The Income Tax Appellate Tribunal, Delhi, has established a significant precedent by permitting partial telescoping of unaccounted on-money earned in prior years as an explanation for large cash deposits made during the demonetization period. This ruling provides critical clarity on the application of Section 68 of the Income Tax Act in real estate development cases where cash inflows are historically unrecorded but later deposited in banks.
Background & Facts
The Dispute
The dispute arises from the assessment of M/s Shalimar Corp Ltd for A.Y. 2017-18, where the Assessing Officer (AO) made substantial additions under Section 68 of the Income Tax Act, 1961, on account of unexplained cash deposits totaling Rs. 65.79 crore. The AO rejected the assessee’s explanation that these deposits represented proceeds from unaccounted on-money received in prior years, particularly from real estate transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed additions of Rs. 49.30 crore in cash deposits, Rs. 1.37 crore from customer advances, and Rs. 3.34 crore from a loan, while deleting other additions. Both the assessee and the Revenue filed cross-appeals before the ITAT.
Key Facts
- The assessee is a real estate development company engaged in the sale of residential and commercial properties.
- A search and seizure operation was conducted by the Income Tax Department on 18.06.2015, uncovering evidence of unaccounted on-money receipts.
- A Special Auditor quantified unaccounted on-money at Rs. 197.82 crore for the six preceding years and the year of search.
- The ITAT, in consolidated appeals (ITA Nos. 2360, 2764-2768/Del/2022), held on 31.07.2025 that 20% of the gross on-money receipts should be treated as undisclosed income, replacing the AO’s higher rate of 37.72%.
- For A.Y. 2017-18, the assessee declared income of Rs. 27.49 crore on 30.10.2017.
- During FY 2016-17, the assessee deposited Rs. 65.79 crore in cash into its bank accounts.
- The assessee claimed an opening cash balance of Rs. 12.41 crore as of 01.04.2016 and cash receipts of Rs. 41.38 crore in April 2016, totaling Rs. 56.49 crore as cash-in-hand before demonetization.
- On 08.11.2016, just before demonetization was announced on 08.11.2016, the assessee held Rs. 56.49 crore in cash.
- Between 09.11.2016 and 30.11.2016, Rs. 56.49 crore was deposited in banks; an additional Rs. 8 crore was deposited in December 2016.
- The AO accepted Rs. 12.41 crore as opening balance but treated Rs. 49.30 crore (Rs. 41.38 crore + Rs. 8 crore) as unexplained cash under Section 68.
- The AO also added Rs. 2.78 crore as advance from customers, Rs. 3.34 crore as loan from Saket Niketan (P) Ltd., Rs. 1.5 crore from Prominence Impex Pvt Ltd, and Rs. 40 crore as advance from Nihon Impex Pvt Ltd.
- The CIT(A) confirmed Rs. 49.30 crore, Rs. 1.37 crore (out of Rs. 2.78 crore), and Rs. 3.34 crore, but deleted Rs. 1.5 crore and Rs. 40 crore.
Procedural History
- 18.06.2015: Search and seizure conducted by Income Tax Department.
- 31.07.2025: ITAT, in consolidated appeals, held that 20% of Rs. 197.82 crore on-money is taxable as undisclosed income.
- 30.10.2017: Assessee filed return for A.Y. 2017-18 declaring income of Rs. 27.49 crore.
- 26.09.2022: CIT(A) passed order confirming certain additions under Section 68.
- 20.01.2026: Hearing held before ITAT Delhi.
- 09.04.2026: Judgment pronounced.
The Parties' Positions
For the Assessee
- Argued that the Rs. 49.30 crore cash deposits were proceeds of on-money earned in prior years, which had been quantified and accepted as taxable income by the ITAT in earlier appeals.
- Relied on Anantharam Veerasinghaiah & Co. v. CIT (123 ITR 457) to assert that telescoping of prior unaccounted income is permissible if facts support it.
- Highlighted a quantum leap in turnover in A.Y. 2017-18, indicating post-search compliance and legitimate recording of income.
- Contended that the plea of telescoping was raised from the assessment stage, not belatedly.
- Argued that the absence of physical cash during search does not negate the existence of prior unaccounted income.
For the Revenue
- Contended that no physical cash was found during the search, making the claim of prior cash holdings implausible.
- Asserted that the ITAT had already treated on-money as income at 20%, and allowing telescoping would result in double benefit.
- Argued that the Rs. 40 crore advance from Nihon Impex Pvt Ltd was an accommodation entry, as the lender’s financials were not submitted and the transaction was allegedly colorable.
- Claimed that the CIT(A) erred in relying on the assessment order of Nihon Impex Pvt Ltd without verifying its creditworthiness.
Relief Sought
- Assessee sought deletion of Rs. 49.30 crore cash addition, Rs. 1.37 crore customer advance, and Rs. 3.34 crore loan addition under Section 68.
- Assessee also sought relief from taxation under Section 115BBE.
- Revenue sought restoration of Rs. 49.30 crore cash addition, Rs. 40 crore advance from Nihon Impex, and Rs. 1.37 crore customer advance.
The Legal Issue
Can unaccounted on-money earned in prior years, already quantified and taxed as undisclosed income by the ITAT, be used as a legitimate explanation for cash deposits made in the subsequent assessment year under Section 68 of the Income Tax Act, and if so, to what extent?
