Section 68 and Customer Advances in Real Estate: Key Takeaways from Carcanet Infra Projects Private Limited Vs ITO (ITAT Pune)

The Pune Bench of the Income Tax Appellate Tribunal, in Carcanet Infra Projects Private Limited Vs ITO, has clarified an important legal position: customer advances recorded as liabilities in the books of a real estate developer can still be examined under Section 68 of the Income Tax Act 1961. Merely labelling a credit as “advance from customers” does not exempt it from scrutiny.

At the same time, the Tribunal recognised that the assessee had later produced substantial supporting documentation and, therefore, deserved another opportunity to substantiate the credits. Consequently, while upholding the legal applicability of Section 68 to such advances, the Pune ITAT set aside the appellate order of the CIT(A) and remanded the matter for a fresh decision after detailed verification.

Background of the Case

Nature of Business and Return Filing

  • The assessee, Carcanet Infra Projects Private Limited, is a private limited company engaged in construction and development of plots.
  • For AY 2018-19, the assessee filed its return of income electronically on 30.03.2019, declaring a total income of ₹9,44,850.
  • The case was selected for Scrutiny under CASS on the parameter “Income from Real Estate Business”.

Assessment Proceedings and Key Facts

During assessment under Section 143(3) r.w.s. 143(3A) & 143(3B), the Assessing Officer (AO) scrutinized the audited balance sheet and noted the following:

  • Advances from customers as on 31.03.2018 were shown at ₹75,92,64,762.
  • On calling for details and break-up, the AO identified that fresh advances received during the relevant year worked out to ₹15,95,75,897.
  • The AO issued notices under Section 143(2) and Section 142(1) and called for:
    • Names and addresses of parties
    • PAN
    • Amount of advance/loan
    • Date of agreement
    • Copies of agreement deeds
    • Balance amount receivable

The assessee supplied only a list of advances on 24.02.2021, from which the AO derived the figure of ₹15.95 crore as current year additions to customer advances. However, the AO found that:

  • Information relating to the business activities/source of income of the customers, along with
    • Bank statements,
    • Income Tax Returns, and
    • Financials of the customers

had not been furnished.

According to the AO, the assessee had not discharged the onus of proving:

  1. Identity of the creditors/customers,
  2. Creditworthiness (financial capacity) of such persons, and
  3. Genuineness of the transaction.

Holding that these fresh advances remained unexplained cash credits, the AO invoked Section 68 and:

  • Added ₹15,95,75,897 as unexplained cash credits, and
  • Assessed the total income at ₹16,05,20,750.

First Appeal Before CIT(A)

Assessee’s Stand Before CIT(A)

In appeal before the CIT(A), National Faceless Appeal Centre, the assessee argued that:

  • The impugned amount represented advances from customers for plots/flats and was part of business receipts in the ordinary course of real estate activity.
  • Such customer advances are not “loans” or “unsecured borrowings”, and therefore, treating them as unexplained cash credits under Section 68 was incorrect.
  • The assessee had submitted:
    • Names, PAN, addresses and mode of payment of customers;
    • Copies of land purchase agreements for 121 out of 139 customers;
    • Bank statements showing that all advances were received via banking channels.

On this basis, the assessee claimed to have:

  • Established the identity of the customers, and
  • Established the genuineness of the transactions through executed agreements and bank trail.

As regards creditworthiness, the assessee contended that if the AO had doubts, it was the AO’s duty to issue summons or notices to the parties for verification. Alternatively, the assessee contended that since these were business advances, the strict rigour of Section 68 regarding creditworthiness should not apply in the same way as in the case of unsecured loans.

Findings of CIT(A)

The CIT(A) dismissed the appeal and recorded, in essence, the following findings: