ITO Vs Delnaz Homi Sukheshwalla (ITAT, Mumbai Bench)
Non-Compliance Cannot Tax the Entire Property—but Fresh Evidence Cannot Escape Rule 46A Either: ITAT Restores ₹1.26 Crore Addition
The controversy
The assessee, Ms. Delnaz Homi Sukheshwalla, was subjected to reassessment for AY 2017-18.
During the reassessment proceedings, the assessee failed to furnish the relevant explanations and documentary evidence before the AO. The assessment was therefore completed u/s 147 r.w.s. 144B on 24 January 2025.
The AO treated the entire investment of ₹1.26 crore in an immovable property as unexplained investment u/s 69 and assessed the assessee’s total income at ₹1,28,43,810.
The assessee challenged the assessment before the CIT(A)/NFAC. While the CIT(A) rejected the legal objections concerning the validity of notice u/s 148 and approval u/s 151, he deleted the entire addition on merits.
The Revenue appealed against the deletion. The assessee filed a cross-objection challenging the legality of reopening.
AO taxed the asset merely for want of compliance
The addition arose because the assessee did not furnish the documents necessary to explain the source of the property investment during assessment.
The AO consequently treated the entire purchase consideration as unexplained without separately identifying what part of the investment lacked an explained source.
Before the CIT(A), the assessee furnished explanations and documentary evidence concerning the acquisition and its funding. On examining that material, the CIT(A) found that the AO had neither considered the assessee’s explanation nor identified any specific unexplained component.
The CIT(A) held that adding the entire purchase value merely because the assessee failed to comply during assessment amounted to taxing a capital asset itself, rather than taxing an unexplained investment established through evidence.
Accordingly, the addition of ₹1.26 crore u/s 69 was deleted.
Revenue had no chance to examine fresh evidence
The difficulty, however, was that the documents relied upon by the CIT(A) had not been produced before the AO.
The AO therefore had no opportunity to verify their authenticity, examine the source of funds, reconcile the payment trail or offer comments upon the assessee’s explanation.
The CIT(A) considered this fresh evidence without following the procedure prescribed under Rule 46A of the Income-tax Rules, 1962.
Rule 46A regulates production of additional evidence before the first appellate authority. Where evidence not produced before the AO is admitted, the CIT(A) must ordinarily record the reasons for admission and give the AO a reasonable opportunity to examine the evidence, cross-examine witnesses where relevant & produce rebuttal material.
The appellate authority cannot rely upon additional evidence behind the AO’s back and grant relief without following this procedure.
Assessee challenged the reopening
Through her cross-objection, the assessee challenged the order passed u/s 148A(d), notice issued u/s 148 & the approval obtained u/s 151.
The CIT(A) had earlier dismissed these legal grounds. Before the Tribunal, however, the assessee agreed that the dispute could be adjudicated on merits or restored for factual verification.
The ITAT therefore did not finally decide the validity of reopening. It permitted the assessee to raise the relevant grounds in accordance with law during the restored appellate proceedings.
Neither wholesale addition nor untested deletion
The Tribunal found that the dispute required examination in its proper factual perspective.
On one side, an addition of the entire property value could not be sustained merely because the assessee had not participated effectively in the assessment. Section 69 requires an examination of the investment and the explanation regarding its nature & source. The taxing authority must identify the portion that remains unexplained.
On the other side, the CIT(A) could not delete the addition by relying upon documents produced for the first time without giving the AO an opportunity to verify them.
Thus, both the assessment and first appellate exercise suffered from different procedural deficiencies. The AO lacked the assessee’s evidence, while the CIT(A) considered that evidence without completing the Rule 46A process.
ITAT’s ruling
The ITAT restored the entire matter to the CIT(A) for fresh adjudication.
The CIT(A) was directed to grant the assessee a reasonable opportunity of hearing. If necessary, he could call for a remand report from the AO or otherwise permit the AO to examine the additional evidence.
The assessee would be required to demonstrate the complete source of the property investment through relevant agreements, payment schedules, bank statements, loan or gift documents, confirmations & other contemporaneous records.
