Can Income Tax Department Tax the Entire On-Money Received by a Builder in the Year of Receipt? ITAT Mumbai Says No!
ITAT Mumbai Allows Project Completion Method, Permits Telescoping of ₹42.44 Crore and Deletes Interest Disallowance
Case: DCIT v. Sumer Builders
Appeal Nos.: ITA Nos. 4915 & 5130/Mum/2016
Assessment Year: 2011-12
Order Date: 8 January 2021
Bench: ITAT Mumbai – F Bench
Members: Shri C.N. Prasad, Judicial Member and Shri M. Balaganesh, Accountant Member
Introduction
Real estate transactions involving receipt of cash over and above the documented sale consideration, commonly known as ‘on-money’, have always attracted considerable attention from the Income Tax Department.
But an important question arises: When a builder receives on-money during the construction of a project, can the entire amount be taxed as income in the year of receipt? Can the expenditure incurred out of such undisclosed receipts towards the same project be ignored? And what happens when the builder consistently follows the Project Completion Method of accounting?
The Mumbai Bench of the Income Tax Appellate Tribunal addressed these important questions in DCIT v. Sumer Builders, delivering a significant ruling on the taxability of on-money, telescoping of undisclosed receipts against project expenditure and allowability of interest on borrowed funds.
The decision is particularly relevant for real estate developers and professionals handling search assessments involving undisclosed cash receipts.
1. Facts of the Case
A search and seizure operation was conducted in the Sumer Group of cases on 23 December 2010. Although the assessee, Sumer Builders, was not itself subjected to search, its project site office at Prabhadevi was surveyed under Section 133A.
During the search, the statement of one of the partners of Sumer Corporation, Shri Ramesh Shah, was recorded under Section 132(4).
In his statement, he admitted receipt of on-money in cash in respect of flats and parking spaces in the assessee’s ongoing project, known as Sumer Trinity Towers.
Based on this statement, the assessee disclosed on-money receipts of ₹47,16,72,184 in its return of income for AY 2011-12.
Further, its sister concern, Vighnaharta Projects Pvt. Ltd. (VPPL), separately disclosed ₹10 crore.
Thus, the total disclosed amounts were approximately ₹57.16 crore.
The assessee explained that the disclosed amounts had been utilised towards expenditure incurred on the ongoing Prabhadevi project and had been reflected as additions to Work-in-Progress (WIP).
However, the Assessing Officer disallowed the entire expenditure of ₹57.16 crore claimed as application of the disclosed income towards project WIP.
The Assessing Officer also disallowed interest expenditure of approximately ₹14.94 crore under Section 36(1)(iii), alleging that borrowed funds had been diverted to sister concerns for non-business purposes.
The assessee challenged these disallowances before the CIT(A), Mumbai, and subsequently before the ITAT.
2. First Issue: Can On-Money Be Telescoped Against Project Expenditure?
The first important issue before the Tribunal was whether the on-money disclosed by the assessee could be treated as having been utilised towards expenditure incurred on the very same project.
The assessee submitted that:
– The disclosed on-money was generated from the Prabhadevi project.
– The amounts had been utilised towards expenditure incurred on the ongoing project.
– The expenditure had been accumulated as additional WIP.
– The statement recorded during the search itself indicated that the application of the disclosed income would be furnished to the Department.
– No cash was found or seized during the search or survey operations.
The Department, however, argued that the assessee had not produced sufficient documentary evidence to substantiate the expenditure.
Tribunal’s Important Observations
The Tribunal observed that the Department had relied upon the statement recorded under Section 132(4) for bringing the on-money to tax.
However, the same statement also contained an assurance that details of the application of the disclosed income would be furnished.
The Tribunal held that if the Department relied upon the statement for taxing the receipts, it could not selectively ignore the other part of the same statement dealing with the utilisation of those receipts.
The Tribunal observed that a statement sought to be used as evidence must be read as a whole and not selectively.
It further noted that the CIT(A) himself had accepted that expenditure had actually been incurred on the project. This finding had not been challenged by the Revenue.
The Tribunal also rejected the observation that the project was substantially completed and, therefore, no further expenditure was required. The Assessing Officer himself had acknowledged that the project was under construction.
Telescoping of On-Money Against Project Expenditure
The Tribunal accepted the principle that once undisclosed income has been offered to tax, its application towards expenditure cannot automatically be ignored, particularly where the expenditure relates to the very project from which the receipts originated.
