Trade advances in real estate cannot be treated as unexplained cash credits when consistently adjusted against sales

Trade advances received from flat purchasers in the ordinary course of a real estate business, when consistently accounted for under the project completion method and later adjusted against sales, are not to be treated as unexplained cash credits under section 68. Where the corresponding sales are recorded and taxed, and the same accounting treatment has been accepted in earlier years, selectively taxing the advances without rejecting the books as a whole is not justified. The note also highlights that such treatment would risk taxing the same receipts twice.

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Issues: Whether advances received from customers/flat purchasers in the ordinary course of the assessee's real estate business could be treated as unexplained cash credit under section 68 of the Income-tax Act, 1961.

Analysis: The assessee was engaged in real estate development and followed the project completion method consistently. The record showed that customer advances were received in the ordinary course of business, adjusted against sales in the same or subsequent years, and the corresponding sales were offered to tax. The revenue had also accepted the same accounting pattern in earlier years. In such circumstances, the advances could not be characterised as unexplained liabilities or cash credits. Sustaining the addition would also amount to taxing the same receipts twice. The addition was further untenable because the sales reflected in the books were accepted while the linked advances were selectively brought to tax without rejecting the books as a whole.

Conclusion: The addition under section 68 was not sustainable and had to be deleted; the issue was decided in favour of the assessee.

Final Conclusion: The appellate order was set aside and the assessment addition on account of customer advances was deleted, resulting in relief to the assessee.

Ratio Decidendi: Trade advances received in the ordinary course of a real estate business and regularly adjusted against sales under a consistently accepted project completion method cannot be taxed as unexplained cash credits under section 68 absent a valid basis for disturbing the settled accounting treatment.

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