ITAT Rejects Search-Based Suspicion, Upholds Deletion of ₹28.50 Crore Addition U/s 68

DCIT Vs Sparkling Soil Private Limited (ITAT Mumbai)

Search May Ignite Suspicion, but Cannot Burn a Documented Fund Trail—ITAT Upholds Deletion of ₹28.50 Crore u/s 68

The controversy

The assessee, Sparkling Soil Private Limited, was engaged in real-estate investment. For AY 2015-16, it had originally declared income of ₹1.40 crore.

During FY 2014-15, the assessee received an aggregate amount of ₹28.50 crore from six companies. These transactions were recorded in its audited books and had also been disclosed during earlier assessment proceedings.

A search u/s 132 was subsequently conducted in October 2021 in the cases of DB Realty, Dynamix Group & related entities. Based upon material found during the search, the assessment was reopened.

The AO concluded that the six creditor companies formed part of a network of nine entities controlled by Mr. Gajanan Patkar and operated through dummy directors. The entire ₹28.50 crore was added as unexplained cash credit u/s 68.

The CIT(A) deleted the addition after examining the complete documentary trail. The Revenue approached the Mumbai ITAT.

AO questioned the creditors’ entire history

The AO’s case did not rest merely upon the immediate transfers made to the assessee. He questioned the very genesis and functioning of the creditor companies.

Some directors stated during search that they had little knowledge of the companies’ business or financial affairs and signed papers and cheques placed before them. The companies had earlier received substantial share-application money, portions of which were subsequently forfeited.

The AO further examined their transactions with Richa Realtors, which had received approximately ₹36.05 crore from nine companies under MOUs for proposed commercial premises in a redevelopment project.

When the premises were not delivered, disputes went to arbitration. Awards resulted in repayment of the advances together with substantial compensation. The AO treated the arbitration as a pre-arranged mechanism for generating funds within the companies.

CIT(A) followed the money beyond the lenders

The CIT(A) did not delete the addition merely because the creditors possessed PANs, confirmations, audited accounts & bank statements.

He examined the antecedent source of their funds, including the MOUs with Richa Realtors, the redevelopment project, subsequent involvement of Tata Housing, arbitration proceedings, awards, banking payments & corresponding tax treatment.

The arbitration awards contemplated return of the original investment together with compensation aggregating to ₹73 crore. Payments aggregating to approximately ₹109.05 crore were made, and the compensation component was accounted for by Richa Realtors and disclosed by the recipient companies.

The CIT(A) also permitted cross-examination of persons whose search statements formed a major foundation of the addition.

Cross-examination changed the evidentiary picture

Mr. Prakash Joshi, partner of Richa Realtors, had initially described the arbitration as an “internal arrangement.”

During cross-examination, however, he explained that the funds were originally raised for a MHADA redevelopment project against proposed commercial space. After Tata Housing entered the project, the development plan changed and the promised commercial area could no longer be provided.

Disputes therefore proceeded to arbitration under the contractual clauses, and payments were made to settle the claims without obstructing the project.

His explanation was supported by the MOUs, development agreements, arbitration documents & actual movement of funds.

Similarly, the cross-examination of Mr. Ajit Pendse did not support the sweeping inference that all nine companies and all their transactions were fictitious.

The ITAT held that original search statements remained relevant, but once cross-examination occurred, the evidence had to be appreciated as a whole, together with contemporaneous documents.

Commercial purpose of ₹28.50 crore established

Six creditor companies formed an AOP named Ganpati Ventures. In January 2015, the assessee entered into a joint-venture agreement with the AOP for developing approximately 50 acres at Village Jalochi, Baramati.

Ganpati Ventures was to contribute ₹40 crore, of which ₹28.50 crore constituted initial funding.

Ganpati Devasthan Trust, owner of the land, invited bids through public notice. The assessee emerged as the highest bidder at precisely ₹28.50 crore, and the Charity Commissioner approved the sale. The property was acquired on 26 February 2015 for that amount.

Thus, there was a direct correspondence between the joint-venture contribution, money received from the six entities & actual acquisition of the identified land.

The assessee subsequently pursued conversion and development. The land was eventually converted to non-agricultural use, though reservations in the development plan and road-connectivity difficulties impeded the project.

The Tribunal held that failure of the project to fructify as originally expected could not retrospectively make its funding bogus.

ITAT’s ruling

The identity of the creditors stood established through corporate and tax records. Their creditworthiness was supported by identifiable receipts from Richa Realtors and the corresponding banking, accounting & tax trail.

Genuineness was demonstrated through formation of Ganpati Ventures, the joint-venture agreement, acquisition of land for the identical amount & subsequent development efforts.

No evidence showed movement of unaccounted cash from the assessee to the creditors, Richa Realtors or any intermediary in exchange for the banking credits.

The adverse search material justified deeper enquiry, but general doubts regarding how some creditor companies were incorporated or managed could not displace transaction-specific evidence.

The ITAT therefore upheld deletion of ₹28.50 crore u/s 68 and dismissed the Revenue’s appeal.

Author’s comments

The ruling shows the difference between a paper trail and a commercially connected evidentiary trail.

PANs, confirmations & bank entries may establish the first layer but are not always sufficient where search material suggests accommodation entries. Here, the assessee succeeded because the enquiry went further: source of creditors’ funds, contractual origin, arbitration awards, tax treatment, cross-examination, ultimate utilisation & subsequent conduct were all proved.

Significantly, the ITAT did not decide the abstract controversy over whether the assessee had to prove “source of source.” It held that, on facts, the source of source had actually been examined and established.

Suspicion justified investigation—but once the investigation produced a coherent commercial explanation, suspicion could not survive as evidence.

