellant denies herself liable to be assessed on a total income as determined in the impugned order of Assessment passed by the learned assessing officer under section 143 [3] r.w.s. 144B of the Act amounting to Rs. 49,70,789/- and confirmed by the learned Commissioner of Income-tax [Appeals], as against the income declared and reported by the appellant of Rs. 12,10,720/-, on the facts and circumstances of the case.
3. The learned Commissioner of Income-tax [Appeals] is not justified in confirming the erroneous addition made by learned assessing officer of Rs. 37,60,069/- as unexplained investment under section 69 of the Act, on the facts and circumstances of the case.
3.1. The learned Commissioner of Income-tax [Appeals] and the learned assessing officer both failed to appreciate that the total consideration paid jointly by the appellant and her husband i.e. Sri. Vaishak B M, amounting to Rs. 1,95,00,000/- out of Housing Loan borrowed jointly by the appellant and her husband and also from the sale of equities, mutual funds and bonds by the appellant of Rs. 55,06,980/- by the appellant and Rs. 49,22,738/- by the husband of the appellant being the source for investment in the purchase of new residential house totaling to Rs. 1,95,00,000/- and consequently there is no unexplained investment under section 69 of the Act as alleged and the addition requires to be deleted, on the facts and circumstances of the case.
3.2. The learned Commissioner of Income-tax [Appeals] and the learned assessing officer both failed to properly appreciate that the appellant and her husband jointly have purchased the property for a total purchase consideration of Rs. 1,95,00,000/- jointly and deducted TDS on the total consideration paid by them on the total amount of Rs. 1,95,00,000/- i.e. TDS on Rs. 1,00,00,000/- deducted by the appellant and the balance amount of Rs. 95,00,000/- TDS having been deducted by the husband of the appellant and have been duly remitted to the account of the government and consequently the addition made as unexplained investment under section 69 of the Act requires to be deleted, on the facts and circumstances of the case.
3.3. The learned Commissioner of Income-tax [Appeals] and the learned assessing officer on an erroneous appreciation of facts and without considering the details, documents and submissions made by the appellant has made the addition of Rs. 37,60,069/-, which is arbitrary, based on suspicion, surmise and conjecture without any proper basis, on the facts and circumstances of the case.
3.4. The learned Commissioner of Income-tax [Appeals] ought to have held that the addition made by the learned assessing officer, under section 69 of the Act is bad in law, since the required conditions and the parameters to invoke the provision of section 69 of the Act have not been complied with and consequently the addition made invoking the provisions of section 69 of the Act is not warranted, on the facts and circumstances of the case.
4. Without prejudice, the appellant objects for being taxed as per special rates of taxes as per the provisions of section 115BBE of the Act on the addition made by the learned assessing officer, on the facts and circumstances of the case.
5. Without prejudice, to the right to seek waiver as per the parity of reasoning of the decision of the Hon’ble Apex Court in the case of Karanvir Singh 349 ITR 692, the Appellant denies herself liable to be charged to interest under section 234 A, 234 B and 234 C of the Act on the facts and circumstances of the case. The appellant contends that the levy of interest under section 234 A, 234 B and 234 C of the Act is also bad in law as the period, rate, quantum and method of calculation adopted by the learned assessing officer on which interest is levied are not discernible and are wrong on the facts of the case.
6. The appellant craves leave to add, alter, amend, substitute or delete any or all of the grounds of appeal urged above.
7. For the above and other grounds to be urged during the course of hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.
3. The facts show that the assessee, an individual deriving salary income, filed her return declaring total income of ₹ 1,210,720. During the year, she and her spouse jointly purchased an immovable property for ₹ 195 lakh as co-owners. The assessee deducted tax at source on her share of the payment, and her spouse also deducted tax on his share. The return was selected for verification to examine the investment in immovable property and the capital gain deduction claimed. The assessee explained that the entire purchase consideration was paid through banking channels and that part of the acquisition was financed by a housing loan. She produced her bank statements and those of her spouse to show that the payments were made from their respective bank accounts.
