ITAT Holds Loss Cannot Be Treated as Unexplained Income

For the Assessment Year 2018-19, an individual taxpayer reported an income of Rs. 2,846,830. The tax department, however, flagged her account for undisclosed Bitcoin activity worth Rs. 18,50,795. The taxpayer explained that she had actually poured Rs. 1,250,000 into Bitcoin trading but was hit by a cyberattack. She only recovered Rs 628,317 as compensation, resulting in a clear financial loss.

Despite this, the Assessing Officer (AO) noticed a discrepancy between the reported numbers and bank entries, labelling Rs. 600,795 as an “unexplained investment” under Section 69. The CIT(A) agreed, effectively turning her trading loss into a taxable gain.

Main Issue: Can a discrepancy in Bitcoin transaction values be taxed as an unexplained investment if the taxpayer can prove the original investment was disclosed and ended in a loss?

Tribunal’s Decision: The Tribunal took a common-sense approach, noting that if both the investment and the eventual realisation are visible in bank statements, the transaction isn’t “unexplained”. You can’t simply treat the difference in numbers as hidden income when the taxpayer clearly walked away with less than they started with.

The Tribunal found that the tax authorities failed to grasp the factual reality of the trade. Since the Rs. 12.5 lakh investment was already on the record and the recovery was lower, adding Section 69 penalties wasn’t justified. To wrap things up properly, the Tribunal sent the file back to the AO for a final check. The taxpayer just needs to show the evidence of the loss to have the addition deleted for good.

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