Shanti Developers v. Deputy Commissioner of Income-tax

 

ITA Nos. 827/RJT/2024 & 274/RJT/2025 (AY 2011–12)

ITAT Rajkot Bench

Decision dated: 28 January 2026

Coram: Dr. Arjun Lal Saini (AM) & Dinesh Mohan Sinha (JM)

Decision: Appeals allowed in favour of the assessee

 

Facts of the Case

 

The assessee, Shanti Developers, is a partnership firm engaged in the business of real estate development. A survey under Section 133A of the Income-tax Act, 1961 was conducted at the business premises of the assessee on 25.10.2010, during which a diary indicating cash “on-money” receipts aggregating ₹3.75 crore was found.

 

The partner of the firm admitted that the said on-money was utilized towards construction expenses, resulting in unrecorded Work-in-Progress (WIP). The entire amount of on-money was voluntarily disclosed as income and duly offered to tax in the return of income for AY 2011–12.

 

The original assessment under Section 143(3) accepted the disclosure. Subsequently, the Principal Commissioner of Income Tax invoked Section 263, alleging lack of verification of WIP and correlation between on-money receipts and expenses. In the consequential assessment order, the Assessing Officer:

 

Disallowed ₹3.66 crore of WIP expenditure by invoking Section 40A(3), and

 

Added ₹25.17 lakh under Section 68 in respect of an unsecured loan received from M/s Bhoomidev Credit Corporation Ltd.

 

The additions were confirmed by the CIT(A), NFAC, leading to appeals before the ITAT.

 

Issues for Consideration

 

Whether WIP expenditure incurred out of on-money already offered to tax can be disallowed under Section 40A(3)?

 

Whether unsecured loan received through banking channels, supported by confirmations, affidavit, TDS, and repayment can be treated as unexplained cash credit under Section 68?

 

Tribunal’s Analysis and Findings

Issue 1: Disallowance of WIP under Section 40A(3)

 

The Tribunal noted that:

 

The entire on-money of ₹3.75 crore had already been offered to tax.

 

The WIP expenditure of ₹3.66 crore was incurred out of the same disclosed income.

 

All expenses were supported by vouchers, with individual payments below ₹20,000.

 

The expenditure was capitalized as WIP and not claimed as a revenue deduction.

 

The Tribunal held that invoking Section 40A(3) in such circumstances would result in double taxation, which is impermissible in law. Once undisclosed income has been taxed, the corresponding expenditure incurred out of such income must be allowed, unless found to be bogus.

 

The Tribunal further observed that Section 40A(3) is intended to curb non-genuine or unaccounted expenditure, and not to penalize genuine business expenses merely because they were incurred in cash, particularly when the source of such cash has already suffered tax.

 

Reliance was placed on the coordinate bench decision in Aryaland Enterprise v. ITO (ITA No. 224/Rjt/2019), wherein it was held that disallowance of expenses incurred from disclosed undisclosed income would amount to unjust enrichment of the Revenue.

 

Accordingly, the disallowance of ₹3.66 crore was deleted.

 

Issue 2: Addition under Section 68 – Unsecured Loan

 

The Tribunal examined the addition of ₹25.17 lakh comprising loan of ₹25 lakh and interest thereon. It was noted that the assessee had furnished:

 

Loan received through account payee cheque

 

Confirmation from the lender

 

PAN and return of income of the lender

 

Affidavit of the director of the lender company

 

Evidence of repayment in subsequent years

 

TDS deduction on interest paid

 

The Tribunal held that the assessee had satisfactorily discharged the onus under Section 68 by establishing:

 

Identity of the creditor

 

Creditworthiness

 

Genuineness of the transaction

 

The Tribunal rejected the Revenue’s contention that the lender was an accommodation entry provider, holding that mere suspicion or investigation reports, without direct evidence of cash exchange, cannot justify an addition under Section 68.

 

Reliance was placed on the coordinate bench ruling in M/s Dawn Chemicals v. ITO (ITA No. 332/Rjt/2024) involving the same lender on identical facts, where the addition was deleted.

 

Accordingly, the addition under Section 68 was also deleted.

 

Final Decision

 

Disallowance under Section 40A(3): Deleted

 

Addition under Section 68: Deleted

 

Both appeals allowed in favour of the assessee

 

Ratio Decidendi

 

No double taxation is permissible where undisclosed income has already been offered to tax and corresponding expenditure is genuine.

 

Section 40A(3) cannot be applied mechanically to genuine WIP expenses incurred from disclosed on-money.

 

Capitalization of expenditure as WIP makes the transaction tax neutral, eliminating any revenue loss.

 

For Section 68, once identity, creditworthiness, and genuineness are established, the burden shifts to the Revenue.

 

Allegations of accommodation entries must be supported by cogent and direct evidence.

 

Significance of the Ruling

 

This decision is of considerable precedential value in cases involving:

 

Survey disclosures of on-money

 

WIP in real estate projects

 

Disallowance under Section 40A(3)

 

Alleged accommodation entries under Section 68

 

The ruling reinforces the principle that tax administration must be fair, non-punitive, and free from double additions, especially where the Revenue has already accepted the disclosure of income.

LINK TO DOWNLOAD THE ORDER
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