Facts of the Case

The assessee, SKZ Developers LLP, a real-estate developer, filed its returns of income for Assessment Years 2021-22 and 2022-23. A search and seizure action under Section 132 was conducted on 28.09.2021 in the B-Safal and City Estate Group, during which certain loose papers, excel files and digital data were found indicating alleged unaccounted cash transactions in respect of projects “Privilon” and “Paarijat Eclate”.

Based on seized material, the Assessing Officer concluded that the assessee had sold residential units at prices higher than those recorded in registered sale deeds and received on-money in cash. The AO estimated project cost using seized excel sheets, applied assumed sale rates and treated the entire alleged difference as unaccounted on-money, making additions aggregating to ₹53.36 crore. The AO also computed deemed rental income on unsold flats under Section 23(5).

On appeal, the CIT(A) held that the entire on-money could not be taxed and restricted taxation to profit element @17% after estimating a uniform sale rate of ₹6,500 per sq. ft., while reducing deemed rent to 3% of fair market value. Both the assessee and the Revenue filed cross-appeals before the Tribunal.

Issues Involved

Whether additions for alleged on-money receipts could be sustained solely on the basis of loose sheets, excel files and WhatsApp chats without corroborative evidence, whether estimation of uniform sale rate and profit ratio was justified, and whether deemed rental income on unsold flats was taxable under Section 23(5).

Petitioner’s Arguments

The assessee contended that the seized materials were dumb documents containing indicative offer rates or internal cost workings without names of buyers, dates, confirmation of transactions or proof of receipt of cash. It was argued that no buyer was examined, no cash trail or unexplained investment was found, and affidavits from purchasers denying cash payments were ignored. The assessee further contended that estimation of uniform sale rate and profit ratio was arbitrary and based on conjectures.

Respondent’s Arguments

The Revenue relied upon seized materials, broker data and cost estimates to argue that sale prices recorded in registered deeds were below construction cost and that the assessee must have received cash consideration. The Revenue challenged deletion of full on-money addition and sought restoration of the AO’s findings, also arguing for higher deemed rent.

Court Order / Findings

The ITAT Ahmedabad held that additions for alleged on-money receipts were unsustainable. The Tribunal observed that the seized documents relied upon by the AO were merely indicative quotations, negotiation proposals or internal workings and did not constitute evidence of actual receipt of cash. No corroborative material such as confirmation from buyers, cash flow trail, unexplained investment or utilisation of alleged on-money was found. The Tribunal reiterated that suspicion, however strong, cannot replace proof and relied on judicial precedents including Maulikkumar K. Shah and Fort Projects (P) Ltd.

The Tribunal further held that even estimation of uniform sale rate at ₹6,500 per sq. ft. and profit element @17% by the CIT(A) was based on assumptions and could not be sustained in absence of concrete evidence. Accordingly, the entire additions relating to alleged on-money for both assessment years were deleted.

On the issue of deemed rent, the Tribunal upheld applicability of Section 23(5) and confirmed estimation of deemed rental income at 3% of fair market value as reasonable.

Important Clarification

The Tribunal clarified that in real-estate cases, additions for on-money receipts cannot be made merely on the basis of loose sheets, internal excel files or WhatsApp chats unless supported by independent, corroborative evidence. It was also clarified that deemed rent under Section 23(5) is applicable to unsold flats once the statutory period from obtaining completion certificate expires.

Final Outcome

The appeals filed by the assessee for Assessment Years 2021-22 and 2022-23 were allowed in respect of deletion of all on-money additions. The appeals filed by the Revenue were dismissed in full. The addition towards deemed rental income under Section 23(5) at 3% of fair market value was upheld.

 Link to download order

https://www.mytaxexpert.co.in/uploads/1769062130_SKZDEVELOPERSLLPAHMEDABADVS.THEDCITCENT.CIRCLE14AHMEDABAD.pdf

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