4. She further explained that a housing loan of ₹ 1 crore was obtained, and that the total payment of ₹ 19,520,068 was supported by payments made by her spouse of ₹ 4,625,068, sourced from his bank account showing funds of ₹ 4,922,738, and by the assessee’s own payment of ₹ 4,894,000, sourced from funds of ₹ 5,506,980 available in her bank account. These facts were supported by bank statements, capital gain statements, the loan sanction letter, copies of the sale deed and sale agreement, Form No. 16, and other documents.
5. After examining the details, the learned Assessing Officer issued a show-cause notice dated 9 February 2024 proposing to treat ₹ 1 crore as unexplained income on the ground that the housing loan was not substantiated by documentary evidence, and to treat ₹ 95 lakh, being the difference between the sale value and the registered value, as cash payment.
6. Although the assessee submitted a detailed explanation, the learned Assessing Officer issued another proposal stating that, out of the house payment of ₹ 195 lakh, the housing loan of ₹ 1 crore and mutual fund redemption of ₹ 1,979,861 stood explained, leaving ₹ 7,520,139 as unexplained, and proposed to add 50% thereof, i.e., ₹ 3,760,069, in the hands of the assessee.
7. The assessee did not respond to this show-cause notice. The learned Assessing Officer therefore completed the assessment by order dated 28 March 2024, adding ₹ 3,760,069 to the returned income of ₹ 1,210,720 and determining the assessed income at ₹ 4,970,790.
8. Aggrieved, the assessee appealed before the learned CIT(A), who reproduced the statement of facts and the assessment order, referred in paragraph 13 to Form No. 35 and the assessee’s request to file additional evidence under Rule 46A, declined to admit the same, and upheld the addition made by the Assessing Officer, thereby dismissing the appeal.
9. The assessee is therefore in appeal before us. Shri Mounesh Sarkar, learned advocate for the assessee, filed a paper book and was heard on behalf of the assessee. Shri Sundeep Kumar H. S., learned Additional Commissioner of Income-tax, was heard on behalf of the Revenue.
10. We have carefully considered the rival submissions and perused the orders of the lower authorities. We have also examined the assessee’s written submissions before the learned CIT(A), placed at pages 148 to 152 of the paper book. The assessment order records the relevant facts. The assessee purchased the house property jointly with her husband for ₹ 19,520,068. Part of the purchase was funded through a housing loan, which the learned Assessing Officer accepted and which is not in dispute. The assessee demonstrated that ₹ 5,506,980 was available in her HDFC Bank account, mainly from mutual fund redemptions, including HDFC Liquid Fund and ICICI Prudential Liquid Fund. Of this amount, she paid ₹ 4,895,000 towards the property. Similarly, her husband’s HDFC Bank account reflected mutual fund redemptions of ₹ 4,922,738, of which he paid ₹ 4,625,068 towards the purchase. Thus, funds were available in the bank accounts of both the assessee and her husband. The mutual fund redemptions were made shortly before the payments for the acquisition of the property. The record also shows a withdrawal of a provident fund balance of ₹ 25 lakh, credited to the HDFC Bank account. These details were submitted before both the Assessing Officer and the learned CIT(A), and were already on record when the show-cause notice was issued. Merely because the assessee did not respond to the second show-cause notice, no addition could have been made when all relevant information was already on record. The learned CIT(A) also confirmed the addition only on the ground that the assessee had not replied to the second show-cause notice. The assessee admitted that she could not respond to that notice; however, she had already furnished the necessary details in response to the earlier notice, and they were also before the learned CIT(A). In these circumstances, the investment of ₹ 19,520,068 stood explained by the housing loan of ₹ 1 crore, funds of ₹ 4,922,738 available in the husband’s HDFC Bank account, and funds of ₹ 5,506,980 available in the assessee’s HDFC Bank account. The source and application of funds were traceable within a few days, as the mutual fund redemptions occurred in November and the payments were made on 1 December 2021. We therefore hold that the assessee fully explained the source of funds used for acquiring the house property. Accordingly, the addition of ₹ 3,760,069, being 50% of ₹ 7,520,139, is deleted. Ground of appeal No. 3 is allowed, and the Assessing Officer is directed to delete the addition.
11. All other grounds of appeal are either general or supportive in nature and are dismissed.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 21st September, 2026.
