Entire Land Deal Receipts Cannot Be Taxed as Income: ITAT Restricts Addition to Estimated Profit Element

Munir Usmanbhai Ghanchi Vs ITO (ITAT Ahmedabad)

Entire Land Deal Receipts Cannot Be Taxed as Income: ITAT Restricts Addition to Estimated Profit Element

The Ahmedabad ITAT granted major relief to an assessee engaged in purchase and sale of land plots by holding that entire business receipts, advances and property transaction amounts cannot automatically be treated as unexplained cash credits under Section 68. The Tribunal observed that only the profit element embedded in disputed receipts could be brought to tax.

The reassessment was reopened based on RMS information relating to high-value property transactions, cash deposits and non-filing of return. The Assessing Officer ultimately made additions exceeding ₹6.72 crore, including ₹6 crore under Section 68 towards current liabilities, addition towards opening capital, disallowance under Section 80C and addition for alleged undisclosed business receipts.

Before the Tribunal, the assessee furnished detailed reconciliation of liabilities, advances, property dealings and turnover. It was explained that the amounts largely represented advances received against land transactions, temporary financial accommodation from relatives and business receipts connected with real-estate dealings. The assessee also pointed out that many receipts had already been offered as business turnover and certain transactions related to properties handled as power-of-attorney holder for family members.

The ITAT found that the AO had mechanically treated entire closing liabilities as unexplained cash credits without appreciating the business nature of transactions. The Tribunal specifically observed that in such cases, the entire receipts cannot be taxed and only the embedded profit element can be assessed. Considering the facts, incomplete verification and nature of land business, the ITAT estimated taxable income at 15% of disputed turnover of ₹1.87 crore and restricted the addition to ₹28.16 lakh instead of ₹6 crore.

The Tribunal further deleted addition relating to opening capital after accepting that the same was supported by Income Declaration Scheme (IDS) declarations. Deduction under Section 80C towards LIC premium was also allowed based on supporting evidence. Addition towards undisclosed business receipts was deleted after the Tribunal accepted that the amounts were already part of declared turnover and related family property transactions.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal has been filed by the assessee against the order dated 15.07.2025 passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as ‘Ld. CIT (A)’ in short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’ in short) for Assessment Year 2015-16.

2. The assessee has raised following grounds of appeal:-

“1. The CIT(A) erred in law and in the facts of the case in confirming the order of the Assessing Officer in exercising jurisdiction u/s 147 of the Act.

2. The CIT(A) erred in law and in the facts of the case in confirming the order of the AO in making addition of Rs. 6,00,07,464/- on account of liabilities u/s 68 of the Act.

3. The CIT(A) erred in law and in the facts of the case in confirming the order of the AO in making addition of Rs. 39,13,920/- on account of opening capital u/s 68 of the Act.

4. The CIT(A) erred in law and in the facts of the case confirming the order of the AO in making addition of Rs. 1,00,000/- u/s 80C of the Act.

5. The CIT(A) erred in law and in the facts of the case in confirming the order of the AO in making addition of Rs. 20,91,261/- on account of undisclosed business receipts.”

3. The brief facts of the case are that the assessee is an individual engaged in the business of purchase and sale of land plots. The case of the assessee was reopened u/s 147 of the Act on the basis of information received through Risk Management Strategy (RMS) of the Department, which indicated that the assessee had entered into high-value financial transactions including purchase and sale of immovable properties, substantial cash deposits in bank accounts and non-filing of return of income for the relevant assessment year. Pursuant to notice issued u/s 148 of the Act, the assessee filed return of income declaring total income at Rs. 11,29,700/-. The assessment was then completed u/s 147 r.w.s. 144B of the Act on 20.03.2023 determining total income at Rs. 6,72,42,345/- by making various additions, including (i) addition of Rs. 6,00,07,464/- on account of liabilities u/s 68 of the Act, (ii) addition of Rs. 39,13,920/- on account of capital, (iii) disallowance u/s 80C of the Act and (iv) addition of Rs. 20,91,261/- as undisclosed business receipts.

