Property Investment Scrutiny to an Individual - ₹1.97 Cr, Addition Dropped by AO

The Problem

Buying or selling a high-value property often attracts the attention of the Income Tax Department. If the value of the transaction appears disproportionate to the income reported in the Income Tax Return, the case may be selected for scrutiny. However, receiving a scrutiny notice does not automatically mean that additional tax is payable.

In this case, an individual taxpayer received a Section 143(2) notice (issued when the Income Tax Department selects a return for detailed examination) after the case was selected under the Computer Assisted Scrutiny Selection (CASS). The department noticed that the taxpayer had purchased a residential property for approximately ₹1.97 crore, while the Income Tax Return reflected nil taxable income for the year. The return also disclosed a short-term capital gain arising from the sale of another property and losses from futures and options (F&O) trading.

To understand the transaction, the department issued a Section 142(1) notice (asking the taxpayer to submit documents, information and explanations) seeking bank statements, sale deeds, purchase agreements, capital gain workings, trading records and other supporting documents.

During the assessment, the department proposed an addition of ₹1.97 crore under Section 69 (applicable where the source of an investment cannot be satisfactorily explained) on the ground that the source of funds used for purchasing the property had not been adequately established.

What We Did

The scrutiny assessment was handled by furnishing detailed documentary evidence explaining the complete source of funds used for acquiring the property. Supporting documents, including bank statements, payment receipts, registered sale deeds, purchase agreements, capital gain computations and transaction records, were submitted during the assessment proceedings.

A detailed explanation established that the payments towards the property had been made through regular banking channels over earlier financial years using accumulated disclosed income. The evidence also demonstrated that the registration of the property took place during the relevant assessment year, whereas the payments themselves had been made in preceding years and were fully supported by documentary records.

The department examined the documents alongside information available through Form 26AS, the Income Tax Return, broker information and other records before completing the assessment.

The Result

After verifying the documentary evidence and the flow of funds, the Income Tax Department accepted that the investment was made from explained sources. The payment receipts and registered documents substantiated that the consideration for the property had been paid through disclosed funds in earlier years.

As a result, the proposed addition of ₹1.97 crore under Section 69 was dropped, no adverse inference was drawn, and the assessment was completed under Section 143(3) (regular scrutiny assessment completed after examination of records) read with Section 144B (faceless online assessment procedure) without any addition to the returned income.

Key Takeaway:

Received a scrutiny notice for a property purchase? A proposed addition under Section 69 can be successfully challenged when the source of funds is clearly explained with proper documentation such as bank statements, payment records and legal agreements.