ITAT Mumbai Allows ₹42.44 Crore Project Expenditure Against Undisclosed On-Money

Sumer Builders Vs DCIT (ITAT Mumbai)

Summary: The Income Tax Appellate Tribunal (ITAT), Mumbai, in Sumer Builders Vs DCIT, adjudicated cross-appeals filed by the assessee and the Revenue against the order of the Commissioner of Income Tax (Appeals)-53, Mumbai, dated 23 March 2016, for Assessment Year 2011-12. The dispute arose from search and seizure proceedings conducted in the Sumer Group on 23 December 2010 and a simultaneous survey under Section 133A at the assessee’s Prabhadevi project site. Although the assessee’s premises were not searched, a statement recorded under Section 132(4) from Ramesh Shah, a partner of Sumer Corporation, disclosed cash on-money received in connection with flats and parking spaces at the Sumer Trinity Towers project. The assessee disclosed ₹47,16,72,184 as on-money receipts, while its sister concern, Vighnaharta Projects Pvt. Ltd. (VPPL), separately disclosed ₹10 crore. The Assessing Officer accepted these disclosures but questioned the corresponding application of funds towards the ongoing project.

The principal controversy concerned the assessee’s claim to include ₹57,16,72,184 in the project’s work-in-progress (WIP), comprising ₹47.16 crore disclosed by the assessee and ₹10 crore disclosed by VPPL. The Assessing Officer reduced the WIP by the entire amount, holding that the assessee had failed to furnish sufficient documentary evidence of the expenditure. The CIT(A) confirmed the disallowance, reasoning that the expenditure might fall within the prohibition under Section 37(1), that no supporting evidence had been found during the search, and that the project was substantially completed, leaving little justification for further expenditure. The CIT(A) also rejected the application of VPPL’s disclosed income in the assessee’s hands because the two were separate entities. The assessee challenged these conclusions, maintaining that the disclosed cash had been deployed in construction and other project-related expenditure.

Before the Tribunal, the assessee sought admission of additional evidence, including photographs showing the project’s construction status, documents concerning tenant-related litigation, High Court orders and assessment records for subsequent years. It argued that the Assessing Officer had disallowed the expenditure without issuing a specific show-cause notice or seeking necessary particulars, while the CIT(A) had made adverse observations about project completion without confronting the assessee. The Revenue opposed admission of the additional evidence. After examining the proceedings, the Tribunal found that much of the evidence was already available in departmental records or directly addressed the CIT(A)’s observations. It considered the assessment order’s treatment of expenditure brief and inadequate and held that the assessee should have a proper opportunity to establish its claim. Relying on judicial precedents concerning additional evidence and appellate powers, the Tribunal admitted the material and proceeded to decide the issues rather than remanding them.

On the treatment of undisclosed cash receipts and related expenditure, the Tribunal examined the assessee’s contention that the entire amount of on-money could not be treated as taxable profit without considering the expenditure incurred in earning those receipts. The assessee emphasised that no undisclosed cash was found or seized during the search and survey operations and that the funds had been applied towards the project. The Tribunal considered decisions including Panna Corporation, Prime Developers Vs DCIT and CIT Vs Golani Brothers, addressing the estimation of expenditure associated with unaccounted receipts and the evidentiary difficulties surrounding cash transactions. It accepted the principle that, in appropriate circumstances, reasonable expenditure attributable to undisclosed receipts may be considered even where conventional documentary evidence is unavailable. The Tribunal also examined whether the Revenue could rely selectively on the statement acknowledging cash receipts while disregarding the accompanying explanation concerning their application.

The Tribunal separately considered the ₹10 crore disclosed by VPPL and the assessee’s claim for telescoping that amount against project expenditure. It referred to judicial decisions recognising telescoping where disclosed or assessed income constitutes the source of another expenditure or investment, so that the same funds are not subjected to duplicative additions. The Tribunal accepted the assessee’s claim for telescoping of the ₹10 crore disclosed by VPPL. Regarding the ₹47.16 crore disclosed by the assessee itself, however, it considered the assessee’s position that 10% represented the estimated profit element and that the remaining amount related to expenditure. Accordingly, the Tribunal restricted the telescoping/application claim concerning the assessee’s own on-money to ₹42.44 crore, representing approximately 90% of the ₹47.16 crore disclosure. The relevant grounds concerning application of income and project WIP were therefore partly allowed.

Another significant issue concerned the year in which the disclosed on-money receipts should be taxed. The assessee maintained that it consistently followed the project completion method of accounting, under which 10% of incremental project receipts was offered to tax annually, while the balance was carried forward for recognition upon project completion. The CIT(A) had refused to admit the additional grounds raising this issue and had also rejected them on merits. The assessee relied on NTPC Vs CIT and CIT Vs Pruthvi Brokers and Shareholders Pvt. Ltd. to support consideration of its legal claim. It also cited decisions recognising that income from real estate projects must be assessed consistently with the regularly followed and accepted method of accounting. The Tribunal examined the assessee’s accounting treatment and the Department’s acceptance of that method in earlier and subsequent assessment years.