4. Aggrieved by the order of the Assessing Officer, the assessee has filed an appeal before the Ld. CIT(A), who dismissed the appeal of the assessee and confirmed the additions made by the Assessing Officer.

5. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal.

6. Before us, the Ld. AR reiterated the submissions advanced before the lower authorities and further filed detailed paper book containing reconciliation of current liabilities, capital account and business receipts. The Ld. AR also submitted that the Assessing Officer has made additions in a summary manner, without properly appreciating the nature of the assessee’s business and without examining the evidences placed on record. With regard to the addition u/s 68 on account of liabilities, it was submitted that the same represents advances received in the course of business, advances from friends and relatives and amounts relating to property transactions. The Ld. AR drew our attention to the detailed working placed in the paper book wherein opening balances, transactions during the year and closing balances have been duly reconciled. It was further submitted that a substantial part of the receipts has already been considered as business receipts and offered to tax, and in respect of remaining amount the assessee has voluntarily offered income at the rate of 10% in line with settled legal position that only profit element embedded in such receipts can be brought to tax.

6.1 In respect of addition on account of opening capital, it was submitted that the same is fully explained through Income Declaration Scheme (IDS) declarations and past income. The capital account along with IDS forms and working has been placed on record to demonstrate that the closing capital is duly reconciled.

6.2 Regarding disallowance u/s 80C of the Act, it was submitted that the assessee had made payment towards LIC premium and the supporting evidence has been furnished.

6.3 With respect to addition on account of undisclosed business receipts, the Ld. AR submitted that certain transactions pertain to properties sold by the assessee as power of attorney holder on behalf of his parents and therefore do not represent his income. It was further submitted that certain receipts have already been included in the turnover and the assessee has offered additional income on the differential amount.

7. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that the assessee had failed to furnish necessary evidences during assessment proceedings and therefore the additions were rightly made and confirmed.

8. We have carefully considered the rival submissions and perused the material available on record including the additional evidences filed before us.

9. Validity of Reopening

The first issue relates to the validity of reassessment proceedings initiated u/s 147 of the Act. From the record, it is evident that the reopening was based on specific information relating to high-value property transactions, cash deposits and non-filing of return of income. The Assessing Officer issued notice under section 148A(b) and thereafter proceeded in accordance with law. Therefore, in our considered opinion, the Assessing Officer had in his possession tangible material which formed a reasonable basis for belief that income chargeable to tax had escaped assessment. Accordingly, we find no infirmity in the action of the Assessing Officer in initiating proceedings u/s 147 of the Act. This ground of appeal is, therefore, dismissed.

10 Addition u/s 68 on account of liabilities

10.1 The major addition in the present case pertains to Rs. 6,00,07,464/- being the closing balance of current liabilities which has been treated as unexplained cash credit u/s 68 of the Act. It is observed that the Assessing Officer has made the addition primarily on the ground that the assessee failed to furnish confirmations and supporting evidences during the course of assessment proceedings. Before us, the assessee has furnished detailed reconciliation of the liabilities along with ledger extracts, details of advances received, movement of funds and explanation regarding property transactions undertaken during the year. The assessee has explained that the impugned liabilities substantially represent advances received against land transactions, amounts received in the ordinary course of business and temporary financial accommodation from friends and relatives. The assessee has also demonstrated that substantial receipts have already been reflected as business turnover.

