Concept of ‘on money’ during Search and Surveys

Summary: ‘On money’ in real estate refers to the unrecorded cash component received by builders in excess of the official agreement value for properties. This undeclared amount often surfaces during income tax search and survey operations through seized documents like diaries, loose sheets, or digital communications, meticulously detailing cash receipts, dates, and property specifics. While the onus generally lies with the revenue department to prove the receipt of ‘on money,’ incriminating evidence or discovery of excess cash shifts the burden to the assessee. Key issues in taxing ‘on money’ include the head of income it falls under, the allowability of expenses against it, and whether it can be extrapolated across an entire project without specific evidence. Additions based solely on diary entries without corroborating excess cash found are often unsustainable, as such entries alone are not conclusive evidence. Furthermore, tax authorities cannot vaguely assert that received cash has been spent without concrete proof. ‘On money’ is typically taxed as business income, and associated business expenses, even if unrecorded, can be claimed as deductions, provided the assessee can substantiate them. Double taxation of both ‘on money’ as income and expenses incurred from it as unexplained expenditure is generally not permissible. Extrapolation of ‘on money’ receipts across an entire project based on findings from a few units is generally not justified without specific evidence for all transactions. Additionally, while the assessee is generally entitled to deductions like under Section 80-IBA for ‘on money’ treated as business income, buyers implicated in ‘on money’ transactions can contest additions if the evidence, such as a builder’s statement, is not adequately corroborated or if cross-examination is denied.

1. WHAT IS ‘ON MONEY’?

During the course of search and survey, evidence of ‘on-money’ received in cash, meticulously noted in diaries and documents are commonly found and seized in the cases of action against builders and developers. The evidence is normally considered very clinching with specific details, such as dates of receipt, amount received both in cash and cheque, the property for which the amount has been received, and the persons from whom the payments are received, etc. Generally, such findings of search and survey are followed by disclosures by the assessee also. Normally, such searches and surveys are celebrated as great successes, both by the Investigation Wing and also assessments are made bringing to tax the on-money receipt as income of the assessee.

Example: A builder sells flat for Rs. 2 crores. The agreement value is Rs. 1.5 crores. The builder receives Rs. 1.5 crores through bank and Rs. 50 Lakhs is received in cash. The builder records transaction of only Rs. 1.5 crores in his books of accounts. Here, the unrecorded Rs. 50 Lakhs is ‘on money’

2. HOW ‘ON MONEY’ GETS SURFACED?

The ‘on money’ gets surfaced during search and surveys in the form of loose sheets, chits, diaries, whatsapp chats, agreements etc. The difference of amount actually received both in cash and through bank and amount recorded in books of account is ‘on money’.

3. ONUS TO PROVE ‘ON MONEY’

The burden of proof of ‘on money’ depends on the documents found and seized during the search. The onus is on the revenue to prove that the assessee has received ‘on money’. However, where incriminating evidences are found or excess cash is found, the burden to rebut the same is on assessee. In the case of CIT v Smt. Sunita Dhadda 100 taxmann.com 525 (Raj) – SLP dismissed at 100 taxmann.com 526 (SC), it was held that the onus is on revenue.

4. VARIOUS ISSUES IN TAXATION OF ‘ON MONEY’

There are various issues in the taxation of ‘On Money’ such as head of income under which on money is to be taxed, whether expenses are allowable against ‘on money’, deductions against ‘on money’ etc. These various issues are being explained with the help of the following case study.

A search action takes place in the case of M/s. U Realtors engaged in the business of Real Estate. During the course of the search action, a diary is found containing the following entries in respect of one of its projects at Mumbai:

The assessing officer observed that one of the registered Sale Deed of flat 101/J and has found that the agreement value mentioned as 1.60 stands for Rs. 1.60 Crores. Accordingly the assessing officer concluded that cash received against flat 101/J is Rs. 0.80 crore. The AO concluded that total Rs. 2.20

Crore is cash received by the assessee on account of on money on sale of the above flats. Now following questions may arise in the mind of the Assessing Officer and the assessee.

(A) Whether the addition can be made where no excess cash is found during the course of search?

In the above case study, a diary was found during the search. The search team has not found any excess cash during the search. Now, a question arises whether the addition can be made on the basis of the entries in the Diary in a situation where no excess cash is found during the course of search? The onus to prove that the assessee has received on money is on department as no excess cash as compared to cash in hand as per books of account was found. The same was held in case of CIT v Smt. Sunita Dhadda 100 taxmann.com 525 (Raj).

A diary is not regular books of accounts. As per Section 34 of Indian Evidence Act, 1872, entries in books of account, including those maintained in an electronic form, regularly kept in the course of business, are relevant whenever they refer to a matter into which the Court has to inquire, but such statements shall not alone be sufficient evidence to charge any person with liability. Therefore, where no excess cash or any other incriminating evidence is found, the alone diary cannot be the basis to make the addition.

Common Cause v Union of India 394 ITR 220 (SC); CBI v V. C. Shukla (1998) 3 SCC 410

In the absence of cash found during the search, addition cannot be made on the basis of a diary or even computer print outs found during the course of search.

(B) Whether the AO can contend that the cash received has been spent?

The another issue that arises that whether it will be legally permissible for the assessing officer to contend that the cash of Rs. 2.20 Crores is received but the same would have been already spent in some way and therefore, the same is not found during the search?

Assessing Officer cannot make a loose observation that the amount would have been received and also spent on some unknown item. The AO must prove with evidence such as expense vouchers that amount received in cash has been actually spent or invested. Mere Surmises and suspicions cannot be the basis of addition. There must be concrete evidence of expenditure incurred. The same was held in the case of Dhakeshwari Cotton Mills Ltd. v CIT 26 ITR 775 (SC) and Lalchand Bhagat Ambica Ram v CIT 37 ITR 288 (SC).

(C) Whether the cash amount of 0.80 be read as Rs. 80,000/-

In the above case study, the assessee contends that the amount cash received of 0.80 is not Rs. 0.80 crore. Rather, it is 0.80 Lakhs i.e. Rs. 80,000/- received for expenses incurred on behalf of customer. Now the question arises can the assessee contend that the amount mentioned as 0.80 cannot be interpreted as 0.80 Crore but it represents reimbursement of some expenses incurred on behalf of the buyers of the flats and the same represents Rs. 80,000/- and not 80 Lakhs.

In the registered sale deed, the AO has found that the agreement value of flat is Rs. 1.60 crores. The same has been mentioned in diary as 1.60. Applying the same proportion, the AO has held that 0.80 is Rs. 80 Lakhs received in cash. It would be very difficult for the assessee to contend that 0.80 is Rs. 80,000/-

(D) Addition where the excess cash has been found during the course of search

In case excess cash has been found during the course of search, the notings in the diary will become relevant. The diary will no more be a dumb document. The Onus of proving that the notings do not reflect receipt of on money will be shifted on the assessee.

(E) ‘On Money’ taxable under specified sections or as business income?

The assessee has disclosed that he has received the on money and has agreed to include it in his income. In such a case a question arises as to whether unaccounted ‘on money’ received from the customers is taxable as Income from Other Sources u/s 68 of the Act or it can be brought to tax as business income

The taxability of ‘on money’ will be taxable as normal business income, as it is directly linked with project or flats sold in the normal course of business. For instance, in the above example, it was mentioned in the diary that the on money against Flat 101/J to 103/J was Rs. 2.20 crores. The department cannot tax it as income under Sec 68 of the Act. The unrecorded receipts are directly linked with business of assessee and therefore cannot be taxed under head income from other sources. The on money of Rs. 2.20 crore in this case study will be added in the turnover of assessee.

(F) Whether income must be taxed on completion of the project?

The business income will be taxed in accordance with method of accounting regularly employed by the assessee. In such cases argument is advanced by the assessee that unaccounted cash received is part of total sale proceeds and the same should be taxable as part of total project revenue and in accordance with the method of accounting regularly followed either as per Completed Contract Method (CCM) or Percentage of Completion Method (PCM).

The above issue was dealt by Pune Bench of ITAT in the case of Dhanvarsha Builders & Developers Pvt. Ltd. v Dy. CIT [2006] 102 ITD 375 (Pune – Trib.) and it was held by the Tribunal that such income should be taxed in accordance with the method of accounting regularly followed.

In this case Tribunal observed as under:

The conduct of search and seizure operation in a particular year does not lead to an inference that the undisclosed income detected as a consequence thereof has to be taxed in the assessment year relevant to the previous year in which search was conducted. In other word, accounting of profits have yet to be made on the basis of method of accounting followed by the assessee. No elaborate discussion has been made in this regard in the assessment order. Therefore, it would be appropriate that this matter is restored to the file of the AO to find out the method of accounting, namely, whether the assessee has been accounting the profits—(1) on year to year basis, (it) on sale basis or (iii) on project completion method.

In the case of assessee following Project Completion method it was held that On Money will be part of the income of the year when project is completed – CIT v Happy Home Corporation 414 ITR 524 (Guj) – SLP of Department Dismissed (SC)

(G) Whether expenses allowable against the ‘On Money’

The assessee admits that on money has been received and agrees to include it in the business turnover. However, he claims that out of the on money received, he has expended the amount on unrecorded expenditure. It is general practice in the real estate industry that the payment to contractors, bribes, penalties, cash payment for purchase of land etc. are not fully recorded in books of accounts. The on money received for sale of flats is utilized for these purposes. The assessee wishes to claim the expenses against the amount included in turnover. Whether the assessee can claim benefit of deduction for the same on the pretext that the amount spent is towards business expenses which has been incurred out of the on money received.

The assessee can claim the expenditure out of on money as deduction against the amount of on money included in turnover. The entire on money cannot be held as taxable. Only the profit portion is taxable and not the entire on money. The reason for the same is that the on money represents the excess receipts and not the excess income. However, the onus to prove that the on money has been spent, will be on the assessee. The assessee needs to justify the same by providing the vouchers, statements of contractors etc.

In the present case study, suppose out of Rs. 2.20 crores on money, M/s U realtors has expended Rs. 1.70 crores. Here, only Rs. 50 Lakhs will be taxable as business income and not the entire Rs. 2.20 crores.

A note-worthy point is that where computation is made de-hors books of accounts, provisions of section 40A(3) are not applicable.

The benefit of telescoping needs to be allowed. The relevant case laws are as under:

In the case of Pr. CIT v Aliasgar Anvarali Varteji 96 taxmann.com 231 (Guj), it was held that where entire unaccounted income found during search was offered as part of overall disclosure and negative balance in books of account was on account of payment made out of said unaccounted income, assessee could not be denied benefit of telescoping of original disclosure.

In the case of Dhanvarsha Builders & Developers Pvt. Ltd. v DCIT 102 ITD 375 (Pune), it was held that seized Material should be read as a whole for computation of income and expenditure as emerging from seized documents shall be allowed to assessee.

In the case of Abhishek Corporation v DCIT (1999) 63 TTJ 651 (Ahd.), it has been held that even though it is established from seized documents that assessee was receiving premium/’on money’ on booking of flats belonging to third parties, entire receipts of ‘on money’/premium cannot be treated as undisclosed income of assessee; only net profit rate can be applied on unaccounted sales/receipts for making addition.

In the case of CIT v President Industries (2000) 158 CTR 372/258 ITR 654/ 124 Taxman 654 (Guj) Tribunal was justified in holding that entire undisclosed sales could not be added as income of assessee but addition could be made only to the extent of estimated profits embedded in sales for which net profit rate was adopted; no referable question of law arises.

(H) Whether both ‘On Money’ and Unexplained Expenditure are to be taxed.

There may be cases where evidences are found during search or survey operation with the real estate developer relating to unaccounted income as well as unaccounted expenses. Unaccounted income may be in the nature as ‘on money’ received from the customers against sale of flats and un- accounted expenses may be expenses incurred by the developer and paid in cash such as: expenses for payment to contractors, wages, bribes, penalties, Advertisement expenses, brokerage, commission etc. Tax Authorities try to make addition of unaccounted income u/s 68 and separate addition for unaccounted expenses u/s 69C of the Act. On the other hand, assessees’ try to put the claim that if unaccounted income is brought to tax u/s 68 of the Act, the expenses incurred relating to business but not accounted in the books of account should also be allowed as expense and therefore the addition can be made only for the net surplus income if any. Whether the AO is justified in taxing on money as well as unexplained expenditure u/s 69C.

The plea of the department is that in view of the specific provision u/s 69C of the Act, regarding unexplained expenditure which states that “Not- withstanding anything contained in any other provision of the Act, such unexplained expense which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.” Therefore, unaccounted business expenses cannot be allowed as deductible business expenditure.

However, the AO would not be justified in taxing both the income as well as expenditure out of that income. This would lead to double taxation. Both the income and expenses incurred out of that income cannot be taxed. The assessee has admitted the unrecorded income and also agreed that expenditure has been incurred out of that income, the AO cannot tax the expenditure separately. Once ‘On Money’ was considered as revenue receipt, any expenditure out of such on money could not be treated as unexplained expenditure – Doing so would amount to double addition – CIT v Golani Brothers 85 taxmann.com 355 (Bom. HC).

There is force in the argument which can be advanced by assessee that the source of unaccounted expenditure is the funds generated from unaccounted income. Therefore, separate addition for unaccounted expenses cannot be made. The addition can be made only for unaccounted income.

In the case of CIT v Radhika Creation [2011] 10 taxmann.com 138 (Delhi), it has been held that Sec. 69C refers to the ‘source of the expenditure’ and not to the expenditure itself; further, in the absence of any material found during the search, addition of expenditure would not be justified in the block assessment.

Sec 69C is applicable where the source of such expenditure is not explained. The assessee has explained the source of expenditure and therefore, the income as well as expenditure cannot be taxed.

In the present case study, the payment vouchers worth Rs. 1.70 crores were found to be unrecorded in the books of accounts. The AO cannot tax both Rs. 2.20 crores as on money and Rs. 1.70 crores as unexplained expenditure. The expenditure of Rs. 1.70 crores is out of on money receipts of Rs. 2.20 crores. Here, the taxable amount would be only Rs. 50 Lakhs i.e. Rs. 2.20 crores less expenditure of Rs. 1.70 crores.

(I) Extrapolation of Receipt of ‘On Money’

In the case of search or survey of the real estate developers, there may be cases when evidences are found regarding receipt of unaccounted cash or ‘on money’ from the customers. Such evidences may be found relating to certain units out of total project or from some of the customers. Tax Authorities try to extrapolate receipt of ‘on money’ to the entire project with respect to all the customers. Tax Authorities advance the argument that in case ‘on money’ is being received in certain cases, it reflects that the actual market price is higher and therefore the presumption is that ‘on money’ has been received from all the customers.

The assessee may defend the above situation based upon facts which may be peculiar and separate for each case. Extrapolation of such expenses can be defended by demonstrating, based upon facts, that ‘on money’ received from the customers with respect to which evidences have been found, was given by the customers for extra work/interiors/furnishing which was not applicable in other cases. The other line of defence may be to demonstrate the fluctuating market situation of real estate and establish the case that only in specific cases extra premium or ‘on money’ was charged and received. In the case of D.N. Kamani (HUF) v DCIT (1999) 70 ITD 77 (Patna)(TM), it has been held that documents regarding receipt of “on money” by assessee having been found in respect of sale of flats to one party, addition could not be made in respect of all the parties to whom assessee sold flats merely on the basis of presumption.

For instance, in the present case study, the assessing officer takes a view that the assessee is having habit of receiving cash for sale of flats and the same is in the range of 38% to 55% of the agreement value. The assessing officer accordingly makes an addition at 40% of agreement value for all the flats in the project.

In this connection, it is to be noted that the action of the assessing officer is not justified. Since, the assessing officer has not found any material and concrete evidence in relation to other flats, the AO would not be justified in making addition with regard to flats other than the flats mentioned in the diary. In absence of any material, the addition is only on suspicions and not justified as per settled principle of law. The following fundamental principles will prevail—

(a) Suspicion can never be the basis of addition

(b) Even in a best judgment assessment (similar to search assessment) some guess work is bound to be there, the same cannot be arbitrary.

In the case of ITO v W.D. Estate (P.) Ltd. (1993) 46 TTJ 143: 45 ITD 473 (Bom.-Trib.), addition was made on the basis of statement of disgruntled employee of assessee relying upon survey report of Ministry of Finance about the practice of ‘on money’ transaction in real estate business. Statement of disgruntled employee which does not suggest alleged ‘on money’ receipt, is not sufficient proof. Moreover, no evidence has been produced to show that assessee in fact received the alleged ‘on money’ payment. Survey report of Finance Ministry cannot be substituted for proof. Further, even documents seized during proceeding under Sec. 132 do not suggest alleged transaction. In the absence of tangible evidence addition is not justified. Therefore the same has been deleted.

Other Relevant Judicial Decisions—

• CIT v Nagendra Baliga 363 ITR 410 (Kar) – Assessing Officer is not entitled to extrapolate the undisclosed income detected in the course of search for a particular period to the entire block period on estimate basis.
• CIT v Ghodawat Pan Masala Products P. Ltd. 250 ITR 570 (Bom) – Assessing officer recast trading account on the basis of certain stock found during the course of search. The GP ratio so computed was applied to entire block period – Held not permissible.
• Fort Projects P. Ltd. v DCIT 145 TTJ 340 (Kol) – Directly covering the case of on Money on sale of Flat in absence of any evidence
• Samrat Beer Bar v ACIT 75 ITD 19 (Pune)(TM) – Extrapolation of sales – Held not allowed

However, contrary view has been expressed by the Pune Bench of ITAT in the case of Param Anand Builders (P.) Ltd. v ITO (1996) 59 ITD 29 (Mum.-Trib.) A.Ys. 1986-87 & 1987-88, it has been held that, it cannot be accepted that the assessee had received the ‘on money’ as its income only in the last two assessment years under consideration. The assessee has been earning ‘on money’ from the beginning of the project although the percentage might have increased in the later years. Taking those factors into account the view taken by the A.O. to the effect that assessee should have earned profits at the rate of 25% of gross receipt, appears to be reasonable and justified.

In the case of Surinder Kumar v CIT 340 ITR 173 (P & H), the High Court has held against the assessee on the theory of permissible guess work and that it is not correct to contend that intermittently the assessee was not making sales outside the books.

(J) Whether deduction under section 80-IBA available?

There may be situations where evidences regarding the receipt of on-money or unrecorded cash sale amount are found which is offered to tax as income from business. At the same time, assessee claims full amount as deduction of profits under this section. Since such amount of on-money is in the nature of business income, deduction under this section would be allowed as there is no specific denial in this respect in the section.

Suppose, in above case study, M/s U realtors takes the plea the that the project qualifies for deduction u/s. 80-IBA and there is no dispute by the department about eligibility of the project for the deduction. Accordingly the amount of addition made shall also be allowed as deduction u/s. 80-IBA. It is to be noted that specified Sections such as 69A applies only where the assessee cannot explain source of acquisition of the money and doesn’t apply for On Money. In such a situation all deductions permissible in relation to the business shall also be permissible for which the addition has been made.

This issue was considered with reference to deduction under section 80-IB(10) and view was approved in Malpani Estates v ACIT 108 DTR 255 (Pune).

• CIT v Sheth Developers Pvt. Ltd. 25 com 173 (Bom) – builder receiving undisclosed income in the course of its business is entitled to deduction u/s. 80-IB.
• Madhav Corporation v ACIT 85 com 238 (Ahd.); ITO v Gajraj Constructions 62 taxmann.com 18 (Pune).

(K) Whether the deduction u/s 80-IBA be claimed even where Income is assessed under specified sections?

Section 115BBE(2) states that Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) and clause (b) of sub-section (1).

From above sub-section following inference may be drawn that restriction is on:

• No deduction in respect of any expenditure or allowance
• Set off of any loss

Section 80-IBA is a profit linked deduction and not an expenditure or allowance linked deduction. Therefore, Sub-section (2) may not affect claim u/s. 80-IBA.

(L) Impact of On Money on Buyer

There may be instances where the on money is admitted by buyer and the department initiates proceedings against the buyer. The addition may be proposed in the hands of the buyer u/s. 69 or 69B.

Section 132(4A): Unless the document indicating the on money transaction is counter-signed by the buyer or in the hand-writing of the buyer the same cannot be considered as conclusive evidence in the case of the buyer.

Implication of statement of the builder recorded u/s 132(4) of the Act

The Statement of builder can be an information but not evidence. The Addition made merely on the basis of the statement of builder without any corresponding evidence is not justified.

Relevant Judgments

• CIT v Vivek Prahladbhai Patel 66 taxmann.com 41 (Guj)
• Sumathi Janardhana Kurup v ITO 160 com 40 (Bom.)

Further section 132(4) uses the words “may” be used as evidence. The buyer can certainly rebut the recorded statement of builder.

• He should seek the copy of the statement of builder.
• Not furnishing the statement to assessee, the addition is not justified.
• CIT v Kanubhai Maganlal Patel 79 taxmann.com 257 (Guj)
• Seek Cross examination of the person whose statement is recorded