Cases Discussed

• Roshan Di Hatti v. CIT (107 ITR 938, SC)
• Kale Khan Mohammad Hanif v. CIT (50 ITR 1, SC)
• CIT v. Devi Prasad Vishwanath Prasad (72 ITR 194, SC)
• CIT v. Durga Prasad More (82 ITR 540, SC)

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI

1. The aforesaid appeal has been preferred by the Revenue against the impugned order passed by the learned Commissioner of Income-tax (Appeals), in relation to the assessment framed under section 143(3) read with section 147 of the Income-tax Act, 1961 for the Assessment Year 2015-16. The principal grievance of the Revenue is against the deletion of addition of ₹28,50,00,000 made by the Assessing Officer under section 68 of the Act in respect of amounts received by the assessee from six corporate entities. Since the grounds raised by the Revenue emanate from the same addition and traverse different facets of the findings recorded by the learned CIT(A), they are being taken up together.

2. The material facts giving rise to the present appeal are that the assessee-company is engaged, inter alia, in the business of real estate investment and had filed its original return of income on 30.09.2015 declaring total income of ₹1,40,28,710. The case was selected for scrutiny and assessment under section 143(3) was completed on 14.12.2017 determining the total income at ₹1,51,89,220. Subsequently, proceedings under section 263 were initiated by the learned Principal Commissioner of Income-tax and, pursuant to the directions issued therein, a consequential assessment order under section 143(3) read with section 263 came to be passed on 30.03.2022, again determining the total income at ₹1,51,89,220. It is relevant to note at this stage that the transactions which are the subject matter of the present dispute had already been reflected in the books of account of the assessee and details relating thereto had also been furnished in the earlier assessment proceedings. However, according to the Assessing Officer, the subsequent search brought to light material which was not available before the authorities at the time of the earlier assessments and, therefore, the acceptance of these transactions in the earlier proceedings was not regarded by him as determinative of their genuineness in the reassessment proceedings.

3. In the meanwhile, a search and seizure action under section 132 was carried out on 07.10.2021 in the cases of DB Realty Group, Dynamix Group and other related entities, wherein the assessee was also covered. Consequent thereto, its case was centralised with the DCIT, Central Circle-8(1), Mumbai. The assessment for the year under consideration was thereafter reopened by issuance of notice under section 148 dated 19.12.2022 in terms of Explanation 2(i) to section 148. In response thereto, the assessee filed its return on 18.01.2023 declaring total income of ₹1,51,89,220. During the reassessment proceedings, the Assessing Officer confronted the assessee with the findings emerging from the search concerning a set of nine companies which, according to the Investigation Wing, were controlled and managed by Shri Gajanan Patkar and were operated through persons who were alleged to be dummy directors. Out of these entities, the assessee had during the relevant previous year received an aggregate amount of ₹28.50 crore from the following six companies:

3.1. The Assessing Officer treated the aforesaid entities as part of the alleged network unearthed during the search and questioned not merely their financial capacity but the very genuineness of the transactions. His case, in substance, was that the funds available with these entities had themselves emerged through a pre-arranged chain of transactions involving M/s Richa Realtors, preceded by their incorporation through alleged dummy directors, introduction of funds and thereafter arbitration proceedings which, according to the search findings, were make-believe arrangements. On this premise, and after rejecting the explanation and documentary material furnished by the assessee, the Assessing Officer held that the assessee had failed to satisfactorily establish the identity and creditworthiness of the creditors and, more particularly, the genuineness of the transactions. He accordingly treated the entire amount of ₹28,50,00,000 as unexplained cash credit under section 68 and completed the reassessment on 26.04.2023 at a total income of ₹30,01,89,220.

4. The assessee carried the matter in appeal before the learned CIT(A), both on the validity of the reassessment proceedings as well as on the merits of the addition under section 68. The challenge to the validity of reopening was rejected. However, while examining the addition of ₹28.50 crore on merits, the learned CIT(A) undertook an extensive examination of the material placed before him. Apart from the income-tax returns, audited financial statements, confirmations and bank statements of the six entities, he examined the antecedent transactions through which the funds had reached these companies; the transactions entered into by them with M/s Richa Realtors; the Memoranda of Understanding executed in connection with the redevelopment project undertaken by Richa Realtors; the subsequent involvement of Tata Housing in the said project; the arbitration proceedings and awards; the payments made pursuant thereto and their tax treatment in the hands of the recipient companies. He further examined the formation of the AOP, namely Ganpati Ventures, the Joint Venture Agreement entered into with the assessee, acquisition of the land at Village Jalochi, Baramati, and the subsequent steps taken for its development. Significantly, since considerable reliance had been placed by the Assessing Officer upon the statements of Shri Ajit Pendse and Shri Prakash Joshi recorded during the course of search, the learned CIT(A) also caused an opportunity of cross-examination of these persons to be afforded and examined their answers in juxtaposition with their original statements and the contemporaneous documentary material. Upon an appraisal of the entire material, the learned CIT(A) ultimately held that the assessee had discharged the burden cast upon it in respect of the identity and creditworthiness of the parties as well as the genuineness of the transactions and, accordingly, directed deletion of the addition of ₹28.50 crore.

4.1. Thus, the core issue which falls for our adjudication is not merely whether the six creditor companies were surrounded by circumstances which could legitimately invite scrutiny. The more fundamental question is whether, upon consideration of the entire evidentiary record, including the material unearthed during search, the statements relied upon by the Assessing Officer, the subsequent cross-examination of the concerned persons, the documentary trail explaining the antecedent source and movement of funds, and the commercial transaction for which the assessee received and utilised the amount, the explanation furnished by the assessee regarding the nature and source of the credit of ₹28.50 crore can be said to have satisfactorily discharged the burden contemplated under section 68.

5. Before adverting to the findings recorded by the learned CIT(A), it would be apposite to first examine the precise foundation on which the Assessing Officer proceeded to treat the amount of ₹28.50 crore as unexplained cash credit. This assumes significance because the case of the Assessing Officer was not founded merely on the financial statements of the six creditor companies or upon an isolated examination of the credits appearing in the books of the assessee. His conclusion was substantially influenced by the material and statements gathered during the search conducted on 07.10.2021 and the inference drawn therefrom regarding the genesis, control and functioning of a group of nine companies, six of which had advanced the impugned amount to the assessee. The Assessing Officer, therefore, sought to examine the credits not merely from the immediate transaction between the assessee and the six companies but against what, according to him, was the larger background in which funds had been generated in these entities.

6. During the course of search at the premises of M/s Praturna Trading Pvt. Ltd., situated at Nirmal Building, Nariman Point, Mumbai, the Investigation Wing identified nine companies, namely, Niramay Trading Pvt. Ltd., Jalak Trading Pvt. Ltd., Praturna Trading Pvt. Ltd., Aparimeya Trading Pvt. Ltd., Nibodh Trading Pvt. Ltd., Nirmay Trading Pvt. Ltd., Nidhanam Trading Pvt. Ltd. and Prasadan Trading Pvt. Ltd. and Ashtadashan Vyavharak Pvt. Ltd. According to the search findings, these companies were centrally controlled and managed by Shri Gajanan Patkar. The Assessing Officer further referred to the statement of Shri Ajit Pendse, Chartered Accountant, recorded during the course of search, wherein he explained that Shri Gajanan Patkar had been introduced to him through Shri Vivek Jadhav and that assistance had been sought from him in coordinating activities connected with incorporation of several companies in Mumbai. The Investigation Wing also confronted Shri Ajit Pendse with statements of certain persons who had become directors/shareholders of some of these companies and, on the basis thereof, inferred that such persons had been arranged as directors at the instance of Shri Gajanan Patkar and were not independently managing the affairs of the respective companies.

7. The search findings further referred to the manner in which capital had initially come to be introduced into these entities. According to the Assessing Officer, shortly after their incorporation in Financial Year 2009-10, substantial share application monies were received from various companies. It was noticed that in eight out of the nine companies substantial share application money was subsequently forfeited by 31.03.2012. The Assessing Officer also observed that several of the entities which had subscribed to such share capital were not carrying on substantial business activities and some were subsequently struck off from the records of the Registrar of Companies. From these circumstances, the Assessing Officer inferred that the initial financial base of the nine companies itself required examination and that their formal corporate existence, statutory registrations and banking transactions could not, by themselves, be regarded as conclusive of the commercial reality of their affairs.

8. Another circumstance which weighed considerably with the Assessing Officer was the evidence concerning the directors of some of these companies. In particular, reference was made to the statements of Smt. Chandni Vipul Jain and Shri Satish Khimji Shah, who were directors of Jalak Trading Pvt. Ltd. Smt. Chandni Vipul Jain, in her statement recorded under section 131, stated, inter alia, that she had no knowledge of the business activities, assets and liabilities or financial affairs of Jalak Trading Pvt. Ltd.; that she had not attended its board meetings; and that documents placed before her had been signed without knowledge of their contents. She described herself as being a director only on paper. Similarly, Shri Satish Khimji Shah, in the statement recorded during the search, stated that he did not have knowledge of the affairs of Jalak Trading Pvt. Ltd., had not participated in its management and had signed documents and cheques placed before him. He too described himself and his wife as directors merely on paper. The Assessing Officer regarded these statements as significant circumstances suggesting that, notwithstanding the formal corporate structure of these companies, the persons shown as directors were not actually exercising control over their affairs.

9. The enquiry during search, however, did not stop with the incorporation or management of these companies. The Investigation Wing proceeded further into the manner in which substantial funds came to be available with them. It was found that the nine companies had entered into separate Memoranda of Understanding with M/s Richa Realtors, a Mumbai-based real estate concern, in connection with a redevelopment project at Mulund. Under these arrangements, the nine companies had collectively advanced approximately ₹36.05 crore to M/s Richa Realtors against proposed allotment of commercial premises in the project. According to the Assessing Officer, the terms of these MOUs were unusual inasmuch as they contemplated substantial quantified damages together with interest in the event M/s Richa Realtors was unable to deliver the contemplated commercial premises. The project did not ultimately result in allotment of the commercial spaces contemplated under the MOUs and disputes thereafter went into arbitration. Pursuant to the arbitration awards, substantial amounts were paid by M/s Richa Realtors to these nine companies, including compensation over and above the amounts originally invested by them.

10. The Assessing Officer treated the aforesaid arbitration arrangement as an important link in what he perceived to be a pre-arranged mechanism for creation of funds in the hands of these companies. For this purpose, considerable reliance was placed upon the statement of Shri Prakash Joshi, partner of M/s Richa Realtors, recorded under section 132(4) during the course of search. In answer to a question concerning the participation of the directors of the nine companies in the arbitration proceedings, Shri Prakash Joshi had stated that the arbitration proceedings were an “internal arrangement”; that the directors of the nine companies had been appointed by Shri Ajit Pendse; and that, as far as he was aware, such directors did not have any say either in the arbitration proceedings or in the functioning of the companies. This statement, read together with the circumstances relating to the directors and the earlier capital structure of the companies, led the Assessing Officer to infer that the arbitration was not an ordinary commercial dispute between independent parties but formed part of an arrangement through which substantial funds were generated in these entities.

11. On the basis of the aforesaid material, the Assessing Officer reconstructed what according to him constituted the modus operandi. In his perception, companies had first been incorporated and operated through persons who did not exercise effective control over their affairs; an initial capital base had thereafter been created, inter alia, through share application monies and subsequent forfeiture; these companies then entered into MOUs with M/s Richa Realtors involving investment of approximately ₹36.05 crore; the contemplated commercial premises were not delivered; and the matter was taken to arbitration resulting in payment of substantial amounts by Richa Realtors. According to the assessment order, an amount of approximately ₹99.77 crore was paid to the companies during Financial Years 2012-13 and 2013-14, and these funds subsequently became available for investment in properties or for advances to various concerns. The Assessing Officer, therefore, regarded the sequence not as a collection of independent commercial events but as an interconnected arrangement culminating in the generation and deployment of funds through these entities.