10.2 Heard the arguments of both the parties and perused the material available on record.

The total amount received by the assessee during the year is Rs.6,00,55,729/-, out of which the advances from customer was Rs. 3,38,00,097/-. Out of these receipts, the assessee has offered an income of Rs.72,93,097/- in the return of income filed u/s 148 of the Act. Out of the advances received of Rs.3.38 Cr., the assessee has returned Rs.20 lakhs and Rs.25 lakhs on account of cancellation of deeds. Out of the total amount of receipts, the amounts received from father of the assessee namely Shri Usman Ghanchi was Rs.33,00,000/-, thus leaving the total balance receipt of Rs.1,87,77,000/-. Unsecured loans received from father Shri Usman Ghanchi of Rs.29,00,000/- and of Rs.7 lakhs from mother Rahana Ghanchi are proved and not in dispute. The journal entry related to purchase of property of Shah Alam Scheme, which has been paid by father of the assessee and profits thereof were offered due tax. The entry on the purchase of property for which the amounts have been paid by the father has been repeated again by the Assessing Officer which led to double addition.

10.3 From the material placed on record, it is evident that the Assessing Officer has proceeded to treat the entire closing balance of liabilities as unexplained cash credit without appreciating the true nature of the transactions and without bringing any material on record to establish that the entire receipts constituted undisclosed income of the assessee. It is a settled proposition of law that where transactions are intrinsically connected with business activities, the entire receipts cannot be assessed as income and only the profit element embedded therein can be subjected to tax. At the same time, it is also evident that complete supporting evidences in respect of all the credits and liabilities were not furnished before the Assessing Officer during the course of assessment proceedings. Therefore, the explanation of the assessee cannot be accepted in entirety. Considering the peculiar facts of the case, incomplete verification of certain transactions and the nature of business carried on by the assessee, some reasonable estimation of income embedded in such receipts would meet the ends of justice. The undisclosed turnover after the examination of the entire transactions was found to be Rs.1,87,77,000/-. The regular gross profit offered by the assessee of Rs.72,23,097/- over the turnover of Rs.6,00,55,729/- works out approximately 15%. Considering the nature of business of the assessee dealing in purchase and sale of land plots, volume of transactions and overall facts and circumstances of the case, we therefore deem it fair and reasonable to tax the income attributable to such disputed receipts at 15% of the total business turnover. The total amount of tax on the undisclosed turnover works out to Rs.28,16,655/-, which shall be treated as additional income from regular business activities.

10.4 Accordingly, the Assessing Officer is directed to confine the addition u/s 68 of the Act to 15% of the total business turnover/receipts which amounts to Rs.28,16,655/-

Thus, this ground of appeal of the assessee is partly allowed.

11. Addition u/s 68 on account of Opening Capital

The next issue relates to addition of Rs. 39,13,920/- on account of opening capital. The assessee has explained that the capital has arisen from income declared under the Income Declaration Scheme, 2016 and subsequent business income. The capital account along with detailed reconciliation and supporting documents has been placed on record. The fact of IDS 2016 declaration is a fact on record, not in dispute. Hence, we direct the Assessing Officer shall allow the claim of the assessee in light of IDS declarations.

This ground of appeal of the assessee is accordingly allowed.

12. Disallowance u/s 80C of the Act.

The assessee has claimed deduction of Rs. 1,00,000/- u/s 80C of the Act towards LIC premium. The Assessing Officer disallowed the same due to absence of evidence during assessment proceedings. The assessee has produced supporting documents. The Ld. DR could not rebut the evidence. Hence, we direct the Assessing Officer shall allow the claim of the assessee in light of evidences on record.

This ground of appeal of the assessee is accordingly allowed.

13. Addition on account of Undisclosed Business Receipts

The addition of Rs. 20,91,261/- has been made on account of alleged undisclosed business receipts. The assessee has submitted that the transactions pertain to properties sold on behalf of family members as power of attorney holder and the said receipts have already been included in declared turnover. The assessee has also offered additional income on differential amount. In our considered view, the entire amount cannot be treated as income without examining the nature of transactions and corresponding evidences. Since the receipts have already been included in declared turnover, we hold that no further addition is called for on this count.

This ground of appeal of the assessee is thus allowed.

14. In the result, the appeal of the assessee is partly allowed in terms indicated hereinabove.

Order pronounced in the open Court on 15.05.2026