After completing factual verification and observing the prescribed procedure, the CIT(A) must pass a fresh order in accordance with law.
Importantly, the Tribunal directed that the exercise should remain confined to necessary factual verification and should not expand into a roving or fishing enquiry.
Both the Revenue’s appeal and the assessee’s cross-objection were allowed for statistical purposes.
Author’s comments
The order balances two elementary but frequently ignored principles.
First, non-compliance may justify an adverse inference, but it does not authorise the AO to mechanically treat the entire purchase price as unexplained income. A property is an asset; only the investment whose source remains unexplained can be brought within s.69.
Second, the first appellate authority possesses wide powers, but additional evidence must travel through the gateway of Rule 46A. The AO is entitled to verify new documents before they become the foundation for deletion.
The remand is deliberately narrow. The Tribunal has prohibited a roving enquiry and confined the exercise to verification of the source of the existing investment. This protects the assessee from the remand being used to open unrelated matters.
The decision also clarifies that neither side has finally succeeded. The ₹1.26 crore addition has not been sustained, but its deletion has also been vacated. The result will depend upon whether the assessee’s fresh evidence establishes an identifiable & credible fund trail.
The practical lesson is clear: evidence withheld at assessment may still be admitted in appeal for sufficient cause—but relief cannot be granted until the Revenue receives a fair opportunity to test it.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI BENCHES, MUMBAI
This appeal by the Revenue and the Cross Objection by the Assessee are directed against the order dated 03.12.2025, impugned herein, passed by the National Faceless Appeal Centre/Ld. Commissioner of Income Tax (Appeals) {in short ‘Ld. Commissioner’} under section 250 of the Income Tax Act, 1961 (in short ‘the Act’), for the A.Y. 2017-18.
2. Brief facts relevant for adjudication of the instant appeal are that the Assessee, for one reason or the other, failed to furnish the relevant documents before the AO. Consequently, the AO, vide assessment order dated 24.01.2025, passed under section 147 read with section 144B of the Act, assessed the total income at Rs. 1,28,43,810/-, after making an addition of Rs. 1,26,00,000/- under section 69 of the Act on account of unexplained investment.
3. The Assessee challenged the assessment order before the Ld. Commissioner, who dismissed the legal grounds concerning the validity of the notice issued under section 148 and the approval granted under section 151 of the Act. However, on merits, the Ld. Commissioner deleted the addition of Rs. 1,26,00,000/-, inter alia, by observing that the AO neither considered the explanation of the Assessee nor identified the unexplained component of the investment. The Ld. Commissioner, therefore, held that the addition of the entire purchase value, without examining the evidentiary basis, amounted to taxation of a capital asset merely on account of non-compliance, rather than on the footing of unexplained investment.
4. As observed above, the Assessee failed to furnish the relevant submissions and documents before the AO. Consequently, the AO had no opportunity to examine the explanation and documents subsequently produced by the Assessee.
5. The Assessee, vide C.O. No. 229/M/2026, has also challenged the legality of the order passed under section 148A(d) and the notice issued under section 148 of the Act. However, during the course of hearing, the Assessee agreed to the adjudication of the matter on merits and/or restoration thereof for factual verification by the Ld. Commissioner.
6. Considering the peculiar facts and circumstances of the case in totality, we observe that the issue requires examination in its proper perspective. Further, the Ld. Commissioner considered the additional evidence furnished for the first time before him without following the procedure prescribed under rule 46A of the Income Tax Rules, 1962. We, therefore, deem it appropriate to restore the matter to the file of the Ld. Commissioner for decision afresh in accordance with law. Suffice to say, the Ld. Commissioner shall afford a reasonable opportunity of being heard to the Assessee and, if required, may call for a remand report from the AO and/or afford an opportunity to the AO to examine the additional evidence.
7. We clarify that the exercise shall remain confined to the necessary factual verification and shall not extend to a roving enquiry.
8. The Assessee shall be at liberty to raise any other ground in accordance with law.
9. In the result, the Revenue’s appeal and the Assessee’s Cross Objection are allowed for statistical purposes.
Order pronounced in the open court on 17.08.2026.