12. It was in this backdrop that the Assessing Officer examined the amount of ₹28.50 crore received by the assessee during the previous year relevant to the year under consideration from six of these companies. A notice under section 142(1) was issued requiring the assessee to explain why the amount should not be treated as unexplained cash credit under section 68. The assessee, in response, stated that all the transactions had been effected through normal banking channels and stood duly recorded in its audited books as well as in the books of the six companies. It relied upon their names, addresses and PANs, audited financial statements, confirmations and bank statements. It was also pointed out that details pertaining to these very transactions had been furnished during the original scrutiny assessment as well as in the proceedings consequent to the order under section 263, and no addition had then been made in respect thereof. According to the assessee, the identity of the creditors, their financial capacity and the genuineness of the transactions thus stood established.

13. The Assessing Officer was, however, not persuaded by this explanation. He observed that when the earlier assessment proceedings were completed, the subsequent findings emanating from the search were not available before the authorities and, therefore, the earlier acceptance of the credits could not conclude the matter. According to him, the question was not merely whether the transactions appeared in audited financial statements or passed through banking channels, but whether, having regard to the material subsequently unearthed, the transactions represented genuine commercial dealings. He held that the assessee had failed to furnish an explanation capable of dispelling the circumstances emerging from the search and, particularly, the allegation that these entities had been utilised by Shri Gajanan Patkar for artificially creating funds through pre-arranged transactions. The Assessing Officer thus considered the documents furnished by the assessee inadequate to establish the commercial substance of the credits.

14. In support of his approach, the Assessing Officer referred to the principles governing section 68 and observed that the apparent documentary form of a transaction cannot always be regarded as conclusive where surrounding circumstances indicate otherwise. He referred to the decisions in Roshan Di Hatti v. CIT, Kale Khan Mohammad Hanif v. CIT and CIT v. Devi Prasad Vishwanath Prasad, and also invoked the principle enunciated in CIT v. Durga Prasad More that the taxing authorities are entitled to examine the surrounding circumstances and are not necessarily bound by the apparent tenor of documents. Proceeding on this premise, he observed that entities which are merely vehicles for financial manoeuvring may nevertheless possess corporate registrations, statutory documents, bank accounts and other outward attributes ordinarily associated with genuine concerns. Therefore, according to him, the mere existence of such documentation could not answer the more fundamental question whether the transactions represented real commercial dealings.

15. The Assessing Officer ultimately held that, when the credits appearing in the assessee’s books were viewed in the light of the search findings concerning the manner in which the creditor companies were incorporated and operated, the statements of persons shown as their directors, the antecedent introduction of funds, the transactions with M/s Richa Realtors and the circumstances surrounding the arbitration proceedings, the assessee had failed to establish the identity and creditworthiness of the lenders and the genuineness of the transactions to his satisfaction. He accordingly treated the entire sum of ₹28,50,00,000 received from the six companies as unexplained cash credit under section 68 and added the same to the income of the assessee.

16. Before the learned CIT(A), the assessee assailed the addition on the ground that the six creditor companies were existing corporate entities and their identity stood established from their PAN, returns of income and other statutory records. In support of their creditworthiness and genuineness of the transactions, the assessee furnished their audited financial statements, bank statements and confirmations and pointed out that the entire amount had been received through normal banking channels and was duly reflected in the books of account of the respective parties. It was further submitted that these documents were not being produced for the first time, but had substantially formed part of the record in the earlier scrutiny proceedings. Apart from these primary evidences, the assessee sought to explain the entire commercial background of the transactions, namely, the source from which the creditor companies had acquired the funds, the purpose for which the amount was advanced to the assessee and its subsequent utilisation. The learned CIT(A), therefore, proceeded to examine the transaction beyond the immediate credits appearing in the assessee’s books.

17. Insofar as the antecedent source of funds with the creditor companies was concerned, the assessee explained that these companies had earlier invested substantial amounts with M/s Richa Realtors, a partnership firm engaged in the business of builders and developers, in connection with redevelopment of the MHADA New PMGP Co-operative Housing Society at Mulund. The material placed before the learned CIT(A) showed that M/s Richa Realtors had originally been appointed as developer under a Development Agreement and Power of Attorney dated 19.06.2007 for redevelopment of the said property. Under the arrangement, substantial payments were required to be made to MHADA and a sizeable redevelopment project was contemplated. According to the assessee, it was in order to mobilise funds for this project and meet payments towards MHADA, stamp duty and other statutory requirements that M/s Richa Realtors entered into separate Memoranda of Understanding with the nine companies during the period 2009-10 and received aggregate advances of ₹36.05 crore from them against proposed allotment of commercial area in the project.

18. The learned CIT(A) examined the MOUs and noticed that they did not merely record receipt of advances but contained terms governing the proposed allotment and consequences of failure on the part of the developer. The MOUs contemplated execution of definitive agreements after the requisite commencement certificate and approvals were obtained and further provided that, if M/s Richa Realtors was unable to construct and hand over the stipulated area, it would be liable for quantified damages together with interest. They also contained an arbitration clause for resolution of disputes. The terms were substantially similar across the MOUs entered into with the nine companies. Thus, the payments received by Richa Realtors and the contractual stipulations governing the proposed commercial allotments formed part of the documentary record examined in the appellate proceedings.

