The Allahabad High Court has upheld the deletion of a ₹2.73 crore addition made under Section 68 of the Income Tax Act, 1961, holding that the Revenue must establish escaped income through material on record and cannot sustain reassessment merely by questioning the adequacy of evidence furnished during the original assessment.

The Bench of Justice Saumitra Dayal Singh and Justice Swarupama Chaturvedi has found no material establishing non-disclosure and no incorrect disclosure proved by the department. The alleged evidentiary deficiencies could therefore not sustain the disputed addition.

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The assessee operated a sole proprietorship engaged in the jewellery trade. According to his explanation, he also inherited an ancestral business carried on under the name M/s Devi Abhushan Bhandar during the relevant previous year.

Following the combination of the two businesses, the proprietor’s capital in the inherited concern was incorporated into his total proprietary capital. The judgment records an increase of ₹2,78,82,287 in the proprietor’s capital.

During the original scrutiny assessment under Section 143(3), the Assessing Authority had questioned this increase. However, no addition was made on that account, and the assessment was completed at the returned income of ₹18,30,550.

Subsequently, reassessment proceedings were initiated following an audit objection. The Assessing Authority treated the disputed capital amount as undisclosed income and made an addition of ₹2,73,65,027.

In doing so, the authority relied on the assessee’s failure to file a revised return and the alleged absence of documentary evidence establishing that the increase in capital arose from the merger of the two businesses.

The National Faceless Appeal Centre allowed the assessee’s appeal on September 10, 2025, deleting the addition made through the reassessment order dated March 6, 2025.

The Income Tax Appellate Tribunal, Agra Bench, subsequently dismissed the departmental appeal on February 20, 2026.

Before the High Court, the Revenue questioned whether the Tribunal’s decision was perverse because it had accepted the substantial increase in capital as a book entry arising from the merger of personal and inherited business accounts.

The department argued that the assessee had not discharged his primary burden of establishing the genuineness, source and actual introduction of the capital through authentic corroborative evidence.

Rejecting the challenge, the High Court found that the Revenue had brought no positive evidence or material on record to show that the disputed amount did not represent capital already available in the ancestral business.

The Bench noted that the department had neither examined the books of M/s Devi Abhushan Bhandar nor considered its returns to determine whether the capital was available in that concern. Further, the Revenue had not disputed the merger of the two pre-existing businesses.

The Court held that reassessment of the disputed amount was unavailable unless the Assessing Authority possessed prima facie material indicating that the capital did not exist in the ancestral business, or material warranting disbelief of the assessee’s explanation about the merger.

On the facts before it, neither basis had been established.

The Bench drew a distinction between reassessment proceedings and revision under Section 263 of the Act.

It held that the Assessing Authority could not sustain reassessment by reasoning that the assessee had failed to produce sufficient evidence during the original assessment. Such reasoning, the Court observed, might be available in proceedings initiated under Section 263, but could not itself justify an addition in reassessment.

For an addition to survive in reassessment, the Revenue had to establish, through available material, that income had escaped assessment because of non-disclosure or incorrect disclosure.

The High Court concluded that the Tribunal’s findings were findings of fact warranting no interference in the appeal. It dismissed the Revenue’s appeal as lacking merit, with no order as to costs.

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