It relied upon the decision of the Bombay High Court in CIT v. Golani Brothers (250 Taxman 446), which recognised that where unaccounted expenditure is incurred out of on-money receipts, taxing both the receipt and the expenditure can result in double addition.
The Tribunal also relied upon the Supreme Court decision in CIT v. S. Nelliappan (66 ITR 722) while considering the inference that undisclosed business income could have been utilised towards corresponding expenditure.
The Tribunal accordingly accepted the assessee’s claim of telescoping.
However, the assessee itself had admitted that 10% of the on-money represented the estimated profit element.
Therefore, the Tribunal restricted the telescoping benefit as follows:
Particulars| Amount
On-money disclosed by Sumer Builders| ₹47.16 crore
Estimated profit element retained at 10%| ₹4.72 crore
Application allowed towards project WIP| ₹42.44 crore
Thus, the Tribunal allowed telescoping of ₹42.44 crore against the on-money of ₹47.16 crore.
3. Second Issue: Can the Entire On-Money Be Taxed in the Year of Receipt?
This is perhaps the most significant aspect of the judgment.
The assessee was consistently following the Project Completion Method for recognising income from its real estate project.
Under this method:
– Only 10% of incremental project receipts was offered to tax each year.
– The remaining receipts and corresponding project costs were carried forward.
– The final profit was recognised upon completion of the project.
Importantly, the Department had accepted this method of accounting in the assessee’s earlier as well as subsequent assessment years.
The assessee contended that the on-money represented part of the sale consideration for flats and parking spaces and, therefore, should also be governed by the same accounting method.
Accordingly, only 10% of the on-money should be taxed in the relevant assessment year, while the balance should be recognised upon completion of the project.
The Revenue opposed this contention, arguing that the assessee had already admitted the receipts in its return and that the entire amount was taxable in the year of receipt.
It also argued that the assessee had not filed a revised return to withdraw the earlier offer of income.
Tribunal Accepted the Project Completion Method
The Tribunal observed that the Assessing Officer had himself accepted that the assessee was following the Project Completion Method and had consistently offered 10% of incremental receipts to tax.
This method had been accepted by the Department in earlier and subsequent years.
The Tribunal held that the on-money was nothing but part of the sale consideration received on the sale of flats and parking spaces.
Therefore, the same method of accounting had to be applied to the on-money receipts as well.
The Tribunal observed that what the assessee was seeking was merely postponement of recognition of income to the year of completion of the project, in accordance with the accounting method regularly followed and accepted by the Department.
It relied upon the principle of consistency laid down by the Supreme Court in:
1. Radhasoami Satsang v. CIT (193 ITR 321).
2. CIT v. Excel Industries Ltd. (358 ITR 295).
Only Profit Element in On-Money Is Taxable
The Tribunal also reiterated that the entire on-money receipt cannot automatically be treated as income.
It relied upon the following important decisions:
– CIT v. President Industries (258 ITR 654) – Gujarat High Court.
– CIT v. Hariram Bhambhani – Bombay High Court.
– CIT v. Guruprerna Enterprises – Mumbai ITAT, affirmed by the Bombay High Court.
The Tribunal reiterated that on-money receipts represent undisclosed sale proceeds and not income per se. Only the profit element embedded in such receipts is liable to tax.
No Revised Return Required to Raise a Legal Claim Before Appellate Authorities
Another important aspect was that the assessee had originally offered the entire on-money in its return of income.
The Revenue argued that the assessee could not subsequently change its position without filing a revised return.
The Tribunal rejected this objection.
It relied upon:
– NTPC Ltd. v. CIT (229 ITR 383) – Supreme Court.
– CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (349 ITR 336) – Bombay High Court.
– Nirmala L. Mehta v. CIT (269 ITR 1) – Bombay High Court.
The Tribunal observed that there is no estoppel against statute and that an assessee can raise a legal claim before appellate authorities even if the amount was originally offered in the return.
Accordingly, the Tribunal held that only 10% of the on-money receipts were taxable in the relevant assessment year, with the balance to be recognised in the year of completion of the project.
This ground was allowed in favour of the assessee.
4. Third Issue: Interest on Borrowed Funds Advanced to Sister Concerns
The assessee had incurred interest expenditure of approximately ₹14.94 crore on borrowed funds, which was included in project WIP.
