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