The Tribunal relied particularly on the decision in Guruprerna Enterprises, subsequently affirmed by the jurisdictional Bombay High Court, concerning the timing of taxation of on-money receipts under the project completion method. It held that only 10% of the disclosed on-money receipts was taxable in AY 2011-12, with the balance taxable upon completion of the project in accordance with the assessee’s consistently followed accounting method. The Tribunal rejected the Revenue’s objection that the claim could not be entertained because it had not been made through a revised return. It also recognised that a taxpayer’s admission or disclosure does not, by itself, determine taxability contrary to the provisions of law. Consequently, the assessee’s grounds concerning the timing of taxation of on-money receipts were allowed.

The final dispute related to ₹14,94,85,240 of interest expenditure on borrowed funds, which the Assessing Officer had disallowed under Section 36(1)(iii), alleging diversion of interest-bearing funds to sister concerns for non-business purposes. The CIT(A), relying on the Assessing Officer’s remand report, allowed interest attributable to borrowings used for the assessee’s business but sustained the remaining disallowance. Both parties challenged the decision. The assessee argued that advances to sister concerns were commercially expedient because the concerns operated in the same real estate business and supported its commercial activities. The Tribunal accepted the relevance of commercial expediency and found that the Revenue had not controverted the common business purpose of the assessee and its sister concerns. It deleted the remaining interest disallowance and upheld the relief already granted by the CIT(A), noting that the Assessing Officer’s own remand report supported that relief. The assessee’s appeal was partly allowed, while the Revenue’s appeal was dismissed, by the order pronounced on 8 January 2021.

Cases Discussed

• Keshav Mills Vs CIT — 56 ITR 365 (Supreme Court). Relied upon concerning admission and consideration of additional evidence.
• Roshan Vs CIT — 107 ITR 938 (Supreme Court). Cited on procedural fairness and additional evidence.
• Prabhavati S. Shah Vs CIT — 231 ITR 1 (Bombay High Court). Relied upon regarding appellate consideration of additional evidence.
• Puranmal Radhakishan Vs CIT — 31 ITR 294 (Bombay High Court). Cited regarding the limits of appellate powers where the Revenue has not challenged a finding.
• New India Assurance Co. Vs CIT — 31 ITR 844 (Bombay High Court). Cited on the scope of appellate jurisdiction.
• Ramaswamy Vs CIT — 40 ITR 377 (Madras High Court). Relied upon concerning remand prejudicial to an appellant.
• Tin Box Co. Vs CIT — 249 ITR 216 (Supreme Court). Cited regarding reasonable opportunity of hearing.
• Zenith Processing Mills Ltd. Vs CIT — 219 ITR 721 (Gujarat High Court). Cited concerning procedural opportunity.
• Ester Industries Ltd. Vs CIT — 316 ITR 260 (Delhi High Court). Cited concerning procedural opportunity.
• Dhirajlal Girdharilal Vs CIT — 26 ITR 736 (Supreme Court). Cited against findings based on conjectures or assumptions.
• Dhakeshwari Cotton Mills Vs CIT — 26 ITR 775 (Supreme Court). Relied upon concerning evidentiary foundations of tax assessments.
• DCIT Vs Panna Corporation — Tax Appeal Nos. 323 and 325 of 2000 (Gujarat High Court). Discussed regarding expenditure associated with unaccounted receipts.
• Prime Developers Vs DCIT — ITA Nos. 175 to 178 and 321 to 324/Mum/2010 (ITAT Mumbai). Discussed regarding reasonable expenditure against unaccounted receipts.
• CIT Vs Golani Brothers (Bombay High Court). Discussed in relation to on-money receipts and corresponding expenditure.
• CIT Vs S. Nelliappan — 66 ITR 722 (Supreme Court). Relied upon regarding telescoping and inference of a common source of funds.
• Elite Developers Vs DCIT — 73 ITD 379 (ITAT Nagpur). Cited regarding telescoping of undisclosed income against expenditure or investments.
• NTPC Vs CIT — 229 ITR 383 (Supreme Court). Relied upon concerning additional legal grounds before the Tribunal.
• CIT Vs Pruthvi Brokers and Shareholders Pvt. Ltd. (Bombay High Court). Relied upon concerning claims raised before appellate authorities.
• CIT Vs Hariram Bhambhani — ITXA No. 313 of 2013 (Bombay High Court). Cited regarding taxation of the profit element of unaccounted receipts.
• CIT Vs Prime Developers — ITXA No. 2452 of 2013 (Bombay High Court). Cited concerning treatment of unaccounted receipts.
• CIT Vs President Industries Gujarat High Court CIT Vs President Industries — 258 ITR 654 (Gujarat High Court). Cited concerning taxation of profit embedded in undisclosed sales.
• CIT Vs Guruprerna Enterprises (Bombay High Court). Relied upon concerning taxation of on-money under the project completion method.
• CIT Vs Gujarat Gas Ltd. — 245 ITR 84 (Gujarat High Court). Cited regarding assessed income being lower than returned income.
• Abdul Qayumme Vs CIT — 184 ITR 404 (Allahabad High Court). Cited regarding the effect of admissions on taxability.
• Mayank Poddar Vs ITO — 262 ITR 633 (Calcutta High Court). Cited concerning taxation according to law despite admissions.
• SAIL DSP Employees Association Vs Union of India — 262 ITR 638 (Calcutta High Court). Cited concerning the legal effect of an admission of taxability.