19. The subsequent developments in the redevelopment project were also examined. The record showed that, under the Joint Development Agreement dated 30.09.2010 entered into between M/s Richa Realtors, MHADA and the concerned society, the scale and financial requirements of the redevelopment underwent substantial change. M/s Richa Realtors thereafter entered into a Development Agreement dated 27.12.2010 with Tata Housing Development Company Ltd. for joint development of the project. Under this arrangement, Tata Housing was to undertake the development at its cost and the gross sale proceeds were to be shared between Tata Housing and Richa Realtors in the agreed ratio. A supplementary arrangement was subsequently entered into in the backdrop of further changes in FSI and the project configuration, under which the revenue share of Richa Realtors was subject to a stipulated cap and funding arrangements of substantial magnitude were contemplated. The learned CIT(A) considered these agreements as part of the commercial background against which the earlier commitments made by Richa Realtors to the nine companies had to be examined.

20. According to the explanation placed before the learned CIT(A), after Tata Housing became involved in the project and acquired the stipulated development and selling rights, M/s Richa Realtors was unable to fulfil its earlier commitments for allotment of commercial premises to the nine companies. Claims were consequently raised under the MOUs and the disputes were referred to arbitration in August 2012. Arbitration awards were thereafter made in September/October 2012. The material before the learned CIT(A) showed that, against the original aggregate advances of ₹36.05 crore, the awards contemplated aggregate payments of ₹1,09,05,00,000, comprising return of the original amounts together with compensation aggregating ₹73 crore. The payment details placed on record showed that ₹99.77 crore was paid during Financial Year 2012-13 and the balance ₹9.275 crore during Financial Year 2013-14.

21. The tax treatment of these payments was also placed before the learned CIT(A). M/s Richa Realtors had accounted for compensation aggregating ₹73 crore in its books against the PMGP project, comprising ₹63.725 crore in Financial Year 2012-13 and ₹9.275 crore in Financial Year 2013-14. Correspondingly, the nine recipient companies had disclosed the compensation aggregating ₹73 crore in their respective returns of income. The learned CIT(A) thus noted that the amounts received by these entities from Richa Realtors and their tax treatment were identifiable from the material placed before him. Thereafter, during Financial Year 2014-15, six out of these entities advanced an aggregate sum of ₹28.50 crore to the assessee. On the basis of the banking and financial records produced, the assessee sought to demonstrate a traceable antecedent source for the funds which ultimately came to it.

22. The assessee further explained that the receipt of ₹28.50 crore was itself embedded in a separate real estate transaction and was not an isolated transfer of funds without any stated commercial purpose. Six of the aforesaid companies had constituted an Association of Persons under the name Ganpati Ventures for carrying on real estate activities. The assessee had entered into a Joint Venture Agreement with Ganpati Ventures in January 2015 in connection with development of approximately 50 acres of land bearing Gut Nos. 64A and 64B at Village Jalochi, Taluka Baramati, District Pune. Under the joint venture arrangement, the contemplated contribution by Ganpati Ventures was ₹40 crore, of which ₹28.50 crore constituted the initial funding. The assessee’s case was that the amounts received from the six constituent companies represented their contribution towards this commercial venture and had been utilised in connection with acquisition of the very land which was proposed to be developed.

23. The learned CIT(A) examined the documents relating to the acquisition of the land as well. The land was originally owned by Ganpati Devasthan Trust, Baramati. Permission for its sale had been sought before the Charity Commissioner and, after invitation of bids through public notice, the assessee emerged as the highest bidder at ₹28.50 crore. The Charity Commissioner, Pune, by order dated 27.11.2014, permitted sale of the property to the assessee at the said consideration. The record further showed that there had been disputes concerning tenants and restrictions attached to the land, which were dealt with before the competent authorities. Ultimately, the assessee acquired the land by agreement dated 26.02.2015 for ₹28.50 crore. Thus, the amount received from the six entities and the consideration paid for acquisition of the land were not examined by the learned CIT(A) merely as accounting entries but in the context of the underlying transaction and the contemporaneous documents relating thereto.

24. The learned CIT(A) also examined the assessee’s explanation as to why the proposed development had not substantially fructified despite the acquisition of the land. The documents showed that an application was made to the Baramati Municipal Council/Nagar Parishad for conversion and development of the land; approval was granted in principle and, ultimately, an order dated 07.04.2017 was passed converting the land to non-agricultural use. In the interregnum, the development plan prepared under the Maharashtra Regional and Town Planning Act placed portions of the property under reservation for residential/garden/wrestling-ground purposes, which reservation was subsequently modified to some extent. The assessee also relied upon the absence of the requisite DP road connectivity and other regulatory impediments as reasons why the proposed construction could not proceed as originally contemplated. These circumstances were considered by the learned CIT(A) while examining whether the Joint Venture Agreement and the stated purpose for which the funds had been received had any correspondence with subsequent objective conduct.

25. Thus, before arriving at his conclusion, the learned CIT(A) examined not only the primary evidence relating to the six creditors but also the antecedent and subsequent transactions surrounding the impugned credits. On the one hand were the findings emerging from the search concerning the constitution and management of the nine companies and the statements relied upon by the Assessing Officer; on the other were the MOUs with Richa Realtors, the MHADA redevelopment documents, the subsequent agreements involving Tata Housing, the arbitration proceedings and payments, their treatment in the books and returns of the concerned entities, the constitution of Ganpati Ventures, the Joint Venture Agreement with the assessee, the acquisition of the Jalochi land and the subsequent statutory steps taken towards its development. It was in the course of this appellate enquiry that the statements of Shri Ajit Pendse and Shri Prakash Joshi, which constituted an important part of the Assessing Officer’s case, also came up for closer examination. Since the assessee had specifically sought their cross-examination, the learned CIT(A) directed the Assessing Officer to afford such opportunity. The effect of the answers given in such cross-examination upon the original statements and upon the inference drawn by the Assessing Officer requires separate consideration and is dealt with hereafter.

