ITAT Chandigarh Quashes ‘On-Money’ Addition Based Solely on Third-Party Digital Evidence

Background of the Dispute

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Home Construction Co. Vs DCIT has set aside an addition of ₹1.17 crore made towards alleged “on-money” on sale of residential flats. The Tribunal held that when the entire basis for the addition is digital and documentary material seized from a third party’s premises (in this case, a broker, Sh. Ravi Kapoor) and no incriminating evidence is recovered from the assessee itself, such an addition cannot be sustained in law.

The appeal before the ITAT arose from an order of the Pr. CIT(A)-5, Ludhiana dated 26/03/2025 relating to Assessment Year 2022-23, where the first appellate authority had partly upheld an “on-money” addition made by the Assessing Officer (AO).

Facts of the Case

Return and Business Activity

  • The assessee, M/s Home Construction Co., filed its return of income for A.Y. 2022-23 under Section 139(1) declaring income of ₹2,68,240.
  • The assessee is engaged in the business of developing residential flats/apartments. For the year under consideration, it had a real estate project named “Sun Apartments”, consisting of 27 flats.
  • Out of these, only 3 flats were sold during the relevant financial year.

Search Action on Group and Third Parties

  • A search and seizure operation under Section 132 was conducted on 16.11.2021 in the group cases of Homelife Buildcon Pvt. Ltd., of which the assessee is a group concern.
  • During this search, incriminating material was allegedly recovered from various locations connected with the group.
  • Independently, search proceedings were carried out at the premises of Sh. Ravi Kapoor, stated to be an important broker associated with the group.
  • From his residence, the department seized:
    • Digital data from mobile phones and email accounts
    • Diaries and loose sheets
    • Allotment letters and transaction notes

According to the AO, this material indicated receipt of unaccounted cash (“on-money”) over and above the registered sale value of certain flats of the group concerns, including that of the assessee.

Assessment Proceedings

  • The case was compulsorily selected for scrutiny. Statutory notices under Section 143(2) and Section 142(1) were issued through electronic mode.
  • The assessee did not dispute jurisdiction or the validity of the notices.

During assessment, the AO:

  1. Examined the statements recorded during search, particularly that of:
    • Sh. Jagjit Singh Grewal, partner of the assessee firm
    • Sh. Ravi Kapoor, real estate broker
  2. Correlated these statements with the digital/physical data seized from Sh. Ravi Kapoor.

The AO concluded that the seized material established a pattern of cash “on-money” receipts on sale of flats in Sun Apartments.

Proposed Addition on Account of “On-Money”

  • A show-cause notice was issued proposing to treat ₹1,50,33,334 as undisclosed business receipts representing “on-money” allegedly collected over and above the recorded sale consideration of three specific flats:

    • Flat A-1
    • Flat D-1
    • Flat A-3

  • The assessee’s stand before the AO was:

    • Sh. Ravi Kapoor was an independent real estate broker engaged in his own business, and not an authorised representative or employee of the assessee.
    • Any digital records or diaries maintained by him were his own, and the assessee could not be held responsible for his private notings.
    • The seized data had no direct nexus with the assessee’s books of account or its recorded transactions.
    • No corroborative enquiry had been carried out from the buyers of the flats.

The AO rejected these submissions and treated the digital/physical material as conclusive proof of under-reported sale consideration.

AO’s Computation of Alleged “On-Money”

  • On the basis of seized material and his inferences, the AO recomputed the sale consideration of three flats (A-1, D-1, A-3) as allegedly actually received versus what was recorded in sale deeds and books.
  • For Flat A-1 and D-1, specific seized papers and transaction details were claimed to show higher consideration than registered.
  • For Flat A-3, the AO applied the same effective rate per flat as in Flat A-1, citing similarity of size, floor and location, and rejecting the assessee’s argument regarding individual negotiation and other price-determining factors.

The AO thus made an addition of ₹1,50,33,334 as unrecorded “on-money” under business income and assessed total income at ₹1,53,01,574. Penalty under Section 271AAB(1A) was initiated and interest under Sections 234A, 234B, 234C and 234D was charged.

Order of the CIT(A)

The assessee challenged the assessment before the Pr. CIT(A)-5, Ludhiana.