On-money receipts in real estate are taxable only on embedded profit, with timing linked to sale deed execution.

Undisclosed on-money receipts in a real estate project are taxable only to the extent of the profit element embedded in those receipts, not as gross receipts. The estimation must reflect the project's nature, surrounding facts, past margins and comparable material; on the facts, a 10% addition was treated as fair and reasonable. Taxability was also aligned with the year of execution of the sale deed, not the year of mere receipt, because the assessee's revenue recognition followed conveyance and ICDS-III was held inapplicable on those facts. The ITAT thus granted partial relief to the assessee and rejected the Revenue's case on both rate and timing.

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Issues: (i) Whether, on the facts of the real estate project, only the profit element embedded in the on-money receipts could be brought to tax and, if so, at what rate; (ii) whether the on-money income was taxable in the year of receipt or in the year of execution of the sale deed, and whether ICDS-III applied.

Issue (i): Whether, on the facts of the real estate project, only the profit element embedded in the on-money receipts could be brought to tax and, if so, at what rate.

Analysis: The receipts recorded in the seized material represented undisclosed on-money from property transactions. The books were not accepted, and estimation of income was required, but the addition could not extend to the entire gross receipts because the taxable amount was only the profit element embedded in such receipts. The rate of estimation had to be based on the nature of the project, surrounding facts, past margins, and comparable material. In the facts of the case, the Tribunal found that a uniform 10% estimate on on-money was fair and reasonable.

Conclusion: Only the profit element embedded in the on-money receipts was taxable, and the addition was restricted to 10%.

Issue (ii): Whether the on-money income was taxable in the year of receipt or in the year of execution of the sale deed, and whether ICDS-III applied.

Analysis: The Tribunal held that the accounting principles relied upon by the Revenue under ICDS-III were not applicable to the assessee in the facts of the case. The assessee followed revenue recognition on execution of the sale deed, and the taxable event for the estimated on-money profit was therefore aligned with the year in which the conveyance/sale deed was executed and the relevant risk and reward passed. The year of mere receipt of on-money was not accepted as the correct year for taxation on these facts.

Conclusion: The on-money profit was taxable in the year of execution of the sale deed, not in the year of receipt, and ICDS-III was held inapplicable.

Final Conclusion: The assessee succeeded on the rate of estimation and on the year of taxation, while the Revenue's appeals failed; the consolidated result was partial relief to the assessee and dismissal of the Revenue's appeals.

Ratio Decidendi: In cases of undisclosed on-money receipts from real estate transactions, only the profit embedded in such receipts is taxable, and the timing of taxation follows the assessee's recognised revenue event where the applicable accounting standard is inapplicable on the facts.

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