26. One of the principal planks on which the Assessing Officer had rested his conclusion was the statements recorded during the course of search, particularly those of Shri Ajit Pendse and Shri Prakash Joshi. The assessee had specifically contended before the learned CIT(A) that these statements had been relied upon adversely without furnishing their complete copies and without affording an opportunity of cross-examination. Since the statements constituted an important part of the material relied upon for treating the transactions as non-genuine, the learned CIT(A), vide communication dated 03.03.2025, required the Assessing Officer to provide an opportunity to the assessee to cross-examine Shri Ajit Pendse and Shri Prakash Joshi. The cross-examination was thereafter conducted and copies thereof were forwarded by the Assessing Officer along with his report dated 11.03.2025.

27. Insofar as Shri Ajit Pendse is concerned, the Assessing Officer had relied upon his original statement to support the allegation that persons had been arranged as dummy directors in the companies at the instance of Shri Gajanan Patkar. During cross-examination, however, Shri Ajit Pendse explained that Shri Gajanan Patkar had been introduced to him by his client Shri Vivek Jadhav and that he had been requested to assist in arranging two or three persons as directors/shareholders of companies proposed to be incorporated, as a stop-gap arrangement. With reference to Shri Milind Madhukar Karmakar, whose earlier statement had also been put to him, Shri Pendse stated that Shri Karmakar was his friend whom he had advised to purchase shares in Aparimeya Trading Pvt. Ltd. and Praturna Trading Pvt. Ltd. and to become a director therein; according to him, what was represented was that Shri Karmakar would receive back his investment upon sale of the shares and not any separate remuneration merely for acting as director. Likewise, with reference to Shri Nitin Nilkanth Jog, he stated that Shri Jog had invested in shares of certain companies and had become their director and subsequently received the sale proceeds upon disposal of those shares and resignation from the directorship.

28. On consideration of these answers, the learned CIT(A) observed that the cross-examination of Shri Ajit Pendse did not support the wider inference that the nine companies were merely paper companies having no independent existence or that their entire activities were fictitious. He particularly noticed that Shri Pendse had explained the circumstances in which Shri Milind Karmakar and Shri Nitin Jog had acquired shares and became directors in certain companies. The learned CIT(A), therefore, found that the answers elicited in cross-examination did not sustain, in the manner suggested by the Assessing Officer, the sweeping characterization of all the companies and all their transactions as merely paper arrangements.

29. The statement of Shri Prakash Joshi, partner of M/s Richa Realtors, assumed still greater significance because the Assessing Officer had relied upon his original statement that the arbitration proceedings with the nine companies were only an “internal arrangement”. During cross-examination, Shri Joshi explained the commercial background of the transactions in considerable detail. He stated that M/s Richa Realtors had been appointed as developer for redevelopment of the PMGP project and, for raising funds required for payments to MHADA and obtaining regulatory approvals, proposed commercial area in the project had been offered to the nine companies. Since definitive sale agreements could not then be executed, MOUs were entered into and advances were received against the proposed commercial spaces. This explanation corresponded with the MOUs and other project documents which had been furnished during the appellate proceedings.

30. Shri Prakash Joshi further explained that the subsequent development of the project materially altered the position. According to him, after the tripartite development arrangement with MHADA and the society, additional FSI became available and the scale of the project increased considerably. M/s Richa Realtors thereafter entered into arrangements with Tata Housing Development Company Ltd., under which the development and selling rights of the project were substantially vested with Tata Housing while Richa Realtors was to receive its stipulated revenue share. The revised project contemplated by Tata Housing did not provide for the commercial area which Richa Realtors had earlier agreed to make available to the nine companies. Consequently, Richa Realtors could no longer fulfil its obligations under the earlier MOUs and disputes arose with those entities, which were thereafter referred to arbitration in terms of the contractual stipulations.

31. More importantly, Shri Prakash Joshi was specifically confronted in cross-examination with his original answer recorded during search wherein he had described the arbitration proceedings as an “internal arrangement” and had stated that the directors of the nine companies had no say in the arbitration proceedings or functioning of those companies. In response, he stated that the matter related to events which had taken place almost nine years earlier and that, while his statement was being recorded during search, he had not given a proper answer. He then explained that arbitration became necessary because Richa Realtors could not deliver the commercial area promised under the MOUs; that the proceedings were before an arbitrator mutually agreed upon by the concerned parties; that the awards were accepted by Richa Realtors; and that the payments were made in order to resolve the disputes so that the project and Richa Realtors’ revenue entitlement therefrom were not impeded. He further stated that the payments pursuant to the arbitration awards were made out of the funding received from Tata Housing.

32. The learned CIT(A) considered the explanation given by Shri Prakash Joshi in cross-examination in conjunction with the documentary evidence already placed before him. He observed that the explanation regarding the PMGP redevelopment project, the advances received from the nine companies, the subsequent arrangements with Tata Housing, the inability to provide the contemplated commercial spaces, the arbitration proceedings and the payments pursuant to the awards was supported by the corresponding agreements and financial records. In this backdrop, he found that the earlier statement recorded during search, when read by itself, could not be accorded overriding evidentiary weight in disregard of the subsequent explanation and the documentary material. He accordingly held that the characterization of the entire Richa Realtors transaction as a make-believe arrangement merely on the basis of the original statements was not justified.

33. Thus, the cross-examination undertaken during the appellate proceedings brought on record explanations directly bearing upon the statements which had formed a material foundation of the addition. The learned CIT(A), after considering those answers together with the contemporaneous documentary evidence relating to the underlying transactions, did not accept the inference drawn by the Assessing Officer solely from the original statements. It was thereafter, and upon taking into consideration the documentary trail discussed hereinabove relating both to the antecedent source of the funds and their subsequent deployment in the assessee’s joint venture, that the learned CIT(A) held that the assessee had established the identity and creditworthiness of the creditors as well as the genuineness of the transactions and directed deletion of the addition of ₹28.50 crore under section 68.

