SPAN REALTORS,THANE vs. DCIT, CENTRAL CIRCLE 1, THANE, THANE

At the outset, the learned counsel submitted that the legal grounds challenging the validity of the assessments, including the grounds relating to approval under section 153D of the Act, were not being pressed. The additional grounds raised in ITA No. 6893/Mum/2024 for Assessment Year 2020-21, ITA No. 6891/Mum/2024 for Assessment Year 2021-22 and ITA No. 6964/Mum/2024 for Assessment Year 2020-21 were also stated to be not pressed. Accordingly, all such legal and additional grounds are dismissed as not pressed. The only surviving issue in these appeals is whether, on the facts emerging from the seized material, the Assessing Officer was justified in estimating the profit embedded in the unaccounted “on-money” receipts at 15%, or whether a lower rate, as contended by the assessees, ought to be adopted.

The relevant facts are that a search and seizure action under section 132 was carried out on 12.01.2021 in the case of the Span Group. The assessees are partnership firms engaged in the business of real-estate development and have undertaken residential projects in and around Mira Road and Bhayander in the District of Thane. During the search conducted at the residential premises of Shri Anil Morarka, stated to be one of the key persons associated with the Span

In the course of the respective assessment proceedings, the assessees were called upon to explain whether the receipts and expenditure reflected in the seized documents had been recorded in their regular books of account. The assessees initially contended that the notings had been made by junior- level staff who did not possess complete knowledge of the transactions and, therefore, the figures could not, without further corroboration, be treated as actual receipts of “on- money”. Without prejudice to this contention, it was submitted that even if the seized notings were accepted, the entire amount of the unaccounted receipts could not be assessed as income. Since the seized records themselves reflected both receipts and expenditure arising from the same business activity, only the profit element embedded in such transactions could legitimately be brought to tax. The assessees accordingly offered that the income may be estimated at 8% of the net “on-money” receipts.

The Assessing Officer did not accept the contention that the notings had been made by some junior employee without knowledge of the underlying transactions. He observed that Shri Anil Morarka had been associated with the Span Group for several years and that the records had been maintained in a systematic and meticulous manner, containing details of projects, receipts, cancellations and cash expenditure. The Assessing Officer, therefore, treated the entries as reliable evidence of unaccounted business transactions undertaken by the assessees. He nevertheless accepted the underlying proposition advanced by the assessees that the entire unaccounted receipts could not be regarded as income and that it was only the profit embedded therein which was liable to be assessed. However, he rejected the rate of 8% suggested by the assessees on the ground that no specific evidence had been furnished to demonstrate that the profit from these transactions was as low as 8%. Proceeding on the general premise that the profit margin in the real-estate business ordinarily ranges between 10% and 15%, the Assessing Officer adopted the higher rate of 15% and made corresponding additions in the respective assessment years.

The learned CIT(A) affirmed the action of the Assessing Officer. He observed that the assessees had not brought any cogent material on record to demonstrate that the notings did

Before us, the learned counsel fairly submitted that the assessees were no longer pressing their legal grounds and were confining the controversy to the quantum of profit embedded in the transactions recorded in the seized material. His principal contention was that the rate of 15% had been applied without examining the commercial results disclosed by the very material upon which the additions were founded. Drawing our attention to the consolidated year-wise charts furnished during the hearing, he submitted that the seized documents recorded not merely the “on-money” receipts but also cancellation of bookings and substantial cash expenditure incurred in the execution and development of the projects. Thus, according to him, the seized documents

The learned counsel further demonstrated that in the case of Span Realtors, the gross “on-money” receipts for the relevant period were ₹34,69,81,398, out of which ₹7,31,35,762 related to cancellation of bookings, leaving net receipts of ₹27,38,45,636. As against these net receipts, the cash expenditure reflected in the seized material aggregated to ₹28,44,85,970, resulting in an overall deficit of ₹1,06,40,334. Similarly, in the case of Span Developers, the aggregate net “on-money” receipts, after adjustment of cancellation of bookings, were ₹4,55,56,658, whereas the cash expenditure reflected in the seized documents aggregated to ₹14,24,42,781. It was pointed out that the year- wise position was not uniform: in certain years the receipts exceeded the expenditure, whereas in several other years the expenditure was substantially higher than the receipts. Therefore, the assumption that the assessees had consistently earned a net profit of 15% in every year was contrary to the pattern disclosed by the seized material itself.