Arguments Presented
For the Appellant/Petitioner
The assessee relied on Anantharam Veerasinghaiah & Co. v. CIT (123 ITR 457) to argue that the availability of funds from prior unaccounted income does not preclude the assessee from claiming telescoping benefit, provided the facts and circumstances support it. The counsel emphasized that the ITAT had already accepted the Rs. 197.82 crore as real, quantifiable on-money income, not an intangible addition. The quantum leap in turnover post-search indicated genuine compliance. The assessee had disclosed the source of cash deposits from the outset, distinguishing the case from Anantharam, where the telescoping plea was raised for the first time before the ITAT. The counsel cited CIT v. Nabadwip Chandra Dey (190 ITR 133), ACIT v. Dharam Das Agarwal (144 ITR 143), and Vinod Bhandari v. PCIT (116 taxmann.com 264) to support the principle that prior unaccounted income can explain subsequent deposits.
For the Respondent/State
The Revenue contended that the absence of any physical cash found during the search rendered the claim of prior cash holdings implausible. It argued that the ITAT’s earlier decision to tax 20% of on-money as income was a final determination and could not be used to justify cash deposits in a subsequent year. The Revenue further contended that the Rs. 40 crore advance from Nihon Impex Pvt Ltd was an accommodation entry, as the lender’s financials were not submitted, and the transaction was structured to launder unaccounted funds. The Revenue relied on the AO’s observation that the transaction was colorable and not a genuine property advance.
The Court's Analysis
The Tribunal acknowledged the settled principle from Anantharam Veerasinghaiah & Co. v. CIT that prior unaccounted income cannot automatically explain subsequent deposits, but must be evaluated in light of the peculiar facts of each case. The Tribunal noted that unlike Anantharam, where the assessee raised telescoping for the first time before the ITAT, here the claim was made from the assessment stage and supported by documentary evidence.
"In the instant case, the ITAT has accepted the factum of generation of income in the form of on-money in real estate business in the years prior to A.Y. 2017-18, and has held the same as taxable as unaccounted income at the rate of 20% of total on-money received. In such a peculiar facts and circumstances, we are of the considered view that the claim of the assessee for telescoping benefit has some merit."
The Tribunal further observed that the assessee’s turnover doubled in A.Y. 2017-18 compared to prior years, indicating a shift from unrecorded to recorded transactions post-search. However, the Tribunal also noted the absence of any physical cash found during the search, which cast doubt on the literal existence of Rs. 56.49 crore in cash on hand.
The Tribunal adopted a balanced approach: while accepting the legitimacy of the on-money income and the reasonableness of the telescoping claim, it imposed a 50% cap on the benefit to account for the evidentiary gap. The Tribunal held that 50% of the Rs. 49.30 crore (i.e., Rs. 24.65 crore) could be explained by prior on-money, and the remaining 50% remained unexplained.
Regarding the Rs. 40 crore advance from Nihon Impex Pvt Ltd, the Tribunal found that the CIT(A) had correctly relied on the investigation report, the statement of the lender’s director, and the completed assessment of Nihon Impex, which contained no adverse findings. The Tribunal held that the mere non-compliance with a notice under Section 133(6) could not override the cumulative evidence of genuineness.
Regarding Section 115BBE, the Tribunal relied on the Madras High Court’s decision in S.M.I.L.E. Microfinance Ltd. v. ACIT to hold that the provision applies only to transactions occurring on or after 01.04.2017, and since the deposits were made in FY 2016-17, normal tax rates applied.
The Verdict
The assessee’s appeal in ITA No. 2769/DEL/2022 is partly allowed. The addition of Rs. 49.30 crore under Section 68 is reduced by 50%, i.e., Rs. 24.65 crore is deleted. The addition of Rs. 1.37 crore on account of customer advances and Rs. 3.34 crore on account of loan from Saket Niketan (P) Ltd. is deleted, as these are deemed part of the on-money component. The assessee is not liable to tax under Section 115BBE. The Revenue’s appeal in ITA No. 3068/DEL/2022 is dismissed. The AO is directed to recalculate the total income of the assessee for A.Y. 2017-18 accordingly, applying normal tax rates and excluding the deleted additions.
What This Means For Similar Cases
Telescoping Is Not Automatic But Is Permissible with Substantiation
- Practitioners must now demonstrate a clear link between prior unaccounted income and subsequent cash deposits, supported by quantified evidence and consistent with the assessee’s business model.
- The ITAT has introduced a 50% cap as a reasonable compromise where physical evidence of cash is lacking but prior income is established.
- This creates a new benchmark: partial telescoping may be granted even without physical cash found during search, if the income source is judicially recognized.
Section 68 Additions on Advances Require Cumulative Evidence, Not Just Non-Compliance
- The mere failure to respond to a notice under Section 133(6) cannot be the sole basis for treating an advance as unexplained income.
- If the lender’s assessment order shows no adverse findings, and the transaction is documented (agreement, TDS, Form 26AS), the burden shifts to the Revenue to prove mala fide intent.
- Practitioners should proactively submit the lender’s assessment order and transaction documents to discharge the initial onus under Section 68.
Post-Search Turnover Surge Supports Legitimacy of Disclosure
- A significant increase in declared turnover after a search operation can be used as circumstantial evidence of genuine compliance.
- This may be leveraged in future cases to argue that previously unrecorded income is now being properly accounted for, reducing suspicion around cash deposits.
Taxation Under Section 115BBE Is Not Retroactive
- Section 115BBE applies only to income arising on or after 01.04.2017.
- For cash deposits made in FY 2016-17, even if unexplained, normal tax rates apply.
- Practitioners must challenge any application of Section 115BBE to pre-2017 transactions as legally untenable.
