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Judgment
Per Renu Jauhri, Accountant Member:
This appeal by the Revenue is directed against the order dated 26.09.2025 of the National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the Assessment Order dated 31.12.2017 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the Income Tax Officer, Ward-28(2), Delhi, (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2015-16.
Grounds of appeal filed by the Revenue are reproduced as under:
“1)That the Ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 4,13,30,421 made without appreciating that the assessee failed to disclose any capital in earlier years' ITRs and failed to substantiate the sudden disclosure of Rs. 7.06 crore in A.Y. 2015-16.
2)That the Ld. CIT(A) erred in accepting the assessee's claim of "accumulated capital" without verifying any year-wise capital buildup, inflows, withdrawals or supporting documentary evidence.
3)That the Ld. CIT(A) has ignored the settled principle that the burden of proof lies squarely on the assessee, especially when capital introduced is disproportionate and inconsistent with past disclosures.
4)That the Ld. CIT(A) erred in holding that non-disclosure in prior years' ITRs was only a procedural lapse, whereas it is a substantive lapse indicating that the capital did not exist prior to AY 2015-16.
5)That the deletion of addition was made on assumptions and presumptions, without independent inquiry, contrary to law and judicial discipline.
6)That the department craves to add, amend, alter or modify any grounds of appeal at the time of hearing
Although the Revenue has raised as well as six grounds of appeal, the sole substantive issue relates to the addition of Rs. 4,13,30,421/- on account of unexplained capital introduced during the year, which was deleted by the CIT(A). Hence, revenue is aggrieved.
Brief facts of the case are that the assessee had filed his return for A.Y. 2015-16 on 01.10.2015, declaring income of Rs. 15,26,470/-. The case was selected for limited scrutiny on the issue of ‘substantial increase in capital in a year’. During the course of scrutiny, the AO noted that the capital of the assessee was shown as nil prior to the year under consideration, whereas he has shown closing capital of Rs. 7,06,01,336/- in this year for which no proper explanation had been offered by him. Accordingly, after taking into account the assessee’s share capital in the balance sheet of the firm M/s Next Waves India, wherein the assessee was having 20% share, balance of Rs. 4,13,30,421/- (Rs. 7,06,01,336/- -Rs. 2,92,70,915/-) was treated as unexplained and added back to his income. Consequently, the assessment was completed u/s 143(3) vide order dated 31.12.2017, at assessed income of Rs. 4,28,56,819/-.
Aggrieved, the assessee filed an appeal before the Ld. CIT(A). The assessee explained that he was earning income from three sources, as under:
‘(a) income from salary from the partnership firm
(b)income from commission and business income and
(c)income from other source from investment made.
The assessee submitted relevant details with regard to the above. Before the Ld. CIT(A) and explained that up to A.Y. 2014-15, the tax consultant who had been filing his return of income had not furnished the balance sheet particulars in the ITR form. However, for A.Y. 2015-16, a new tax consultant was engaged to prepare the balance sheet as on 31.03.2015, and he computed the total capital, while submitting full balance sheet particulars in the ITR form. After examining the details submitted, Ld. CIT(A) accepted the assessee’s contention that the closing capital as on 31.03.2015 was the result of accumulated capital over time from different sources of income after deducting expenses / withdrawals and the same also included 20% share received from the firm M/s Next Waves India by him. Accordingly, the addition made by the AO was deleted by the CIT(A) vide order dated 26.09.2025.
Aggrieved with the order of Ld. CIT(A), the Revenue has filed present appeal before the Tribunal.
We have heard the rival submissions and perused the material available on record. We note that the assessee filed requisite details in support of his contentions, as under:
The Ld. CIT(A) examined the assessee’s submissions in the light of the supporting documentary evidences and concluded as under:
“6.Decision: I have carefully considered the assessment order, the submissions of the assessee, and the facts on record. It is clear that the AO has proceeded on a narrow view that since the capital was not disclosed in earlier years’ ITRs, the entire amount as reflected in AY 2015-16 must be treated as unexplained. On the other hand, the appellant has explained that the capital is nothing but accumulated balance over the years in the partnership firm, which has been built up from disclosed sources. The Appellant has produced all records/ evidence in the form of Balance Sheets /ITRs and various annexures of the partnership firm to prove the source of such capital in his hands from various sources both before me and also before the AO at the time of the assessment proceedings.
It is seen from the evidence submitted that for the last so many years the appellant has derived income from business, interest, salary, profits from the partnership firm M/s Next Wave India and his total income from such sources stands at almost more than 9 crore rupees. A major part of this income has come from his 1/5th share of profit from this partnership firm(almost 90%). This is not in question and stands verified from various evidence filed.
The AO has not brought on record any independent evidence to show that fresh capital of Rs. 4,13,30,421/- was introduced during the year under appeal. The addition is based solely on the fact of non-disclosure in earlier ITRs, which by itself cannot be the basis of treating the amount as unexplained. The principle of law requires the AO to establish a nexus between the alleged unexplained capital and any income not disclosed. In absence of such enquiry or evidence, the addition cannot be sustained.
Many of the judicial precedents of various HC/SC have consistently taken the view that such an addition cannot be made.
In CIT v. Shantiprakash Agarwal (2010) 320 ITR 715 (Chhattisgarh HC)
The Hon'ble Court held that once the assessee has explained the source of capital as accumulated balance from earlier years, the AO cannot treat it as unexplained income merely because the assessee did not show it properly in earlier returns. Non-disclosure in earlier ITRs is at best a procedural lapse, not substantive evidence of unexplained income.
In CIT v. Ritu Anurag Agarwal (2010) 2 taxmann.com 134 (Del HC)
The Hon'ble Delhi High Court ruled that capital account balances carried forward from earlier years cannot be added under section 68/69 merely on the ground that they were not reflected in earlier returns, unless the AO shows that fresh unexplained amounts were introduced during the relevant year.
In CIT v. Kulwant Rai (2007) 291 ITR 36 (Del HC) The Hon'ble Court emphasised that additions under section 68 cannot be made in respect of capital which is duly recorded in the books and explained as accumulated balance. The burden lies on the AO to show that there was unexplained inflow in the current year, not merely a reporting variation.
CIT v. Smt. P.K. Noorjahan (1999) 237 ITR 570 (SC)
The Hon'ble Supreme Court clarified that even if an explanation is not fully satisfactory, the discretion under sections like 69 must be exercised judiciously. If facts suggest that the addition is purely technical without any real undisclosed income, the AO is not justified in treating it as income.
In ACIT v. Kulwant Kaur (2012) 26 taxmann.com 65 (ITAT Chandigarh)
The Hon'ble ITAT held that where capital balance represented accumulated profits of earlier years, the AO could not make an addition solely on the ground that the same was not disclosed in past returns. Accounting or disclosure lapse cannot substitute for proof of unexplained income.
Accordingly, the addition of Rs. 4,13,30,421/- made by the AO is hereby deleted.
The ground of appeal is allowed.”
In view of the above facts and circumstances, we are of the considered view that the order of the CIT(A) is well-reasoned and a speaking order passed after due examination of the factual matrix. Therefore, we find no reason to interfere with the same. Accordingly, the Revenue's appeal is dismissed.
In the result, appeal of the Revenue is dismissed.