Pune ITAT Restricts Taxation on Unrecorded Real Estate Transactions

The Pune Income Tax Appellate Tribunal (ITAT) has recently made a significant ruling in a case involving the Viraj Group, specifically M/s Viraj Estates Pvt. Ltd. The tribunal's decision restricts the taxation of unrecorded real estate receipts, emphasizing the importance of considering both income and related expenses in such transactions.

A search and seizure operation under Section 132 of the Income-tax Act, 1961, was conducted on 20 April 2023 at the business and residential premises of the Viraj Group, including the office of M/s Viraj Estates Pvt. Ltd. During this operation, the department seized a handwritten cash book maintained in Gujarati and digital Tally data stored in files identified as “V89” and “CON”.

The seized material allegedly revealed substantial unaccounted cash transactions relating to real estate dealings, accommodation entries, cash loans, and unexplained banking transactions. Based on the seized records, the Assessing Officer (AO) prepared a Digital Cash Book (DCB) and, for the Assessment Year (AY) 2014-15, identified unrecorded off-the-books receipts aggregating to Rs 26.47 crore from land and plot transactions.

The AO treated the entire amount as undisclosed business income. Additionally, cash loan transactions reflected through “V A/c” entries were treated as unexplained money under Section 69A, resulting in a separate addition of Rs 31.01 crore without considering corresponding repayments and debit entries.

On appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) rejected the assessee’s legal challenge regarding the validity of notices and approvals. However, on the merits, the appellate authority held that the entire gross receipts could not be taxed because the seized records themselves reflected substantial business outgoings and expenses. ITAT Pune upheld the CIT(A)’s approach. The Tribunal held that where seized records disclose both receipts and related expenditure, only the profit element embedded in the unaccounted real estate receipts can be brought to tax.

The seized handwritten cash book itself reflected corresponding unrecorded expenditure incurred in the course of the business. Following settled judicial principles governing real estate transactions and unaccounted sales, the Tribunal agreed that only the profit element embedded in such receipts could be subjected to tax and upheld the profit-rate methodology adopted by the CIT(A).

With regard to the “V A/c” cash loan transactions, the Tribunal accepted that the entries represented a continuous cycle of receipts and repayments among related parties and group concerns. Since the same cash was repeatedly circulating through the system, taxing every credit entry independently would result in multiple taxation of the same funds. The Bench therefore approved the application of the peak credit theory and upheld the CIT(A)’s direction restricting the addition to the peak balance of Rs 24.24 crore instead of the gross addition of Rs 31.01 crore.

Thus, the Tribunal dismissed the Revenue’s objections and substantially sustained the relief granted by the CIT(A), reaffirming that only the real income component embedded in unrecorded transactions can be brought to tax and that peak credit principles apply where funds rotate through recurring cash transactions.