Sale of Ancestral Property Taxable as Capital Gains not as Income from Other Sources

Milind Anand Karkhanis Vs ITO (ITAT Delhi)

The assessee appealed against the order of the CIT(A) for Assessment Year 2012-13 concerning the tax treatment of proceeds received from the sale of ancestral immovable property.

The assessee submitted that he had acquired a one-third share in an ancestral property, which was subsequently sold for a total consideration of ₹34.50 lakh. He received one-third of the sale proceeds but did not disclose any capital gains in his return of income. During reassessment proceedings under Section 147, the assessee furnished documents establishing that the property was ancestral and that he held a one-third share. However, the Assessing Officer treated the assessee’s share of ₹11.50 lakh as “Income from Other Sources” without allowing indexation on the cost of acquisition.

Before the CIT(A), it was acknowledged that income arising from the sale of immovable property is chargeable under Section 45(1) as “Capital Gains” and should be computed in accordance with Sections 48, 49, and 55 of the Act. Despite this observation, the appeal was dismissed.

The Tribunal noted that there was no dispute regarding the assessee’s ownership of the ancestral property or the receipt of sale consideration. The only issue was whether the receipt should be taxed as “Capital Gains” or “Income from Other Sources.” It held that, since the amount arose from the sale of immovable property, it was taxable under the head “Capital Gains.”

The Tribunal found the CIT(A)’s rejection of the valuation report as belated and the reasons for sustaining the addition to be unsustainable. It restored the matter to the Assessing Officer for fresh adjudication after considering the documents furnished by the assessee. The Assessing Officer was directed to provide the assessee with a reasonable opportunity to present submissions, and the assessee was permitted to furnish additional documents in support of his claim. Accordingly, the impugned order was set aside, and the appeal was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals) Addl/JCIT(Appeals-1), Coimbatore [in short ‘the CIT(A)’] dated 27.3.2026, for assessment year 2012-13.

2. Shri Puneet Sachdev, appearing on behalf of assessee, submitted that the the assessee had acquired 1/3r^d share in ancestral property during the period relevant to assessment year under appeal. Thereafter, the said property was sold at a total consideration of Rs. 34.50 Lacs. The assessee got 1/3r^d share in the said sale consideration. Admittedly, the assessee had not disclosed capital gain on sale of ancestral property in the return of income. During assessment proceedings u/s. 147 of the Act, relevant documents were furnished by the assessee before the Assessing Officer (AO) to substantiate that the property sold is ancestral property and the assessee is having 1/3^rd share in the said property. The AO without giving benefit of indexation on the cost of acquisition made addition of Rs. 11.50 lacs treating entire sales proceeds (to the extent of assessee’s share) as ‘Income from other Sources’ instead of ‘Capital Gains’. The assessee carried the issue in appeal before the CIT(A). The CIT(A) in para no. 5.3 at page 15 of the impugned order accepts that the income from sale of immovable property is chargeable u/s. 45(1) under the head ‘Capital Gains’, and the AO was required to compute capital gain in accordance with provisions of sections 48, 49 & 55 of the Act, but finally dismissed appeal of the assessee. The ld. Counsel prayed for treating the said receipt of Rs. 11.50 lacs under the head ‘Capital Gains’ and also to grant benefit of indexation.

3. Per contra, Shri Manoj Kumar representing the department supported the impugned order and prayed for dismissing the assessee’s appeal.

4. Both sides heard. Orders of the lower authorities examined. Facts narrated by the assessee’s Counsel regarding acquisition of ancestral immovable property and the part of sale consideration received on sale of said immovable property by the assessee, during the relevant period are not in dispute. The limited issue for consideration is, Whether the receipts on sale of immovable property are to be taxed under the head ‘Capital Gains’ or ‘Income from Other Sources’. It is undisputed that the receipts received by the assessee are from the sale of immovable property. Therefore, the aforesaid receipts are taxable under the head ‘Capital Gains’. The solitary reason given by the CITA() to reject submissions of the assessee is that the assessee has failed to substantiate the claim of cost of acquisition and cost of improvement. The valuation report furnished by the assessee was rejected holding it to be belated. The reasons given by CIT(A) to uphold addition made by the AO and to reject valuation report are unsustainable. Considering entire facts, I deem it fit to restore this issue back to the file of the AO for denovo adjudication after considering the documents furnished by the assessee. The AO before passing fresh assessment order shall grant reasonable opportunity of making submissions to the assessee, in accordance with law. The assessee if, so desire, may furnish any other document to substantiate his claim.

5. In the result, impugned order is set aside and appeal of the assessee is allowed for statistical purpose.

Order pronounced in the Open Court on 05/06/2026.