Unsecured Loan Claims Need Verification, Rules Mumbai ITAT in Property Investment Case

The Mumbai Income Tax Appellate Tribunal (ITAT) has provided partial relief to taxpayer Baby Naz Shoukat Shaikh in a dispute relating to an addition of Rs 75 lakh made by the Income Tax Department.

Before examining the facts of the case, the tribunal considered a delay of 447 days in filing the appeal. The assessee explained that the appellate order had been sent to the email address of an ex-employee instead of her registered email address, because of which she was unaware of the order. The Tribunal accepted this explanation as reasonable cause, condoned the delay and admitted the appeal for hearing.

The present case started when the AO scrutinised the taxpayer’s return and noticed investments made in two immovable properties. Since the taxpayer did not respond to repeated notices seeking details of the source of these investments, the AO completed the assessment under the best judgement provisions of the Income Tax Act. He treated investments of Rs. 1,10,00,000 in the two properties as unexplained and also added Rs. 15,14,798 deposited in a bank account as unexplained cash credits.

In appeal, the CIT(A) examined additional evidence submitted by the taxpayer. Based on the material produced, the Commissioner deleted the addition of Rs 35 lakh relating to one property and also deleted the addition of Rs 15,14,798 relating to cash deposits. However, the addition of Rs 75 lakh relating to another residential property was sustained on the ground that the source of the investment had not been satisfactorily explained.

Before the ITAT, the taxpayer explained that the Rs 75 lakh investment was funded through three sources. According to her, Rs. 29,84,000 came from a housing loan obtained from Jammu & Kashmir Bank, Rs 29 lakh was received as unsecured loans from friends and relatives, and the remaining amount came from her own capital, savings, and the current year’s income. She argued that documentary evidence supporting these sources had been furnished during the appellate proceedings.

After examining the records, the Tribunal found that the housing loan of Rs 29.84 lakh was duly supported by bank statements and a certificate issued by the bank. The bank had also confirmed that the loan account was subsequently closed. Therefore, the Tribunal held that this portion of the investment was properly explained and no addition could be sustained to that extent.

However, the Tribunal was not satisfied with the evidence relating to the alleged unsecured loans of Rs 29 lakh from friends and relatives. It was observed that only loan confirmation letters had been filed. No supporting documents, such as bank statements, income tax returns or financial records of the lenders, were produced to establish their creditworthiness or the genuineness of the transactions. The Tribunal held that confirmation letters by themselves don’t count as a loan transaction under the Income Tax Act.

The Tribunal also found errors in the taxpayer’s argument that part of the investment was made from her own capital and past savings. No past income tax returns, financial statements or other documents indicating the accumulation of savings were provided. As a result, the Tribunal held that this claim also required proper verification.

Considering these facts, the ITAT partly allowed the appeal. It stated “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 the 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.”

Lastly, the tribunal directed the AO to conduct necessary enquiries, verify the taxpayer’s claims, and provide a reasonable opportunity of hearing before passing a fresh order.