34. We have heard the rival submissions and carefully considered the material placed on record, the assessment order and the detailed findings recorded by the learned CIT(A). The addition under section 68 is in respect of ₹28.50 crore received by the assessee from six companies during the relevant previous year. The Assessing Officer has doubted these credits essentially on the basis of material gathered during search concerning the constitution and management of a larger set of nine companies, statements of certain directors and other persons, and the antecedent transactions of these companies with M/s Richa Realtors. The learned CIT(A), on the other hand, has examined the documentary trail relating to the source of funds, the underlying transactions with Richa Realtors, the subsequent cross-examination of the persons whose statements were relied upon, and the commercial purpose and utilisation of the funds by the assessee. Insofar as identity is concerned, the six creditors are incorporated companies having PANs and income-tax records and their returns, audited financial statements, confirmations and bank statements were placed on record. Indeed, the Revenue’s own case proceeds upon an elaborate investigation into these very companies. Therefore, their identity as juridical entities is not really the area of controversy; the substantive enquiry is whether they possessed the capacity to advance the amounts in question and whether the transactions with the assessee were genuine.

35. We have, therefore, first examined the adverse circumstances relied upon by the Assessing Officer. The statements of Smt. Chandni Vipul Jain and Shri Satish Khimji Shah, directors of Jalak Trading Pvt. Ltd., wherein they expressed lack of knowledge about the affairs of that company and stated that documents and cheques had been signed without understanding their contents, are undoubtedly relevant circumstances. Likewise, the material concerning introduction of share application monies in these companies and subsequent forfeiture thereof legitimately called for scrutiny of their affairs. However, these circumstances primarily bear upon the manner in which some of the companies were constituted or managed. They do not, by themselves, establish that the particular sum of ₹28.50 crore received by the assessee represented its unexplained money. They certainly required the assessee to satisfactorily explain the creditors, availability of funds with them and the transaction pursuant to which such funds were advanced; and it is on that evidence that the impugned credits ultimately have to be tested.

36. On the antecedent source of funds, the enquiry conducted by the learned CIT(A) travelled considerably beyond the immediate bank accounts of the creditors. The material shows that M/s Richa Realtors was undertaking redevelopment of the PMGP project pursuant to development rights obtained in respect of the MHADA property. For mobilising funds for the project, it entered into MOUs with nine companies during 2009-10 and received aggregate advances of ₹36.05 crore against proposed allotment of commercial spaces. The MOUs identified the contemplated commercial areas and contained stipulations regarding damages, interest and arbitration in the event the developer failed to fulfil its obligations. Thereafter, under the Joint Development Agreement dated 30.09.2010 between Richa Realtors, MHADA and the concerned society, the scale and financial obligations of the project underwent substantial changes. Richa Realtors subsequently entered into a Development Agreement dated 27.12.2010 with Tata Housing Development Company Ltd. and thereafter a supplementary arrangement, under which Tata Housing assumed substantial obligations relating to funding and development of the project and Richa Realtors became entitled to an agreed revenue share. In consequence of these subsequent developments, Richa Realtors could not provide the commercial premises earlier contemplated under the MOUs and disputes with the nine companies were referred to arbitration in terms of the contractual stipulations. Thus, the events culminating in arbitration were examined by the learned CIT(A) against the underlying project documents and not merely on the explanation subsequently offered by the assessee.

37. The arbitration awards contemplated return of the original amounts together with compensation aggregating ₹73 crore. The record shows aggregate payments of ₹1,09.05 crore pursuant to the awards, of which ₹99.775 crore was paid during Financial Year 2012-13 and ₹9.275 crore during Financial Year 2013-14. The compensation component of ₹73 crore was accounted for by Richa Realtors against the PMGP project and was correspondingly disclosed by the recipient companies in their respective returns of income. Thereafter, during Financial Year 2014-15, six of these companies advanced an aggregate amount of ₹28.50 crore to the assessee. We are conscious that disclosure of the compensation in the returns of the recipient companies or its accounting treatment in the books of Richa Realtors cannot, by itself, confer genuineness upon a transaction which is otherwise shown to be sham. Its relevance here lies in the fact that it forms part of a continuous documentary trail comprising the earlier MOUs, the subsequent project developments, arbitration awards, actual banking payments and corresponding accounting and tax treatment. The availability and movement of the funds with the creditor companies were thus capable of being identified from the material placed on record.

38. The Assessing Officer had nevertheless regarded the Richa Realtors transaction and the arbitration as make-believe, placing considerable reliance upon the search statements, particularly the statement of Shri Prakash Joshi describing the arbitration as an “internal arrangement”. This aspect underwent further examination before the learned CIT(A). When Shri Prakash Joshi was cross-examined, he explained the original transactions with the nine companies, subsequent changes in the project following the involvement of Tata Housing, inability of Richa Realtors to provide the promised commercial area and the consequent resort to arbitration. He was specifically confronted with his earlier statement and explained the circumstances in which that answer had been given. His explanation regarding the underlying transactions finds support in the MOUs, development agreements, arbitration documents and corresponding movement of funds. Likewise, in cross-examination Shri Ajit Pendse explained the circumstances concerning the persons introduced as shareholders/directors and did not support the wider inference that every transaction undertaken by these companies was merely a paper arrangement. The original statements do not cease to be relevant because of the subsequent cross-examination; however, once the very persons whose statements are relied upon have been cross-examined, their evidence has to be appreciated as a whole and in conjunction with the contemporaneous documents.

39. On considering the aforesaid material cumulatively, we find that the inference that the funds received by the creditor companies from Richa Realtors necessarily arose out of a fictitious arbitration arrangement does not find adequate evidentiary foundation. The circumstances noticed during search undoubtedly justified a deeper enquiry, but such enquiry cannot stop with the circumstances which initially generated the doubt. Here, the antecedent MOUs, the changes in the redevelopment project, subsequent arrangements with Tata Housing, arbitration documents, actual payments and the explanations elicited in cross-examination form part of the same evidentiary record. When these materials are read together, the original statement describing the arbitration as an internal arrangement, standing by itself, cannot sustain the conclusion that the entire antecedent source of the creditors was fictitious.

