The department stated that incriminating evidence collected during raids, carried out on November 6, clearly shows "large scale tax evasion and money laundering".
Sources said that the income tax sleuths also carried out surveys at a few BMC officials' premises.
The department said that raids were also conducted on entry operators in Mumbai and Surat after which the probing sleuths found evidence of bogus entries and fake expenditure to the tune of Rs 735 crore.
"Raids were carried out on entry providers and beneficiaries who have been engaged in execution of civil contracts mainly in Brihanmumbai Municipal Corporation (BMC)," said Income Tax department in a statement.
A total of 37 premises were covered under search action and seven premises were covered under survey.
"There were reports that certain contractors had taken entries in the form of loans, etc. from entry providers and also inflated expenses in the books of accounts to suppress income," said the department.
The raids had also led to the detection of the use of bogus companies floated by entry providers for giving entries to businesses in the form of loans or bills for expenses.
The agency stated that in the case of the entry providers, systematic modus operandi of bank fraud and forgery has been detected whereby the promoters have made investments in immovable properties and shares of group companies by siphoning off the bank loans.
"In the case of the contractor groups, several instances about inflation of expenses by bogus purchases/sub-contracts and taking of loans from entry providers have been identified," it stated.
A senior Income Tax official said that investigations are in progress, including identification of the remaining beneficiaries.
( With inputs from IANS )