ITAT Chennai Quashes Additions on Flat Investment, Finds Funds Properly Explained | Biz Flow Kit

The Income Tax Appellate Tribunal (ITAT) in Chennai has removed additions of Rs 49.80 lakh and Rs.10.80 lakh made against a taxpayer after determining that her investment in a new flat and cash deposits were incorrectly deemed as unexplained, despite being traceable to the sale of her earlier property and household items.

A bench of Judicial Member Aby T. Varkey and Accountant Member S.R. Raghunatha held, “We thus find that the addition made by the AO u/s 69A was without any basis and on incorrect appreciation of relevant facts and that he had misdirected himself on irrelevant material.”

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A residential flat has been sold by the taxpayer for Rs 35.50 lakh. Rs 33 lakh was obtained via the bank. Rs 2.50 lakh was obtained in cash. Also, she sold household items and electronic goods for Rs 8.09 lakh in cash. The amounts were deposited in her bank account.

Afterwards, she purchased a new flat for Rs 35 lakh. She paid Rs 2.80 lakh for stamp duty and registration. She spent Rs 12 lakh on interiors. Rs 49.80 lakh was the total investment.

As per the assessing officer, the property was registered in January 2017. But the payment was shown in August 2017. As per this, and relying on doubts of the lease agreement, the officer refused exemption u/s 54 (which allows tax exemption on capital gains if money from the sale of a house is reinvested in another residential property).

He considered the whole Rs 49.80 lakh as unexplained money u/s 69A (which allows tax authorities to treat money as income if the taxpayer cannot satisfactorily explain its source). He added Rs 10.80 lakh deposited in the bank account as unexplained. The same has been upheld by the Commissioner of Income Tax (Appeals) (CIT (A)).

The taxpayer cited that the cheques were issued during registration. They were encashed after that because of practical reasons. She put reliance on bank statements and confirmation from the seller.

The Tribunal considered the same explanation. It stated, “the assessee had sufficient bank balance on 04.01.2017 to issue and hand over cheques of Rs.47 lacs to the vendor on 05.01.2017. It is also not in dispute that, later on, the vendors had encashed the cheques and the amounts were paid out of the bank account of the assessee in August, 2017.”

It denied the opinion that the delay in encashment made the transaction unexplained. It was determined that the authorities put reliance on irrelevant material.

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The bench stated, “This confirmation further affirms the case of the assessee that, there was no unexplained payment made towards the purchase of the flat at Raj Castle in January 2017 and that the cheques issued then had been encashed by the vendor in August 2017 and therefore there was no involvement of any unexplained monies.”

The tribunal on cash deposits considered that Rs 2.50 lakh had been received from the sale of a flat. The balance has been obtained via the sale of household items. These were supported by records.

The bench held, “the explanation furnished by the assessee regarding the proceeds derived on sales of household items, electronic appliances, and gadgets of Rs. 8,09,600/- is found to be plausible. We thus hold the action of the AO in adding the same as unexplained monies to be unjustifiable.”

The tribunal held that the additions u/s 69A could not be sustained. It held that the exemption u/s 54 could not be refused in the facts of the case. Both additions were removed.