The Assessing Officer alleged that interest-bearing funds had been diverted to sister concerns for non-business purposes.
The CIT(A), after obtaining a remand report, allowed interest attributable to approximately ₹49 crore of loans utilised for the assessee’s business, while sustaining the remaining disallowance.
Both the assessee and the Revenue challenged the respective portions of the decision.
Tribunal Deleted the Remaining Interest Disallowance
The Tribunal noted that the assessee had sufficient interest-free funds available to make advances to its sister concerns.
Further, the assessee and its sister concerns were engaged in the same line of business.
The advances were made to ensure continuity of business activities and avoid disruption in ongoing real estate projects.
The Tribunal held that such advances were supported by commercial expediency.
It relied upon the following important judicial precedents:
1. Hero Cycles Pvt. Ltd. v. CIT (379 ITR 347) – Supreme Court.
2. CIT v. Reliance Utilities and Power Ltd. (313 ITR 340) – Bombay High Court.
3. CIT v. HDFC Bank Ltd. (366 ITR 505) – Bombay High Court.
4. CIT v. Reliance Communication Infrastructure Ltd. (260 CTR 159) – Bombay High Court.
The Tribunal observed that the Revenue had not controverted the availability of sufficient interest-free funds.
It also accepted that the advances were made for commercial expediency, considering the common business interests of the assessee and its sister concerns.
Accordingly, the remaining interest disallowance sustained by the CIT(A) was deleted.
The Revenue’s appeal challenging the relief granted by the CIT(A) was also dismissed.
5. Final Decision of the Tribunal
The Tribunal partly allowed the assessee’s appeal and dismissed the Revenue’s appeal.
The important reliefs granted were:
Issue| Decision
Application of disclosed on-money towards project expenditure| Telescoping of ₹42.44 crore allowed
Taxability of on-money| Only 10% taxable in the relevant year; balance in year of project completion
Interest disallowance under Section 36(1)(iii)| Remaining disallowance deleted
Revenue’s appeal| Dismissed
6. Important Takeaways for Real Estate Developers and Tax Professionals
This judgment offers several useful principles for handling tax assessments involving on-money and real estate projects.
1. On-money is not necessarily income in its entirety.
Where undisclosed sale receipts are identified, only the profit element embedded in such receipts may be taxable, depending on the facts and applicable legal principles.
2. Telescoping against project expenditure is permissible.
Where the source of project expenditure is explained by undisclosed receipts from the same project, the Department cannot mechanically tax both the receipts and the corresponding expenditure.
3. Consistency in the accounting method matters.
Where the Project Completion Method has been consistently followed and accepted by the Department, the same method should ordinarily be applied to on-money receipts forming part of the same project consideration.
4. Search does not automatically determine the year of taxation.
The year in which undisclosed receipts are detected or admitted does not necessarily determine the year in which the corresponding project profit becomes taxable.
5. An admission in the return does not prevent a legitimate legal claim.
An assessee can raise a valid legal claim before appellate authorities even if the amount was originally offered in the return, subject to the applicable procedural and evidentiary requirements.
6. Commercial expediency is relevant for interest disallowance.
Advances to sister concerns engaged in the same line of business, supported by commercial expediency and availability of interest-free funds, may not justify disallowance of interest under Section 36(1)(iii).
Conclusion
The decision in DCIT v. Sumer Builders is a comprehensive ruling dealing with three important aspects of real estate taxation: telescoping of undisclosed receipts against project expenditure, recognition of income under the Project Completion Method and allowability of interest on borrowed funds.
The most significant lesson is that taxability of on-money cannot be decided merely by looking at the date of receipt. The nature of the receipt, its utilisation, the method of accounting regularly followed and the actual profit embedded in the transaction must all be considered.
A search may reveal undisclosed receipts, but that does not mean the entire receipt automatically becomes taxable profit in the year of detection.
Equally, where the assessee establishes that the receipts have been utilised towards the very project from which they arose, the corresponding application of income cannot be ignored mechanically.
For real estate developers, this judgment is a useful reminder that the Department must examine the complete commercial and accounting realities of a project rather than viewing undisclosed receipts in isolation.
After all, in a real estate project, receipt of money and earning of profit are not necessarily the same event.
Case Law: DCIT v. Sumer Builders, ITA Nos. 4915 & 5130/Mum/2016, AY 2011-12, ITAT Mumbai, order dated 8 January 2021.
The copy of the order is as under:
