Mr. Sanjiv Shankar, IRS (IT: 1993)
CIT(A)-11, Pune
[email protected]

Mr. Sanjiv Shankar

Shri Sanjiv Shankar is an officer of the 1993 Batch of the IRS. He has a Post-Graduate degree from Delhi University and a Masters in International Development, with specialization in International Taxation from Sanford School of Public Policy, Duke University, USA.

He has co-authored a book titled Essays in Tax Policy and Practice in 2015. He has extensive work experience in the Income-tax Department in corporate and centralized assessments, investigation, intelligence & criminal investigation, and appeals. He has also worked at the Policy level in Government of India and has been part of the Indian Delegations to major countries including China, Canada, Australia, Singapore and UK during which period he worked to align Public Policies in India to the International Best Practices.

Executive Summary

Assessment of ‘On-Money’ has been the story of ‘Hype vs Reality’. It involves understanding of fundamental issues of taxation such as Receipt vs Income, Heads of Income, Method of Accounting, Business Receipts vs Income from Other Sources, etc. In the absence of a fine understanding of such issues, despite clinching evidence, the AOs have been making assessments, which at times, could not pass the tests of appeal. The essay seeks to flag these issues involved and explains the position of law, as laid down by courts. The paper suggests that despite the power of penalty enshrined in the Act since FY 2015-16, in the interest of equity, there is further need to amend Sections 68/69 of the Act to make the provisions of assessment of ‘on-money’ rational. The paper has been reviewed by Shri Narendra Kumar, Pr. CIT, Jodhpur and his valuable inputs have also been incorporated in the essay.


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. However, at the appellate stage, the disclosures are retracted and these so-called open and shut cases (from the revenue point of view), face serious challenges. The amendments to the Act since 2015, does provide some teeth to the AOs. Though, these powers are to levy penalty, corresponding to the value of the cash transactions, above a threshold. The penalties would be under stricter scrutiny by the appellate authorities.

In the above context, let us examine a simple case of search/ survey on a land developer, where a document, indicating land wise receipt both in cash (on-money) and cheque listed, was found and seized. It is admitted that the cash receipts were ‘on-money’ receipt for the land parcels booked for sale and that they were not accounted in the regular books of accounts of the assessee. Receipts by cheques are part of the regular books. However, it was claimed that the sale as per the regular accounting practice, only materializes when the possession of subject land parcels are handed over to the respective parties and therefore, it is in the year of handing over possession that the sales are offered to tax. The receipts prior to such hand over are in the nature of ‘advance’ and not ‘income’ and therefore, the taxability of such unaccounted receipts in cash cannot arise as per the dates of receipts mentioned in the documents found and seized during the search/ survey, as has been done by the AO. The argument further goes that in the year of handover of the property, both the cash and cheque components are offered as revenue, as per the project completion method of accounting and offered to tax. In one such typical case, where the search had taken place in July 2011 and documents related to ‘on-money’ receipts pertained to prior year, the assessee claimed in its Income Tax Return for AY 2015-16, that profit from the project including the on-money receipts have been disclosed in AY 2015-16. On the perusal of the ITR, for AY 2015-16, it was evident that the assessee had offered sale receipts of Rs. 30,73,39,165, including the on-money amounting to Rs. 3,67,94,000, received on account of sale and booking on land. However, after claiming the various expenses, only an amount of Rs. 8,24,947 was offered to tax as profit. The assessee in this case started offering profit for the project from AY 2013-14 and the details of profit shown in successive years has been as under:

Table 1

Sr. No. Sale Receipt Excluding  on Money (in Rs.) On Money (In Rs.) Total Sale Receipt (In Rs.) Profit (In Rs.)
1 16,68,08,905 69,47,000 17,37,55,905 3,20,700
2 8,34,72,567 1,92,00,000 10,26,72,567 4,01,043
3 27,05,45,165 3,67,94,000 30,73,39,165 8,24,947
Total 52,08,26,637 6,29,41,000 58,37,67,637 15,46,690

From the above table, it is evident that despite including the ‘on-money’ in the sale receipt, the assessee ultimately offered very low profit for all the assessment years. In the above case, while the AO may have assessed to tax, the entire on-money receipt of Rs. 6,29,41,000 what is offered to tax by the assessee is a profit of Rs. 15,46,690 only. Revenue may suspect that the assessee might have inflated its expenses to reduce the taxable income, but this is very difficult to prove.

The above example gives rise to several issues for consideration, some of which are listed as under:

  • The ‘on-money’ on the date of search has neither been declared as ‘sales’ nor as ‘advances’ in the books.
  • Whether the ‘on-money’ may be assessed under the head ‘income from business and profession’ or ‘income from other sources’.
  • The ‘on-money’ evidently being business receipts can it be assessed as ‘income from other sources’.
  • If ‘on-money’ is business receipts then will the method of accounting determine its accrual as income as per past practices.
  • ‘Documents’ containing ‘on-money’ details not being books of accounts, can it be assessed under Section 68 of the Act.
  • As receipts are not entered in the regular books of accounts and are unaccounted and undisclosed, can it partake the character of ‘income’ to be assessed as ‘income from other sources’.
  • Which is the year in which, the ‘on-money’ receipts can be brought to tax.
  • What are the requirements as per the accounting standards vis-a-vis the ‘project completion method’ and ‘percentage completion method’.
  • Can the cash component and cheque component of the sale receipts be taxed in different assessment years, when cash component is ‘on-money’ and not recorded in books and cheque money is recorded and offered to tax on project completion method.
  • The levy of penalty on the cash component and its sustainability in appeal.


The first principle in Income-tax is that all receipts are not income. Generally speaking, the word ‘Income’ covers receipts in the shape of money or money’s worth which arise with certain regularity or expected regularity from a definite source. The Income-tax Act has given an inclusive definition of income as per Section 2(24) of the Act. The Supreme Court in CIT vs. Karthikeyan (GR) (1993) 201 ITR 866 (SC) has held that the purpose of the inclusive definition is not to limit the meaning but to widen its net, and the several clauses therein are not exhaustive of the meaning of income; even if a receipt did not fall within the ambit of any of the clauses, it might still be income if it partakes of the nature of income. In order to constitute ‘income’, the receipt must be one which comes in (a) as a return, and (b) from a definite source. It must also be of the nature which is of the character of income according to the ordinary meaning of that word in the English language and must not be one of the nature of a windfall. Mehboob Productions (P) vs. CIT [1977] 106 ITR 758 (Bom). However, the income-tax authorities cannot assess all receipts, they can assess only those receipts that amount to income. Therefore, before they assess a receipt, they must find that to be income. They cannot find so unless they have some material to justify their finding. (Lalchand Gopaldas vs. CIT 48 ITR 324 (All)).


Section 14 of the I-T Act classifies income under the heads of Salaries, Income from House Property, Profit and Gains of Business or Profession, Capital Gains and Income from Other Sources; for the purposes of charge of Income Tax and Computation of Total Income. The quantum of income which is assessed to Income-tax is peculiar to that head, but it is not unusual that commercial considerations may properly describe the source differently (Brooke Bond and Co. Ltd. vs. CIT [1986] 162 ITR 373 (SC). Income falling specifically under any of the heads of income other than the residuary head of income specified in Section 14 of the I-T Act 1961 cannot under any circumstance be charged under the residuary head i.e. Income from Other Sources. Heads of income are mutually exclusive and an item of income coming under an exclusive head cannot in any circumstance be charged under another head (Bihar State Co. Bank Ltd. vs. CIT [1960] 39 ITR 114 (SC)). Neither assessee nor revenue has the option to choose the head for a particular item of income (United Commercial Bank Ltd. vs. CIT [1957] 32 ITR 688 (SC)).


The I-T Act (Section 145) provides that income chargeable under the head Profits and Gains of Business or Profession or Income from Other Sources shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Income is brought to tax either on accrual basis or on receipt basis, as per the method of accounting regularly employed by the assessee. In the case of a developer/ builder, the income has been offered to tax either on project completion method or on percentage completion method. In case where the accounting method followed was project completion method, it was claimed that the full consideration along with the ‘on-money’ receipt cannot be brought to tax in the hands of the assessee till the project is completed or substantially completed. The argument taken is that while the receipt of ‘on-money’ is an objective fact, ‘income’ is a legal concept, which has to be arrived at after considering various aspects such as expenditure and the year of taxability. In the case where the assessee is following the project completion method for computing its income and the same is established in the returns of income filed prior to search, it is argued that even after search and detection of ‘on-money, the taxation of income can only be as per the method of accounting regularly followed by the assessee.

On the basis of the principle of consistency, it is argued that the revenue should compute income as per the method of accounting regularly followed by the assessee. In the case of CIT vs. Bill Hari Investment Ltd. 299 ITR 1, the Hon’ble Supreme Court has held as follows:

‘15. Recognition/ identification of income under the 1961 Act, is attainable by several methods of accounting. It may be noted that the same result could be attained by any one of the accounting methods. Completed contract method is one such method. Similarly, percentage of completion method is another such method.’

Under project completion method, the revenue is not recognized until the contract is complete. Under the said method, cost is accumulated during the course of the contract. The profit and loss is established in the last accounting period and transferred to P&L account. The said method determines results only when contract is completed.

On the other hand, percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under this method is determined by reference to the stage of the completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that cost incurred to date bears to the estimated total cost of contract.

In the decision of the Bombay High Court in CIT vs. Taparia Tools Ltd. 260 ITR 102 (Bom), it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method invoked is not correct and it distorts the profits of a particular year.

Various Tribunals and Courts have held that undisclosed income detected as a consequence of search and seizure operation has to be taxed on the basis of method of accounting followed by the assessee.

In exercise of the powers conferred by Sub-section (2) of Section 145 of the Income-tax Act 1961, the CBDT has notified the Income Computation and Disclosure Standards (ICDS). This notification has come into force with effect from 1st day of April 2015 and accordingly applies to the assessment year 2016-17 and subsequent assessment years. All contract or transaction existing on the 1st day of April 2015 or entered into on or after the1st day of April 2015 shall be dealt with, in accordance with the provisions of this standard. In the case of conflict between the provisions of the Income-tax Act, and the Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. As per the ICDS, the contract revenue and contract costs associated with the construction contract shall be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the ‘percentage of completion method’. As indicated, under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. As such, with the ICDS notified by the CBDT, the percentage completion method has become the de facto method for recognition of costs and revenue for the builders/ developers and applies to all contracts and transactions existing as on 1st April 2015. This should simplify the job of the Assessing Officers.


The common argument taken of the assessing officers in assessing the ‘on-money’ has been that as per the provisions of the I-T Act, unaccounted and undisclosed income is deemed to be income of the assessee of the FY in which it is received. It is generally argued that had the diaries/ documents indicating unaccounted ‘on-money’ receipts, not being unearthed as a result of search, the ‘on-money’ would not have been offered to tax. It is therefore, argued that the question of any method of accounting for determining taxable income does not arise as the entire ‘on-money’ being undisclosed is taxable in the year of search/ survey. The disclosure made during the course of search (though generally retracted later) is also relied upon as a ground for bringing to tax the entire ‘on-money’ receipt in the year of detection.


The details of ‘on-money’ receipt found during the course of search and seizure in the form of Diaries or Documents are at times self-explanatory and speaking documents. This is so because they may be found from the business premises of the assessee, at times even in the handwriting of the key persons of the business and list in detail the property against which the ‘on-money’ has been received with dates, amount, cash and cheque components and names of the persons from whom received and such other details. Sometimes even the expenses incurred in cash are found along with the details of ‘on-money’ receipts. In such cases, the only logical inference to draw would be that the ‘on-money’ receipts even though unaccounted in the regular books of accounts are actually receipts from the business of the assessee. However, only where details of receipts of unaccounted money in cash or cheque are found, and there is no satisfactory explanation to the source of the money, such receipts may be assessed under the head ‘Income from Other Sources’.

Once the ‘on-money’ receipt is confirmed and quantified, the AO will face the challenge of determining the ‘taxable income’ and the year in which such taxable income may be brought to tax. Depending on the facts of the case, the AO may take recourse to one of the following methods:

Rejection of Books and Determination of Income on a Best Judgment Basis

Once deficiencies in the regular books of accounts are found, books may be rejected either on grounds of their incorrectness, incompleteness or non-verifiability and the AO gets the power to estimate the assessee’s income in a fair and reasonable manner. Once the fact of receiving ‘on money’ is admitted, the Assessing Officer is legally entitled to reject the book results and estimate the ‘on money’ in respect of all the shops. In this connection, the AO may rely on the Supreme Court judgments in the case of H.M. Esufali H.M. Abdulali, in the case of Raguwar Mandal Harihar Mandal 8 STC 770 and in the case of Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC). The only exception to this proposition is that estimate must be rational and not arbitrary, though some guess-work is bound to be there. The AO may also refer the property for valuation to the Valuation Officer as per Section 142A and a similar reference can also be made by the authorized officer of a search under Section 132(9D). If the projects have been completed and the sales substantially made, the AO may take recourse to determining the total cost and total sales and bring to revenue for taxation, the total area of sales effected in various years on a pro rata basis. A good method would be to spread the total cost of the project over the saleable area of the land/ shops/ flats/ stalls etc., so as to determine the cost per sq. ft. of the saleable area and then ascertain the cost of the total area sold during each year by multiplying the rate per sq. ft. saleable area to the area sold by the assessee in each year. Once this exercise is done, then the same may be deducted from the total receipts of each year as the case may be including the ‘on money’ charged by the assessee. The difference so arrived at would be assessable profits/ losses of each year.

In the case of Golani Brothers (2000) 75 ITD 1; the ITAT Pune has upheld the action of the AO in assuming that assessee must have also received the ‘on money’ in respect of the balance 67 shops sold during these years, when the material found and seized in search contained only a list of 201 shops in respect of which ‘on money’ was received by the assessee. In this connection, the reliance was placed on the decision of the Hon’ble President, of the Tribunal as Third Member in the case of Overseas Chinese Cuisine vs. Asstt. CIT (1996) 55 TTJ (Bom) 304 (TM) : (1996) 56 ITD 67 (Bom)(TM) wherein it has been held that once a fact has been proved to be in existence, the presumption can be raised in respect of other transactions. This treatment by the ITAT Pune was also reaffirmed by the Bombay High Court in the case reported as (2017) 160 DTR (Bom) 24. In another judgement of the Bombay High Court in the case of Harish Textiles Engineers (2015) 128 DTR (Bom) 145, the estimation of ‘on-money’ on machines was also upheld for the period prior to the period for which evidence was found.

Books Accepted and Taxable Income Determined as per the Method of Accounting Followed

Where the seized or impounded documents contain details of unaccounted ‘on-money’ as also details of expenditure in cash which have not been recorded in regular books, the taxable income may be determined by allowing the cash expenses from the cash receipts as per the documents. However, before taking this path, the AO has to examine the fact that the receipts and expenses relate to the business of the assessee and both the receipts and expenses relate to the same project. The relevance of the provisions of Section 40A(3) in such cases may also be examined. As the ‘on-money’ is by definition collected in cash, if there is evidence of ‘on-money’ spent in cash, the AO should examine this aspect and apply provisions of Section 40A(3). In rare cases, where the ‘on-money’ has been deposited in bank, AO may apply Section 68/69 provisions and even then disallow the expenditure made in cash by relying on provisions of Section 40A(3) of the Act. In CIT vs. Mohan Lal Agrawal [2017] 393 ITR 402 (Calcutta), the Hon’ble Court held that as the application of the provision of Section 40A(3) to the unverified expenditure of undisclosed sales would have led to 20 per cent disallowances thereof, since the seized documents of undisclosed income showed that the transactions had taken place mostly in cash; this oversight by the Assessing Officer in not applying Section 40A(3) had been prejudicial to the interest of the revenue. The court held that it was also not a case where two views were possible and the Assessing Officer had taken one of them. As regards the applicability of Section 40A(3), it was held that whenever any expenditure was claimed, there were never two views. Therefore, revision order was to be upheld. In the case of Sai Metal Works [2011] 241 CTR 377 (Punjab & Haryana), the Punjab & Haryana High Court held that Section 40A(3) applies to the proceedings of assessment under Chapter XIV-B. Where the seized/ impounded documents indicate only unaccounted receipts but no details of unrecorded expense, it may be prudent for the AO to assess the entire receipts as income as per the method of accounting followed. Alternatively, he may consider a percentage of the receipts as income considering the facts of the case.

Assess the Unrecorded Receipts as Taxable Income?

The difficult path is to assess the entire unaccounted receipts as taxable income. For this course of action, it has to be proved that the receipts being not recorded and undisclosed, partakes the character of income. One line of investigation may be to examine all the persons whose details may be found in the documents as the source of the ‘on-money’. The assessee may be asked by the AO to produce those persons or at least confirmations from them of having paid such amounts in cash. Where no such confirmations of the cash payments are filed, the AO may have better ground to assess the ‘on-money’ as taxable income. This method may be justified on grounds of equity. It would be against the principle of equity if an assessee who has not recorded part sales in his books and therefore evidently had no intention to offer the said receipts to tax, even after detection, is allowed to reconstruct its books and again given the leeway to offer the receipts to tax on a future date. This option for the AO, from the revenue point of view, needs to be strengthened and a suitable provision under Section 68 of the Act may be incorporated to tax such unaccounted receipts as ‘taxable income’ in the year of receipt. This will strengthen the anti-avoidance provisions of the Income-tax Act and can be justified on grounds of equity. Currently, in all such cases, even though the CIT(A) and ITAT may not support the cause of revenue, in view of the existing adverse judgements of most Tribunals and Courts; Principal CsIT may still pursue such cases in appeal (subject to the threshold limits) at the level of the High Courts and Supreme Court, as it certainly gives rise to a question of law. The legal issue for the courts is to determine whether the undisclosed income detected during the course of search and survey be treated differently from the income earned from business in the ordinary course.

Taking Recourse to Section 68/69 of the Act

Whenever on the basis of the seized or impounded documents/ diaries and the notings therein it is not possible to ascertain that the receipts in cash are business receipts, the same may be assessed as income from other sources. As books of accounts have not been defined in the Income-tax Act, there are court judgements which support the view that the entries found in the diaries and documents and not recorded in regular books may be considered as unexplained cash credits and assessed under Section 68 of the Act. Similar view may be taken in respect to unexplained expenditures, assets and investments under Section 69, etc.


As indicated above, the method of accounting normally determines the year of taxation of the profits earned by the developer/ builder under the regular proceedings. However, where unexplained cash is found, the same can be assessed in the year of search/ survey. The taxability of ‘on-money’ found should be guided by the year of receipt and the method of accounting regularly followed. Depending on the validity of the books and the method adopted by the AO in quantifying the profits, the year of taxation may be determined. However, there is a need for specific provision in the Act to tax the ‘on-money’ in the year of receipt as ‘deemed income’.


In recent years, the following provisions have been inserted to prohibit cash transactions, with a particular eye on the builders/ developers:

a. The Finance Act 2015 included ‘specified sum’ within the ambit of Section 269SS of the Act w.e.f 01.06.2015. ‘Specified sum’ as per this Section means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place. Contravention of Section 269SS shall attract penalty under Section 271D of the Act for an amount equal to the contravention.

b. Finance Act, 2017 inserted Section 269 ST w.e.f. 01.04.2017, prohibiting receipt above Rs. 2 lakh in cash, except in conditions allowed under Section 269SS of the Act. Contravention of Section 269 ST is now punishable under Section 271DA by levy of penalty of an amount equal to the contravention.

The contravention of Section 269SS and levy of penalty under Section 271D of the Act is subject to the condition that any loan or deposit or specified sum, where the person from whom the loan, or deposit, or specified sum, is taken, or accepted, and the person by whom the loan, or deposit, or specified sum is taken, or accepted, are both having agricultural income and neither of them has any income chargeable to tax under this Act. Further, contravention of Section 269ST is subject to condition as per Section 269SS and the levy of penalty under Section 271D and 271DA is subject to good and sufficient reasons for the contravention. The Hon’ble Supreme Court in the case of CIT vs Adinath Hi-Tech Builders (P) Ltd (2019) 261 Taxmann 168 (SC) dismissed the Special Leave Petition against the judgment of Bombay High Court. The Bombay High Court in this case had held that there was violation of Section 269SS where assessee received advances against journal entries hence attracted penalty under Section 271D. In another recent judgement of the Bombay High Court in the case of Nitin Wadikar (2019) 414 ITR 647 (Bom), the Bombay High Court upheld the judgement of the ITAT and held that the assessee has not given reasonable explanation for failure to fulfill the requirement of Section 269SS and, therefore, penalty under Section 271D is leviable. However, Pune ITAT in the case of P.R. Associates (2019) 70 ITR_TRIB (Trib) 469 (Pune), has recently held that in order to meet its financial obligations, assessee borrowed money from unorganized financial sector in cash and filed a loss return; therefore, there was reasonable cause for not conforming to requirement of Section 269SS, penalty was held to be invalid. In the case of Shivaji Ramchandra Pawar (HUF) (2018) 163 DTR (Bom) 308, the Hon’ble court held that the law provides that the breach of Section 269SS invites penalty under Section 271D. The aforesaid breach has no relation to addition and/ or deletion of income. The mere fact that a party accepts loans in cash (which are otherwise explainable) would not absolve a party from penalty under Section 271D in the absence of reasonable cause. The fact that the assessee’s appeal in quantum proceedings before CIT(A) deleted addition under Section 68 would have no bearing in respect of penalty imposed under Section 271D, for breach of Section 269SS. Even if the assessee has explained the identity, the source and genuineness of receipt in cash for the purpose of Section 68, would not by itself permit/ allow a party to obtain loans in cash in breach of Section 269SS. CIT vs. Jai Laxmi Rice Mills (2016) 286 CTR (SC) 159 : (2016) 134 DTR (SC) 223: (2015) 379 ITR 521 (SC) distinguished.


To conclude, all receipts are not income. But wherever on facts, it can be proved that the unrecorded receipts (on-money, etc.) partake the character of income,, the AO may assess it as taxable Income. All such cases may be pursued in the High Courts and Supreme Court, as they give rise to a question of law. Where evidence indicates business connection for the receipt, the taxable income can be assessed as per the method of accounting regularly followed. As per the ICDS notified by CBDT, percentage completion method has to be followed w.e.f. 01.04.2015. In fit cases, AO may invoke Section 145(2) to reject books and estimate income on a reasonable basis. Since 01.06.2015, the cash receipts are punishable with penalty of an equal amount. As levy of penalty is subject to conditions, in order to rationalize the assessment of ‘on-money’ receipts to tax, an amendment may be considered in Section 68 of the Act to deem ‘on-money’ receipts as income of the year of receipt, particularly in cases of search/ survey.

Source- Taxalogue 3- April to June 2020

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