40. We then come to the transaction between the six companies and the assessee, which has an independent documentary trail of its own. The six entities constituted an AOP under the name Ganpati Ventures for carrying on real estate activities. The assessee entered into a Joint Venture Agreement with Ganpati Ventures in January 2015 for development of approximately 50 acres of land bearing Gut Nos. 64A and 64B at Village Jalochi, Baramati. Under the agreement, the contemplated contribution by Ganpati Ventures was ₹40 crore, of which ₹28.50 crore constituted the initial funding. Ganpati Devasthan Trust, which owned the land, had sought permission for its sale and invited bids through public notice. The assessee emerged as the highest bidder at ₹28.50 crore and the Charity Commissioner, Pune, by order dated 27.11.2014 permitted the Trust to sell the property to the assessee at that consideration. After the issues concerning the land were dealt with, the assessee acquired the property under agreement dated 26.02.2015 for ₹28.50 crore. Thus, there is a direct correspondence between the initial contribution contemplated under the Joint Venture Agreement, the aggregate amount received from the six entities and the consideration paid for acquisition of the very property proposed to be developed.

41. The subsequent conduct is also consistent with the stated object of the joint venture. After acquisition, the assessee pursued the process for conversion and development of the property. Application was made before the local authority, approval was granted in principle and the land was ultimately converted to non-agricultural use by order dated 07.04.2017. In the meantime, the development plan placed portions of the property under reservation for residential/garden/wrestling-ground purposes and the reservation subsequently underwent modification. The assessee also explained the continuing difficulty relating to DP road connectivity. These circumstances explain why the development did not proceed in the manner originally contemplated. More importantly, they demonstrate objective steps taken subsequent to the receipt of funds which are consistent with the commercial purpose recorded in the Joint Venture Agreement. The inability of the project ultimately to fructify as envisaged cannot, in these circumstances, retrospectively render the funding transaction non-genuine.

42. Tested on the touchstone of section 68, the identity of the six creditors stands established from their corporate and tax records. Their creditworthiness in relation to the impugned advances is supported not merely by their financial statements but by identifiable antecedent receipts from Richa Realtors and the corresponding banking, accounting and tax records. As regards genuineness, the credits are supported by the constitution of Ganpati Ventures, the Joint Venture Agreement contemplating an initial contribution of ₹28.50 crore, the actual acquisition of the identified land for the same consideration and the subsequent steps taken towards its development. We are equally conscious that the apparent form of a transaction cannot be accepted mechanically where surrounding circumstances indicate otherwise and that the transaction has to withstand the test of commercial reality and human probabilities. It is precisely on that account that the adverse circumstances emerging from the search required examination. However, once the subsequent enquiry brought on record the complete documentary trail and the explanations in cross-examination, those materials also necessarily form part of the evidentiary assessment. On the entire record, the surrounding circumstances which initially created doubt stand substantially explained by the transaction-specific evidence subsequently examined.

43. It is also significant that no material has been brought on record showing any corresponding movement of cash or unaccounted money from the assessee to the six creditor companies, Richa Realtors or any intermediary against which the impugned banking credits were received. Absence of such evidence, by itself, would not be decisive where an assessee otherwise fails to satisfactorily explain a credit under section 68. Here, however, the assessee has established the creditors, the availability of funds with them, the contractual basis on which the money was received and its actual deployment towards acquisition of the identified property. In such circumstances, the general adverse material concerning the manner in which some of the creditor companies were constituted or managed, without a transaction-specific nexus with the impugned credits, is insufficient to hold that the ₹28.50 crore represented unexplained money of the assessee.

44. The assessee has also contended that, for the assessment year under consideration, its burden under section 68 could not be extended indefinitely to establishing the source of the source. We do not consider it necessary to decide the controversy on this proposition. In the facts before us, the enquiry has actually travelled beyond the immediate creditors. The antecedent receipts from Richa Realtors, the contractual basis thereof, arbitration awards, accounting and tax treatment and subsequent movement of funds to the assessee have all been examined. The impugned credits can, therefore, be adjudicated on the evidence actually available on record without resting our conclusion upon the larger question as to the extent of the assessee’s obligation to establish the source of source.

45. Thus, what emerges from the entire material is that the search findings furnished sufficient reason for subjecting these transactions to a closer scrutiny; but the learned CIT(A) did not delete the addition merely on the strength of confirmations, PANs, audited accounts or banking channels. He examined the antecedent source of funds with the creditor companies, the underlying Richa Realtors redevelopment project and MOUs, subsequent arrangements with Tata Housing, arbitration proceedings and actual payments pursuant thereto, their accounting and tax treatment, the cross-examination of the persons whose statements formed an important basis of the assessment, the constitution of Ganpati Ventures, the Joint Venture Agreement with the assessee, and the acquisition and subsequent steps towards development of the Jalochi property. On a cumulative appreciation of these facts, we find that the assessee has satisfactorily explained the nature and source of the credits of ₹28.50 crore. The identity of the creditors stands established; their capacity to make the advances is supported by the identifiable funds available with them; and the genuineness of the transaction is borne out by the contemporaneous commercial arrangement, actual utilisation of the amount and subsequent conduct consistent with its stated purpose. The adverse circumstances relied upon by the Assessing Officer warranted enquiry, but after considering the complete material which emerged from such enquiry, they do not provide sufficient evidentiary basis to hold that the impugned credits represented unexplained cash credit in the hands of the assessee. We, therefore, find no infirmity in the finding of the learned CIT(A) directing deletion of the addition of ₹28,50,00,000 made under section 68 of the Act.

46. In view of our findings recorded hereinabove, we uphold the order of the learned CIT(A) deleting the addition of ₹28,50,00,000 made by the Assessing Officer under section 68 of the Act. Accordingly, the grounds raised by the Revenue challenging the deletion of the aforesaid addition are dismissed.

47. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced on 17th August, 2026