Can Wrong Information Given to Banks Be Taken as a Basis for Making Additions Under the Income Tax Act, 1961?

Many times, clients provide inaccurate information to banking companies to gain personal benefits, such as increased cash credit limits. This raises the question of whether such inaccurate information can serve as a basis for adjusting the returned income of the assessee during the assessment process under the Income Tax Act, 1961.

The Income Tax Department may initiate an income assessment based on this inaccurate information. However, the department must prove that the information provided to the banking company is true. The department cannot make additions to the returned income solely based on inaccurate information if it is unable to establish that such information is, in fact, true and correct with concrete evidence.

The primary purpose of the assessment is to determine whether the assessee has concealed income while filing their Income Tax Return (ITR). Inaccurate information cannot be used to justify adjustments to the returned income, even if the assessee himself provided it to another party. Any assessment order issued by the department that affects the returned income or is prejudicial to the assessee's interests must be well-reasoned and backed by solid evidence.

This perspective is further supported by the case of Assistant Commissioner of Income-tax, Circle-1 (1) v. Jaibaba Castings Pvt Ltd - [2024].