It was also submitted by the learned counsel that the assessees were not developing premium or luxury projects

The learned counsel clarified that the assessees were not claiming that the aggregate excess of expenditure should be recognised as a business loss or that no addition should be made at all. His submission was that the substantial expenditure disclosed by the seized material materially eroded the assumption of a profit margin of 15%. To put an end to the controversy and to take care of any possible leakage of revenue, he urged that profit may reasonably be estimated at 5% of the net “on-money” receipts. Such an estimate, according to him, would recognise an income element in the

The learned CIT DR, on the other hand, strongly relied upon the orders of the Assessing Officer and the learned CIT(A). He submitted that the seized documents constituted direct and contemporaneous evidence of unaccounted business transactions and that the assessees could not be permitted to disown the receipts recorded therein. He further contended that the consolidated position projected by the assessees could not determine the taxable income of each assessment year. Although expenditure exceeded receipts in some years, there were other years in which the receipts were substantially higher than the expenditure. The Assessing Officer had already taken a fair and balanced view by not bringing the entire unaccounted receipts to tax and by assessing only the profit element embedded therein. Therefore, according to the learned CIT DR, the rate of 15% adopted by the Assessing Officer and sustained by the learned CIT(A) did not call for any interference.

We have heard the rival submissions and carefully perused the assessment orders, the impugned appellate orders, the seized-material-based charts and the written submissions placed before us. At this stage, there is no serious dispute that the seized documents record an

An estimation of income, by its very nature, involves a certain degree of approximation; nonetheless, it must be anchored to the facts and circumstances emerging from the record. The Assessing Officer adopted the rate of 15% principally on the general observation that profit in the real- estate business ordinarily ranges between 10% and 15%. However, neither the assessment orders nor the impugned appellate orders refer to the historical profit margins of these assessees, any comparable project undertaken in the same locality, the prevalent margins in projects catering to a similar class of purchasers, or any other tangible material which could support adoption of the uppermost rate of 15%. The existence of unaccounted receipts undoubtedly justifies estimation of the income embedded therein, but it cannot, by itself, lead to the inexorable conclusion that such transactions must have generated profit at the highest rate generally attributed to the industry.

At the same time, we are unable to accept that the aggregate excess of cash expenditure over receipts should result in no addition whatsoever. The receipts and expenditure spread over several assessment years have not been correlated project-wise or transaction-wise with such precision as would permit the actual profit or loss to be determined merely by setting off one aggregate against the other. The expenditure incurred in one year may relate to

Thus, while the organised and systematic nature of the unaccounted transactions warrants estimation of income so that the profit embedded therein does not escape assessment, the substantial cash expenditure recorded in the same documents, the fluctuating year-wise position, the overall excess of expenditure over receipts, the nature and location of the projects and the absence of any comparable material supporting a profit margin of 15% make the rate adopted by the Assessing Officer excessive. The estimation has to strike a judicious balance between the legitimate interests of the Revenue and the commercial reality disclosed by the seized material; it cannot become a means of taxing a disproportionate part of the receipts merely because the underlying transactions were conducted outside the regular books.

Considering the cumulative effect of all these circumstances, we are of the considered opinion that estimation of profit at 5% of the net “on-money” receipts, namely, the receipts remaining after adjustment of cancellation of bookings and forming the very basis of the additions made by the Assessing Officer, would be fair and reasonable. This rate adequately recognises the income element inherent in the unaccounted business transactions and takes care of possible revenue leakage, while at the same time giving appropriate weight to the substantial expenditure recorded in the same seized material. The rate of 5%, therefore, rests upon the peculiar factual and evidentiary matrix of these cases and represents a reasonable approximation of the income that could be said to have arisen from the transactions.

We accordingly direct the Assessing Officer to restrict the addition in each of the assessment years under consideration to 5% of the respective net “on-money” receipts forming the basis of the original additions, in place of the rate of 15% sustained by the learned CIT(A), and recompute the income accordingly. The levy of interest shall be consequential. The grounds relating to initiation of penalty proceedings are premature and require no separate adjudication in these quantum appeals.

In the result, all the appeals of the assessees are partly allowed in the terms indicated above.